Friday, 2 May 2014

"This Is New."

Game Changer: Labour's finance spokesperson, David Parker, has come up with a credible solution to the many problems associated with New Zealand's Reserve Bank Act mandated monetary policy. Labour now has a more convincing economic story to pitch to the voters than National. Game on!
KEYNESIANISM by other means. That’s what David Parker’s new monetary policy offers voters – and they should take it.
The measures announced by Parker on Tuesday morning constitute the long-awaited framework upon which the detail of Labour’s manifesto can now be hung. Indeed, without Parker’s proposed changes to the Reserve Bank Act and the Kiwisaver scheme, Labour’s promise to resuscitate the manufacturing export sector and create thousands of new jobs would’ve been empty. But now that Parker has provided the party with an economic skeleton to articulate its redistributive muscle, well: “Dem bones, dem bones gonna walk around!”
And it’s all Parker’s doing. Political observers have long dismissed the man behind Labour’s economic programme as an earnest, rather rumpled provincial lawyer and “policy wonk”. There’ll be a lot less of that now. For the first time in more than 40 years, Labour has developed a joined-up economic policy that is all its own.
Parker confirmed this himself when journalists demanded to know which other countries were running their monetary policy in the way he’s suggesting. “No one,” replied the Shadow Finance Minister with obvious pride, “this is new.”
That’s true – as far as it goes – but a close study of the way the Singaporean government has manipulated its superannuation and public housing schemes over recent decades might suggest that Parker is not alone in recognising the powerful monetary impact of raising and lowering the level of compulsory contributions to citizens’ savings funds. What really sets Parker’s plan apart is the way in which he has grafted what are, in effect, Keynesian demand management imperatives onto that most monetarist of institutions – the Reserve Bank of New Zealand.
“We propose an important new tool – varying the employee contribution rate for work based savings”, Parker informed his breakfasting business audience. “The variable savings rate mechanism – or VSR – would allow the raising or lowering of savings rates, rather than interest rates, to reduce or boost local consumption.”
Not only is Parker’s scheme sound economics (a judgement with which even the business community, however grudgingly, was forced to concur) but it is also spectacularly good politics.
A lower exchange rate bodes well for manufactured export and import substitution industries alike and that, in turn, points to job growth. Real job growth, that is: the sort that generates full-time, densely unionised, high-skill, high-wage employment.
And Parker’s story just gets better with the telling.
By utilising the VSR, rather than the Official Cash Rate (OCR) to take the heat out of the economy, the Reserve Bank Governor will be able to protect mortgage-holders from the sort of continuous income-squeeze they are currently undergoing. The VSR is unlikely to be wheeled out every six weeks in the manner of the OCR, and its wider application will almost certainly reduce each individual’s contribution. What’s more, the money being withdrawn from circulation will remain in New Zealand. The average Kiwi’s economic nationalist nerve cannot help but be stimulated by the knowledge that the big Aussie banks’ ability to turn New Zealand’s misery into Australia’s profit will be patriotically curtailed.
The question now for Parker and his boss, David Cunliffe, is how to bring the good news from Labour’s “war-room” to the party’s electoral base. Tuesday’s announcement has had the effect of binding Labour’s message into a single, coherent narrative – but it is not a story that can be told in a ten-second sound-bite. Social media can help in this respect, but Facebook and YouTube can only take this sort of story so far. Good news is best delivered in person.
The ideal vector for this type of message is the nationwide political tour. Cunliffe painting the picture of a kinder, gentler, more inclusive and economically productive New Zealand, while Parker details precisely how Labour proposes to take us from problem to solution.

