Robert Muldoon is Back
For forty years or more before 1984 Labour and National governments gradually created an economic hothouse environment in which they sought to be the dominant players within the economy. They pushed taxation to high levels, borrowed overseas and at home, spent big, and regulated ever more enthusiastically, lifting inflation in the process. Exchange controls fixed the international value of our currency, and wage and price controls attempted to restrain the cost of living. Controls on interest rates coupled with requirements that financial institutions invest large portions of their funds in government stock meant that theoretically an individual could borrow for housing, but few institutions had much to lend. I recall having terrible trouble getting a loan in the 1960s to buy my first house. Mortgage lending wasn't advertised. In effect there was no money market. One had to cosy up to bank managers. When I lived several years in the US I was astonished to see billboards advertising loans.
Once controls were taken off interest rates in July 1984, then exchange controls lifted in December, and the dollar floated in March 1985, ministers in the Lange-Douglas government thought it unlikely that we'd ever return to a hothouse of Robert Muldoon proportions. In one sense, we haven't. The dollar still floats, wages and prices aren't controlled, and the only restraint on interest rates is set from time to time by the Reserve Bank Governor in order that he can keep within the inflation bands he signed up to with the Minister of Finance.
However, the relative freedom that exists is constantly under threat these days because the government, as in Muldoon's days, insists on being the dominant economic player in the economy. State spending races ahead at a much faster rate than it did in the 1990s, and the bureaucracy has ballooned by 24,000 in eight years, forcing up house prices, especially in Wellington. The regulatory environment within which the market operates is festooned with rules and regulations that keep being fine-tuned in a manner that would have gladdened Muldoon's heart. When one takes into account Working for Families payments, roughly 50% of the total population has now been converted into a form of state dependency. Getting ahead depends more on the decisions of the Minister of Finance than on one's own efforts. The inflationary impact of the state's dominant role is enormous. To a large extent Alan Bollard is having to try to regulate the pressures created by the man who appointed him Reserve Bank Governor. The more Michael Cullen throws at health with no beneficial results, or spends on Working for Families, or gives to a hundred and one well-meaning causes, the more this cumulatively becomes a factor in Bollard's need to lift interest rates. Put crudely, those benefiting from Cullen's Working for Family arrangements who have housing loans, keep having to pay more when their loans come up for renegotiation because Bollard is left with no option but to lift their mortgage interest payments. What the right hand gives, the left takes away. It only becomes bad politics when the victims realise what is happening. The economic fairground with its swings and roundabouts has become a giddy ride, just as it was in Muldoon's time.
But wait. It's worse. Higher interest rates bring more short-term money into the country from Japanese housewives and others chasing the highest interest rates in the western world. That pushes up the exchange rate, which destroys local jobs as a variety of businesses move off shore. As the economy gradually slows, unemployment will rise. Cullen and Clark will then spend even more "assisting" those who are the ultimate victims of their policies, turning even more of them into state dependents. Ultimately, I suspect that this Labour government would love to have everyone dependent on their largesse. It would be the ultimate Nanny State. In the meantime, Bollard splashes our money around in the exchange market in an attempt to frighten off overseas buyers of the Kiwi. The jury is out on whether this will do more than briefly halt the inexorable rise in the dollar. After all, Cullen shows no sign of easing off the spending accelerator. Quite the reverse. And the cabinet is full of eager regulators. After a lot of spending on market intervention, Bollard is likely to find that the inflationary pressures are still there, making it probable that the dollar will remain high, and possibly go even higher. Politicians who try to control the market have usually ended up its victims, even, eventually, in Albania.