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.]