The quantitative easing policies suggested by the Green Party may or may not be a good idea. But the arguments being put up against it don't carry much weight.

First of all, an up front disclaimer. I have no formal training in economic theory (albeit that I dabble on occasion in some Law and Economics theory in the course of my day job). Whether or not my lack of credentials completely disqualifies me from talking about what I am going to talk about is in the eyes of the reader.  But I'd just point out that given the recent predictive performance of folks who are formally trained in economic theory, I'm not sure that they ought to be able to tell us "we know about this stuff, so the rest of you just sit back and let us take care of it" anymore. That's not a populist argument against trusting the concept of expertise, by the way, as much as it is an evidence-based observation that confident claims that economic theory clearly demonstrates that "if X, then Y will happen" haven't played out all that well in the real world.

Anyway, I hadn't realised my last post - which touched on the suddenly hot topic of "quantitative easing" - would coincide with Russel Norman going on Q+A to forcefully advocate New Zealand adopting a form of such policies. (I guess I really should talk to Tim more often.) I don't pretend to be able to give a full analysis of the merits and potential dangers of his proposal - see my above disclaimer - but it seems to me that the arguments being deployed against those proposals by the National Government need a bit more work. 

Those arguments divide into three frequently heard attacks on any sort of governmental meddling in economic markets. First, it isn't necessary to do anything. Second, even if it is necessary to "do something", the proposed response just won't work to fix the problem at hand. Third, even if the proposed response will work to fix the problem at hand, it will do more harm than good along the way.

So, for an example of the first attack, we have Steven Joyce (literally!) telling Radio NZ that:

What the Greens are proposing would literally cause the international community to doubt New Zealand's economic priorities quite significantly, and it literally would be a case of talking the economy down to other countries which are in much tougher situations than we are.

So, you see, the proposed measures (literally!) aren't needed in New Zealand because "the approach has only been embraced by countries in crippling debt ... ." And, I guess, while New Zealand's debt levels are bad (or so we keep being told when the issue of assets sales comes up), they aren't "crippling". Therefore, we just don't need to do what the Greens suggest, because the conditions in New Zealand are quite different to those where the policies are being adopted.

Except ... what about Switzerland? It isn't a "county in crippling debt" - it's been running budget surpluses for the last six years! - and yet it has been engaged in a programme of quantitative easing since 2011 in an effort to lower the value of the Swiss Franc relative to the Euro. So it isn't exactly the case that quantitative easing represents the last, desperate gamble of hopelessly indebted countries trying to restart their economic heartbeats. In fact, to revisit a point made in my last post, claiming that debt levels and quantitative easing policies are inextricably interlinked is to mix up your fiscal with your monetary policy.

Well, that then leads to the second line of attack. John Key trundled this out in Parliament when he responded to a Russel Norman question thus:

If the member wants to go and have a look at Switzerland and see how successful it has been at defending the Swiss franc at 1.20 against the euro, he is welcome to do that. All of these things are voodoo economics that do not work.

Which would be a good point. After all, even if you think that lowering the value of the NZ Dollar is a highly desirable measure, there really is no point trying to do so if the policy just won't work. And so we take up the PM's invitation and find ... this. Which shows that since the Swiss Central Bank announced publicly in 2011 that it was going to set a target of 1.20 CHF/EUR, and reiterated that it would buy an unlimited amount of foreign currency to achieve this target (including by "printing more money", if necessary), the Franc has pertty much traded at just this level. And we also find this (pdf), a report from the IMF which describes the Swiss policy as "appropriate" and concludes that: "The exchange rate floor, seen as credible by the markets, has halted appreciation and helped shore up the economy ... ."

Now, of course this doesn't prove that any similar quantitative easing measure would work as effectively in New Zealand. Nor is it necessarily the case that just because the measures have worked effectively so far in Switzerland, they will continue to do so forever. But let's just say that if your dismissal of the proposal in New Zealand is "go have a look at Switzerland" ... you probably actually should go have a look at Switzerland before you mount it.

