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The Origins of Inflation Targeting in New Zealand with Don Brash | Hoover Institution · The Capitalism and Freedom in the Twenty-First Century Podcast

0:08
- This is the Capitalism and Freedom
0:09
in the Twenty-First Century Podcast, an official podcast
0:12
of the Hoover Institution Economic Policy Working group,
0:14
where we talk about economics, markets, and public policy.
0:17
I'm Jon Harley, your host Today my guest is Don Brash,
0:20
who is governor of the Reserve Bank of New Zealand
0:22
for 14 years, from 1988 to April, 2002,
0:27
where he was the first central banker
0:28
to pioneer inflation targeting across the world.
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He also was leader of the opposition
0:33
and leader of New Zealand's National Party from
0:36
October, 2003 to November, 2006.
0:39
Thanks so much for joining us, Don. Very welcome.
0:43
It's a, it's a real honor to have you on
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and really, you know, I I think inflation targeting,
0:49
you know, is, is often seen as, as a huge,
0:53
massive policy success on the par of Central Bank, but,
0:56
but I think a lot
0:57
of people aren't fully aware of its origins.
0:59
So I wanna get first into your personal origins.
1:02
How did you originally get interested in economics?
1:05
Growing up in New Zealand, going on to do a, a, a PhD and,
1:09
and play a role in economic policy in the 1980s
1:12
and 1990s, sort of at a key time of,
1:15
of market reforms in advanced and emerging economies.
1:18
There was a lot going on in the, the 1980s
1:22
and just from, from a market reform standpoint, New Zealand,
1:24
there's, I think floating the New Zealand dollar,
1:28
reducing tariffs and so forth.
1:29
I also know that you're a Kiwi farmer.
1:32
You also, I think, share some policy
1:34
and farming cross interests with ho was very young,
1:36
Victor Davis Hansen, who farms the almonds.
1:40
And, and you also have an autobiography
1:42
called Incredible Luck.
1:43
I'm curious about your, your personal origins.
1:46
You know, were there any other New Zealand
1:47
accounts that you looked up to?
1:49
For those that aren't aware, bill Phillips,
1:51
who's the namesake of the Phillips Curve,
1:53
is also a New Zealand economist.
1:54
I'm curious, how did you first get interested in economics?
1:58
- Well, I was mainly interested in foreign policy.
2:01
I was very much preoccupied with the causes of war.
2:04
'cause I grew up in the immediate aftermath
2:07
of the Second World War,
2:08
and I was working out
2:10
how I could possibly make a difference in
2:12
international foreign affairs.
2:15
So my undergraduate degree was mainly in history
2:19
and economics, equally actually.
2:21
But history was a much stronger faculty at the time.
2:25
And, but when I finished my, my bachelor's degree
2:29
with a history, very good marks
2:31
and so on, I couldn't see much history, much, much prospect
2:35
for my career in, in history.
2:38
So I thought I better get into economics.
2:41
And I went to the Australian National University to do a PhD
2:45
having done a master's thesis in New Zealand saying how bad
2:49
and awful and terrible foreign investment was
2:53
or external debt was.
2:55
And I went to, to the Canberra Australian National
2:58
University, convinced that
3:00
I should do a much more in-depth study
3:03
of the effects of foreign investment.
3:05
And by chance I got the opportunity
3:07
to do a detailed study on a hundred American affiliated
3:10
companies in Australia.
3:12
I started off in tent to prove
3:15
how bad they were for Australia.
3:17
And to the great embarrassment of many of my friends,
3:21
I reversed 180 degrees
3:24
and I realized that American investment had been enormously
3:26
beneficial to Australia.
3:29
And that sort of started me off on a,
3:31
on a pro market track.
3:35
I went from there to the World Bank.
3:37
I spent five years there, learned a great deal at the time
3:40
that Robert McNamara was president of the World Bank.
3:43
I learned a lot from him. And
3:46
- You were working in the us
3:48
- In the US in Washington DC Wow.
3:51
A part of that time I was on the staff of what became known
3:54
as the Pearson Commission
3:57
in full Commission on International Development, but named
4:00
after Lester Pearson, the former prime Minister of Canada,
4:03
who chaired that commission.
4:05
There were six or seven of the, of the good
4:07
and great of the world on that commission.
4:10
And there were 12 staff of whom I was
4:12
lucky enough to be one.
4:14
And I was the person advising them on the role
4:16
of private foreign capital in economic development.
4:19
So that, in a sense, that started me off on a,
4:22
on an economic track rather than a foreign policy track.
4:25
I came back to New Zealand, ran an investment bank
4:28
for 10 years, affiliated with Wells Fargo Bank.
4:31
So I had a connection there again with the United States.
4:34
Then at that point, I, I made a, a,
4:38
a false attempt to get into politics.
4:40
Didn't, didn't work.
4:42
So then I got out right out of banking
4:44
and became chief executive of
4:45
what was then called the Kiwi Food Authority,
4:48
which coincided with the fact that I had just bought a piece
4:51
of land and planted it in, in Kiwi fruit vines.
4:55
And that explains why to this day, I still have a,
4:58
an interest in a kiwi fruit orchard.
5:00
It's a, it's a great product. I was then asked
5:05
to, to amalgamate effectively
5:10
what in America would be called savings
5:11
and loan institutions.
5:13
There were, there were nine
5:15
of these rather weak institutions
5:17
and I was asked to put them together.
5:20
And I was, had done that for two years when all
5:22
of a sudden I was asked to be governor of the Reserve Bank.
5:26
I should say that during that previous time,
5:28
I was at the Kiwi food industry, the, the labor government,
5:33
which is our ostensibly our left wing party asked me,
5:38
or the finance minister asked me to do a number of things
5:40
for the government in the economic policy space.
5:44
And the most significant of these was,
5:47
- This was Roger Douglas, who's the finance manager,
5:49
- Correct. That that's right.
5:51
- Known for market reforms.
5:52
At that time, I, I guess floating the, the key, the,
5:55
the New Zealand Dollar Terrace finish deregulation
6:00
- Quite right.
6:01
He was the most market oriented finance minister in
6:04
New Zealand history to that point.
6:07
And did things which I thought were inconceivable
6:10
for center right government,
6:11
let alone a center, a left government.
6:14
The, I was mainly involved in that particular period as far
6:18
as government policy was concerned on tax policy.
6:22
And he asked me to chair a three person committee
6:24
to design our value added tax,
6:27
which we call a goods and services tax.
6:29
Now, you can debate the merits of taxation,
6:32
but if you're gonna have tax, a goods
6:36
and services tax
6:37
or value added tax is about as good as it gets.
6:41
But most countries are tempted to create exemptions,
6:45
different rates, et cetera, for different goods.
6:48
So you exempt, for example, children's clothing
6:50
or books or food.
6:53
And in no time at all, you have a much more complicated
6:56
system to implement than we had in New Zealand.
