The Dim-Post

April 29, 2014

Labour’s monetary policy

Filed under: economics — danylmc @ 2:21 pm

According to their web site (btw, I notice that Labour’s Red Alert blog hasn’t been updated for about six weeks, indication that Matt McCarten has made a positive contribution) Labour will

  1. Maintain the Reserve Bank’s independence and its inflation target.
  2. Broaden the objective of the Reserve Bank to include the external balance and allow it to use current tools to tackle our overvalued dollar.
  3. Give the Bank a new tool to adjust universal KiwiSaver savings rates as an alternative to raising interest rates. This would mean Kiwis would pay money to their retirement savings instead of higher mortgage payments to overseas banks.

Universal KiwiSaver and a tool to adjust KiwiSaver rates to keep mortgage rates low? I think you can do one of these but not both. If you’re going to compel people to save their money because its good for the economy then that’s one thing. But if you’re going to compel people to save money and then modify the rates to benefit a smaller subset of people who have mortgages you’re in the tricky position of higher rates having a disproportionate impact on lower income earners – who are unlikely to own a home – and benefiting higher income people with mortgages. That’s hard to justify.


  1. It sounds horrific for someone who’s trying to budget. I’d probably end up saving at the maximum rate to reduce uncertainty, which is probably a good idea but rather defeats the purpose.

    Comment by pete — April 29, 2014 @ 2:44 pm

  2. It’s not just mortgage holders who benefit from lower interest rates. If labour could actually make rental property less attractive through tax and remove the pressure from foreign absentee home owners, then lower interest rates would allow businesses to reduce their borrowing costs as well.

    They’ll have to look at taking tax off KS to make this even remotely attractive though.

    Comment by Chris Bull — April 29, 2014 @ 2:55 pm

  3. Monetary policy is not designed to “benefit people with mortgages”.

    Comment by garethw — April 29, 2014 @ 3:16 pm

  4. Quick thoughts – if you replace the word saving for tax (whilst the kiwisaver proposal is not a tax in that you will see the money back at some time in the future, at the moment it is used it acts as an implicit tax), then:
    Labour is proposing a regressive taxation policy (lowest income earners hit hardest);
    Labour is handing a significant fiscal power to the Reserve Bank (current setting is that RBNZ addresses monetary policy and it is the government that pulls the fiscal policy levers);
    A lower dollar in order to support exporters also means higher costs for imports – this is likely to hit low income earners the hardest. There needs to be some really big (and immediate) offsetting improvement to employment and wage rates – which actually would work against the stated aim of addressing inflation.

    Simply using your existing fiscal tools – e.g., build houses to address house price inflation, would be a simpler solution which creates a lot less unintended consequences (sorry working person, didn’t see you as could only afford the SUV without revision camera because my kiwisaver has gone up).

    Comment by WH — April 29, 2014 @ 3:41 pm

  5. Clearly the Greens are upset Labour has put out an independent economic policy.

    The reason the policy is hard to justify is because compulsory savings are fundamentally illiberal. Why the hell should the government dictate my savings vehicle? Maybe I want to buy an orchard or a bakery or gold…

    Comment by Swan — April 29, 2014 @ 4:47 pm

  6. Making granny eat cat food with reduced interest on her savings so I can buy a fourth rental property.

    Comment by Russell Beaumont — April 29, 2014 @ 6:42 pm

  7. Up the Workers!! Especially those workers who have a portfolio of speculative assets financed with cheap credit.

    Comment by Simon — April 29, 2014 @ 7:05 pm

  8. I haven’t read any detailed policy on this (does it exist?), but my understanding of this is that it should be considered alongside other Labour policies, such as a capital gains tax, which will somewhat address Russell Beaumont’s fourth-rental-property issue.

    Comment by Daniel — April 29, 2014 @ 7:20 pm

  9. Daniel, you need a better accountant. Russell is correct. Labour is bringing a poll tax, but hey, its about equality innit? Except for the self employed who control their kiwisaver contribution and can contribute nothing if they choose, but divert the equivalent into (now) low interest investment mortgages (in a high demand economy) held down by their kiwisaver contributing paye tenants. Hilarious.

    Comment by Grant — April 29, 2014 @ 8:22 pm

  10. It’s fairly easy to tell if inflation is being primarily driven by asset trading, because it’s is part of the calculation for inflation. So if it is, you raise interest rates. If it isn’t, you raise kiwisaver rates. I’d assume that’s part of the policy.

    @garethw “Monetary policy is not designed to “benefit people with mortgages”.”