Today He'd Use PowerPoint: In the election year of 1975 Rob Muldoon took his charts and graphs and tables on a nationwide tour to discredit Labour's economic policies - especially its NZ Superannuation scheme.
There would be an additional measure of delicious political irony in such a road-trip. Forty years ago Labour’s original superannuation scheme was systematically undermined by Rob Muldoon’s travelling roadshow. From town to town and on into the main centres the pint-sized “economic wizard” advanced with his charts and graphs and tables, and with every stop on his exhaustive itinerary the crowds grew larger and more convinced that Labour’s scheme (which today would be worth $260 billion!) was a bad idea.
How satisfying it would be to reverse the process.
This essay was originally published in The Waikato Times, The Taranaki Daily News, The Timaru Herald, The Otago Daily Times and The Greymouth Star of Friday, 2 May 2014.


Don Franks said...

What about the low paid who have no money spare for Kiwi saver and no prospect of home ownership?

Anonymous said...

It wasn’t so much Muldoon’s charts and graphs as the dancing Cossacks that put the frighteners on the public in 1975 – the Cossacks and the promise of a pay-as-you go super scheme that was easier to understand and offered much more to the average voter than the Labour scheme. The element of compulsion in the Labour scheme caused a lot of resentment and its unfairness to women led Labour to offer the widely-ridiculed “baby bonus” by way of compensation. It was a gift to Muldoon.

The LVR is complex and has too many as yet unknown variables to sell easily to the voters. Its merits are debatable and the noise of the debate is only going to unsettle potential Labour supporters.

Labour doesn’t need charts and graphs. It needs something tangible to offer the public.

TM said...

What a week for Labour. This policy is exactly what they needed. Something of substance, rather than tinkering with relatively unimportant policies as they have been doing recently.

That combined with National's crony capitalism coming to the fore (why doesn't anyone dig down further into Skycity?) should see a good rebound in the polls.

Anonymous said...

The policy encourages people to borrow tax deductible debt to buy houses. Bank depositors are already wiped out by tax and inflation, the government will confiscate their savings in a crash as well as giving any possible returns to spendthrift borrowers in their kiwisaver through the VSR.

Anonymous said...

Labour are NeoLiberal Wonker monetarists. They are rubbish just National Lite. They are part of the two headed party grip of vice on this country.

jh said...

And plans to follow reserve bank treasury advice on immigration?

Guerilla Surgeon said...

They certainly need to do something.

jh said...

NZ Reserve Bank Slams Population Ponzi

Guerilla Surgeon said...

Food for thought JH, but I suspect that – judging by the Maurice Williamson affair that the main reason for bringing in migrants is to have people to contribute to the party coffers and vote for them :-).

Loz said...

The Reserve Bank Act provides for the restriction of public purchasing as a means of restraining demand and keeping prices constant. Increasing interest rates or increasing the rate of forced saving are both methods for contracting the purchasing power & disposable income of wage and salary earners as the accepted method of price stabilisation. In other words, the Reserve Bank Act charges the institution with restricting money supply (and therefore demand) as a means of stabilising the economic cycle.

Labour’s proposed modification to the Act isn’t Keynesian. It is little more than another tool that rests upon the same classical supply and demand economics that Keynes rejected as it asserts that controlling prices through restricting the purchasing power or working New Zealanders will produce conditions for economic stability and growth.

Keynes began his summary of his General Theory with the observation:

“The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes”.

From the Great Depression until the 1980’s the failure of classical economics was accepted with government policy specifically constructed to address full employment and income inequality problems. The 1989 Reserve Bank Act was itself the complete rejection of Keynesianism. The bank’s summary of the legislation’s purpose shows that it was the antithesis of Keynes. It dismissed the “outstanding faults” identified by Keynes and stated:

… “Before 1989 the Reserve Bank had a number of objectives, such as full employment and high levels of production and trade, as well as price stability”…. “having multiple objectives for monetary policy reduced the likelihood of any of them being achieved.” … “the best way monetary policy can assist long-term economic and social well-being is by delivering price stability which encourages the economy and employment to grow again”

Labour’s proposed amendment doesn’t recognise the “outstanding faults” of classical economics that Keynes identified. It doesn’t challenge that monetary policy should in the hands of a body that works isolated from the rest of government. The modification is purely to tack on a bright-eyed philosophical justification to the bank’s primary function which happens to accept neoliberal / classical economics as creating growth and employment! Labour’s actual amendment (in bold) is reprinted below.