7:00
Thanks to Roger Douglas.
7:03
More than, more than, more than thanks to me.
7:06
As, as chairman of the committee, we have A GST, which is
7:09
as good as any in the world
7:10
with a possible exception in Singapore.
7:12
Both countries have a, a goods
7:14
and services tax evaluated tax,
7:17
which is equal across everything with no exceptions,
7:21
which makes it extremely simple to implement.
7:25
And, and that was my, to that point, my, my greatest,
7:28
greatest contribution to policy.
7:30
But then, as I say, Roger Douglas asked me to be governor
7:33
of, of the Reserve Bank,
7:36
and that's of course when I started getting involved in
7:38
monetary policy and, and inflation and so on.
7:42
- Fantastic. So, so 1988 is when he became governor
7:46
of the Reserve Bank of New Zealand.
7:49
I'm curious in, in inflation targeting,
7:53
the inflation targeting regime was put into place in,
7:56
in 1990.
7:59
I'm, I'm curious, tell us the story of
8:01
how this all came together.
8:03
I know, you know, the, there was a famous interview
8:08
in which you went on TV
8:09
and you said, you know, you I think favored a a zero
8:14
to 2% target.
8:16
I'm, I'm curious, you know, was there a lot of academic
8:19
thinking or, or was it more, you know, personality driven?
8:23
I'm just curious, how did this whole idea to,
8:27
to have an inflation target come about?
8:29
I, I know like, you know, prior to inflation targeting
8:32
explicit inflation targeting regimes, you know, for example,
8:35
the US briefly had a, a monetary policy targeting regime
8:40
that was going on in, in probably
8:41
around the same time in the late 1980s, I think in,
8:44
in the Volker Fed.
8:45
I'm curious, like what was being discussed at that time?
8:48
You know, did the Central bank and,
8:50
and the government at the time at least, you know,
8:52
did they buy into sort of Milton Friedman's idea
8:54
that inflation was always in everywhere,
8:57
a monetary phenomenon, which wasn't exactly a,
9:00
a common belief in the 1970s, for example,
9:02
when there were a lot of
9:04
price controls and things like that.
9:05
I'm curious, how did this whole idea
9:07
to start inflation targeting come together?
9:10
- Well, the background was that we had, had inflation, which
9:14
by developed country standards was, was, was quite high.
9:17
Not, not like Turkey
9:19
or not like South Africa, not like Zimbabwe,
9:22
but nevertheless, fairly high double digits between 10
9:27
and 15% for several years in the end.
9:30
And poor growth.
9:32
And that was a useful exercise in one sense
9:35
because it showed that tolerating more inflation did not
9:38
give you more growth.
9:40
Our growth was quite modest
9:42
by developing country standards despite, or
9:45
because of this, this, this fairly high inflation.
9:51
But, but let me go back one, one step prior to 1989,
9:56
and I say 89 'cause that's when the act was passed.
9:59
There were two kinds of central banks in the world.
10:02
There were the completely independent central banks,
10:05
so at least notionally the Fed being the most obvious one,
10:08
but also the Bonders Bank in Germany, Swiss National Bank
10:10
and Switzerland and so on.
10:12
But that was about all, there weren't very many of 'em,
10:14
most central banks were effectively, effectively a branch
10:19
of the Treasury.
10:21
They did as the government of the day, told them to do.
10:25
And that meant that monetary policy was quite cynically
10:28
manipulated by the government in power.
10:32
And, and the 1989 legislation pioneered a new track.
10:39
The government said, look, the inflation rate is something
10:42
which the government should decide.
10:45
What, what rate does the government
10:48
tolerate its currency devaluing?
10:51
In other words, what, what inflation
10:52
rate are they willing to accept?
10:53
It's a political decision,
10:57
but how they deliver that should be up
11:00
to the technocrats in a central bank.
11:03
And the unique thing about the New Zealand framework at the
11:08
time was
11:09
that it left the inflation rate choice in the hands
11:13
of the elected government
11:15
and told the bureaucrats in the central bank to deliver it.
11:21
And, and the, the, the inflation rate,
11:24
which the government wanted, had to be public in writing
11:27
and everyone knew what the, the target was.
11:30
The government couldn't fudge it
11:33
and the Central bank had to deliver it.
11:34
Now, when I said Central Bank,
11:36
when the 1989 legislation was fi first drafted,
11:42
it involved a contract between the Minister of Finance
11:44
and the governor personally.
11:47
And I recall saying to the minister as it was being drafted,
11:51
surely you want a contract with the reserve bank?
11:54
And he said, no, we can't fire the Reserve Bank.
11:57
We can't even fire the Reserve Bank board,
12:00
but we sure as hell can fire you.
12:02
And it was therefore a very personal responsibility
12:05
for the governor at that time.
12:07
It's changed more recently, but at that time,
12:10
and for the next 20 years
12:12
or more, the responsibility was on the governor
12:16
to deliver a contract, which was in writing
12:20
where the government chose the target inflation rate.
12:23
Now the beauty of that is that if government,
12:26
if the central bank is a tight monetary policy is doing it
12:29
because the government has mandated the inflation rate,
12:33
which the, the gov the reserve bank must deliver.
12:37
So unlike the situation situation you have in the
12:39
United States right now, where,
12:42
where the president can criticize the Fed
12:44
for not dropping interest rates, he'll be the first
12:48
to complain if inflation gets outta control.
12:50
But, but in the New Zealand framework,
12:52
the government can't really criticize the central bank
12:56
as long as the inflation rate is is within the
13:00
mandated target.
13:02
So that, that, that's created a totally new framework.
13:07
And it's the framework which has been adopted of course
13:09
since that time, by Australia, by Canada, by Sweden, by uk.
13:14
But it's where the government has responsibility
13:16
for nominating the inflation rate
13:19
and requiring the central bank to deliver it,
13:22
or our case originally the governor
13:25
of the central bank to deliver it.
13:27
So that was a unique framework,
13:30
but when you go to structure a framework, framework like
13:33
that, you have to have in some sense a numerical target.
13:37
What, what does the government want for the inflation rate?
13:39
Well, the zero to two, I think came out
13:44
of an interview with Roger Douglas on television shortly
13:47
after the New Zealand inflation rate dropped below 10%
13:51
for the first time in some years.
13:54
And the television reporters hit that, Roger Douglas,
13:56
aren't you satisfied now you've got inflation under 10%.
14:00
And Douglass replied, no, no, I'm looking at like zero
14:04
or zero to two.
14:06
And it was a flippant off the cuff remark when he sort of
14:10
made the zero to two comment.
14:12
And it became, of course, holy gospel,
14:15
when I became governor some six months later,
14:20
that was the target I was told I had to meet.
14:22
Now at that point, it was an informal target
14:26
and it, when the legislation was passed in 89 requiring a
14:29
written instruction
14:31
to the central bank on the inflation rate,
14:33
that's when we formally adopted the zero to two by 90 92.
