Gareth Morgan, Director of Gareth Morgan Investments
It’s political chic again to denigrate monetarism and regurgitate Keynesianism, why?
In the US the Reagan era was followed by an economic recession in 1990 as asset price deflation induced a crumbling in domestic demand. Kenesian’s blame high real interest rates and financial market deregulation. That high rates persisted from the early 1980s and failed to stop an asset price splurge is taken t mean that the interest rate weapon failed. Yet over the whole period of Reagonomics, including the recent slowdown, the US growth rate has averaged 2.3%, not that bad by comparison with other OECD countries. In fact the Republican era was one of rampant Keynesian fiscal policy counteracted by a monetarist line on inflation. This contradiction produced high real rates. To prescribe Keynesianism again, the main tenet of which is both fiscal and monetary policies which expand domestic demand during times of economic slowdown, and the main result of which has been inexorable growth in the public sector debt load and endemic inflation, seems an overreaction to the US slowdown.
New president Clinton was elected at the time the economy was already in rapid recovery – annualised growth over the second half of 1992 was 4%. His election initially spooked financial markets and raised the cost of capital in America. But he wooed them with a promise to cut the budget deficit. Interest rates fell and the sharemarket rallied. Now his fiscal plans are quickly turning to slush as he struggles with Congress and the integrity of his budget projections are questioned. Financial markets are faltering. If the deficit reduction is not fulfilled then interest rates will rise and share values will be cramped.
A further favourite Keynesian jibe at America is that the rise in its unemployment is the result of monetarist credo. No account at all is taken of the massive effect deregulation of international capital markets has had upon the movement of factories and production to more competitive economies. This affect is hampering most of the expensive OECD bloc, as they export blue and white collar jobs to the emerging markets. Such a structural shock can hardly be blamed on pursuit of anti-inflation policies at home. The ultimate result of these pressures must be changes in real exchange rates, with the expensive OECD currencies all falling against the more competitive blocs.
In NZ there’s a mimicking of the US upsurge in fiscal expansionism, endorsed politically by the Labour party. Their embrace of the Clinton strategy borders on sycophantic, with senior spokespeople toadying to Clintonites to the extent of beaming them in by satellite to provide advice rather than articulating and defending the arguments themselves. Keynesian academics here are also gathering the courage to re-enter the policy debate now the disgrace of their policy prescription is fading in the political consciousness. It’s inescapable that the central tenet of that school remains that government’s role should be to expand domestic demand through a large budget deficit until full employment is reached, and that monetary policy shouldn’t negate that effort. The formula’s flawed.