It seems that Phil Goff feels sorry for those people who voted National only to see the Nats pretty much follow the same policies, and so is coming up with policy proposals to make those people feel better about their vote. I was particularly struck with this one:
Mr Goff said yesterday that Labour would give the Reserve Bank new powers to regulate the economy, suggesting the present focus on inflation will be expanded to include the stability of the dollar, full employment and economic growth.
For argument’s sake, let’s pretend that this is a serious policy proposal and think about what it means and how it would be implemented. First of all, what are these “new powers” that could be given to the Reserve Bank. At the moment, the Bank has the ability to set interest rates for borrowing and lending between it and financial institutions, the ability to buy and sell securities in the open market, and some capacity to regulate the financial sector. What “new powers” could the Bank be given that could have an impact on employment and growth: the ability to set taxes; responsibility for the minimum wage; education policies? If there are such powers that are within the ability of the government to give to the Reserve Bank what is the constitutional argument for giving these to the Bank rather than retaining them to exercised by the government and subject to parliamentary scrutiny?
Second, how would the Reserve Bank’s new focus be written? The academic literature on optimal monetary policy often imagines that central banks are, in fact, concerned with more than just maintaining low and stable inflation, and so postulate a quadratic loss function in which the monetary authority seeks to minimise a weighted sum of squared deviations of inflation from target, output from trend, etc. Are we seriously going to start writing quadratic loss functions into the Reserve Bank Act, with parliamentary debate on the exact weight to put on to each term in the function?
Now, I fully realise that Goff's speech is just political grandstanding rather than a serious policy position, but the worry is that this sort of announcement could force a future Labour government to make some kind of superficial tweak to the monetary policy environment to create the illusion of change. The likely implementation of Goff’s stated policy would probably be the insertion of some weasel words into the policy targets agreement along the lines that the Reserve Bank is responsible for maintaining an undefined level of stability in an unspecified exchange rate, unemployment at the undefined level considered to be “full”, an unspecified level of economic growth, a win for the All Blacks in the World Cup, and general contributions to world peace.
When it comes to monetary policy and central bank independence, however, even weasel words can have bad consequences. This kind of muddying of the objectives, while not making any difference to currency stability, employment or growth, would effectively remove any accountability from the Reserve Bank for its actions, since any decision could be justified as being based on seeking to improve outcomes for one of the multiple objectives it now has responsibility for.