14:38
'cause we were at a higher rate of inflation by that time
14:42
in, in the early 1990. Yeah,
14:45
- So, so if, if, I guess my understanding is, and
14:48
and later it shifted from, you know, zero to two to,
14:52
I think it's zero to three and then,
14:55
and then eventually one to three.
14:57
So eventually, you know, 2% became the middle of the band.
15:00
I mean, it's fascinating how like one i I guess 2%,
15:04
which we hear about today in 2% inflation targeting why it's
15:06
important that we target 2%.
15:08
Originally it was the upper part of this band that was
15:13
somewhat, I don't wanna say randomly thrown out there
15:16
as a number, but I mean, I'm just curious, like is it,
15:21
I mean, is there any information in terms of like, was there
15:25
any kind of academic input into this?
15:27
Was, was there, or
15:29
or was this just a a a sort of arbitrary set of numbers that
15:35
that, that Roger Douglass had come up with?
15:37
I mean, was there any ahead of that TV interview,
15:40
was there kind of any, I guess, discussions
15:42
between the central bank or economists
15:45
or I guess folks in the legislature or,
15:48
or is it, was it just really a, a a kind
15:50
of an arbitrary thing that we've now all
15:52
sort of coalesced around?
15:53
- Initially it was rather arbitrary
15:55
as in the way I've described subsequently we rationalized it
15:59
as 1% measured inflation
16:03
is probably ac akin to actual inflation.
16:07
Yeah. Actual inflation is zero
16:10
1% measured inflation is probably equivalent
16:12
to price stability because of biases in the measurement
16:15
of the consumer price index.
16:17
I think you had a senate committee in, in the United States,
16:21
I think was the Boston Boston committee, which
16:23
- Estimated, yeah, and after Hoover's very own Michael
16:25
Boskin, who's, who's a senior fellow on the,
16:27
on the staff here still.
16:29
- Okay. Okay. And I think from memory,
16:32
that committee estimated about a 1% bias
16:35
in the US measurement of the CPI.
16:38
I think actually that took place
16:39
after our zero to two was established,
16:41
but we rationalized it subsequently as, as being
16:45
genuine priceability plus or minus one.
16:47
That, that, that's where we rationalize zero to two.
16:50
Now, subsequently, we decided there were so many
16:55
exogenous shocks,
16:57
which hit a small economy in a trading environment that
17:01
the target was undesirable narrow.
17:05
So we toyed with the idea of having a target of minus one
17:09
to three, in other words, same midpoint
17:12
of 1% measured inflation, which we, we had as tantamount
17:16
to price stability, but a slightly wider range
17:20
before the governor was at risk of losing his job.
17:23
Then we thought actually if measured inflation was,
17:25
was tracking below zero,
17:28
the chances are we'd be easing pretty aggressively.
17:32
So we decided minus one to three, while it had the symmetry
17:36
of being retaining the 1% target was a bit artificial.
17:40
So we changed it to zero to three
17:42
after political negotiations in the mid nineties
17:45
between political parties.
17:48
Subsequently, we, it was also agreed that,
17:52
and bear in mind the fact that the target is mandated
17:55
by the elected government
17:58
that were inflation tracking towards zero again,
18:02
would be easing fairly aggressively.
18:04
So the, the target was eventually changed to one
18:06
to three against the mid point of two.
18:10
- Well, it's, I mean it's it's fascinating that, that one,
18:15
I guess that the arbitrary nature of it, so one, the,
18:18
the Boston Commission I, I think didn't happen
18:20
until till maybe 19 95, 19 96, a good number of years later.
18:24
And that's correct. Right.
18:25
I think the, the Reserve Bank of New Zealand,
18:28
I think figured out what they had figured out years,
18:30
I think years later that, you know, there is this, you know,
18:33
maybe 1% bias.
18:35
But I I I'm just curious, I I know some of the history in,
18:38
in the US and Canada that, you know, for example,
18:41
Paul Volker, you know, through the rest of his life,
18:45
you know, favored a 0% inflation target.
18:47
And he was, I I think a, a a very big critic
18:50
of 2% inflation targeting for many decades.
18:54
I mean, obviously, you know, very few central banks.
18:56
He did those words, I think.
18:58
But, but I'm curious, I, I know like John Crow at that time,
19:01
who's the governor of the, the central
19:03
or Canada Central Bank, the Bank of Canada, he favored a,
19:06
a 0% inflation target originally, or,
19:09
or a lower one, I guess maybe zero 1% inflation target.
19:14
And then at the time, I think what had happened was,
19:16
you know, there's a li a liberal government in power in,
19:19
in Canada, the, the early crutch and government and,
19:23
and essentially the, the, the Crunch.
19:25
And Martin government wanted a higher inflation target
19:28
because, you know, they sort of believed in this, you know,
19:30
Phillips curve sort of concept that, you know,
19:32
you could maybe create more jobs
19:34
by letting inflation run a little bit hotter.
19:36
And then in the US you know,
19:38
the Fed never really even announced its official inflation
19:41
target until 2012 under the Bernanki fed, even though sort
19:45
of, it was, I think a pretty well known, poorly kept secret
19:49
that the, the Fed was targeting 2%.
19:52
But I'm curious, you know, when you were a central banker at
19:53
that time, I mean, when sort of the,
19:56
the 2% consensus hadn't formed yet.
19:59
I'm curious, what were those conversations like
20:01
with other central bankers?
20:02
I mean, was there sort of a, I mean we,
20:04
nowadays we have these sort
20:06
of cross country macro debates now about all these things,
20:10
you know, what should our monetary regimes look like?
20:12
And often our shocks are, are increasingly similar and,
20:15
and more globalized it seems.
20:17
But I'm curious, like
20:18
what were the conversations like back then?
20:20
Was there a battle for 0% inflation targets that,
20:25
that, that was going on that sort of eventually lost out?
20:28
Or, and, and I'm curious, another thing that you often hear,
20:30
like from folks like Bernanke, when he was chairman
20:32
of the Fed defending the 2% inflation target in,
20:35
in the 2010s when people were bending over backwards,
20:39
you know, because the inflation was running below 2% and,
20:43
and how, you know, some people made the case, it was sort
20:45
of an emergency that, that we weren't hitting a 2% target.
20:50
I'm curious, like it was one of those arguments
20:52
that people make is that, well, you know,
20:54
we should be afraid of deflation
20:55
and if we had negative inflation that people would be saving
20:59
tons more and and reducing their consumption
21:02
and this could make economic contractions much worse.
21:06
Were there any sorts of conversations like
21:08
that happening back in the late 1980s, early 1990s when the,
21:12
the sort of inflation, early inflation targeting
21:14
regimes were being set up?
21:16
- I don't remember them to be honest.
21:18
We were so pleased to get inflation below two
21:21
and regularly around one that the idea of getting it
21:25
below zero didn't really have much appeal
21:28
or any public currency either.
