Well, after my fuck up on minimum wages, I guess I’d better point to something that shocked me: a Labour MP talking sense. Mr Rick Barker on Red Alert takes aim at the pain capital gains tax could cause to mainstream, hardworking Kiwis. His anecdote (perhaps staged, but that’s not the point) looks at a typical scenario:

This man is no bludger, no rack rent landlord, he is not highly leveraged gambling on capital gain to off set other costs, he is a hard working Kiwi and a saver.  He has done what was asked of him and now he fears that he is to be punished some how for doing the right thing, saving prudently.  He saw a house as a good investment.  Property values might go down, but he would still have the house.

Great stuff – a capital gains tax will hurt hardworking Kiwis, which is why the Prime Minister has rightly ruled it out. The only problem Rick, is that your own leader wanted to do a deal on capital gains tax. You’re on the right track, but you really need to get rid of the phil-in in charge of Labour.

A reader has kindly reminded FCK of Parliament’s Inquiry into the future monetary policy framework, reported just over a year ago, when Labour had a majority on the Finance and Expenditure Select Committee. The report, written at the direction of former Minister of Finance Dr Cullen, was intended to re-enforce Labour’s commitment to bipartisan support for price stability and inflation targeting. Goff’s speech yesterday repudiated that commitment.

The key findings of the committee were (emphasis by FCK):

• confirms the importance of maintaining price stability as a vital component of a healthy and well performing economy.
• agrees that monetary policy remains the primary means for maintaining price stability.
• acknowledges that the Policy Targets Agreement between the Minister of Finance and the Governor of the Reserve Bank of New Zealand recognises the important role price stability plays in supporting the achievement of wider economic and social objectives, and that it requires the Reserve Bank, in pursuing its price stability objective, to operate monetary policy in a manner that avoids unnecessary instability in output, interest rates, and the exchange rate.
• acknowledges that New Zealand’s monetary policy approach, emphasising central bank independence and inflation targeting, is standard among, small, open, and developed economies.
• acknowledges that New Zealand’s monetary policy operates in a similar manner to countries with wider mandates, such as Australia and the United States.
• acknowledges that at times of strong inflation pressures, the costs of maintaining price stability are often borne disproportionately by the export sector.
• acknowledges that a range of economic factors and resource constraints have contributed to recent inflation pressures and to how quickly monetary policy has affected inflation outcomes.
• acknowledges that factors other than monetary policy—such as sustained improvement in trend productivity—play a key role in lessening the adjustments required to maintaining low inflation over the medium term.
• believes that constraints on the availability of natural resources, particularly crude oil, are likely to be increasingly significant contributors to inflation.
• heard extensive evidence concerning supplementary stabilisation instruments, such as a mortgage interest rate levy, an interest-linked savings scheme, and other taxes that might complement interest rates in managing inflation, but did not find the arguments
  in their favour compelling enough to support them being pursued further at this time.

What’s fascinating is that Labour are now essentially repudiating their own inquiry, or at least arguing that price stability has a much great affect on the export sector and that it is incompatible with “wider economic and social objectives”. The question is, why? Charles Chauvel should have enough of a background in business (being a former board member of Minter Ellison Rudd Watts and Meridian Energy) to know that price stability is important to all sectors of the economy.

Update: The inquiry was not directly by Michael Cullen. Mea culpa.

Labour leader Phil Goff has announced that the party is abandoning the bi-partisan consensus on monetary policy, and would remove inflation-based targets and thus the independence of the Reserve Bank if elected. Labour obviously doesn’t feel it pumped up inflation enough last time they were in office with their fiscal imprudence. Matt Nolan gives more of an insight here, looking at Cunliffe’s badly-put argument for abandoning price stability. Basically the argument is that a focus on inflation means we ignore exchange rates and employment, which is nonsense.

What intrigues FCK the most about this withdrawal from reality is the view that price stability is not important to working New Zealanders, and the current system only favours the rich. No Right Turn says:

people like John Key don’t see the value of their assets eroded by inflation. But its very, very bad for everyone else, with interest-rate driven spikes in unemployment and mortgage pain, and crashes in export earnings due to the resulting shifts in the exchange rate.

Always half-right, Idiot/Savant ignores the fact working New Zealanders also have assets to erode in value (KiwiSaver anyone?) and will be the first to be hit by rising prices for groceries and other consumer items, driven by higher rates of inflation, due to having lower disposable incomes.

Moreover, it’s businessmen like Olly Newland, Bob Jones and Alan Gibbs who benefit the most from higher levels of inflation. All of them made a killing in property development during the 80s because high levels of inflation gave them a higher return on capital from buying and selling property, much higher than they could expect with lower levels of inflation. Certainly, when the Reserve Bank Act 1989 was implemented it led to higher levels of unemployment, and has from time to time spiked and hurt homeowners. But higher unemployment largely subsided during the mid-1990s, and apart from a downturn during the 1998 Asian crisis has been improving ever since. Even today unemployment rates are only roughly equal to those seen in 2001, not 1991.