"The primary function of the Bank with respect to monetary policy is to enhance New Zealand’s economic welfare through maintaining stability in the general level of prices in a manner which best assists in achieving a positive external balance over the economic cycle, thereby having the most favourable impact on the stability of economic growth and the level of employment."’

The proposal simply states the most favourable impact on growth and employment is achieving “a positive external balance” which is then stated to be the basis of price stability, growth and eventually employment. It actually places faith in the exact opposite of Keynes showed happening in a free-market economy. Sadly, it’s not a game changer Chris as it shows little change in economic thinking within Labour from its neoliberal direction of 30 years ago.

Jigsaw said...

I think one of the reasons that it is unlikely to work are the huge number of exemptions. On one hand Kiwisaver will be compulsory but on the other all self employed and the lower waged will be from the scheme. Labour will continue to be handicapped as the election approaches and the economy improves.

Jigsaw said...

If Labour makes Kiwisaver compulsory does this mean that the government will guarantee the funds in the scheme even though they are run by private companies? Will they then remove the funds from the companies and run it as a state organisation or will the private companies be able to do what they wish with the funds as they are shielded by the state guarantee?
It doesn't seem to have been thought out very well.

Guerilla Surgeon said...

"Will they then remove the funds from the companies and run it as a state organisation "

We can only hope :-).

Ennui said...

Chris, As a student I learnt about Adam Smith, Marx, Keynes an adult I learnt about Friedman and neo-liberalism. All good, Keynes came out as the good guy, with the ideal state being the "welfare state" with "cradle to grave security". Underwritten of course by Keynesian fiscal economics.

Two things escaped our analysis, first the concept of limitless growth. How could we be so stupid, nothing can past a certain point. Second the concept of endless resources, again we stupidly assumed that resources don't run out.

And what resources? Fossil energy made the growth possible, enabled the industrial revolutions, the modern growth economy. As did rare earth minerals. The bad news..they are in decline.

All of the above economic models rely on growth: the aggregate has only one future direction, down. As such Parker and Labour may advocate policies as described and they may get short term results.

So we dance on the political head of a pin, angels gazing into a rosy skied eternity, debating how many of us can stand on the head of a shrinking pin that consist of oil supply. Suggesting Keynesianisms or similar. And so we head blithely for the cliff following our equally blind leaders.

Or perhaps Labour in government (not before, its not very electable) could institute measures for the "NEW POST CARBON ECONOMY".

Victor said...


Thanks for that. I've been trying to work out exactly what was Keynesian about VSR and thought I must have missed something.

As you explain it, it sure aint Keynesianism.

But, by providing an occasional alternative to interest rate hikes, VSR could presage a mild improvement in economic management with greater emphasis on the needs of the export sector and the "real economy".

It's hardly though the step-change we need.

Jigsaw said...

GS - perhaps you should examine the track record of the state when they run compulsory superannuation schemes. As a young teacher I was compelled to belong. Later I found out that although we put in our money in cash the government (both main parties) matched that not with cash but with IOUs until the time came when it became unmanageable and they simply shut it down and began a new one. Contrast that with Ontario where both parties put in cash and its now one of the richest schemes in the world. No government would be able to keep its hands off the money!

Chris Trotter said...

Okay, Loz and Victor, if Keynesianism is NOT about the government spending its way out of recession (and sharply reducing the mass unemployment that accompanies it) and then saving its way out of an inflationary surge in workers'incomes (by withdrawing spending power from the economy), then please explain, in layman's terms, what it IS about.

Victor said...


Let me divide your challenge into two

"....Keynesianism is....about the government spending its way out of recession (and sharply reducing the mass unemployment that accompanies it)......"

