A Comment on Chief Crazy Horse Reserve Bank of NZ's Official Cash Rate Cut Today

I did Radio NZ's Morning Report commenting on the Reserve Bank's expected rate cut today. It says, "A Reuters poll of 33 economists had 32 expecting the RBNZ to slash the official cash rate by 50 basis points on Wednesday, bringing the rate down to 3.75 percent. Economist and professor at Auckland University Robert MacCulloch spoke to Corin Dann". You can listen to it by clicking this link. Dann characterizes my position that the so-called "neutral rate of interest" (where inflation is neither increasing or decreasing) is about 4% as out-of-line. He said in latter comments on Morning Report that the RBNZ says the neutral rate is more likely about 3%, so it can keep cutting without igniting inflation. Note that you can not directly observe the neutral rate. It is an academic concept.

Let me defend my view as being not remotely out-of-line. First, NZ's trend economic growth rate is now very low - we're experiencing "secular stagnation" that has been going on for several years. Its not a temporary dip in the business cycle with a strong underlying trend. Even the PM & Finance Minister agree productivity growth has almost ground to a halt. Our young talent pool is leaving in record numbers. The PM says to stop it, NZ must increase wages. But people also value status, not just money. And the high status jobs have all been given away to well-connected mates of National & Labour. Otago's Vice Chancellorship should have gone to one of our top research scholars who has become a big name on the world stage, of which there are a surprising number - but no, it goes to Disgraced Former Finance Minister Robertson. This week, NZ First Leader Peters announced 70 year old Heather Simpson, who was Helen Clark's Chief of Staff, has been appointed as Director of Ferry Holdings, in charge of buying new Cook Strait Ferries. She advised Labour on how to lock-down NZ's borders even tighter during Covid and was behind the disastrous creation of Health NZ that wrecked health-care. She joins 76 year old Sir Peter Gluckman advising Judith Collins how to restructure science and get NZ into the likes of AI, which he barely knows a thing about, and 70 year old Management Lecturer Lester Levy, who's in charge of single-handedly revamping our health system. But the problem is not management, it is the socialized model of single payer / single provider that is falling apart, both here and the UK. Not that I'm ageist - I'm also getting on - but these are terrible appointments.

Such issues mean getting NZ's economy growing can only be solved by supply-side policies that increase productive capacity, enhance incentives and end jobs for National & Labour Party boys & girls, not RBNZ sugar hits. There's also upward pressure on the neutral rate of interest due to the government's huge fiscal cash deficit of $20 billion, about 4-5% of GDP. What's more, the Reserve Bank of Australia said yesterday it doesn't want to cut its cash rate below 4% for fear of igniting inflation. Former US Treasury Secretary Summers argues that its "neutral rate is more likely above 4%". Kiwi real interest rates have been higher for decades than American ones, and most of the OECD.

My conclusion is that the RBNZ is in panic mode. Although the new Reserve Bank Act says it has a single mandate of price stability (it used to be dual, also giving it powers to keep employment high, at least in the short run) the Bank is desperate to get people borrowing & spending again. When you're dealing with an outfit full of dubious hires, and a Senior Leadership Team that has barely studied economics, you never know what it will do next.

A Tribute to the Founder of Well-being Economics, Richard Easterlin, who we flew out to NZ in 2019. He symbolizes a choice our country must make.

A few weeks ago, the founder of well-being economic, Richard Easterlin died, at the age of 98. In 2019, I invited him out to NZ, as a Visiting Professor to Auckland University. He was interviewed by Liam Dann at the NZ Herald and had a degree of influence over this nation's approach to the pandemic, as recognized by the Beehive in June 2020, which includes a link to a Zoom interview that I did with him back then. Easterlin was the intellectual architect of former PM Ardern and Finance Minister Robertson's "well-being approach" and "well-being budgets". That approach has always been scorned by National and ACT, who regard it as a joke. It is no joke to me. Easterlin argued, with much evidence, that the main drivers of human happiness are high quality health & health-care, a satisfying job, and close support from a family group. Economic growth and an obsession with consumerism & materialism were not particularly important in his view. Why? Because he believed strongly, with lots to back him up, that human well-being depended not so much on how wealthy we are in absolute terms, but more on how wealthy we are compared to others.

One can view NZ as a country now divided into two halves - one pushing for economic growth - which has become the Coalition's sole focus now - versus another group who are not so obsessed with it and give greater weight to quality of life, work-life balance, and overall lifestyle. I'm not laughing, like the Coalition, at Easterlin's legacy. Aside from being a friend, he was a deep thinker. Don't most people live in NZ because, though they could become richer by going to live somewhere else, still prefer the overall quality of life here? The Coalition will not be re-elected on the basis that it fires up economic growth should it fail to fix the health-care system. In such a case, Kiwis will react at the ballot box with ferocious anger. It is why the Conservative government in the UK lost in a landslide that saw over a decade of Labour rule under Tony Blair. Should Kiwis see their overall quality of life being undermined during this government, that issue will reduce their support for the Coalition more than headline figures on how fast the overall economy grows. To the extent higher GDP is not shared around, it matters less to people.

So don't laugh too loud just yet should you support National or ACT about Easterlin's well-being economics. NZ is the 11th happiest nation in the world. Isn't that position more important than our GDP per capita ranking? We certainly do need to be more economically prosperous, but not to the extent we lose our lifestyle. Then it is certainly time to leave. Why, by the way, did PM Luxon say he is "wealthy" & "sorted & buy a bach on Waiheke? Why does he symbolize the view that after acquiring a boat, bach and BMW (in his case a Tesla) one is fine? In Silicon Valley in the US, a guy with Luxon's wealth would not stand out. But Luxon feels relatively wealthy in NZ. He wants to be King of his Ant Hill, rather than a small fish in a big pond. That is Easterlin's point. Luxon is thinking of his position compared to other Kiwis. He feels his life-style in NZ is great since his health is good (especially with his private health insurance), has a satisfying job, supportive wife & children, so feels "sorted". In the sense of valuing overall quality of life, Richard Easterlin was a huge fan of Kiwis. So go good with the Big Guy Upstairs, Richard, who probably shares your values.