The NZ Herald's "Business Editor at Large", in order to defend the actions of our Reserve Bank these past years, had this to say about things written in the recent report authored by the former RBNZ Governor Graeme Wheeler & NZ Initiative fellow Bryce Wilkinson which critiqued the Bank's performance (along with several other Central Banks):

"Like all economics, it is political".

On and on the Herald goes with its lecture about the subject that I have studied for 30 years:

"Economics is not hard science. Hard science runs real-world experiments over and over in the lab, with controls in place, until it is accurate to irrefutable degrees".

Really? As a matter of public education, to write these kinds of gross generalizations is, in my opinion, a disservice to the readership of that paper.

I wonder whether the NZ Herald would like to write a follow-up article to "re-educate" its readers on the massive movement in economics these past decades to run "real world experiments", both "natural", and inside & outside labs with controls in place, like the medics do when testing drugs, to ensure the results are accurate to irrefutable degrees.

To recognize this extraordinary shift in economics to avoid it being labelled "all political", the 2019 Nobel Prize in Economics was made to Abhijit Banerjee, Esther Duflo and Michael Kremer “for their experimental approach to alleviating global poverty .. Their experimental work has changed the culture of economics .."

I'd suggest to the Herald's Owners & Editors they may like to read the article below, called "The Macroeconomist as Scientist and Engineer", by the writer of the world's most popular undergrad econ textbook & former Head of Harvard's Econ Department. Maybe they could also get in touch with my colleague, Ananish Chaudhuri, who is a Professor of Experimental Economics at the University of Auckland and ask for his views.

More generally, trying to diminish reports by eminent economists like Graeme Wheeler and Bryce Wilkson by labelling economics as "all political" does no-one any favors.


When you lack the monetary economics expertise to make decisions in the best interests of your own nation, then you copy others. But it can lead to disaster. The main reason why our Reserve Bank took the money printing / Quantitative Easing road was because other central banks were taking it. The bureaucrats figured that even if they ran into trouble by doing so, their excuse to save their own jobs would be, "Well, that's what others did". They called it "least regrets". The strategy may have worked for them but it sent NZ into a wage-price spiral.

Where are things at today? The RBNZ has formally declared an Official Cash Rate of 2% as being the "neutral rate", meaning neither contractionary nor stimulatory with respect to inflation. The OCR now stands at 2.5% and the Bank has said that, "Once supply & demand are more in balance, the OCR can then return to a lower, more neutral, level".

Former US Treasury Secretary & Harvard University President, Larry Summers, last week rubbished such claims, describing them as "indefensible", "inexplicable" & "wishful thinking" in the States, where the Federal Funds Rate (equivalent to our OCR) is also sitting around 2.5% & inflation is not much higher than here (about 9% compared to NZ's 7-8%). In both nations, short term real rates (the OCR minus the inflation rate) are deeply negative.

"There is no conceivable way that a 2.5% interest rate at an economy inflating like this is anywhere near neutral. And if you think it is neutral, you are misjudging the posture of policy in a fundamental way", according to Summers. Which implies by the same logic that our entire political class, business media and public have been led by the RBNZ to misjudge the posture of Kiwi monetary policy, since the cash rate is the same in this country.

So why did the RBNZ call the 2% rate "neutral" and now says, as the OCR has risen to 2.5%, that the desire is to return to a "more neutral" level? Politics. Because for the Bank to state that it's still running a stimulatory policy, meaning inflation will remain at elevated levels, breaching the 1-3% target for years, would cause public uproar & resignations.

As a consequence, our Central Bank, like the US Fed, has instead decided to play the PR / Comms game & do politics not economics. The RBNZ has made an assertion which is "indefensible" by claiming to be running a policy that will cut inflation, even though it isn't .. which is why its credibility is in tatters. The Bank's true (behind-closed-doors) policy is to cross its fingers & hope our inflation will go away on its own. Don't hold your breath.




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Robert MacCulloch