Very broadly speaking that IS Keynesianism as it applies to recessions. It’s what we should have been doing over the last half dozen years but have failed to do. This missed opportunity will come back to haunt us, as interest rates rise and our infrastructure and social fabric continue to decay.

".....and then saving its way out of an inflationary surge in workers' incomes (by withdrawing spending power from the economy)”

Well that latter point is common ground between a wide range of economists, including, I would have thought, the late Milton Friedman.

What distinguishes Keynesianism is:

a) the choice of tools (fiscal, monetary or something else)

b) the direction of economic policy

For Keynes, economic policy was essentially about ensuring sustained and widely diffused prosperity rather than mere market efficiency and stable currency (useful though these things are).

Merely introducing a new (and regressive) means of choking off demand will do little towards this broader goal, unless it’s associated with other measures that will stimulate sustained growth and its effective social diffusion.

Obviously, Labour will be unveiling other policies over the next few months that might fill that gap. We can but hope!

In the meantime, I don’t think that VSR is inherently incompatible with a Keynesian approach. But nor is it inherently incompatible with a strategy that prioritizes the fight against inflation, deregulation, the rational allocation of resources or any of the usual right-wing shibboleths.


Thanks for reminding us all of the inherent limits of growth-centered economics.

My own view is that (short to medium term)there’s room in New Zealand for a form of economic growth that will actually reduce our carbon footprint.

But it won’t happen without government involvement or investment.

Anonymous said...

"Labour now has a more convincing economic story to pitch to the voters than National. Game on!"

Labour may have a more convincing economic story to pitch but the problem Labour has is that they have absolutely no clue about how to pitch it, so it won't be game on, unfortunately.

Victor said...


May I, on reflection, soften my previous stance.

VSR isn't Keynesianism but would sit very comfortably with a broadly Keynesian policy mix.

There are some signs that we might get such a mix from a Labour-led government. But there are also signs that we wouldn't.

As previously stated, I think VSR could have the edge over piddling around with interest rates if the goal was to restrain inflation without imposing further impositions on export-led growth.

A key issue would still remain the weight we should give to combating inflation vis-a-vis other policy goals.

I would also question how effective VSR would be in restricting the one form of inflation that undoubtedly needs restraining, viz. real estate prices.

Piddling with interest rates can directly affect the real estate market in ways that I don't see VSR doing.

Don Franks said...

What about the low paid who have no money spare for Kiwi saver and no prospect of home ownership?

Ok, I get it now.

Not relevant to this demographic.

Loz said...

Hey Chris,

A fundamental aspect of Keynes' argument was that the traditional ideas of a free market, currency devaluation nor a reduction of wages would ever produce full employment in a meaningful sense. As such, the state is the only utility that can be used to achieve what market economics couldn't. He argued there was a permanent role for government in combating inherent market imperfections which consistently developed unemployment and gross inequality. This is why the preceding 1966 Reserve Bank Act orientated monetary policy to achieve "the highest level of production and trade and full employment, and of maintaining a stable internal price level."

Keynes was about using the state to moderate the two primary failings of the market system - unemployment and gross inequality. He argued that the established narrative that prosperity would come from competition and gaining entry to new markets was wrong. Instead of proposing an export led recovery, he stated that "nations can learn to provide themselves with full employment by their domestic policy". These are the important aspects of Keynes, far more central than reducing the state to a player of influence in generating supply and demand through spending and saving. That’s not to dismiss the importance of the state in spending and saving as a tool in influencing the economy.

One observation of particular relevance in relation to the Reserve Bank Act is his belief that "supply and demand" and projected inflation is not simply the logical outcome of an increase in general purchasing power. As a demonstration, he highlighted that different sections of society behaved differently when receiving an increased income. The wealthy may save more or invest in a hobby - which isn't necessarily inflationary. It's only those in economic distress whom will immediately spend their new wealth on consumable goods. The 1989 Reserve Bank Act is founded on the simple supply & demand premise that inflation is best controlled by restricting demand. The way it achieves this is by increasing the living costs of working people until they can't afford to be in the market for more goods or services. If effective real wages are shredded due to increased debt servicing levels or through compulsory retirement savings the affect is the same. It's effective as a tool to control price inflation but it's not Keynesian.

