Interest Rate Cuts Fail When Applied in Isolation

Repeated reductions in interest rates do little to resolve underlying economic issues. Instead, any strategy that will overcome the impending volatility of 2009 must tightly coordinate several key growth drivers.

The volatility of the Dollar system, further job reductions and increasing turmoil require a holistic approach for solving economic weakness. For a more effective economic stimulus, three key growth drivers must be coordinated. These key drivers are infrastructure investments, immigration increases, and interest rate reductions.

Infrastructure investments

Job creation by investing in infrastructure remains one of the most effective and proven economic stimulus strategies.

Infrastructure projects of various sizes across major regions of New Zealand can quickly create a broad spectrum of jobs. Such projects, as long as they are diverse, will always add both short and long-term value.

For example, investment in expansion of airports, ports, and city venues helps stimulate local jobs while also promoting growth in commerce, trade, and tourism. This in turn fosters expansion of the regional service industries.

Investments in information technology at the local and national level can apply to many fundamental needs, including enhancements to health care and education, while also benefiting businesses in the private sector.

Investments in existing DOC managed resources, such as recreational improvement projects, conservation projects, and tourism initiatives can stimulate numerous jobs and provide overt long-term benefits.

By initiating expansion in these distinct areas, job growth is well diversified and distributed around the nation.

Any investments in job growth must also take into account the necessity of immigration and the value of interest rate reductions.

Immigration increases

Immigration is an effective tool for filling skills shortages, infusing funds and regenerating local economies.

Changing laws to help increase immigration of business and professional people can significantly fuel growth in several areas. Such professional people tend to spend their money where they make their living, while also directly participating in the local economy, applying much needed skills, and investing funds within the banking system.

The growth is also more stable over the long term than those of foreign investments, which tend to disappear when interest rates fall or shifts occur with the FOREX market. More importantly, those who choose to migrate to New Zealand tend to apply long-term plans to their investments and life, which directly benefits their regional economy.

It is important to consider that immigration tends to result in job growth in areas including the residential housing sector, while also increasing the capital value for existing homeowners. These two factors, when combined with long term stability can directly reduce the number of emigrations to Australia as well.

The fears associated with job imbalances and housing cost increases can be rectified by applying the other two key tools of infrastructure investments and interest rate reductions.

Interest rates

Interest rate cuts and other fiscal strategies linked to the banking systems can create stabilisation, but only when gradual and in context of other growth initiatives.

In the United States, multiple and significant rate cuts did little to manage the decline of housing values or the overall market conditions.

As a result, most Americans today have lost much of their invested capital in their homes while they remain obligated to unsustainable levels of mortgages to banks. Over reliance on interest rates has a dramatic negative impact on mid-term market stability.

What macroeconomics has proven in the United States is that such rate cuts when applied in isolation fail to stimulate sustainable growth in any sector, including housing.

However, interest rate reductions can be useful when applied in the context of increased immigration, where the value of houses rises and new housing starts expand. Interest rate reductions can improve market conditions while tempering growth so that home affordability remains relatively steady.

If interest rate reductions are moderate and avoid unsteady jumps, they become useful tools for producing longer-term economic growth.

Nevertheless, kick starting the economy cannot come from interest rate adjustments alone.

Conclusion

Any viable economic solution stems from a combination of job growth, infusion of funds and skills through immigration, and reasonably adjusted interest rates.

Moreover, this three-pronged strategy impacts a fuller spectrum of economic woes.

Funding of infrastructure projects performs a bottom up job growth stimulus. The immigration of business and professional workers offers a direct benefit at the middle tier. In addition, fiscal strategies including banking law changes and interest rate reductions address issues from the top.

Furthermore, since each of these methods operates within their own timeframe, the results manifest over longer periods, retaining more sustainable growth momentum.

Significant risk exists if a move forward into 2009 repeats the same steps already tried in the United States. The reductions in interest rates did little to resolve the underlying issues of job declines and debt levels.

The result was a substantive failure of overall economic stimulus.

Infrastructure investments, immigration increases and interest rate reductions applied cohesively offer a far more viable long-term solution.

New Zealand is in a unique position to implement such a coordinated stimulus, and perhaps prove that economic expansion can occur even during times of global retraction.

It is important to implement these key growth tools expediently and in coordination. Otherwise, New Zealand’s leaders will find themselves immersed in financial turmoil that will stain their tenure and encourage their downfall.

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Mark Rais is a writer for the technology and science industry. He serves as a senior editor for an on-line magazine and has written numerous articles on socio-political solutions.

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