Keith Rankin's Thursday Column

 Macroeconomic Policy

 23 May 2002

Budgets are not what they used to be. The monetary policy statements the week before are marginally more interesting. They have taken over what budgets and mini-budgets used to do, the fine-tuning of the macroeconomy. That emasculation of fiscal policy may not be a bad thing. State capitalism was always a bit control-freakish, and rounds of tax cuts are public lolly scrambles for the benefit of those who least need lollies. (The only fear is that the government will forget what to do if a real spending crisis - ie like that of the 1930s - ever does hit us again.) Further, by taking over the mantle of responsibility for managing aggregate demand in a way that counters the economic cycle, the Reserve Bank is no longer on a holy crusade against inflation (the language of the 1989 Reserve Bank Act notwithstanding). All the Reserve Bank Governor has to do now is read the short-term economic forecasts. If they project that growth will exceed 3% per annum then the Bank raises the Official Cash Rate. If they point to growth under about 1.5% then the Official Cash Rate is cut. Otherwise interest rates stay as they are.

It is not clear that the business cycle needs to be countered through this kind of hands-on management. The natural heart-beats of capitalism represent the ongoing stimulus that is needed to induce the creative responses that we claim to be looking for. It's more important that we learn to ride the cycle than that we tranquillise the cycle. Thus it's best to let so-called inflationary-risk situations to play themselves out. Safety-first is not always the best policy; an overly protective upbringing is not even the safest policy. It is wrong to suggest that economies perform best when certainty and predictability prevail.

The United States economy grew through the 1990s under conditions that our Reserve Bank would have said were unsustainable. Inflation did not result. Yet the crash of the dot.coms suggests that the US "new economy" was unsustainable, regardless of the possibility of inflation. But was this unsustainability a big problem? Sure, some people travelled an economic roller coaster. But would they have been better off if the boom had been repressed by overly proactive central bankers? I don't think so. Further, the "disequilibrium" conditions that prevailed may have generated more positives than negatives for global society.

Long-run economic growth is a qualitative rather than a quantitative phenomenon. If the New Zealand economy grows at a steady 2% per capita for the next 200 years we each (or at least our descendants), will have on average 50 times as many goods and services to consume in 2202 as we do now. (It's called exponential growth.) That's just not possible unless we qualitatively change our outputs. Let's take a more adventurous approach. The excessive caution of Doctors Cullen, Brash and Carr achieves little other than to stifle the imaginative adaptations that will be necessary if economic progress is to continue into the era of our great-great-grandchildren.

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