We wuz robbed

by Linda Sanders / 24 November, 2012
A return to damaging Muldoon-style economics should be avoided.
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Sir Robert Muldoon was one of our more colourful prime ministers. He was also one of our greatest economic meddlers. Such was the extent of his tampering that by the time he was finally kicked out of office by a frustrated electorate we were in dire financial straits. His parting shot was trying to stop the free float of the dollar by the incoming 1984 Labour Government.

Much has been written about the effects of the economic reforms of the 1980s. I’ve always believed their severe impact on some segments of the community was all the worse because we had suffered a generation of poor economic management by Muldoon.

The economy needs professional care and should not be subject to the whims of politicians who have their eye on voters at the next election rather than the effects of their policies a generation later. Every time Rob, as he was known, found something in the economy was not working in the way he wanted, he would tweak something else. A price or wage freeze here, another set of regulations there: we were more highly regulated than many communist countries.

A cartoon of Muldoon squeezing a rugby ball summed things up: when he applied pressure in one place it caused a bulge in another. That’s what happens with economies. If you start interfering with one thing, you distort another. You can’t tamper with key economic settings and expect everything to stay in equilibrium. Which is why suggestions we should require the Reserve Bank governor to start using monetary policy to try to control the dollar are plain dumb – and dangerous. If it was possible to have our cake and eat it – that is, lower the dollar by trying to manipulate its value – everyone would be doing it. In essence, you can use monetary policy to target either inflation or the dollar – you can’t do both.

As ASB Bank says in its October 30 economic update: “The more focus that goes on controlling the dollar, the more volatile overall growth, inflation and interest rates are likely to be. The dollar would also do less work in buffering the economy against shocks (for example, a global crisis, a local drought, a plunge in export prices), so shocks will impact on economic growth more.”

According to the ASB, when the Swiss – who supposedly know a thing or two about money – intervened in their currency market, they had spent 20 billion Swiss francs (or 3.4% of their GDP) before they gave it away as a bad joke. Hong Kong is another country you might think would know better. It controls its currency, pegging it to the US dollar. Mortgage rates there are low, but property prices have risen 85% in three years. So the Government has put in place measures such as 40% minimum house deposits, debt servicing thresholds and controlling the release of land – echoing Muldoon-style economic management – and property continues to boom and bust.

It has been suggested limits be placed on our bank lending, but that’s just likely to encourage loan sharks. And high minimum deposits as a prerequisite for housing loans would penalise most those trying to get on to the property ladder. If we try to artificially engineer a low exchange rate, it will raise import prices, cutting everyone’s standard of living. For that matter, the ASB reckons the dollar is only slightly higher than warranted by fundamentals such as our real terms of trade.

Interest rates policy is not perfect, but it is better than the alternatives. Ultimately there is no free lunch. The way to a balanced economy is to boost productivity, eliminate the budget deficit and let business build things and generate jobs.

Send your questions to money@listener.co.nz
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