The Act makes it impossible for the increasing numbers of people in financial angst to ever gain a real increase in purchasing power without the bank playing whack-a-mole every time a flicker of hope appears. New Zealand could never have got out of the Depression if government policy was trying to increase the employment levels and wages of New Zealanders while its central bank slashed incomes every time increased spending was observed. The mechanism is itself deeply flawed and incompatible with a Keynesian response to recession.

Victor said...


Why did I ever bother responding to Chris's challenge?

You've done a much better job than anything of which I'm capable.

Thanks for ironing out the wrinkles in the argument.

Chris Trotter said...

Thank you, Loz.

I shall have to go away now and think very hard about the talented Mr Parker's policy.

A case of "be careful what you wish for", I suppose.

Sometimes it's dangerous to ask questions.

Victor said...


You're not the only person on whom Loz has imposed a re-think.

I've long defined myself as (broadly) a Keynesian but I'm also a great fan of export-led growth.

That's the problem with other people's views. They can disturb your certainties.

And that's also one of the virtues of this site.


Would your view of VSR be different if it was supplemented by more progressive personal taxation AND linked to some sort of Sovereign Wealth Fund or national investment policy?

Scouser said...

I popped in to comment on a couple of what I believe are incorrect statements by Chris and then found myself in the middle of a decent thread on Keynes. I'll address my remarks on Chris's statements 1st.

"The average Kiwi’s economic nationalist nerve cannot help but be stimulated by the knowledge that the big Aussie banks’ ability to turn New Zealand’s misery into Australia’s profit will be patriotically curtailed."

The banks prefer the lower interest rates as their margin tends to be similar in low and high interest environments but they generally make a lot more loans in low interest environments so they then make more money.

"Not only is Parker’s scheme sound economics (a judgement with which even the business community, however grudgingly, was forced to concur) but it is also spectacularly good politics."

Sorry - the initial response was midly +ve but once a decent analysis had been performed the policy is seen as possibly neutral probably -ve. The key issue for the RB is that they perceive escalating house prices as a major issue. Low interest rates are a large stimulus for this. The effect of keeping interest rates down will outweigh any decrease in available money unless the decrease in available money is magnificent. Thus, it's more likely to increase any boom in house prices for instance.

As an example, Brash praised the idea of giving the RB more than the interest rate hammer as a tool but stated that VSR was not the right tool. This somehow translated in to his undying support.

I agree, however, with Chris in that it is good politics by Labour.

On Keynes my two penneth - there are indications that when there's a major correction it's a waste of money and counterproductive but in a lesser correction then it can dampen the effects of such a recession. As with many economic approaches they're more rules of thumb applicable in some circumstances rather than any scientific reproducible approach.

One of the major criticisms I have of much economic theory is that it ignores 'change costs' and assumes a level of ability of change that history shows is untrue. It almost assumes efficiencies occur immediately. As an example - Yes, running a motor vehicle industry in NZ isn't viable but if we kill it off overnight we get significant costs in unemployment benefit, then we have re-training for the unemployed etc. etc. So, the idea of pushing change as a supported process is where the market meets government.

Keynesian economics is an example of this. From a pure market efficiencies perspective it's nonsense. From a managing consequences on people perspective it dampens the more ruthless consequences of the market, which even a right of centre on economics person like myself sees merit in.

One element of Keynesian economics that is rarely brought up by the left is that it also supports tax cuts and that arguably tax cuts have a greater stimulus effect than increased government spending.

It's arguable that National followed the perfect Keynesian approach - we did not have a major recession - they increased government spending as a proportion of GDP and brought in tax cuts.