21:31
One of the strange you mentioned the Greenspan Fed, one
21:34
of the strangest things about the, the Fed, it seemed
21:36
to me was that they had an inflation target
21:38
was scared to mention it.
21:40
And, and I think that that's odd
21:43
because for me, the inflation targets plays a very important
21:46
role in expectations and therefore in behavior.
21:49
And, and one of the great things about a small country,
21:52
which of course the US is not, is that the governor can
21:56
and could
21:57
and did spend a lot of time going around talking
22:01
to rotary clubs and farmers groups
22:02
and church groups, anyone who would listen
22:05
to convince the public
22:07
that we were deadly serious about getting this inflation
22:10
to the target because expectations are, are,
22:15
are pretty important.
22:16
And they're important also in terms of the social cost
22:20
of delivering a inflation target.
22:22
If people genuinely believe the inflation rate is going
22:25
to be 1% or 2%
22:27
or whatever the target is, their behavior tends
22:30
to some degree to gravitate to that kind of target.
22:34
It makes the job monetary policy that much easier.
22:38
- Now, at that time in the late eighties, early 1990s,
22:43
were there surveys established yet at that point
22:46
that could track long-term inflation expectations?
22:48
Like in, in the US for example, there's the University
22:50
of Michigan surveys that we have here
22:54
that have been going I think since the 1960s
22:55
or quite some period of time.
22:58
And I know, I mean there,
22:59
there's many other expectations measures now that exist
23:02
and surveys that exist.
23:03
Policy makers obviously follow this very closely.
23:05
They also follow, you know, maybe inflation linked bonds,
23:09
which have been around really only since the late 1990s
23:12
and there's risk premium in that.
23:14
So that's not a perfect measure of,
23:17
of inflation either looking at inflation breakevens.
23:19
But I'm curious, what sorts
23:21
of data were you paying attention to in, in your
23:25
14 year governorship?
23:26
What were you paying attention to to make sure that you knew
23:28
that inflation expectations were being better anchored
23:32
by the inflation targeting
23:33
- Machine?
23:34
Especially my memory a bit here, Jon,
23:36
I can't remember exactly what particular indicators he
23:38
watched carefully, but we did have some indicators
23:41
of inflation expectations, both, both short term and,
23:43
and medium term, which we were influenced by.
23:47
But I guess to a large extent we were focused on, on
23:51
what the inflation outcomes actually were.
23:54
'cause those played a very important role in,
23:56
in conditioning expectations.
23:58
And I mean, I I, when, when
24:02
this tag was first introduced
24:04
and we had monetary policy, very tight interest rates,
24:08
very high unemployment going much higher than it had been
24:12
since the 1930s, it reached the peak of 11%.
24:16
One of the tasks I had was convincing the unions,
24:20
particularly that I was indifferent
24:24
to the unemployment rate, my focus was on inflation.
24:29
And if they wanted to get the unemployment rate down,
24:31
they had to ensure that wage
24:33
and salary demands were consistent with that inflation rate
24:37
because otherwise unemployment would stay high.
24:41
So we actually had a had a major discussion with the,
24:45
the head of the council of trade unions in New Zealand,
24:50
and, and he understood that if
24:56
if wage demands
24:59
and inflation started being more consistent with the target,
25:02
then monetary policy pressure would reduce.
25:06
And to my astonishment and many others, astonishment too.
25:09
And to his great credit, he went
25:11
around the country side talking to trade unions saying,
25:14
guys, if you wanna get interest, interest rates down,
25:17
monetary policy pressure reduced,
25:19
then you've gotta moderate your wage demands.
25:21
And, and it was sort of self-reinforcing.
25:26
- That's, that's fascinating.
25:27
I, I'm curious, like, you know, one thing I guess that,
25:29
that makes the Fed the Federal Reserve
25:31
so different from other central banks around the world,
25:35
I think some people may not realize is that it's very,
25:37
the Fed is very unique in that it has a dual mandate
25:41
that is in, I mean, some people say there's a triple mandate
25:44
and stable interest rates,
25:45
but you know, the, the core sort of dual mandate concept
25:49
that that's been enshrined in loss since the Humphrey Atkins
25:52
Act, which is an act passed in the 1970s, basically,
25:56
you know, price stability, you think stable inflation, low
25:59
and stable inflation and you know, full employment,
26:01
you know, unemployment rate that's close to so-called,
26:05
you know, full employment or you
26:06
know, unemployment that's low.
26:07
I'm curious, like as a is leading when you're leaning a
26:10
central bank that only has a, a mono mandate that is
26:14
to target inflation.
26:16
I mean, does, you know, these sort
26:20
of other unemployment, full employment concerns ever come,
26:23
you know, front of mind?
26:26
You know, for example, you know, I guess we had, you know,
26:28
the great recession, my sense is that some of these mono
26:33
mandate central banks like the Bank of Canada is kind
26:37
of focused on both and kind of may even have some sort of
26:41
unspoken of dual mandate.
26:43
I guess there there's also this thing
26:44
that economists called the divine coincidence
26:46
where you can kind of target inflation
26:48
and end up sort of targeting both in inflation
26:52
and low stable inflation, low inflation and,
26:56
and stable unemployment as well.
26:58
I, I'm curious what you, what you think about that or,
27:01
or what are the things that I guess as a mono mandate,
27:03
central bank or those challenges, you know, as,
27:06
as you mentioned speaking with the, the trade unionists,
27:08
how does that sort of come about?
27:09
I mean, I think during your tenure was a pretty stable time
27:13
macroeconomic wise,
27:14
but I, you know, I think about, you know, 2008 where,
27:17
you know, central banks really kind of went all out to, and,
27:20
and since in 2020 even further, you know,
27:23
more central banks are engaging in quantitative easing,
27:26
doing other things to, to keep interest rates low
27:30
for the express purpose of, of really trying
27:32
to simulate the economy, revive economic growth
27:36
and bring down unemployment.
27:37
I'm curious how that sort of thinking kind of works.
27:40
- Well, I mean, I'm trying to recall the name of the
27:43
well-known economist, I should note offhand,
27:46
who says you cannot have more than one goal per instrument.
27:50
- Hmm. - And I think that's now widely accepted
27:53
and I suspect a Greenspan
27:54
and the Fed guys would, would accept that too.
27:57
They go through the, the pretense of having a dual mandate
28:01
because that's what the law requires of them.
28:04
For a brief period,
28:05
the New Zealand labor government just a few years ago
28:09
introduced a dual mandate for the Reserve Bank
28:11
of New Zealand because the Fed does it, the Bank
28:14
of Reserve, bank of Australia does.
28:15
It says we should too.
28:17
Now we've reverted to a single mandate
28:20
where inflation control is the only
28:24
objective of monetary policy.
28:26
Now, of course, frequently the object,
28:29
the twin objectives will be consistent with the same policy.
