• Yes, There Is An Alternative

    Phil Verry was a patriot, a leading businessman and head of New Zealand’s largest sawmilling firm. He was also an innovative thinker.

    I was privileged to become his friend and colleague, and to help him develop an ingenious refutation of the assertion constantly made by those with closed minds that “there is no alternative” to the failed orthodoxy of relying entirely on raising interest rates in order to combat inflation.

    Phil understood very well that New Zealand producers and investors, as a result of that orthodoxy, are constantly lumbered with an extra-market interest rate surcharge across the board, the cost of which is paid in the main to overseas speculators who contribute nothing to the New Zealand economy.

    Their gain at our expense in fact costs us twice over – by worsening our current account deficit (through interest payments across the exchanges) and by penalising us – through prompting an inflow of short-term lending – with an overvalued currency. The result? Our whole economy is handicapped by our difficulty in competing, both at home and overseas, with foreign producers.

    Phil devised what he called the Interest-Linked Savings Scheme – whose details are set out in my 2007 book Rescuing the New Zealand Economy – which would mimic the operation of interest rates as a counter-inflation tool without burdening the New Zealand current account with unnecessary payments to foreigners or harming our competitiveness.

    Phil would have been delighted to learn that it is that scheme, or something very much like it, that David Parker committed to this week on behalf of an incoming Labour government.

    The first element in Labour’s version of the scheme is to make the KiwiSaver scheme compulsory, thereby resolving our perennial problem of inadequate saving (and worth doing on its own account in any case); a variable savings rate would then be used as a supplement or alternative to the Official Cash Rate as a counter-inflation tool. If the rate was raised, it would, by lowering the immediate spending power of consumers, have much the same counter-inflation effect as a rise in the OCR.

    But, instead of paying an interest rate premium to foreign peddlers of “hot money”, the savings surcharge would be paid into the individual KiwiSaver accounts of New Zealanders and would in due course be paid back, with the addition – in accordance with KiwiSaver rules – of whatever return had been made on investing the money.

    The potential scope and practical operation of this scheme strongly suggest that it would be more effective and less problematic than the OCR in combating inflation. The ability to raise or lower the surcharge at short notice, and its immediate impact on pay packets, would mean that it would be much more quick-acting and better focused than interest rates.

    It would be less easily evaded than the OCR, which has seen its effectiveness substantially reduced by the preponderance of fixed interest rate mortgages. A lower evasion rate would mean that the surcharge could be lower for a given counter-inflation effect than the less reliable and more easily evaded OCR. And the fact that the surcharge would eventually be returned to those paying it would reduce any political reluctance to taking quick action to deal with inflationary risks.

    But the scheme will produce a number of further benefits as well. We would no longer be penalising ourselves and losing national wealth by making free gifts to short-term lenders from overseas.   Foreign lenders would not be paid a premium above the market rate. Unnecessarily high interest rates would no longer deter new investment. We would no longer be burdening ourselves with an over-valued currency, an inflated current account deficit and a productive sector that was less competitive than it should be.

    The wider remit to be given to the Reserve Bank would encourage a more balanced approach to macro-economic policy, which could be allowed to fulfil its proper purpose of promoting the continued development and competitiveness of new wealth-creation. Lenders and investors would be free to respond to normal market factors in agreeing on what interest rate should apply in a given transaction. Both interest rates and the exchange rate, in other words, would be freed up to perform their essential market-clearing functions in a properly functioning market economy.

    Phil argued – and Labour agrees – that those who might be nervous about departing from the current orthodoxy should be reassured, since the OCR would not be abandoned, but would be kept in reserve and turned to as and when necessary.

    The most important advantage of the scheme is the fact that we would raise the level of saving, improve the competitiveness of our industry, and encourage export success, while at the same time restraining inflation more effectively.

    Phil sadly died a few years back and therefore did not live to see the adoption of his ideas. He would have been pleased at the largely positive reception accorded to the new proposals. And he would have been delighted at the belated discovery that “there is an alternative.”

    Bryan Gould

    30 April 2014



  1. Brendon Harre says: May 9, 2014 at 1:06 pmReply

    Thanks Bryan. You explained that well : )

  2. Sheree Small says: July 8, 2014 at 3:40 amReply

    Best idea I’ve heard in a long time, and that’s coming from a National supporter! Cheers

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