The old orthodoxy frays, the next is debated

Last Wednesday John Key invited Winston Peters to read the books that say nothing can be done about the high exchange rate. If Key were keener on reading than he has shown in the case of John Banks’ damning police report, he might find there are now also books challenging the orthodoxy he is wedded to.

These challenges are no longer a fringe activity. Some big names and brains are seriously positing alternatives. While that doesn’t yet tell us the shape of the next orthodoxy, the old one is no longer securely orthodox.

When circumstances changed in the early 1970s the Keynesian orthodoxy frayed. After some debate, the Friedman orthodoxy triumphed.

That originally said central banks should control money supply. But because globalisation and financial innovation kept changing the nature of money, by the 1980s it was not clear which measure of money to target. Inflation was adopted as a proxy.

That proved a somewhat distant proxy when central banks, led by Alan Greenspan (justified intellectually by Ben Bernanke), left inflation positive when Chinese manufacturing and computerisation and new levels of globalisation lowered production prices for goods and services, which suggested there should have been disinflation, not inflation. The money supply ballooned, feeding an asset price bubble and, inevitably, a crash.

This is not just a hindsight view. By the mid-2000s a number of commentators worried about asset prices. I relayed this in a column in January 2006.

Now central banks — supposed to epitomise the straight and narrow — print money like seventeenth-century monarchs. The United States Federal Reserve this month opened the floodgates.

Brazil’s Finance Minister Guido Mantega declared this debasing of the United States dollar a currency war which could have “disastrous consequences” for the rest of the world. Financial Times columnist Gillian Tett said that far from lifting United States producers and consumers off their sickbeds, with each new round of Bernanke’s “quantitative easing” (QE), “expectations and fears are being racheted up”, discouraging investment.

Our central bank can’t do much about Bernanke’s currency war on us. On Thursday Japan’s central bank announced $US125-1000 billion of QE. The yen went down a bit — for just a few hours.

Nevertheless, the Reserve Bank’s new policy targets agreement adds “asset prices” to consumer prices, thus broadening the money supply proxy. And it instructs new governor Graeme Wheeler to aim for 2 per cent inflation, a veiled rebuke to Don Brash’s and Alan Bollard’s floating in the top half of their different target bands (Bollard averaged 2.6 per cent in his 1-to-3 per band).

Meanwhile Labour’s David Parker has been mining the minds of heavyweight international economists who are exploring pathways towards a new orthodoxy. A learning he has taken from Harvard’s Jeffrey Frankel is that no one system of monetary policy is right for all countries or for any one country at all times; New Zealand could try targeting GDP (Joseph Stiglitz, whom Parker also saw, argues for GNP). A second learning: inflation targeting can be procyclical (compounding upswings and downswings), especially for asset bubbles. A third: use macroprudential tools as monetary policy levers.

Put that together with economic development shadow minister David Cunliffe’s exploration of ways the government can usefully get alongside upwardly mobile businesses, in addition to the Friedman orthodoxy’s tight focus on getting regulatory and tax settings right.

Add in that supposed enemies Cunliffe and deputy leader Grant Robertson are jointly leading a small group of MPs aiming to focus at least some of that activity on clean-tech, which has a growing appeal in some areas of business.

Then add Jacinda Ardern’s gradual behind-scenes fleshing out of the “child-centred” approach to social policy first proposed in 2007. Couple that with a swag of reports and a growing range of alliances highlighting poverty and inequality which has got the government edgy, judging by the harrumphing conveyed behind-scenes to Children’s Commissioner Russell Wills’ Wellington workshop on poverty last week.

In sum, Labour is starting to lay some foundations for a more coherent policy than in 2011. And among interest groups there is a growing openness to its counter-propositions to the orthodoxy Key reveres.

But watch Key comfortably batting away the Banks embarrassment with a story he has internalised to the point where it has become for him a reality. That characteristic, which may be a legacy of being odd-boy-out in a state house enclave, gives him the powerful presentational strength of conviction.

Conviction-Key can keep the old orthodoxy breathing a bit longer. Book-reading David Shearer’s subtleties, nuances and counterpoints accurately reflect the argumentative phase of the transition to the yet-to-be-defined next orthodoxy. But that isn’t strong politics. A bookie would say: advantage Key — for now.