28:32
If unemployment is very low, chances are
28:36
that your inflation rate, we are pushing towards the top
28:39
of your target and vice versa.
28:42
But if unemployment's going up
28:44
and inflation rate is, is too high,
28:47
then you've got no choice but to make it make a choice.
28:49
But between those two objectives,
28:52
and it's, there's no doubt at all that in our, our case,
28:55
our primary objective is indeed our formally our only
28:59
objective is controlling inflation.
29:03
So we, we reject the logic of the dual mandate.
29:06
We think the dual made mandate is a fiction which,
29:09
which the fed us to go along with
29:10
because that's what the law says.
29:12
But, but yeah.
29:15
- Well, that's fascinating. I'm curious to, to get
29:18
some further thoughts on, on some of your own, you know,
29:21
thinking on your monetarism and,
29:24
and I know you crossed paths with Milton Friedman, you know,
29:28
who's Hoover senior research fellow, one
29:31
of the most famous accounts of the 20th century, you know,
29:34
pioneer of monetarism and, and free markets in general.
29:37
I know you, you crossed paths with him several times.
29:40
I'm curious what your interactions with him were, were like
29:43
and, and when, when these interactions took place.
29:47
- Yes. I mean it's a curious contact.
29:49
My first contact with Milton Freedom was very odd.
29:52
I was running this investment bank, as I mentioned
29:53
to you in the seventies, and one of my competitors,
29:57
a close personal friend was running a
29:58
competing investment bank.
30:01
And he brought to New Zealand some American economist,
30:03
I can't recall who it was now,
30:05
and it got got some media coverage
30:08
and I said, how can I upstage my friend?
30:11
I thought the best way getting, bring us the best
30:14
American economist, namely Milton Friedman,
30:17
and everyone knew who he was
30:19
and his status was fantastic, a very long shot,
30:23
but I'll, I'll try to see if he'll come to New Zealand
30:26
and invited him by good fortune.
30:28
He said, I'm coming to Australia later in the year, happy
30:31
to come across to New Zealand with my, with my wife Rose,
30:37
no fee required as long as you show me
30:39
around the south island for a week with, with my wife,
30:43
which what we did, we traveled the part of New Zealand,
30:47
the scenic places,
30:48
and he gave three major speeches in New Zealand,
30:50
our main three main cities.
30:52
And that began a, a, a good friendship with,
30:55
with Milton and Rose.
30:57
Subsequently, I had a meal at their home in San Francisco on
31:01
several occasions, and we talked about it.
31:03
He visited New Zealand later, in fact, not long
31:06
before they both died,
31:08
they visited New Zealand on a cruise ship.
31:10
And when they were in, in Auckland, the main city of,
31:13
of New Zealand, my wife
31:15
and I hosted them to dinner at our home.
31:18
I think they were both 93 at the time.
31:21
And I've just enormous admiration for him
31:24
and indeed for Rose, both of course as an economist,
31:27
but also as, as people.
31:29
- That's so fascinating and and it's amazing.
31:32
I mean, seeing their, their influence around the world is,
31:35
is, you know, I think truly is, you know, undeniably,
31:39
you know, perhaps alongside Kane's,
31:42
the most influential comms, the 21st century,
31:46
or sorry, the 20th century, we, we, you know,
31:48
we'll see about the 21st century as as it plays out.
31:51
I'm curious, you know, you, you know, took the helm
31:54
of the Central Bank of Reserve Bank
31:57
of New Zealand in the late 1980s.
31:59
And I'm curious, you know, you know, again, you know,
32:01
the Fed at the time was very focused on targeting monetary
32:04
aggregates, was something, you know, following money.
32:09
Was that something that the Reserve Bank
32:10
of New Zealand was doing a lot of, you know,
32:14
was it already focused on using interest rates
32:17
as a policy tool, like
32:18
how most central banks use them today?
32:21
I mean, if you look at a lot of central bank discourse today
32:25
and, and macroeconomic research, you know, the cool concept
32:29
of money is, is largely absent.
32:32
And I, I think part
32:33
of why the fed abandoned targeting monetary aggregates was
32:36
that money demand wasn't very predictable.
32:38
You know, there's questions about what is money and,
32:41
and this, you know, does treasury bills
32:42
count and things like that.
32:44
But I'm curious, back in the 1980s when,
32:46
you know Milan Friedman and some of his thinking was,
32:48
I think at, at his peak what at the Virgin Bank
32:51
of New Zealand was, was money something
32:52
that was often talked about
32:54
or at least sort of used as a reference point
32:56
predicting inflation?
32:57
I, I'm curious what, how do you think about
32:59
money and monetarism?
33:01
- The short answer is we did not pay much
33:03
attention to money aggregates.
33:05
And that was partly because following this five
33:08
or six year period of extraordinary economic policy change,
33:13
we didn't find anything very consistent
33:16
or predictable in the money, money aggregates.
33:18
So we didn't spend much time watching them.
33:21
In fact, we had a sort of some arcane
33:25
monetary policy framework.
33:26
I'm not sure that I'll bo bore you
33:28
with, with the details of it.
33:29
But it was quite unlike any, any other
33:33
policy anywhere else in the world as far as I know.
33:36
But we, we focused very heavily on convincing the public.
33:41
We were serious and we kept tightening monetary policy when
33:45
inflation was out of the, out of the, out of the target.
33:48
Now when you say tighten monetary policy, what we did was
33:52
we had an absolutely minuscule lever,
33:56
but for some reason they had a, had a big effect.
33:58
We, we targeted the aggregate of balances
34:02
with the central bank, which the whole banking system had.
34:07
There had to be this numerical aggregate
34:12
in the banking systems, collective accounts
34:15
with a central bank every night.
34:18
And, and we kept that number very low when we wanted the,
34:22
the policy to be tight.
34:24
But the amazing thing was we hardly ever had to change it.
34:29
We just had to imply that we might, we sort
34:31
of clear our throat and say inflation is not
34:33
quite where it should be.
34:35
And, and almost instantaneously
34:38
interest rates all over the economy would, would,
34:40
would go up and, and come vice versa.
34:44
It was a, it was an odd framework in terms
34:48
of implementation, but it,
34:49
but it certainly worked in the mid nineties we followed
34:55
the Bank of Canada,
34:57
which you may recall had a monetary conditions index,
35:01
which was a mix of, of interest rates
35:04
and exchange rate, both of which in a small economy
35:07
of course have big effects on, on, on the,
35:10
of the measured inflation rate.
35:13
We made the mistake of publishing that index at
35:17
that time the Bank of Canada had not done so,
35:19
and we also made the mistake, we didn't have it
35:21
calibrated correctly.
35:23
So within 18 months
35:24
or two years we abandoned it,
35:27
it was just accredited in the market
35:29
and it's regarded as one of our mistakes.
