Politicians – stop talking about interest rates!

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I’ve said Michael Cullen should be quiet about interest rates before – now it is John Key that needs to be quiet about interest rates.

The Reserve Bank is independent – if you are a politician you don’t say what you think they should do, as any opinion can be construed as pressure on the Governor. No politician should do it – especially not a potential prime minister in waiting!

Ultimately, the Reserve Bank is a machine that turns interest rates into inflation outcomes – but it can only perform this process (effectively) as long as people believe it is “credible”. If the government leaves the machine alone it can function, and it can keep inflation low without damaging growth. If politicians start stuffing with the machine by questioning it, its credibility stops working and we end up with worse outcomes.

It is a magical machine – politicians should not mess with it. So please, John Key, do not say what you think should happen with interest rates. If you become prime minister you can mess with aggregate demand through fiscal policy – there is no need to try to jump into monetary policy as well.

Winston Peters can say things about monetary policy as no-one listens to him, but both John Key and Micheal Cullen are individuals that people do listen to – as a result, please pick your words around monetary policy carefully, this is not the United States after all.

Update: On that note, here is Winston Peters talking rubbish.  Truly, this sort of rubbish makes me certain that he cares more about getting into parliament than he does about the people he is supposed to serve.

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  • http://www.econ.canterbury.ac.nz/eric Eric Crampton

    I was shouting pretty much the same thing at the car radio on the drive home tonight hearing Key going on about this. I think my version wasn’t as tasteful.

  • goonix

    Agreed.

  • http://tvhe.wordpress.com Matt Nolan

    “I was shouting pretty much the same thing at the car radio on the drive home tonight hearing Key going on about this. I think my version wasn’t as tasteful.”

    I also had to control myself – it was the same when I wrote the Dr Cullen one :P

    “Agreed.”

    Again, economists re-enforcing my economics views – hopefully we aren’t re-enforcing each others wrong views :P

  • John

    The reason older people vote for Peter’s is that they pre date “cross lease” and “infill housing”. These are people who have noticed the growing pains and that they see the downside while people whose homes they visit via Home and Garden (while in the doctors waiting room), get the benefit. A reason for the decline of NZ First is that immigrants don’t vote for Winstons policies (although some English might)

  • John

    What do you think of this article Matt?:

    A South Island economist has called the one million mark a benchmark and an achievement. Population growth drives economic growth and gives the ability to sustain local companies which don’t need to go elsewhere to prosper. That unfortunately has been a frequent refrain from South Island, particularly Christchurch, businesses in the last couple of years.
    http://www.stuff.co.nz/4251444a6520.html

  • http://tvhe.wordpress.com Matt Nolan

    “What do you think of this article Matt?:”

    I think the issue of population is a very interesting one – I will try to write on it at some point. However, it is an issue that requires a fair time investment to write about – and I’m just a little caught up at the moment :)

    The thing with population is that, if we believe we have increasing returns to scale, then in the long run a higher population can make everyone in society better off (at least in a Hicks-Kaldor sense – which implies that if we could compensate people everyone could be better off). However, the conditions for this are interesting – and the costs that exist in the short-run are real.

    As a result, I need quite a while longer before I can post on it :) Keep reminding me though and I will one day :P

  • John

    Thanks Matt, I experienced the growth of Queenstown and tourism and migration and if tourism collapses I wonder whither the “achievement”……. I’m bearish on energy. I also (in my mind) equate the MacKenzie hydro development etc with the period prior to Chch’s growth and the need to infill the garden city. I wonder how much immigration is the raw material for the Property Councils members.

    I remember my Econ 101 lecturer starting by saying “society has 3 problems to solve: what to produce; how much to produce and where to produce it. I would add that when an economy fluctuates players can’t exit as they need to earn and so even though there is enough for everybody we need to keep growing the economy to create new jobs but these are social not economic problems?

  • http://tvhe.wordpress.com Matt Nolan

    “I would add that when an economy fluctuates players can’t exit as they need to earn and so even though there is enough for everybody we need to keep growing the economy to create new jobs but these are social not economic problems?”

    These are a subset of the what, how, and where questions.

    Fundamentally, economics is the study of scarcity. I would say it is more a matter of asking, what is scarcity, where does scarcity exist, how are scarce resources allocated. I

    f we are then in an environment where there is an economic downturn we can ask these questions and get a description of what is happening. Once we know this, and we know how other thing influence this outcome, we can move away from economics and add value judgments in order to determine what we should do – economics describes issues for us, it doesn’t tell us what to do.

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