Sadly, Keynesianism is being abused as allowing governments to spend as they wish. The huge debts that the likes of the UK and US are building up will be a major problem in the future. Everything in moderation. If the economy is f***d then it has to be allowed to correct and a Keynesian approach does not fix that it merely postpones and exacerbates the issue. I'm concerned about even the lesser Keynesian approach National followed.

Loz said...

Thanks for the comments Victor and certainly my thanks are also with Chris for providing the only forum where some depth of discussion can occur over such important policy suggestions.

Let me make one further point in relation to Keynes as it is central to how radical Keynesianism was as a departure from the idea of supply and demand economics.

We would all accept there a relationship between the market demand for goods and services and the volume of people in employment. Classical economics suggests that employment occurs as the result of effectively meeting the demands of a market. The logic appears (at first glance) irrefutable as no employer would entertain hiring staff unless market demand didn't first exist for goods and services. Keynes however, challenged this cause & effect relationship between demand and employment and turned it on its head. He did so by using the earlier Marxist observation that capital (or wealth) was itself the creation of skilled labour working with naturally occurring resources. Instead of an economy being reliant on first attracting capital or wealth to generate employment, directly increasing the numbers of those in employment could also be used to create much needed capital. In a depressed economy he suggested that directly increasing the numbers of those employed could increase the supply of goods and generate new consumer demand through increased wage and salary earnings. The entire economic system could be lifted by directly increasing the level of employment in the first instance to generate the elusive capital that had long been missing from the market based economy.

Part of the criticism Keynes had with the classical view of employment was that employment levels always had a delayed and often stunted response to measured demand increases. One reason he suggested was that in times of recession employers were reluctant to take on more staff so employment didn't lift proportionately to demand... it was "sticky" and at times wasn't observed following an increase in demand at all. He also suggested that most industries have specialised labour requirements and employers weren't always in the position to respond to demand by easily increasing the size of their workforce. For whatever the reason, his observations suggested that employment wasn't simply the result of market demand at all. This imperfection in the relationship between demand and employment suggested to Keynes that a problem existed with the simplicity of the supply & demand model of generating employment. It also suggested a major problem with the idea that a government could constrain market conditions one day while expecting an “elastic” rebound of the employment market the next. We should mention that classical economists suggest that the same "sticky" or imperfect employment response to demand wasn't a failing of the market but rather evidence of market interference the result by structural elements such as unions and employment regulations that prevented the market moving freely.

The existing (and proposed) Reserve Bank Act is designed as a classical economic tool. It suggests that the provision of a freely moving and growing market can provide new sources of wealth that will generate employment. The theory the legislation is based upon suggests that occasional restrictions on internal demand (i.e. "cooling off the economy") are acceptable if they are providing a means of stabilising the market which will ensure long-term growth and employment. A paradox appears with the concept as the restriction of purchasing power in the areas of most need become the prescription for increasing prosperity... supposedly for those being squeezed.


Loz said...

... (continued from above)

Keynesianism was unique as it provided a path out of the low wage, low growth paradigm of the free market by creating capital through large scale employment programmes. I'm not convinced that a time of capital shortage a compulsory savings mechanism can be made Keynesian. In a similar paradoxical vein, the devaluation strategy of reducing the value to the NZ dollar to attract capital & generate demand also stems from the same classical view of employment. Devaluation's stated purpose is to increase prosperity in a depressed economy by lowering the comparative international wage level of New Zealanders. The strategy can only work in attracting capital as long as comparative wage levels remain low and real wages don't increase. Devaluation is likely to compound monetary problems as debt servicing remains with an un-deflated foreign currency (commonly the USA dollar) and the nation is now heavily reliant of foreign produced consumables, all of which will increase in cost, which adds inflationary pressure to the system. Considering the only tool for curtailing inflation is the restriction of demand via interest rate hikes or compulsory saving, devaluation could become a nightmare scenario for wage and salary earners.

Chris Trotter said...

If I'm understanding you correctly, Loz, you are suggesting that the tools Labour has placed its faith in to date will not only not bring into being the High Skill-High Wage Economy Parker is promoting, but may actually drive it even further out of reach.