35:31
As I say, I think the problem was, we,
35:33
we didn't have it calibrated correctly,
35:35
but in a small economy, both the rate
35:37
and interest rates have an effect on, on inflation.
35:40
Both, both as as measured and,
35:43
and longer term, deepest deep more deeply seeded factors.
35:48
And of course in 19 19 99 we adopted a
35:53
more conventional implementation regime where we set up a,
35:58
a cash rate, which we pay on balances with the central bank
36:03
and raise and lower that as as required. Interesting.
36:07
- So there's now, since the 1990s, there's been a,
36:10
a po a policy rate that, that since sort
36:13
of a lower floor on, on interest rates.
36:15
So that's fascinating. Prior to that there,
36:17
I guess the central bank would do open market operations
36:20
to try and influence these various rates
36:22
and exchange rates so forth.
36:24
- Yep. - That's fascinating.
36:26
Yeah, it's amazing how,
36:28
and then now, you know, fast forward post 2008 in the US
36:31
and, and post 2020 in, in a ample reserves regime where,
36:36
you know, you have, you know, the money supply curves moved
36:39
so much to, to the, to the right that you now sort of have
36:43
to use these sorts of policy rates as, as a floor and,
36:47
and have these, you know, sorts
36:49
of corridor systems in the us like you've got the one RP is
36:51
sort of the, the lower band
36:54
and then you've got interest on access reserves on on the
36:57
higher end and, and you kind of need
36:58
to pay interest on reserves in order
37:00
to even move these interest rates around.
37:02
So it's, it's interesting how just the policy tool regime
37:05
is, has changed over the years and,
37:07
and it's, it's really fascinating
37:09
to, to see how that's evolved.
37:10
I'm curious, I guess we talked a little bit about this
37:13
before, but I'm curious about your thoughts about the state
37:15
of Central Bank independence today, you know, and,
37:19
and how it evolved in the late eighties, you know, and,
37:22
and how it's evolved since.
37:23
You know, I think,
37:24
so one thing people don't really realize is how,
37:28
how recent I think Central Bank independence is as,
37:31
as a concept
37:32
and even Milman Freeman wasn't really, I think, you know,
37:36
there, there's not maybe a perfectly accepted definition of
37:39
what central bank independence means,
37:41
but you know, I think Milton Freeman was at some level
37:44
but of a critic of, of independence
37:46
and that he kind of argued that, you know,
37:47
in the US like the president kind
37:49
of gets the monetary policy they want
37:51
because they're the one making the appointments.
37:53
And then, but he also sort of argued for, you know,
37:55
a central bank money growth target sort of to remove
37:59
or the politicians from it in a sense,
38:01
I guess if it could somehow be written in the Constitution
38:04
or something like that.
38:05
I'm just curious, you know, some central banks
38:08
around the world, you know, have these fi I think a lot
38:10
of 'em now have these five year framework reviews in,
38:13
in particular in, in Canada.
38:15
You know, it's sort of a back
38:17
and forth between the Ministry of Finance
38:19
and the central bank within the US at the Fed.
38:22
It's very much internal that is, you know,
38:25
the US treasury doesn't get to have a say in terms of what
38:29
the, the fed's, you know, framework review should be.
38:32
There's been a lot of controversy in,
38:34
in the US about the 2020 flexible average inflation target
38:38
regime that the Fed adopted right before inflation spiked.
38:42
And the idea was, you know, that inflation had run
38:44
so low in the 2010s that they should try and make up for it.
38:48
You know, having some sort of averaging wasn't clear about
38:52
how long they would average over and so forth.
38:53
But I'm curious, like, do you think that this model
38:56
of having sort of input on these
39:02
framework reviews from, you know,
39:05
between both the Central bank
39:06
and the Ministry of Finance, do you think that's optimal?
39:12
- Well, I mean you've got a very different situation in the
39:14
US where, where clearly the fair
39:16
that least notionally is fully independent of,
39:20
of the treasury and administration and so on.
39:22
Even though the president does get to appoint the governor,
39:26
federal governors and, and,
39:27
and the chairman I think from memory
39:28
too, does he point the chairman? I think he does. He
39:30
- Yeah, he does.
39:31
He, yeah, the president gets to appoint essentially,
39:34
you know, the entire Federal Reserve board.
39:36
They don't get to appoint the president doesn't get
39:38
to appoint the regional Fed presidents,
39:42
but the Fed board still has sort
39:44
of some veto power over those right.
39:47
Regional presidents.
39:48
- Right. I i, I must say I,
39:52
I prefer the New Zealand framework
39:54
to any other framework anywhere.
39:56
I mean it's adopted of course, as I said earlier,
39:59
by Australia, by Canada, by Sweden, by uk.
40:03
It puts responsibility where it should lie.
40:06
The, the government of the day has
40:10
and should have the decision about
40:12
how fast their currency devalues.
40:15
That's a political judgment.
40:17
But the delivery of that and,
40:19
and they must be forced to, to tell the public what that
40:23
depreciation of the currency is gonna be.
40:25
If I'm gonna depreciate my, if I'm the prime minister,
40:27
I want my currency to depreciate fast,
40:30
I should tell the public so they can adjust their,
40:32
their decisions in the light of that, that information.
40:38
But once that's decided, the central bank should be free
40:42
to run monetary policy as they judge appropriate
40:47
in order to deliver that target.
40:49
And we'll be time 'em if they don't, that seems
40:52
to mean a democracy, the right framework.
40:55
The, the, the, the situation in the US I think is, is a,
40:59
in terms of monetary policy, a terrible one when,
41:01
when the president clearly is unhappy with interest rates,
41:06
but if the Fed reduces interest rates
41:08
and inflation takes off, he'll be the first to blame the Fed
41:11
for higher inflation.
41:13
I mean it's, it's, it's not a good situation.
41:17
- Well, I mean it's it's fascinating how I, I think you,
41:19
you mentioned earlier about how the,
41:21
the Reserve Bank New Zealand for original framework,
41:23
if I understand correctly, was that
41:25
if the inflation target had sort of got outside its bound,
41:29
then that was kind of a fireable offense.
41:32
- That's correct. And, and,
41:34
and I mean the first time we went outside the bounds was,
41:37
was caused by the, the first Gulf War
41:40
caused a spike in international oil prices.
41:43
The, the measured CPI went above the range.
41:47
The board had responsibility to write
41:48
to the minister saying, notwithstanding the fact
41:51
that this is outside your target,
41:54
we recommend you don't fire the governor
41:56
because these exogenous factors have caused this,
42:01
this spike, the interaction between fiscal
42:05
and monetary also comes into play in the 90 96
42:09
period when the government was very keen
42:11
to reduce tax rates.
42:14
The Minister of Finance wrote to me as governor saying,
42:17
if we cut tax rates by X,
42:21
would it require dramatic tightening of monetary policy?
42:25
'cause clearly fiscal and monetary policy interact on the,
42:28
with the inflation rate and the framework
42:31
recognizes that interaction.
