Andrew Geddis is not an economist. He acknowledges he has had no formal training in economic theory, although “I dabble on occasion in some law and economics theory in the course of my day job” (as law professor at Otago University). He further acknowledged this might disqualify him from talking about the Green Party’s economic proposals that include quantitative easing. He proceeded to talk about it, nevertheless.
His fundamental point, on the Pundit blog, was that the arguments levelled against quantitative easing (QE) by government politicians didn’t carry much weight, at least not with him. He summarised them as (1) it isn’t necessary to do anything; (2) but if it is necessary to do something, QE won’t fix the problem at hand; and (3) if it were introduced to fix the problem at hand, it would do more harm than good.
For starters, Economic Development Minister Steven Joyce had said the Greens’ proposals would significantly cause the international community to doubt New Zealand’s economic priorities and had been embraced only by “countries with crippling debt”.
That rules us out, apparently. Yet the Swiss have embraced it and the Wall Street Journal in August said Switzerland expects to post budget surplus of about 1.5 billion Swiss francs (around NZ$2 billion) this year. Its government recorded surplus equivalent to around NZ$2.5 billion last year; its economy has been one of the best performing in Europe this year; and it has kept its public finances under close control since 2003.
Swiss interest rates have been held near zero since August last year, after the central bank lowered them, and – here comes QE – flooded the money market with liquidity to weaken demand for the Swiss franc. Under this policy, the Swiss National Bank (SNB) is pledged to buy “unlimited” quantities of foreign currency to maintain the franc at rate of Sfr1.20 to the euro.
Green Party co-leader Russel Norman happened to mention Switzerland in support of his proposals. Prime Minister John Key advised him to go there and look and said he would find “all of these things are voodoo economics that do not work”.
Whether the taxpayer should pay for the travel is arguable. The Greens would balk at contributing to greenhouse emissions when they could consult an International Monetary Fund report. In May, the IMF described the SNB’s currency floor policy as “appropriate” in light of deflationary risks and limited alternative policy options.
Its report noted the relative success of the policy so far, too. “The exchange rate floor, seen as credible by the markets, has halted appreciation and helped shore up the economy.” As soon as growth recovered, however, the Swiss were advised return to “free-floating” currency would be “desirable”.
What about the “more harm than good” argument? As Joyce expressed it, the Greens wanted “to abandon sensible monetary policy and whack up the cost of living for every New Zealander”. Yes, weaker NZ dollar would lift the costs of imports but Key is on record as saying he thinks it is overvalued. Plenty of economists agree with him. This means he thinks it should fall. So the Greens would manage it down; the Government awaits market correction to bring it down. Either way, costs will be whacked up for every New Zealander.
Geddis subsequently acknowledged that Matt Nolan, an economist at Infometrics, had produced weighty arguments against QE. Another column would be required to do them justice. Suffice to say, Nolan’s fundamental objection concerns the inflationary threat from policy of “printing money”.
The Trans Tasman newsletter, addressing this, agreed inflation is tax on savings but said high exchange rate is tax on exporters. The trick is to work out which is more threatening – one percent annual inflation rate or struggling tradable sector, especially when we continue to run hefty external deficits, yet the exchange rate has not depreciated to re-balance things as the theory says it should. When the market signals have failed – is it really best to do nothing? M
Bob Edlin is leading economic commentator and NZ Management’s regular economics columnist.
