Has the Social Credit Party 'won' its argument after all this time?

Friday, 19 June 2020

Social Credit Party leader Chris Leitch says the party feels 'vindicated'

After decades on the outer fringes of party politics, the economic ideas of the Social Credit Party have become closer to the mainstream as a result of the response to the coronavirus pandemic.

But it's not quite there yet.

Social Credit, which will be better known as the 'funny money' party to older Kiwis, secured 21 per cent of the popular vote in its heyday in the 1981 election.

But it won only 804 party votes in 2017 when it was humiliated by, among others, the NZ Outdoor Party and the New Zealand People's Party.

Social Credit's signature dish is a fundamental rebalancing of the relationship between the private and public sectors, diminishing the role of what it labels “neo-liberal economics”.

* Reserve Bank ups 'quantitative easing' from $33b to $60b

* Social Credit party's new leader from Northland

The Government has paid out $11 billion in wage subsidies to businesses that have suffered a loss of income as a result of the coronavirus crisis. (File video, first published in August 2020)

With about 70 per cent of the country's private sector workforce having their salaries part-paid for by Government wage subsidies during the Covid lockdown, and the Reserve Bank splashing out $60 billion on quantitative easing (QE), that is arguably happening apace.

Party leader Chris Leitch, a ballroom dance teacher from Whangarei, trumpets that “previous taboos” on economic management had been swept away, with the use of the Reserve Bank to support the economy now accepted.

“Do we feel vindicated? Absolutely,” he says.

“Up until now there has been no acceptance that the Reserve Bank could operate a QE programme. There is a famous clip of John Key saying 'if we could print money then why don't we just print lots of it and give everybody as much money as we like – it's ridiculous',” he paraphrases.

“John Key's assertion has been proved to be ridiculous because we now know it can be done, and the Reserve Bank has done it to the extent of $60b.”

Many of the party's more “everyday” policies sit within the normal spectrum of political discourse.

They include a Thatcheresque zero income tax band on income of up to $20,000 a year, a Labour left-like $20 cap on doctors' and dentists' visits, and a free urban public transport proposal that might please the Greens.

But that is served with an uncompromising monetary policy that sees QE as a cop-out.

Social Credit demands the Government directly creates the “credit” to fund public spending, rather than living off the left-overs of the free market by continuing the conventional international practice of entirely funding its spending through taxation.

One of Leitch's concerns with QE is that banks might cream a huge profit through the “merry-go-round” of selling Government bonds to the Reserve Bank and then buying bonds from Treasury when it issues them to pay for the Government's $50b Covid-19 fiscal programme.

Why not fund the spending direct, with a giant zero-interest loan from the Crown's balance sheet to itself, it asks?

Infometrics economist Brad Olsen agreed people were more open to discussing the idea.

A spectacular coup de grâce came in April, when Reserve Bank governor Adrian Orr declined during a Zoom interview to rule out the “former heresy” of the central bank moving beyond its new comfort zone of QE to buy bonds directly from the Government.

But Olsen said he was still not sure that could be considered mainstream, as it would make monetary policy more beholden on political decision-making.

“In my mind there is a quite a lot of risk and challenge around it.'

Whether Social Credit's monetary policy would deliver the benefits it thinks it could is a one-way ticket to a deep rabbit hole of technical argument.

Reserve Bank Governor Adrian Orr talks about the financial future of New Zealand, post Covid-19.

The warrens include the real-world impact of changing the money supply, “zero sum games”, and what price, if any, might need to be paid to take inflation out of the economy if a super-flexible monetary policy got out of control.

“There is no such thing as a free lunch,” Olsen says.

Such debates are home turf for Social Credit Party diehards, but not perhaps for many voters.

There's no point pouring your energy into a small party, if you are very prepared to make compromises on principle, though.

Leitch believes the party is only “10 per cent” of the way to ideological victory with its monetary plan, with an acknowledgement by a number of economists that the Reserve Bank could create money and give it straight to the Government.

“Nothing has actually changed in terms of what in reality is happening. The Government is still issuing bonds to banks who are selling some of those to private investors.

“The taxpayer is still lumped with paying the interest and repaying the bonds and by 2024 the Budget predicted government debt would be at $200b, and that means taxpayers will be paying interest on $200b and they will have to find $200b to repay those bonds when they mature,' he rues.

Olsen believes Social Credit's concerns that banks will make a killing out of selling bonds through QE, and buying them from the Treasury as it ups its borrowing, are overblown.

“I don't think the Reserve Bank would operate that policy with too much of a 'premium' going on because it just doesn't make sense.”

Some evidence suggests the margins of that merry-go-around aren't at least enormous.

On Tuesday, the Treasury sold $7b of bonds that mature in May 2024 at a yield of 0.4275 per cent.

The closest equivalent of the bonds the Reserve Bank has bought back through its QE programme are $260m of government bonds that it purchased on June 8 and June 15, with respective maturities of April 2023 and April 2025 at yields of 0.318 per cent and 0.458 per cent.

But it's a moot perhaps, and after so long without limelight it seems churlish not to give the final word to Social Credit.

“'If the primary dealers which are the banks are looking at selling bonds back to the Reserve Bank, why would they do that if the return on it is better than the ones they are going to be buying that the Government is issuing now?” asks Leitch.

“That would have to be crazy to do that.

“There is absolutely no reason the Reserve Bank couldn't have put $60b into the Treasury's account and the Government could have given the Reserve Bank one perpetual bond at zero interest – in which case taxpayers would not be involved in any additional interest or subsequent debt repayment.”