Moreover, you seem to be saying that only by the State directly (or in co-operation with private capital) investing in industries that create large numbers of high wage-high skill jobs can the downward cycle of low-wages and unemployment be arrested.

Apropos of this, would an historical example of this Keynesian-style investment be Labour's outreach to the Ford Motor Company in 1935 and the latter's establishment of the labour intensive motor-vehicle assembly plant at Seaview near Petone in Wellington?

Loz said...

Absolutely Chris, the "tools" are only a demand side mechanism for killing purchasing power and a vague concept of reducing the value of the currency as a means to increasing the volume of exports on reduced profit margins. Nothing in the strategy is geared toward creating a high wage economy. The tools don't provide an answer to the increasing shortage of disposable wealth in the world economy. The devaluation "strategy" became a devaluation war during the 1930's and we also seem to have forgotten that at the end of 1984 Labour's strategy for dealing with the constitutional crisis and creating an export bonanza (that never eventuated) was through currency devaluation when the Douglas era first began.

The plan of the first Labour government was to identify large scale employment programmes as underutilised labour was recognised as the biggest tool for expanding the economy. A couple of articles from the Depression era echo the same discussion we have been having. One is an outline of Labour's strategy for the 1935 election by Labour MP H. T. Armstrong. Note his dismissiveness of the Coalitions governments’ currency exchange strategy for growth. Another is from the Minister of Public Works (Bob Semple) during Labour's first year in power.

Victor said...


Have I misunderstood you or are you saying that the accelerator is always to be preferred to the brake?

If not, in what circumstances should the brakes be applied?

And which brakes? (presumably not interest rates or compulsory savings).

Loz said...

Hi Victor,

Even a limited market economy must have some form of dampening mechanism to try and prevent boom and bust bubbles. My criticism is that the broad removal of purchasing power from wage and salary earners isn't really applying a "break" on the economy as it causes long term damage in creating future conditions for employment that aren't easily be reversed. A better analogy of the Reserve Bank Act would be slashing a vehicles tyres to achieve a reduction in speed.

We know the Global Financial Crisis was caused through inadequate regulation of lending practices, which in turn has fuelled massive price rises in property. The natural response to "take the heat out" of the property bubble might be to return to enforcing the restrictions on lending that had prevented property bubbles from developing for over 50 years. Yet, we have become blinkered in accepting self-regulating markets as beneficial that we don’t even consider that the simplistic supply and demand mechanisms have created more damage and financial hardship than any government imposed industry regulation ever has!

In the post-Depression era, the government utilised multiple tools in controlling inflation while simultaneously encouraging growth in employment and real wages. Labour used the Mortgage Corporation and State Advances to provide cheap loans and stimulus at one end of the spectrum but also enforced limits on mortgage lending (a maximum 80% of a house value) at the other end to moderate property market growth. We are so used to the Douglas Era mechanisms that no one even considers regulatory restrictions on lending that would dampen down the developing housing market without the broad destruction to employment that occurs as a result of restricting across-the-board spending!

The 1980's reduction the economy to a representation of "supply and demand" is too primitive and simplistic to be of much value although that's what the Reserve Bank Act's "gas pedal" and "break" are. Increasing the purchasing power of the 70% of New Zealanders who currently receive less than $43,000 a year isn't necessarily inflationary - it completely depends where the money is spent. If an increase in purchasing power meant that pensioners were able to use more electricity in heating their homes there is no increase in inflation at all. When an increase in purchasing power is matched with a corresponding increase in the local production of goods and services to satisfy that demand, it isn't inflationary either.

Across the board contraction in the spending power of wage and salary earners is a terrible way to restrain prices. A more granular, conscious, control over the sale of inflationary goods (imported consumables) by varying punitive sales taxes and tariffs are all methods for controlling market growth and inflation without destroying the prospects of job creation and real wage growth.