    It’s written by people with a bunch of mortgages, who happen to be “accidentally” driving up house prices and rents when most of what they seem own is houses that they rent out. If those people aren’t doing things in their own self interest, the entire foundation of monetary theory is deeply flawed. Should we throw it out and start over, or just keep a bit of an eye on them?

    Comment by tussock — April 29, 2014 @ 8:24 pm

  11. “t’s fairly easy to tell if inflation is being primarily driven by asset trading, because it’s is part of the calculation for inflation. ”

    Asset prices do not form any part of the inflation calculation

    Comment by Swan — April 29, 2014 @ 8:32 pm

  12. Since when did those on lower incomes not have loans?! The OCR affects all market interest rates, not just mortgages.

    It’s not a mortgage tool. It’s a tool to increase or decrease the money supply but driving interest rates down (encouraging spending over saving) or up (removing money to spend, encouraging saving). I get that it shows up in mortgages but it’s broader than that, and is just the mechanism, not the goal. You should also be arguing that all those wealthy mortgage holders have been getting free money for the last 5 years thanks to massively lower than “standard” interest rates.

    Comment by garethw — April 29, 2014 @ 8:35 pm

  13. Foreign investors, property investors, dairy farmers will be delighted. Low income families will enjoy higher fuel, clothing etc etc prices and have to save more to pay for this so it’s brilliant for Labour to counter the critics who say they have lurched to the left, with one brilliant policy they have shown they hate poor people and want to take their money and give it to successful rich people. Well done labour in trying to shore up the rich prick/farmer vote.

    Comment by David — April 29, 2014 @ 8:45 pm

  14. Funnily enough, I’ve never heard Bill English being so concerned about NZers’ living costs. Straight out of the Karl Rove playbook: Pot, kettle, black.

    Comment by deepred — April 29, 2014 @ 9:13 pm

  15. Foreign investors, property investors, dairy farmers will be delighted. Low income families will enjoy higher fuel, clothing etc etc prices and have to save more to pay for this so it’s brilliant for Labour to counter the critics who say they have lurched to the left, with one brilliant policy they have shown they hate poor people and want to take their money and give it to successful rich people.

    I suggest not going to National and its many propagandists (Hi Russell Beaumont!) for your analysis of this policy.

    Comment by Psycho Milt — April 29, 2014 @ 9:20 pm

  16. Sorry about that, indeed asset prices are not included in our reserve bank’s calculations. Seems my reading about how they should be included got me all confused.

    Let’s see if I have any of it down. We put interest rates up because things (which are not mortgages, stocks and bonds, rents, rates, taxes, or almost everything people spend most of their money on) have gone up in price. This floods money into the country, raising the value of the NZ dollar and decreasing the price of the PS3 and petrol and such. That “lowers inflation”, temporarily. It also loads the banks with money and increases their eagerness to loan money to people (mobile mortgage managers at auctions, encouraging the bidders, delightful).

    The resulting high dollar encourages NZ industrialists to relocate off shore. That stops the dollar getting too high, but also means the banks would rather loan to houses, which have trouble moving off-shore. It also puts people out of work, sending those skilled folk seeking greener pastures too, further lowering demand for those things measured by inflation. Less employment means weaker wage growth, lowering consumer demand and inflation in the longer term. Because we’re mostly poorer with weakly capitalised industry.

    Excellent. High interest rates make for cheap imported goods, and only the landed gentry to buy them, with house prices spiralling to crazy levels. Inflation “where it should be”. The investments in the bubble of a property market are untaxed, so even more investment is driven there. Campbell Live runs several shows decrying how much money everyone in the property market is making, driving more money into the property market. Banks profit greatly, but that runs overseas and keeps the dollar from getting too high again.

    Then it’s 2009, the money supply gets the jitters somewhere, anywhere, and all that foreign capital starts leaving the country. Banks immediately make it very hard to get a loan, and the reserve bank starts dropping interest rates toward zero to “stimulate the economy” with new borrowing (while, hilariously, making banks require higher deposits which stops almost everyone from taking it up). The banks start foreclosures on the poor while the rich buy up even more property with the low rates, on “deposits” made from past book gain in asset value.

    The dollar slips a bit, prices of imports go up a bit, fuel gets a bit more scarce again, and that’s “inflation” back up to where it should be instead of negative. Do the factories come back? No, not into a slump. Do the jobs come back? No, but a few unemployed people do, from other similar basket cases. So still no capital where it needs to be and still a weak manufacturing sector. The banks can’t let house prices drop or they’d be broke. So everyone’s still getting poorer, except the landed gentry.

