Obama’s White House has a freeze on $100,000 plus salaries. Key’s Beehive wants no increase in MPs' salaries this year. But what kind of example are these pay-freezers setting?

Newly-installed US president Barack Obama may be winning the headlines for imposing a pay freeze on senior White House staff, but if you want to see a really muscular approach to pay freezing as a recession-busting strategy, the slashers of Singapore seem to be setting the pace.

Late last year, Prime Minister Lee Hsien Loong chopped his own salary by 19 percent. His Ministers took an 18 percent cut and rank-and-file MP’s remuneration was sliced by 16 percent. This month the government announced ministers' pay, which is tied to economic performance, would fall even further this year, although even entry-grade ministers would still be taking home US$1.5m this year.

Senior managers at Singapore ’s giant investment company Temasek have gone so far as to give themselves a 25% pay-cut.

Singapore ’s National Wages Council – composed of representatives of government, employers and unions – has recommended that all Singapore firms adopt a wage freeze or "moderate" raises to stay competitive and save jobs.

It also considered, but rejected for the moment, a proposal to cut employers’ contributions to the Central Provident Fund, the retirement fund for Singapore workers. The Singapore pay-freezers make the Obama and Key gestures look like the work of wusses.

Key’s approach looked mild and moderate, when he wheeled it out. He was simply asking the independent Remuneration Authority to exercise restraint later this year when it reviews salaries for MPs, the judiciary and specified statutory officers and members of local authorities and community boards. His party would submit a recommendation for a “zero” increase for Parliamentarians.

Opposition leader Phil Goff’s initial response was dismissive. Prime Ministerial letters and National Party submissions would have no effect on the independent Remuneration Authority. Currently, the Authority can only have regard to remuneration movements in the public and private sectors in determining salary changes for Ministers and MPs.

Then, Goff upped the ante with an “all or none at all” offer. Labour would support the law change to empower the Authority to take broader economic circumstances into account and freeze Parliamentarians’ salaries – if private sector executives and managers were also subjected to the same constraint. Goff will have a problem if Key takes his advice, given the way the debate developed from this point.

Over the next 24 hours, State Services Commissioner Ian Rennie entered the argument. The 35 state sector chief executives are being told not to bank on a bigger salary. Some of them had already asked that their own salaries be frozen, knowing they would have tough calls to make. A number of them would be making what Rennie called “restraint-type decisions for their own people.”

Rennie’s cautionary advice drew a swift, blunt response from PSA national secretary Brenda Pilott: "We understand times are tough, but we expect to gather round the bargaining table in good faith, not have the decision already made before we sit down." She warned there could be an exodus from the public sector if her members were denied pay increases.

The sudden drop in temperature around the State sector also triggered the frost alarms at Trades Hall.

Service and Food Workers Union national bargaining coordinator Alastair Duncan warned that Key's plans "smacked more of the Muldoon wage freeze era" and pay rises needed at least to keep pace with inflation.

"This is not a good look,” Duncan grumped. “First he made it easier to sack people, now he's made it easier to pay less."

Next, Engineering, Printing and Manufacturing Union national secretary Andrew Little turned up the heat. As far as Little is concerned Key can freeze his own pay, but encouraging a broader freeze to cover the public and private sector “is economic foolishness that would only dampen an economy desperately in need of stimulus.

"We will be continuing to push for above-inflation pay rises throughout 2009," he promised, and that stirred Business New Zealand chief executive Phil O’Reilly to enter the lists.

O’Reilly knows Key’s Ministers are due to review the minimum wage rate around now. He is telling them it would be far better to give workers on the current adult minimum wage rate of $12 an hour a tax cut than a pay increase that will cost them their jobs. As usual, the argument is quickly being reduced to a stark black and white confrontation, the last thing we need right now.

Anyone who lived through the period when wages, prices, and interest rates were all controlled knows comprehensive freezes do not work. They do not encourage the adjustments that restore an economy to health.

Anyone who believes that free market forces will do the job needs to read and re-read the recent confessions of former Federal Reserve chairman Alan Greenspan. His light-handed regime permitted distortions that ultimately produced crisis in the global finance, banking and investment sectors.

Without doubt, however, the interventions being made to revive those vital sectors of the economy will produce equally dangerous distortions that will require constant monitoring and adjustment to avoid another crisis.

The answers are most likely to be found in the grey zone between the extremes of regulation and deregulation.

Hopefully, the current rowing over the suggestion of a pay freeze will not taint the waters so badly that some flexible form of remuneration regulation cannot be considered a part of the solution, as one of the tools to be used sparingly and temporarily to ease adjustments that are needed to bring our economy into balance and give it some new competitive edge.