Which brings us to the final line of attack. Even if quantitative easing measures might be appropriate for New Zealand's situation, and even if they might work to bring the value of the dollar down, they inevitably will have side effects that counterbalance (or even outweigh) any good achieved. And so Steven Joyce tells us that "[The Greens] want to abandon sensible monetary policy and whack up the cost of living for every New Zealander ... ." Which may well be true, in that the less the New Zealand Dollar is worth vis-a-vis other currencies (especially the US Dollar) then the more it will cost us to import goods and services into New Zealand. There is, after all, no such thing as a free lunch - meaning that while a lower dollar may help our exporters (and those who make money helping our exporters), it will hurt anyone wanting to buy anything sourced from overseas.

Well, that sounds bad, doesn't it? But ... wait a minute. Back in April of this year, John Key was reportedly telling "the chair of the Indonesian Economic Committee that the New Zealand dollar was overvalued." At that time, one NZ Dollar bought you just over 0.82 US Dollars ... while today it will buy you 0.817 US Dollars.Then in August, Key tried to talk down the NZ Dollar when he "told Bloomberg News one-way bets on the kiwi were "not a very smart thing to do" and that the central bank had scope to cut rates." At that time, the NZ Dollar was trading at 0.815 against the US Dollar.

So we can assume (can't we?) that John Key also thinks the NZ Dollar ought to fall in value - meaning that John Key also thinks that the cost of living for evey New Zealander ought to go up. As such, doesn't it seem a little bit odd for Steven Joyce to attack the Greens for wanting to bring about the exact same end state of affairs that the leader of his Party wants to see come into being ... even if that leader doesn't  agree with them on the means used to achieve it?

All of which is to say, there may be very good reasons why the Green Party's suggested quantitative easing policies are a bad idea. But I'm not sure we've heard them yet from this Government.

[Update: Having finished writing this and then turned to look at what others are saying about the issue, I'm going to make an immediate exception to my initial "don't trust anyone with an economics PhD" point and direct readers to what is a far more cogent critique of the Greens' proposals by Matt Nolan.]

Comments (14)

by Eric Dutton on October 08, 2012
Eric Dutton

All of which assumes that our currency is overvalued, which is by no means certain. Reducing the value of our currency will simply make it cheaper for overseas interests to purchase New Zealand assets.  The fundamental need is to balance our current account.  Macroeconomics is not rocket science, (or science at all in that it is impossible to design experiments which give reproducible results).  If you separate out all social welfare elements from the tax structure and replace them with exactly the same cash flows from the welfare structure, then the waters are less muddied.  Both tax and welfare rise by about 15 billion dollars and this does not matter a whit.  

 Free from some of the smoke and mirrors, it can be demonstrated that for every dollar of New Zealand production, 72 cents tax is added.  For every dollar of imports, we add 15 cents tax.  So we set up a separate desk at the RBNZ, charged with balancing our payments, with a target of 0 - 1% surplus in our current account over the medium term.  The tool we give them to do this is the export tax deduction. Currently we only deduct the GST portion of the total tax, which is around 22 cents for each dollar of pre-tax production.  There is another 50 cents available to stimulate exports.  If we settled initially on rebating 30 cents of this, then we might find that our exports were stimulated to the extent that our dollar rose, and part of the incentive was lost to the exporter.  Let's say that half the benefit is lost in this way.  The exporter is still looking a landscape which is more appealing than a 10% currency devaluation.  The loss of revenue could be balanced by increasing taxes on imports.  And yes, we can do these things within our existing international obligations.  Its just a matter of putting the numbers in different columns.   

  By making the adjustment of the export rebate independent of the budgetary process, we can engender confidence in the long term nature of the solution.  And yes, if we make exporters better off, then the rest of the country will pay more for the goods which we export.  But we will have some manufacturing left, and we won't be selling off all our assets cheaply to foreign owners.  In fact, with a 1% surplus, we can buy back our own country.

by Pete Sime on October 08, 2012
Pete Sime

This American Life gave a very good explanation of the process by which the Fed pumps new money into the US economy in a segment called Weekend at Bernanke's (26 mins). Transcript here.

by Andrew Geddis on October 08, 2012
Andrew Geddis

"All of which assumes that our currency is overvalued, which is by no means certain. "

Sure ... I mean, given that no-one pegs to gold anymore, everything becomes relative. All I'll point you to is this NBR article, the first sentence of which is: "The kiwi needs to be 15% lower to bring the nation's current account deficit to a more sustainable level, the International Monetary Fund says."

by william blake on October 08, 2012
william blake

Quantative easing could also be seen as a form of consumption tax, especially on petrochemicals, that sits comfortably with the green agenda.