    I mean, it’s a known problem. What’s Labour’s policy do to it? Bugger how it plays on Campbell Live, what would it do? Compulsory savings in a hot market should drive down interest rates for savers, supply and demand. That could reduce pressure from foreign money flows to loan when our economy’s hot. Letting the saving schemes move money off-shore when our dollar gets high and back when it gets low could buffer the shifts there too. Then you’re left with real inflation driven by local expansion of the money supply, which you kill by running a surplus as government in light of the increasing tax take and reduced benefit schemes.

    You’ve still got problems with inflation in a low-growth economy, but it’s not a new problem. You grow an economy with education and other capital investments. Rail, ports, trains that aren’t from the 1970’s, things that reduce the costs of doing business here.

    Or would it be heretical to point out the easy solution to a persistent asset bubble surrounded by falling real wages is some serious inflation of the money supply. Raise the interest rates, require huge but static deposits, steadily raise wages by statute, put huge taxes on the top end to drive capital investment, and start printing money, until we hit 50c to the Aussie dollar. All you need is a government that would put it into useful capital, rather than the pockets of the already rich.

    Comment by tussock — April 29, 2014 @ 11:28 pm

  17. Good hypothesis tussock, except the last bit.

    As you note, high taxes on the top end won’t necessarily drive capital investment unless some form of bipartisan agreement + generation planning + sovereign wealth fund was in place to direct investment sensibly towards your hypothetical high-yield capital projects.

    Also, If the NZD drops to 0.5 AUD, then a bunch more of the desirable (i.e. high value / productivity) workers with transferable skills leave the country for pastures greener.

    Comment by Gregor W — April 30, 2014 @ 9:41 am

  18. Gregor W: kiwis moving to Oz is driven as much by relative cost of living as relative wages. Sure, the “pop over, earn and save” people will be driven by currency costs, but they are as likely to go to Eurpoe or the US. People like me who’ve moved to Oz longer term for standard of living reasons will not be affected by that. I could move back and get a job relatively easily (NZ companies advertise in Australia in my field), but the pay they offer is low, and they make up for it by “lifestyle factors” that I find it hard to believe. Auckland is *not* a world-class city. I have half hourly train service 500m from my current house that shuts down for an hour or two about 4am, seven days a week. Auckland… not so much. Sure, if I needed a house with a mooring for my yacht Auckland would be a better bet, but I don’t have a yacht.

    I Labour was serious about making this latest load a part of their “tax the rich” plans they would have said so. Instead it looks like a play for the National-lite vote, especially the small business owners and property “investors” who stand to win big. I don’t trust Labour to bring this in, then a year later drop a CGT on the winners.

    Comment by Moz in Oz — April 30, 2014 @ 11:40 am

  19. “kiwis moving to Oz is driven as much by relative cost of living as relative wages. Sure, the “pop over, earn and save” people will be driven by currency costs, but they are as likely to go to Europe or the US. .”

    @moz – First part, agreed. Second part, not so much! If you are a skilled worker (for argument’s sake, 35 y/o+) with desirable skills, it’s a lot harder to secure work in Europe or the States as it required you to have secured a job prior to emigration unless to happen to have rights via ancestry.

    Not the case for Aus.

    Comment by Gregor W — April 30, 2014 @ 1:23 pm

  20. Gregor, I’ve got a fairly large number of friends who used the under-30 working visa rules to get a big savings hit before they were 30, and chose the UK or US over Oz because the pickings were significantly better. After 30/35 moving round gets harder, but even in middle age I could get into Canada or the UK without much difficulty (to pick two places I’ve looked at). But the combo of income and lifestyle has not worked for me (they have winter in Canada, for example). A couple of years slaving as an IT conslutant in the UK will still net you a sizeable deposit on a house in Sydney or an outright purchase in most of the rest of Anglonesia, but the same in Oz will get you a deposit in Christchurch…

    If either NZ or Oz brings in an effective CGT on housing there will be significant capital flight (largely to the other country I suspect, giving a wonderful opportunity for the first mover to Tobin Tax the second mover), but I don’t expect that to happen, purely because it would be effective at lowering house prices. Right now the youger lot paying inflated house prices or rents to the older generation is a hidden tax to fund retirement (and an apallingly inefficient one), but fixing that would require political consensus at a time when tribal opposition has proved to be a more effective way to obtain power. Otherwise you get the Abbott Effect – new party comes in and spends the first chunk of its term reversing everything the previous government did.

    Comment by Moz in Oz — April 30, 2014 @ 2:25 pm

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