Newsroom Pro's 8 things at 8: A mirage of monetary policy reforms

1. On closer inspection...

Labour unveiled its new policy on monetary policy yesterday, which on the face of it seemed to signal a major change to the monetary policy framework in place since 1989.

The Government's acknowledgement over the weekend that it was likely to move away from a single decision-maker to a formalised committee process for decision making also appeared a major change, given National, Labour and the Greens all now agree on the shift.

But a closer inspection of the proposals show it is unlikely to change much from what we have at the moment. Governor Graeme Wheeler already uses an informal committee that he alone appoints, which wouldn't change much under the new arrangements.

Labour's move to a dual mandate that includes full employment would also not change too much around interest rates, given the Reserve Bank already assesses whether the economy is at full employment in deciding whether it is generating extra inflation pressure.

An economy with spare capacity or under-employment would drag on inflation, which would trigger rate cuts, while an economy over full employment that is running too hot would necessitate rate hikes.

In reality, a dual mandate would prioritise stable inflation around two percent and full employment, which is deemed to be the NAIRU (Non Accelerating Inflation Rate of Unemployment), would take care of itself in the long run -- assuming the Reserve Bank accurately assesses where the NAIRU is.

The current single mandate system has created situations where the economy ran too hot and was over full employment (2004-07), and one where it has not run hot enough and it was under full employment (since 2014).

Here's my analysis of yesterday's moves over at Newsroom.

2. So where is the NAIRU?

Labour Finance Minister Grant Robertson presented his policy at a very useful monetary policy forum event hosted by Victoria University's School of Government at the lecture theatre behind the old Government Buildings.

Former Reserve Bank economist Michael Reddell and CTU economist Bill Rosenberg commented on the policy at the event, which was chaired by Gary Hawke. Here is the full speech from Robertson and the response from Reddell.

One point of debate was whether to set a full employment level in the Reserve Bank Act or whether any sort of NAIRU (Non Accelerating Inflation Rate of Unemployment) level should be put in any Policy Targets Agreement.

Robertson said the NAIRU generally may be referred to in a PTA, but he was non-committal about whether a specific level would be included and he did not see it being put into the Act.

Reddell argued the Reserve Bank should publish its estimate of where the NAIRU is once every six months. Currently, the Reserve Bank does not publish its estimate of full employment.

The Treasury has estimated the NAIRU at around four percent, which is well below the current unemployment level of 5.2 percent and suggests the Reserve Bank has run the economy too cold to get to full employment in recent years.

Reddell estimated the current gap between the current unemployment rate and the NAIRU meant that 25,000 people were currently needlessly unemployed because the Reserve Bank was running the economy too cold by holding interest rates too high.

3. Interested observers

The audience at yesterday's monetary policy forum included some of the practitioners of monetary policy and the subjects of the debate over who should be making monetary policy decisions.

Deputy Governor Grant Spencer sat in the front row just a few metres from Robertson, Reddell and Rosenberg as they discussed who should make the decision and whether the Reserve Bank had performed well under the current Act. Assistant governor and head of economics John McDermott was in the back row.

Reddell repeated his criticisms of the Reserve Bank decision making framework and its decisions in the forum. His blog posts over the last two years have been a constant source of discussion in and around the bank, and no doubt played a role in shaping the debate that led to yesterday's policy changes.

It would be fair to say neither Spencer nor McDermott appeared thrilled with the debate that ensued at the forum.

Spencer will be the interim Governor for six months after one-termer Graeme Wheeler retires in September. Spencer would have to agree a short term Policy Targets Agreement with Robertson if there is a change of Government.

4. A fait accompli

The other development around the monetary policy debate yesterday was Prime Minister Bill English's apparent acceptance of the need for a change in the decision making structure.

After years of being reluctant to change much, he described Finance Minister Steven Joyce's review of how the Reserve Bank takes decision as a virtual fait accompli.

"The discussion from here is whether the legislation should reflect the practice, and the practice as advised to us by the bank governor is that he uses a committee," English told his post-cabinet news conference.

That was somewhat disingenuous, given English was advised by Treasury in 2012 that he should look at introducing a committee-style system for making OCR decisions, "to avoid the risk of a novice governor that could initially make rogue decisions."

English said he had rejected the advice at the time because the issue was not important and the government had higher priorities for managing the economy.

5. Not a busker yet

Labour leader Andrew Little seemed to dodge a bullet or two yesterday when a jury in the Wellington High Court couldn't make up its mind over whether he had defamed Earl Hagaman without a defence.

The jury decided he had not defamed Lani Hagaman, but that he had defamed Hagaman once. However, it could not decide if Little had qualified privilege when committing the defamation.

Little had faced damages of up to $2.3 million. He said after the verdict that he would be "busking on Lambton Quay by now" if he had had to pay it.

Asher Emanuel's coverage for The Spinoff is useful in understanding some of the stranger aspects of a bizarre case that arguably should not have made it to court.

6. A transfer rather than a sale

Social Housing Minister Amy Adams yesterday announced the formal beginning of the process of selling or at least transferring the ownership of 2,500 state houses in Christchurch.

The tender notice on GETS refers only to a transfer of ownership, rather than a sale. Adams also pointed out any new provider would be expected to create at least 150 new social housing places.

It seems the new places could be put on vacant Housing NZ land, if the following comment in the GETS notice is anything to go by. Any new owner is also not expected to do large-scale Tamaki-style redevelopments.

"We will also be seeking binding proposals for the delivery of extra social housing places, including through the use of vacant sites within the transfer portfolio," Treasury wrote.

"For the avoidance of doubt, short-listed respondents will not be required to submit binding proposals for large scale redevelopment of existing properties."

7. Coming up...

Parliament resumes today at 2pm for its last week before a two week break over Easter and ANZAC weekend.

Former Labour leader David Cunliffe is scheduled to give his valedictory address in Parliament at 5.40 pm.

8. One sad thing

The sudden death of John Clarke while bush walking at the age of 68 was the big shock yesterday. Most New Zealanders will remember him for his Fred Dagg character, but I'll remember him most for his Australian political satire with Brian Dawe.

I covered Australian politics in the mid 1990s and their duets just nailed the Australian political scene, along with many other things, including the Global Financial Crisis.

This is my favourite piece
they did on the European debt crisis. Clarke as 'Roger the financial consultant'.