42:34
If, if the government wants easy monetary policy
42:38
and a given inflation rate, they may well have
42:40
to do something with fiscal policy.
42:43
- That, that's fascinating.
42:45
And, and I mean today, you know,
42:46
the fiscal monetary interaction certainly get a lot
42:49
of discussion given, you know, the quantitative easing
42:52
that's going on, you know, central banks going out
42:54
and buying long-term government bonds.
42:56
And then you also in, in,
42:57
in the US you've had some pretty big shifts in debt
43:00
management policy here in the us The US Treasury decides
43:05
what the maturity, the maturity
43:06
of the newly issued debt's going to be.
43:08
And obviously, you know, that that decision upon, you know,
43:13
the finance ministry to issue more
43:16
or less long term debt is basically isomorphic
43:19
or equivalent to the, the central bank buying or buying
43:23
or selling more long term bonds.
43:25
So, you know, quantitative easing, quantitative tightening,
43:30
you know, can very much be offset by issuance policy from,
43:33
from the fines ministry of the US Treasury.
43:35
So, I mean, it, it's so interesting how these things are,
43:38
are are very much connected
43:39
and absolutely, you know, a con accommodative
43:43
or tight fiscal policy, you know,
43:45
can be moving in the opposite direction
43:47
as as monetary policy.
43:48
I mean it's fascinating how the, the, you know, the,
43:51
the frameworks of Reserve Bank of New Zealand, I mean,
43:53
in some respects some people might say that, you know,
43:56
that there's less independence in
43:59
that respect for the central banks.
44:01
And, and, but at some level, you know, there's also,
44:05
maybe this is a good thing in the sense
44:06
that there's more coordination around, around these sorts
44:09
of policies in, in, in going
44:11
after, you know, stable inflation.
44:14
I'm curious, I wanna put a little bit toward,
44:16
'cause you know, you served as opposition leader,
44:19
you are an MP for many years and, and,
44:21
and leader of the National Party.
44:23
I'm curious, you know, what you think about New Zealand from
44:26
a, a cost of living zoning, you know,
44:29
trade policy standpoint.
44:32
I am just curious, you know, I, I've heard a lot
44:34
of things about land use regulations in, in New Zealand
44:37
and places like Auckland
44:38
and Wellington making it, it very unaffordable there.
44:41
I think New Zealand has had a housing sort of
44:44
affordability crisis in the same respect
44:46
that Canada has had one with land use regulations and,
44:49
and the US has had one largely in its
44:51
coastal real estate markets.
44:53
I'm curious about your thinking around that as well as sort
44:56
of New Zealand's role in international trade.
44:59
Obviously it's much closer, closer to China and, and, and,
45:03
and and Australia and those are big trading
45:05
partners for, for New Zealand.
45:06
I'm curious what your take is on, on New Zealand
45:10
where it's at today as a, as an open economy
45:13
and how some of these cost of living issues that are common
45:17
around the rest of the world,
45:18
how they manifest themselves in New Zealand?
45:21
- Well, the land use regulations you refer
45:23
to have has been a major headache in New Zealand.
45:26
We've had tight land controls around our major cities
45:30
and the consequence has been exactly
45:32
as you found them in the United States.
45:33
Places like Portland, Oregon, Seattle, San Francisco,
45:37
New York, et cetera,
45:38
which have similarly tight controls have similarly
45:41
outrageously expensive housing success
45:45
of governments have said, we'll fix the housing crisis.
45:48
And successive governments have failed to do that,
45:51
but the current government is actually making some progress
45:54
and whereas in Auckland, the ratio
45:57
of the median house price,
45:58
the median household income was about 11 a few years back.
46:01
It's now down to about eight and a half.
46:04
So it's come back quite a bit
46:06
and the government seems intent gradually on, on deflating
46:09
that that bubble, I'm strongly in favor of
46:12
what they're doing in that area.
46:15
Where they can get away with politically is another question
46:17
of course, because more people own houses than, than don't
46:20
and people don't like seeing their major
46:23
asset decline in value.
46:25
But, but that it needs
46:27
to decline in value is is beyond doubt.
46:29
And as I say, the government current government's making
46:31
some, some modest progress in that regard.
46:35
- Huge political economy problem.
46:37
You know, it just, it is like
46:38
entitlements in the US as well.
46:40
You know, people don't wanna lose their benefits or,
46:42
or their home values.
46:44
- Yep, exactly right.
46:45
And, and I mean for us, the model housing market, I think,
46:50
I'm not sure if it still is, but Houston was the model we
46:52
looked at and, and said, my gosh,
46:54
they've got house prices which are a very modest multiple
46:59
of household income and, and they've clearly got it right.
47:03
And of course, as you well know in Houston,
47:05
there are basically no land restrictions at all.
47:07
You can build wherever you like and,
47:10
and that's got some appeal.
47:11
We, we are a country
47:12
of 5 million people roughly on an area somewhat larger than
47:16
the UK and area.
47:18
So we're not short of land.
47:21
There are all kinds of arguments about good land
47:23
and bad land and what have you.
47:24
But, but fundamentally our house prices have
47:27
been outrageously high.
47:31
We have a fiscal problem, which is not unlike that in,
47:34
in most other developed countries it's better than some.
47:38
Our, our current government debt to GDP ratio is about 40%,
47:43
which is a long way short of where the US and, and,
47:47
and Britain and France and Germany and Japan are.
47:51
But it's, it's not good for,
47:53
and for the same reason our populations are aging
47:56
and we have have social security and,
47:59
and health expenditure, which is projected to rise strongly
48:04
as the population continues to age.
48:07
And, and again, in, in a democracy, it's very, very hard
48:10
to change those lines.
48:13
So we've got problems
48:14
that are very similar to other countries.
48:17
Additional problem you alluded to in the trade pattern,
48:21
I was giving a speech in, in the Oxford Union just a couple
48:25
of weeks ago in earlier the month,
48:27
and in, in the 1952 thirds
48:31
of New Zealand's exports went to the United Kingdom
48:34
in 1970 was 35% as the common market was looming.
48:39
Currently Britain takes 2.6% of our exports.
48:45
China takes 26%, which is exactly 10 times as much.
48:50
Australia's our second biggest trading
48:52
partner, the US is our third.
48:54
And of course we have to live with the
48:57
administration's tax tariff policies, which,
49:00
which affect everybody.
49:01
Yeah.
49:03
- Well I'm, I'm curious about, I I guess
49:06
it's fascinating about Auckland's zoning reforms and, and
49:10
and how successful that's been.
49:12
I know Minneapolis is trying
49:13
to do something similar in the US
49:16
or has been in, in in Houston, you know,
49:19
which doesn't really have any zoning is is I think a model
49:22
for, for, for many in terms of what, what
49:26
and uc regulation can achieve in terms of affordability.
