Why Not A National Investment Bank?

The independence of the Reserve Bank is widely seen, in New Zealand and elsewhere, as a cardinal principle of good economic management; but I have never understood why removing important areas of economic policy from democratic accountability is thought to be so commendable.

The Reserve Bank is, after all, a powerful government entity; its decisions on monetary policy have an immediate impact on the economy as a whole and on the well-being of all of us. Why should they not be answerable, like the rest of the government, for the decisions they take? And how do we benefit if fiscal and monetary policy-makers potentially sing from different hymn sheets, and ministers – while held to account in parliament for fiscal policy – are not entitled to direct or even guide the Reserve Bank as to what is needed on monetary policy?

A recent international survey has rated New Zealand as the country that has been most resilient in reacting to the pandemic. That is not surprising, given our success in virtually eliminating the virus.

But it also owes a great deal to the rather more surprising success we have had in returning our economy to its pre-covid trajectory – and that is a reflection of Grant Robertson’s steady hand on the economic tiller.

He quickly recognised that the economy needed an injection of new money, and that the most obvious source of new money is the Reserve Bank. He didn’t have quite the courage needed to ask the Reserve Bank simply to “print” new money, that is, to make it directly available to the government, but has instead used the new money to buy bonds in the private market, thereby lumbering the taxpayer wth a substantial debt that will eventually have to be repaid.

The new money has nevertheless allowed our post-covid economy to perform better than most expected. But the minister’s problems are not over; his new money has flowed into assets rather than productive capacity, with the result that house prices have risen sharply, as have stock markets. This entirely predictable asset inflation has made life difficult for new house buyers, creating a political as well as economic problem for the government.

This problem could have been avoided if the new money had been used to increase benefits or to make a one-off payment to every household (so-called “helicopter money”); the new money would then at least have been spent, boosting jobs and the retail sector, and could have addressed child poverty, rather than just inflating asset values and prices.

New Zealand has not been alone in creating new money, with asset values worldwide rising as a consequence. That is what explains the sad fact that the pandemic has seen the fortunes of the world’s billionaires grow rapidly, while the living standards of working people have slumped.

As the old British working man’s song has it,

“It’s the same the whole world over,
It’s the poor wot gets the blame,
It’s the rich wot gets the gravy,
Ain’t it all a bloomin’ shame?”

There is a solution to the Minister of Finance’s problem, if he cared to take it. Instead of leaving it to the commercial banks to decide how to distribute the new money (no prizes for guessing that their preference is to lend it on mortgage), he could establish a new entity that would allocate the money to productive purposes.

That new entity could be called a National Investment Bank – countries as diverse as Germany and Ghana already have one. It would, in cooperation with the Reserve Bank, and in line with a national industrial strategy agreed by employers and trade unions, fund infrastructure projects and lend the money to new and existing ventures so as to promote new technologies and increase production, jobs, sales, profits and wages.

And if the foreign exchange markets were nervous about this strategy, wouldn’t a lower dollar be an additional advantage?

Grant Robertson himself recognised the desirability of these outcomes when he wrote to the Governor of the Reserve Bank, asking him to take more account of rising house prices and the problems of those trying to enter the housing market.

Why not himself take the step of establishing a National Investment Bank?

Bryan Gould
8 December 2020