Policy Target: The Reserve Bank Act (1989) It was one of the Neoliberal Counter-Revolution's primary objectives: to keep the interfering hands of politicians as far away from the controlling mechanisms of monetary policy as possible. Otherwise known as strangling the economy in order to save it.
SOME ARE CALLING IT irresponsible meddling, others talk about the need to regain control of our destiny. Whatever it’s called, it’s attracting a lot of attention. And not a little concern.
For nearly thirty years both of New Zealand’s largest political parties have faithfully adhered to the doctrine that a country’s monetary policy is best determined by an independent central bank. Furthermore, that the prime focus of monetary policy must be keeping inflationary pressures under the strictest control. In practice, that’s meant keeping the interfering hands of politicians as far away from the steering-wheel as possible.
New Zealand embraced this monetarist view the central bank’s role with special fervour. Our current Reserve Bank Act, passed by the Fourth Labour Government in 1989, places enormous economic power in the hands of a single person, the Reserve Bank Governor. He alone is responsible for carrying out the Act’s primary function: ensuring “stability in the general level of prices”.
The only democratic check upon the Governor’s power comes in the form of the Policy Target Agreement (PTA) negotiated periodically with the Minister of Finance. It isn’t much of a check though, because the only real debate is over the permissible range of inflationary fluctuations. If the inflation rate goes above, or stays below, the agreed levels for too long, the Governor intervenes.
The mechanism he uses to do this is the Official Cash Rate (OCR). By raising or lowering the price at which the privately-owned banks can access liquid funds on a short-term basis the Reserve Bank is able to expand or contract short-term demand in the New Zealand economy and hence (at least theoretically) keep prices under control.
The use of this single, blunt economic instrument has fuelled repeated property booms, blown out New Zealand’s balance-of-payments, and undermined our manufacturing exporters.
So, why did our politicians give so much economic power to one, unelected government official? Why is something so critical to the health of our economy as setting core interest rates not the responsibility – as it once was – of the people’s elected representatives?
Answering that question takes us to the heart of the “Quiet Revolution” in economic management, in which the Reserve Bank Act (1989) played so important a part. Essentially, the decision to remove the management of monetary policy from the politicians’ hands was inspired by the growing fear among political and economic elites that the democratisation of economic policy formation had gotten out of hand.
The deadly confluence of the economic, political and social crises that characterised the 1930s, and which led to the human disaster of World War II, had largely discredited the laissez-faire economic doctrines which spawned them. Rather than go on entrusting the elites with the conduct of economic policy, the citizens of the victorious democratic powers made sure that those responsible for the big economic decisions were politicians accountable to themselves.
The result was a 30-year period of unprecedented economic expansion, during which, in the USA, the share of national income going to the top 1 percent of income earners plummeted to less than 10 percent (from a pre-war high of close to 20 percent). Between 1945 and 1975, thanks to successive post-war governments’ commitment to policies aimed at full-employment and wealth redistribution, and to preserving the bargaining strength of trade unions, the standard of living of ordinary working people rose steadily.
With their economic and political power fast eroding, the Western elites seized upon the inflationary pressures unleashed by the Vietnam War and the Arab Oil Embargo to discredit the democratic conduct of economic affairs.
Politicians, they argued, were unfit to determine economic policy precisely because they were prey to electoral pressures. Only when populist politicians, like New Zealand’s Sir Robert Muldoon, were legally precluded from interfering with the free play of “market forces” could the scourge of double-digit inflation be defeated. And that free play could only occur after the “market distorting” influence of high taxes and excessive government borrowing, inefficient state-owned enterprises, and the power of the “over-mighty” trade unions had been dismantled – comprehensively.
The imposition of what came to be called “neoliberalism” thus represented not a “revolution” in economic management but a “counter-revolution”. And absolutely crucial to its success has been the 30-year bipartisan consensus that no other economic doctrine is to be given a serious hearing anywhere. Not in the news media; not in the schools and universities; and certainly not in the two main political parties: National and Labour.
Hardly surprising, then, that serious disquiet is growing among those whose job it is to defend the neoliberal counter-revolution at all costs. Not only is the Reserve Bank under attack from the Greens (whose modest levels of electoral support make them more irritant than threat) but also, and most alarmingly, from Labour.
And once Labour’s re-democratised monetary policy – what’s next?
This essay was originally published in The Press of Tuesday, 8 October 2013.