49:30
I'm, I'm curious, I guess just in general about market
49:33
reforms and you came in into policy
49:37
and politics at, at a time of a wave
49:42
of market reforms across many countries in the 1980s.
49:44
And you know, what is a market reform, I would say is just,
49:47
you know, a general appreciation of economic freedom in, in,
49:52
in policy, in in, in laws
49:54
and in in economic policy laws in, in, in general.
49:59
And this manifests itself, I think in many ways from,
50:02
you know, deregulation, you know,
50:03
think in the us deregulating the airlines, you know,
50:07
thinking about, you know, other industries.
50:10
You know, in the seventies and eighties, you,
50:12
there are many nationalized industries in many countries,
50:15
and now we, you know, see leaders like, you know,
50:17
Javier Malay, who's, you know, going to Argentina,
50:20
which you know, has suffered under, you know, peronism for,
50:22
for many, many decades.
50:25
And is sort of beginning that process of, of doing,
50:28
I think a lot of the things that countries in the 1970s
50:30
and eighties were doing, which is you, you know,
50:33
liberalizing their economies, you know,
50:36
taking certain industries and deregulating them.
50:39
So you know, there's, whether it's beef export controls
50:44
that are being lifted or, you know,
50:47
rent controls that are being lifted.
50:49
You know, I think Javier Malay is this sort of new
50:54
example of many of the things
50:55
that were going on in the 1980s, including New Zealand.
50:58
I'm just curious, like in, in your mind is,
51:01
are market reforms something that countries need
51:03
to sort of relearn?
51:05
It's, it's economic growth has fallen, especially
51:09
amongst advanced economies, you know,
51:11
is economic freedom a a viable economic growth strategy,
51:16
liberal economic institutions in, in your mind, do,
51:18
do countries need to relearn this?
51:22
- Some do, including New Zealand though, to be fair,
51:25
as you mentioned, we had big liberalization in the eighties
51:29
under this, this labor government, surprisingly,
51:32
we had extensive import controls.
51:35
We didn't have export controls, we had export subsidies
51:38
for the sheep industry in particular,
51:43
tariffs, high quantitative controls were,
51:46
were high rent controls, you name it, controls.
51:49
We had all of those went, all the import control
51:54
or quantitative controls went,
51:55
tariffs were reduced drastically.
51:58
And because that's a traumatic thing,
52:00
as you will understand when you do it, suddenly
52:04
industries which have grown up after two or three
52:07
or four decades
52:08
with high protection suddenly find
52:10
themselves without protection.
52:12
In our case, the motor vehicle industry was,
52:14
was the best example.
52:16
We had 10 different international companies producing cars
52:19
in New Zealand for a total market of a hundred thousand cars
52:22
and was utterly ludicrous.
52:24
They were essentially, IM importing packs of cars
52:29
and assembling them in New Zealand.
52:30
There's no great skill involved in that,
52:33
but it employed tens of thousands of people.
52:36
And of course when you, when you suddenly remove
52:38
that protection, the adjustment process
52:40
is, is pretty brutal.
52:42
And, and sadly that period is regarded
52:45
by many people in New Zealand as, as a disaster,
52:49
as an economist are regarded as fantastic liberation and,
52:53
and set the economy on a, on a much,
52:55
much better track than it would've been had we stuck with
52:57
that dopey framework.
53:00
It was, it was crazy on, on tariff policy, on regulations,
53:03
on, on, you name it.
53:05
One of the things that did, which was in some ways
53:09
might be regarded as, as counter to that we introduced,
53:13
I think the first framework for
53:18
controlling the phishing industry.
53:21
I think it's now been copied quite widely,
53:23
but clearly fishing in the open ocean is one
53:28
where you have the sort of problem of the commons.
53:31
Anything I grab you can't grab if I'm there first.
53:34
And, and we introduced a system of tradable,
53:38
tradable, what are they called?
53:41
IQs, individually tradable quotas. Yeah.
53:47
So you have, you would have to take 4% of the estimated
53:51
sustainable catch of a particular variety of fish or 10%
53:55
or whatever your quota is.
53:56
And a tradable, it's a tradable, right? And
54:00
- Like a cap and trade kind of thing.
54:01
I, I guess with some of these environmental emissions, and
54:05
- I think we were the first to do it in the case of,
54:06
of fishing, but it's been copied now quite widely and,
54:10
and it's, it's a good framework.
54:12
So yeah, I mean, should be doing more liberalization.
54:17
New Zealand almost certainly the government still owns
54:19
or part owns things they shouldn't own
54:23
privatization has has been a sort
54:24
of a political hot balloon.
54:27
Hot hot, yeah, hot topic,
54:30
but it's, it's vast improvement of
54:34
where it was some decades ago.
54:37
- What's fascinating and,
54:39
and you know, we, we will see how long y you know, how, how
54:44
or what heavier malays impact will be.
54:47
I think he's only two years into, into his office
54:50
as president and he's, you know, just won another mandate
54:55
with, with the congressional elections there.
54:58
And, you know, he's, he's moving from one sort of industry
55:03
to another in, in one policy area to another very quickly.
55:06
And I think he's undergoing some labor micro reforms and,
55:09
and fiscal reforms now.
55:10
And, and we'll see, you know, it takes time
55:12
and sometimes these things have done very suddenly,
55:15
you know, you can end up in a lot of hot water politically,
55:18
maybe perhaps, you know, Liz trusts me
55:20
for an example o of that.
55:21
But it's fascinating
55:22
to see politicians attempting market reforms again,
55:25
where I think for a long time, you know, certainly
55:27
after the global financial crisis that these things
55:31
that free markets were, I, I think
55:34
perhaps unfairly getting a bit of a bad rap.
55:35
And I think understanding the history of
55:38
market reforms in places like New Zealand and,
55:40
and many, many countries that engaged in market reforms in
55:42
the 1970s, 1980s, I think is valuable today.
55:47
A real honor to have you on Don
55:48
and to hear about your pioneering career, you know,
55:51
inflation targeting and ideas.
55:54
I think it's safe to say
55:55
that alongside fellow New Zealand economists, bill Phillips,
55:58
you know the name, say the Phillips Curve, that you're both,
56:02
I think two of the most famous economists in
56:04
New New Zealand history.
56:05
It's truly wonderful to get the full history
56:07
of inflation targeting.
56:09
How we got, you know, zero to 2% in how you implemented it
56:13
and how the Reserve Bank
56:15
of New Zealand has been working up until today.
56:18
It's, it's really an honor.
56:19
Thank you so much for joining us.
56:21
- Thank you, Jon. I've enjoyed it. Thank
56:22
- You.
56:23
This is the Capitalism Mind Freedom
56:25
of the 21st Century podcast.
56:26
An official podcast with the Hoover Institution Economic
56:28
Policy working group, where you talk about economics,
56:30
markets, and public policy.
56:32
I'm Jon Harley, your host. Thanks so much for joining us.