Thursday, March 11, 2004

NZ Reserve Bank: Back To Reality

You might have missed it, but NZ Reserve Bank Governor Alan Bollard quietly announced his intention to quietly demolish another part of New Zealand's bizarre experiment in neo-liberal economics.

Along with his announcement that there would be no change in the official cash rate, Bollard has asked Finance Minister Michael Cullen to give the Reserve Bank the capacity to intervene in the currency exchange market to protect the New Zealand dollar from the vagaries of foreign traders. It was enough to set at least one Herald business writer on edge, predicting that "The mere request will be a shock to the currency market".

I think it would be best not to panic. The paper is often a zealous defender of New Zealand's sado-masochistic relationship with Chicago school economics and is easily spooked by anything that seems to run counter to theoretical orthodoxy. The business section of The Herald is so committed to the tarnished dream of perfect markets that the prospect of New Zealand dealing with its economy in the same manner as the rest of the world sends that august group of commentators into gloomy fits of prophecy.

At the same time it would be a mistake to think that Bollard's request is unimportant. Those who believe that government can play a more active role in the regulation of things economic should take some heart from today's announcement. It represents another opening in the ideological conservatism that has gripped this country since the days of Roger Douglas. And it signals that there was much more than just idle speculation behind Cullen's musings a few months ago that government had a few different weapons in its arsenal to deal with excessive currency valuation.

He wasn't just musing. He was floating a trial balloon.

It puts me in mind of an article by Brian Easton that appeared a few months ago in the Listener. In his article Easton tries to show that the policies put in place by the Rogernomes in the 1980's represented a failed revolution. If I read him right, Easton seems to be saying that the Clark government may be what the revolution ought to have looked like. It's a difficult thesis, but it helps Easton to think about Cullen and Clark as revolutionaries, albeit smarter ones:

Will history record 1999 as a year of revolution? The previous ones were associated with periods of long political stability. (The Liberals were in power for 21 years, and Labour first for 14.) The political stability seems to have been associated with strong economic growth. Post-1999 economic growth has been above the OECD average. However, the economy faces the same danger as it did in the 1980s, when the exchange rate was allowed to rise, stifling the external engine of growth. The Rogernomes did not care then ?? and the economy stagnated. This time the government sees the threat.

I am not certain that Easton's speculations make the picture clearer. Much of his argument hinges on the ambiguous use of the word revolution. And I am not sure that he gives Clark and Cullen enough credit for breaking with the disastrous policies of the Lange government. Someone who does is economist Kieth Rankin. In his 2002 article Cullen v. Brash Rankin carefully illustrates the differences between the neo-liberalism represented by Brash and the fiscally tight Michael Cullen. In an interesting passage, Rankin writes that Brash's entry into politics will give Cullen an opportunity to break with the neo-liberal monetary and fiscal policies seen in New Zealand since the mid 1980's:

Former Reserve Bank governor Don Brash's entry into politics has given Finance Minister Michael Cullen a windfall opportunity to criticise the management of monetary policy. Hitherto, at least since 1989, Finance Ministers had been expected to stoically wear the policy actions of the nation's most influential (yet unelected) policymaker.

With Brash taking Labour's rival National toward the neo-liberal right, Cullen has shown that it is now easier for him to carefully pick apart the accretions of the Douglas era. Let's hope that Brash keeps up his good work.