Talking Heads

The Sixth Opinion

The jokes about economists are legion.  It's all in good fun, but as with most jibes, there is usually a bit of truth in each.  Economics has not been called the "dismal science" for nothing.  Was it not Winston Churchill who growled one day, "if you laid all the economists in the world face down, head to tail . . . well, that would be a good thing to do"?  And was it not Winnie who also grumbled that he would give half his kingdom to meet a "one-handed economist"? And some long forgotten sage observed that if you meet two economists you will always be blessed by at least three opinions.

So, we are regaled by the pronouncements of one Shamubeel Eaqub, rated as one of the country's top economists.  Entering into the spirit of the discipline of economics, we wish to give him the two handed salute.

On the one hand, Shamubeel Eaqub hit the nail right on the head when he opined recently on the state of politics in this current election season:

"What scares me are the policies that we see in the fringes and the fringe parties and they scare me a great deal because a few of them, quite frankly, are quite mad," he said. "So when you vote on the 20th of September, you're not voting for National or Labour, you're trying to keep out the influence of some of those crazy policies."  Eaqub said he did not want to go into the parties or policies he was most concerned about. "I don't want to get into bad-mouthing particular political parties. Most of the small parties are not pursuing policies that are good for New Zealand - they are pursuing policies that are good for a small constituency."

Take a bouquet and a bow.  Now, on the other hand . . .

Eaqub also said the Reserve Bank was "stuck in the 80s" in its preoccupation with inflation control and shouldn't be raising interest rates in the current economic environment.  The central bank has lifted the OCR by one percentage point to 3.5 per cent this year.  "When you look at the companies you invest in, how many are increasing margins rapidly? How many of those businesses are raising prices? New Zealand is not in a strong growth, high-inflation period," Eaqub said.

What misplaced rubbish.  Firstly, in defence of the RB, it is subject to the law and the law says it must focus almost exclusively on controlling inflation.  In this vital point, it is different from most other quasi-independent central banks, who are also charged with maintaining employment, and stimulating economic growth, which sets them conflicting objectives oftentimes.  In the bad old days, the New Zealand currency and interest rates used to be manipulated by rogue Prime Ministers who would pick up the phone in the dead of night and order up a rise or decline in interest rates, usually to ensure favourable public opinion just before an election.  New Zealand's economy used to be more centrally controlled than East Germany's.

It was to prevent this perfidy that the Reserve Bank Act legislatively created the independence of the central bank from such craven political "interventions".  It also deliberately made the mandate of the bank more narrow by law, which meant that would not be subject to political interference, and the bumbling uncertainty that comes from many opinionated economists, Mr Eaqub notwithstanding.  Any changes to this Act would have to be done publicly and after due process, usually legislative process, via the parliament.

Secondly, New Zealand is a very small economy and subject to all kinds of distortions.  One of these is a volatile housing market, easily exposed to rampant speculation.  Much of the problem lies with a lack of housing supply, which, in turn, is highly priced, due in no small measure to the stifling regulatory blanket choking new housing development.  The costs to get local government approval to build a house are rapidly becoming one of the most significant imposts.  Approval comes at the price of tens of housands dollars spent satiating the appetites of the highway robbers that masquerade as local councils.  The ultimate blame should likely be laid at the feet of the nation's greenists who are pathologically opposed to any human economic activity.  Long ago it was construed to be destructive to the "natural" environment.

Therefore, it is no surprise that at the first signs of economic recovery out of the most recent recession, the housing market rapidly became speculative and banks returned to high-risk lending.  The inefficient, highly regulated, tightly controlled, supply delimited housing market controls the inflation cycle in New Zealand.  The RB has focused most recently upon killing that goose off before its fools-gold eggs were laid.  It's been a near run thing, and it's not over yet.  Shamubeel Eaqub should know better.

It is the speculative market in housing which produces so much fools-gold and which, in turn, restrains New Zealand companies trading in other sectors from growing their earnings sustainably.  But, no problem. Without doubt another economist would have a sixth opinion on the matter.