I find the latest interest rate rise by the Reserve Bank pretty frustrating on two counts.
Firstly, the economy seems to be slowing, and inflation is undercontrol. An interest rate rise just seems to be unneccesary. The Reserve Bank seem to have an attitude which views any inflation as a huge problem, and which views growth and low unemployment as problems, in that they cause inflation. It just seems so odd to view economic growth as a potential problem to be overcome in the pursuit of low inflation, rather than the other way round! I think this is a consequence of continued over-reliance on monetarist economic theory across the western world. Note that I am not saying that monetarist economics has no value, or that inflation control is not valid. What I am saying is that too much emphasis has been placed on this.
Fortunately, this is somewhat balanced by Cullen's fiscal policy. While this is seldom recognised, Cullen seems to be running a pretty classic Keynesian programme, running a surplus in times of growth, and hopefully running a deficit in times of recession. It remains to be seen though whether people will actually accept new borrowing when we next have a recession.
My second, more specific point about the Reserve Bank is that Bollard can only seem to use one, blunt intrument to target inflation. Specifically, he is concerned about the residential property market, yet the only tool he can use is one that not only has spillover effects on other sectors (such as business investment). It is not even effective at deterring residential property purchase This is because of the prevalence of fixed term loans, the ability of residential investors to write off much of any losses against taxes, and because of the banks' ability to extend the amount and term of loans to compensate for rate rises. Indeed, probably the only people rate rises will deter are first home buyers who are already on the very margins of being able to borrow.
Even if we do accept that inflation is a problem, and I think too much emphasis is given to it, we need to find more precise ways of targetting the sector of the economy which is actually the problem. Any ideas?
2 comments:
agreed re Cullen; isn't it depressing that the level of our political debate is so low that the relatively simple point of a fiscal brake isn't really understood? allowing National to natter away about huge surpluses like they could have spent them over the last few years without leading to interest rate rises.
Also agreed that inflation tends to get treated too much as a first order problem, when we really ought to be most interested in things that directly impact on people's lives, like unemployment.
That being said though: the housing bubble does impact on people's lives, and the 1970s still loom in the past as a monument to what happens when inflation is not treated with sufficient care. Also I think it's probably worth noting that NZ isn't that hawkish on inflation - at least we don't live in the EU.
With regards to less blunt tools, I was chatting to a friend who is a tax lawyer about capital gains tax on investment properties (something that you suggested a few weeks ago). He said (and assuming he's correct) that we do have such a tax on our books but that it isn't policed and requires people to declare that they brought and sold a house for the purpose of a profit . So it seems to me that tightening up the screws on this a bit might help...
I haven't formed a view on a capital gains tax as yet, partly because I haven't seen much discussion of the alternative - making other forms of investment more attractive. Currently investment property is one of the most rewarded forms of investment (through capital gains and tax write-offs), whereas others, like term investments, shares etc, do not offer the same level of reward. I agree interest rates are an ineffective mechanism to control inflation. To be frank, the people the RB should be targeting are the middle to higher income earners, but raising interest rates probably hits the lower income earners the hardest.
Post a Comment