Thursday, November 08, 2007

The difference monetary policy makes

The Household Labour Force Survey is out, and shows record low unemployment of 3.5%. No doubt this will throw the markets into a spin with fears of "wage inflation" and employers being unable to hire more warm bodies (meaning they have to treat their existing warm bodies better as well), but its something the rest of us should be pleased about. Low unemployment means higher wages, better conditions, fewer frustrated desires, and (ideally) fewer people in poverty. How could that possibly be a Bad Thing?

This is the thid straight year of unemployment hovering around this level. Interestingly, in Parliament today, Social Development Minister Ruth Dyson dredged up a comment from Bill English made during the 1999 election campaign promising to keep unemployment at the "floor" of 6%, and that declaring that any claim that it could go lower was "a hoax". I guess they've proved him wrong. But what has made the difference? The answer is changes in monetary policy. Under National, the Reserve Bank had the goal (stated in its 1992 Policy Targets Agreement) of maintaining price stability, regardless of the social consequences. The-Reserve Bank Governor Don Brash followed this goal vigorously, "Brashing" the economy and raising interest rates to throw people out of work whenever unemployment approached that 6% "floor" and wage demands (and hence the threat of inflation) grew too great.

Labour changed all that. While there were a number of minor tweaks along the way, the big change came in 2002 when they rewrote the Policy Targets Agreement to make full employment an explicit goal of monetary policy:

The objective of the Government's economic policy is to promote sustainable and balanced economic development in order to create full employment, higher real incomes and a more equitable distribution of incomes. Price stability plays an important part in supporting the achievement of wider economic and social objectives.

That agreement is unchanged to this day.

So, to some extent, unemployment is a choice of government. Labour has chosen to keep unemployment to a minimum, insofar as it can in a varying globalised economy (it has been helped in this by economic good weather). By contrast, National chose to maintain a high level of unemployment, even when the economy began to recover from the 1990 recession, and to sacrifice the goals, aspirations and wellbeing of tens of thousands of New Zealanders for the benefit of the rich. It was a grossly immoral decision, and the worry is that, if elected, they will repeat it.

Perhaps someone should ask them?