by John Norman on October 08, 2012
John Norman
Re the Swiss according to Stevie - you do have to wonder about him at times - being "on its back".. I did hear that correctly didn't I.. mention was in the basket of countries so deemed before wonderboy dove into the US for its pinnacle of ineptitude etc. On the plus side nice to see would be government ministers dropping their oh so personal reactivity to questions/questioners; to act like ministers with due authority and not somewhat shrill voices at proposals before them that they have clearly not even so much as contemplated; and get a grip on public media as a necessary means of exchange rather than something to take one's side in whatever point is deemed important by them. Like your header, again, Andrew, so disconcerting... wins a hedgehog a la cute per huffingtonpost this day.. go see.. stay happy!
by John Norman on October 08, 2012
John Norman

ps: hedgehog

by Ian MacKay on October 08, 2012
Ian MacKay

As a non economist, it did seem odd that Key/Joyce seemed so quick to bluster and denigrate. Might be something in this quantitative Easing after all.

by stuart munro on October 08, 2012
stuart munro

Government printing is better, so long as it doesn't become a habitual vice. Money directed to appropriate ends is better than gifted to Aussie banksters.

by Peter Tenby on October 08, 2012
Peter Tenby

Not printing when everyone else is is in fact a stronger statement than printing.

Its all relative my dears...

by Matthew Percival on October 08, 2012
Matthew Percival

Gee that Matt Nolan thing is heavy, heavy stuff. The first of my reading on this topic I haven't been able to totally comprehend.

The concept I did get from his piece and agree with is that money is representative of resource. If we take resource to repair Christchurch we take resource away from elsewhere, in this case everyone else with NZD. It would have a similar effect to taxing every man, woman and child and would make us all poorer.

Which is why I struggle with this policy being brought forward by the Green Party. The party that prides itself on highlighting child poverty comes up with an economic policy that will exacerbate that issue. Bizarre.

P.S I was looking forward to Stuart Munro's thoughts on this one, he didn't disappoint!

by Eric Dutton on October 08, 2012
Eric Dutton

 All I'll point you to is this NBR article, the first sentence of which is: "The kiwi needs to be 15% lower to bring the nation's current account deficit to a more sustainable level, the International Monetary Fund says."

When the Greens, the Labour Party, and the Big City Economists are all on the same side  -  why am I afraid? 

by animalspirit on October 12, 2012

As an Uni Canterbury trained "economist" of sorts (ie from that department never  Keynsian - tho regretting a very limited education there now - Keynes himself being a fine mathematician and eventually successful speculator in commodities) I refer you to The Economist article today reprinted in The Herald business supplement - on the grounds that if it's okay for the Swiss to be using Quantitative Easing techniques I think the hysterical references to buckets of cash in Zimbabwe re the PM are spurious (..he who is a Canterbury Uni trained accountant I believe) and I doubt that reinvestment of central bank resources here in NZ in growth projects is going to harm the country's prospects!

by animalspirit on October 12, 2012

And of course as I point out elsewhere the PM's involvement in what used to be classified as The Best Trade Ever where a Bankers Trust trader with clever techniques bet against the entire NZ money supply in NZ in 1987 and the PM appears to have been at the other end of the transaction (see Frank Partnoy Infectious Greed page 20) whereupon the Treasury was apparently very happy - and the trader likewise since he shorted the currency down and had a put option in the other direction so could not lose.  Mind you Bankers Trust mislaid US$80m when he left which they could not account for - that's these rotten computers for you.."his trading caused a ruckus in Wellington, where-as one trader recalled- the kiwi 'fell like a wounded pigeon.'   Wacky events too.  "But New Zealand's officials privately told Bankers Trust they had known about Krieger's bets" (well, they would 'know' about them, wouldn't they!) "against their currency and were happy about the decline, which would make exports cheaper and help spur economic growth." (p24).   Latest best bet was Paulsen shorting the US housing market and he, of course, made many billions and stuffed poor old Europe..told my Michael Lewis in "The Big Short" and others.    Another favourite and topical reading is Treasure Islands by Nicholas Shaxson which explains why the ex-trader PM pines for a tax haven here to collect all the illicit loot.  Much easier than manufacturing and mining!  

by animalspirit on October 13, 2012

Welcome to Planet MBA -  where we are all victims of some defunct economist ....

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