Monetarist doctrine requires central banks to slash interest rates during downturns to encourage the private sector to borrow and spend.
The private sector in many Western economies are now saddled with huge debts.
Monetarism has become impotent.
Lower interest rates during downturns have also led to numerous asset bubbles in property and shares over the past 30 years.
They have also led to a significant growth in wealth inequality in many countries including New Zealand.
Those who own financial assets such as property and shares are pulling away rapidly from those who don’t.
This process has been facilitated by record low interest rates in recent years as central banks attempt to reflate their economies.
Meanwhile the large income and wealth inequalities mean many economies resemble an unbalanced Dynamo that is not functioning properly.
For an economy to operate near or at full employment the demand side of the economy cannot be too skewed.
The trickle-down effect is largely a myth.
The rich often use their excess funds to bid up the prices of existing assets such as property shares and art works.
There are few new jobs created in this process.
A starting point to rebalancing our economy may be significant tax reform.
The bulk of the tax burden in New Zealand is borne by workers.
Yet the rewards of our current economic system are largely skewed towards the owners of capital.
This is not only unfair it is also very inefficient because it distorts demand.