More Courage Needed

Most economists agree that a currently slowing economy could do with some stimulus – and they would also agree that there is no shortage of infrastructure projects which could be brought to productive fruition with help from that stimulus.

In view of the current practice of sub-contracting economic policy decisions to the Reserve Bank, many would no doubt see the Governor as the person best able to step on the accelerator; but Adrian Orr – having dropped interest rates to near zero – would almost certainly respond by saying that he has already deployed virtually all the weapons in his armoury.

He might also say that we task governments and finance ministers with managing the economy, and that it is their responsibility to step up to the plate – and on that point, he is surely right. His responsibilities are met, under current arrangements, when he sets the Official Cash Rate; it is then up to Grant Robertson to decide what to do with the monetary situation thereby created.

The first and most obvious avenue that opens up, with the cost of borrowing at such a low level, is a review of the government’s self-denying ordinance on increasing its borrowing. It makes no sense for the government to be reluctant to borrow, when it can do so at virtually no cost, and could thereby provide a shot in the arm for a slowing economy – as well as proceeding with economically beneficial infrastructure projects.

Sadly, Labour governments have often been unwilling to borrow when it would make sense to do so, for fear of being accused of profligacy, but this is to allow their opponents to set the agenda. The Governor’s whole point in bringing interest rates down, after all, is to encourage business to borrow and, by investing, thereby to stimulate production, employment and spending throughout the economy – so why shouldn’t the government do what it is clearly hoped others will do?

Only those who are ideologically opposed to the government taking a role in the economy could object. Why is borrowing by business to be encouraged as being good for the economy, whereas borrowing by government must be avoided?

We can go further. The case for the central bank making interest-free credit available for the purpose of publicly funding essential investment has often been recognised at other times and in other places as sensible and beneficial – and, in current circumstances, with interest charges virtually non-existent, it is surely a no-brainer.

It is hard to see what objection could be made. We are after all perfectly relaxed when the Reserve Bank presides over a monetary system in which the commercial banks are allowed to create almost all of our money out of thin air. We applauded the world’s monetary authorities when they practised “quantitative easing” – creating new money to strengthen the banks’ balance sheets following the Global Financial Crisis.

The central truth about money – that we create it and that it is our servant, not our master – is well encapsulated in the famous statement by John Maynard Keynes that “whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital.”

What Keynes is saying here is that we – that is, as a country or as a society – can do whatever we have the physical capacity to do and need not be inhibited by a lack of money because, if we are short of the money we need, we can create it – that a shortage of money is, for a sovereign country, never a reason for not doing something.

Many other countries around the world have followed this insight – not least, today, Japan and China – but, at various other times, countries like the pre-war United States re-arming under Franklin Roosevelt, and depression-ridden New Zealand under Michael Joseph Savage, when we built thousands of state houses and brought the Great Depression to an end in the 1930s.

When state-controlled Chinese interests buy up New Zealand enterprises, like Westland Milk Products, they pay for them using credit supplied to them cost-free by the Chinese central bank. We are too foolish and timid to use the same technique in order to protect our essential interests from foreign takeover – or just to get our economy moving again.

Bryan Gould
11 August 2019