Greens solving the wrong problem
09/10/2012 § Leave a comment
Apologies for the very light posting lately. Real life is impinging on my virtual world, and shows no sign of relenting.
As you’ll know, the Greens have suggested that the RBNZ should just print money to get us out of our economic doldrums, and the PM responded that they were ‘wacky‘. The econoblogosphere has already taken them to task, first TVHE and then Offsetting Behaviour.
Those bloggers have covered the topic. I just wanted to add one thing. It looks like the Greens are trying to import the US solution to a problem we don’t have. In the US, quantitative easing (printing money) is supposed to be good for a few reasons:
- debt overhang — people overspent/overinvested in housing, and now the houses aren’t worth what they paid for them. Households are carrying heavy mortgages but can’t sell to get out from underneath them. Inflation may help bring wages and house values back into line, although this does depend on the mortgage rates staying below inflation
- safe haven — the idea is that a general glut of currently produced goods (a lack of aggregate demand) can be considered an excess demand for future goods. More precisely, it is an excess demand for financial instruments to protect spending power into the future. With really low interest rates, cash and bonds are nearly equivalent. Increasing the supply of cash increases the supply of instruments to protect future consumption
- sticky wages — wages are easier to increase than decrease; it is very difficult to give an employee a nominal wage cut. Obviously, there are ways that wages are flexible downward: reducing the number of hours for waged workers is one key way. But, those are nominal wages. Wages don’t need to keep up with inflation, and higher inflation gives more room for real declines in wages. This, in turn, allows for greater adjustment either between tradable and non-tradable sectors, or across industries as a result of differential productivity changes.
These aren’t New Zealand’s problems. The QV website has a graph that shows property prices are back to pre-recession levels [no perma-link]. We don’t have the debt overhang and trapped mortgagees that you see in the US. There doesn’t seem to be a shortage of safe havens, either.The 90-day rate, bond rates, and so on are all positive enough. Some US rates have been negative, which means that savers are willing to pay to keep their money safe for the future. Wage stickiness shouldn’t be a factor, either. Inflation has been a bit up and down and is low at the moment, but is high enough to produce real wage declines.
Normally, I’m all for importing solutions from elsewhere. Let’s just make sure they address our problems.