Economic proposals ‘dangerous nonsense’

Press, 19 December 1988, Page 8

Economic proposals ‘dangerous nonsense’

By

PATTRICK SMELLIE

Both the Reserve Bank and the former Minister of Finance, Mr Douglas, heaped criticism during the week-end on suggestions from several academic economists on how to lower exchange and interest rates.

Mr Douglas described the proposals — formulated mainly by Auckland University’s Professor Alan Catt — as “dangerous nonsense.” The Reserve Bank criticised the proposals for their "sheer inconsistency,” saying the academics were trying to get monetary policy to do many things at once. The proposals essentially suggested that the Government should start managing the money supply to achieve growth in output and employment, rather than concentrate on controlling inflation. The Government’s approach so far has been to target inflation with its monetary policy. It has sought eventual growth and employment through a low-inflation economy, and other policies which put pressure on industry to be competitive. Mr Douglas rejected the academics’ claim that New Zealand was following economic policies not taught in any university. Citing the work of Professor Michael Porter, of the Harvard Business School, Mr Douglas said the critics were outdated. “One of Professor Porter’s central conclusions is that you do not win as a nation by making things easy for your industries. You do not win by devaluing your currency. “You win when there is real and intense pressure

on your industries which forces them to innovate and keep on innovating, if they want to succeed,” he said.

Claims of an overvalued currency were simply signs of inertia, according to Professor Porter, Mr Douglas said.

The Reserve Bank, which was involved in the seminar that created the proposals, but disagreed with them, said monetary policy could not be used for inflation control and growth promotion at the same time.

The bank agreed with the economists that monetary policy had borne too much of the burden for reducing inflation. “Indeed, the bank has consistently argued that the fortunes of the traded goods sector would improve if the policy mix could be altered to include further reductions in the fiscal deficit, further reductions in border protection, and labourmarket reforms.”

But simply loosening monetary policy on its own would lead to further weakening of the New Zealand dollar, which had been occurring since the early 19705. Specific suggestions such as targeting the number of banknotes in circulation were inconsistent with the economists’ wish for .lower interest rates, since the targets they suggested would ac-

tually tighten existing monetary policy, the Reserve Bank said.

Other proposals had not considered the cost to the Government of defending particular exchange rate levels.

The economists were wrong to claim that the monetary policies of Germany and Switzerland were aimed at “achieving optimal levels of output.”

“Nothing could be further from the truth,” the bank said. “Both are countries in which monetary policy is consistently directed towards price stability, and consequently both countries have experienced very low levels

of inflation in the postwar era.”

The bank’s statement said the New Zealand authorities were running monetary policy in line with normal international practice. The large group of economists and manufacturing leaders had called for a lower exchange rate to assist economic recovery.

Their statement on Friday stemmed from an unpublicised seminar a fortnight ago at Auckland University, which included representatives of the Treasury, Reserve Bank, and the Prime Minister’s Department. Treasury, the Reserve Bank, and the National Bank disagreed with the statement, and the Prime Minister’s Department representative did not express a view, according to the executive in residence of the University Graduate School of Business, Mr John Ingram. The statement was not timed to influence the new Minister of Finance, said Mr Ingram, who helped organise the seminar.

The statement predicted continued decline in output in the farming and manufacturing sectors if present policies continued, with no likelihood of significant revival.

“Participants agreed that present exchange

rates were responsible for declining domestic and foreign demand leading to low levels of output, and were the major cause of high unit costs.” The experience of the United States, Britain and Australia showed monetary policy could be loosened without refuelling inflation.

The paper suggested the Reserve Bank should be instructed to manage interest rates to achieve a normal yield curve, and to issue more long-dated Government stock, to let interest rates fall.

Mr Ingram said the statement was not opposed to Rogernomics as a whole.

But the rigid application of the policies risked discrediting free-market policies altogether, he said.

Those involved in the seminar included academic economists from five universities, including Mr Ewan McCann, of Canterbury University, and Professor Bruce Ross, of Lincoln College. The main manufacturers represented included Mr David Lee, of Lane Walker Rudkin Ltd; Mr Peter Stanes, of Fisher and Paykel, Ltd; Mr Richard Carter, of Carter Holt Harvey, Ltd; and Mr Alan Shadwell, the former chairman of the Mair group of companies and president of the Manufacturers’ Federation.