Steve Baron: System Punishes Us for Doing Well

Economic systems are complicated things, and our economic system seems to have barely improved over the years.

It lurches from boom to bust time and time again, creating havoc and destroying lives. These boom and bust episodes are a fundamental flaw that politicians have failed to address, and it is a flaw that holds New Zealand back from a better standard of living.

Economies sometimes thrive — unemployment is low and everyone is happy — for a while. But sooner or later, they crash and burn, and then big business and their owners get bailed out, and the wealthy are usually shielded behind financial tools like limited liability companies and trusts, so it’s average Joe Kiwi who suffers the most.

The Economic Theorists

Don’t get me wrong, I have nothing against capitalism and free enterprise, but our economic operating system is screaming out for an overhaul.

Back in the good old days, Adam Smith — considered by many to be the father of economics — believed competition was the answer and governments should never impose tariffs and taxes, other than to protect free-market competition.

Karl Marx came up with another economic operating system called communism, but that proved, arguably, to be a dog.

Then, John Maynard Keynes, in an attempt to understand the Great Depression of the 1930s, advocated increased government spending and lower taxation to stimulate the economy and pull the world out of the global depression.

Milton Friedman then extolled the virtues of a free market economy with minimal government intervention.

The last National government was hellbent on reducing government spending, and now the Labour government looks likely to adopt Keynesian economic theory and open up the government purses again. While this will be a much-needed boost to struggling regional communities such as Whanganui’s, adopting the policy carte blanche may have issues.

The Perverse Punishment for Success

At the heart of the problem with the economic system is that when the economy is booming, the Reserve Bank jumps in and increases interest rates to reduce the threat of inflation. This increases the cost of mortgages and of doing business — we get punished for doing well, something I find rather perverse.

New Zealand relies heavily on exports to produce overseas income, and interest rate controls — through the Reserve Bank — have a major bearing on our exports.

If the Reserve Bank increases interest rates to curb inflation, this pushes up the exchange rate. This, in turn, makes our exports more expensive to overseas buyers, so they purchase less and exporters make less money.

The use of interest rate controls would seem a blunt and inefficient tool. It is also often a year or more before the desired effect happens, and even then, success is hit or miss.

A Better Solution: Full-Reserve Banking

An often forgotten, far more effective economic tool is full-reserve banking (100 per cent banking), a concept first promoted during the 1930s by US economist Irving Fisher.

Legislation would require all banks to hold a cash reserve of 100 per cent matching every deposit, thereby stemming the expansion of the money supply. Legislation would also be required to restrict shadow banking activities.

An independent National Credit Authority, outside the control of politicians, would also be required to calculate how much new money is needed to be put into circulation (or taken out), free of debt. How this debt-free money is distributed or used is another debate.

I am not advocating the nationalisation of banks, only nationalising the monetary system — the lifeblood of our economic system.

This economic approach would make it easier for the government to control inflation or deflation, and the money supply, all without raising interest rates, which adversely affects exports and the economy. But do Finance Minister Grant Robertson or Prime Minister Jacinda Ardern realise our economic system has a problem? And are they prepared to do anything about it?

Published in the Whanganui Chronicle, 9th March 2018.

Steve Baron is a New Zealand-based political commentator and author. He holds a BA with a double major in Economics and Political Science from the University of Waikato and an Honours Degree in Political Science from Victoria University of Wellington. A former businessman in the advertising industry, he founded the political lobby group Better Democracy NZ. https://stevebaron.co.nz