The ramifications of Orr surrendering inflation to the market with a pathetic 25 point rise in the OCR last week are still being digested, but it is a clear signal from the Reserve Bank Governor that NZ Free Market Monetarism alone will not and can not get the Government out of the neoliberal straightjacket both National and Labour have collectively agreed to to strap themselves into.
Despite the enormous inflationary pressures about to rip through NZ in the wake of Orr’s capitulation, Orr is telling the Government they can’t rely on him screwing the scrum any longer and they have to raise taxes on the rich to pay for it!
Inflation lowered in our last quarter because of softening oil prices caused by Biden tapping the US strategic oil reserves. OPEC responded to Biden with cuts which take effect next month on top of the 25cent fuel subsidy relief coming off, on top of unprecedented 100 000 migrants on top of food supply problems impacted by the recent cyclone damage to our horticultural industry – Orr is driving the Economy off an inflationary cliff and daring Grant Robertson to take the wheel!
We are not seeing wage increases as the driver of inflation, what we are seeing is price gouging!
As Professor Wayne Hope pointed out earlier this week on The Daily Blog…
Behind this policy correspondence lies the fundamental truth of New Zealand party politics. Labour and National are both die-hard monetarists, the Reserve Bank Act is their unspoken article of faith. On this doctrine, advanced in the late 1970s, excessive public expenditure and real wage growth will increase aggregate demand and inflation levels. If central banks can adjust the money supply to increase commercial/investment bank interest rates, demand will contract, and inflation will be manageable. Unemployment rise is a necessary if unfortunate side effect.
Research from William Phillips, Paul Samuelson, Milton Friedman and others seemed to indicate a trade-off between inflation and unemployment. Fiscally responsible governments would target the former through monetary policy. Well-meaning spend-up governments would over-inflate and damage the economy. In New Zealand, Labour’s 1989 Reserve Bank Act effectively ended the debate. Both major parties concurred with the legislation. The 2021 RBNZ Act modernised operations and tweaked the legal wording but didn’t change the basic doctrine.
Aside from older macro-economic arguments, the doctrine is wrong. Inflation today does not have monetary causes and monetarist solutions cannot work. Edward Miller, economic researcher for FIRST UNION, cites a US Federal Reserve study which debunks the Phillips Curve. Organised labour’s declining bargaining power weakens the relation between unemployment and inflation. Wage-push inflation growth is just not there, so why contract the economy? In New Zealand, between 1991 and 2023, union density declined from over 50 to 20% of the workforce. Clearly, today’s stunted, uneven wage growth is not going to trigger an inflationary surge.
…exactly, this isn’t a wage generated inflation, it’s naked price gouging in a weak regulatory environment!
As Emeritus economics professor Tim Hazeldine noted:
It’s COVID inflation that was driven by a supply push from the pricing side of the market. The initial transportation logjams caused by lockdowns gave shippers—especially container shippers—the excuse to drastically hike their prices. In the confusion, many other sellers of many other products discovered that they suddenly had, as one analyst put it, ‘real pricing power’. And boy did they use it!
…this Price gouging inflation is backed up by International research…
For US economists Isabella Weber and Evan Wasner, evidence acknowledged by US and European central bankers indicates that “price setting by firms with market power drive inflation”. Giant corporations have the product portfolios, dominant market positions and revenue management systems to maintain margins and customers. With global reach, they are less dependent on any single national market and can shape prices. By contrast, small businesses cannot easily raise prices as costs go up and interest rate repayments increase. Creditworthiness and access to loans will therefore diminish.
…which is exactly what we are seeing in NZ…
Sound familiar? As Tim Hazledine would attest, supermarkets, power companies and banks are pricemakers who drive up inflation while the rest of us struggle. Most obviously, the four largest Australian banks in New Zealand collectively made over NZ$6 billion in 2022. They exploit, ruthlessly, the margins between the interest rates of wholesale money for them and the mortgage rates for captive homeowners.
…into this debate Orr has clearly drawn a line under how far the Reserve Bank Governor now sees the limits of NZ Free Market Monetarism.
I’m no longer looking for Socialism from Labour, just basic regulated capitalism and even the Independent Reserve Bank Governor seems to be communicating that to Treasury.
The message is clear.
Push up wages, regulate the market and tax the rich!
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Actually, it appears to be both price gouging and wage increases which are leading to higher inflation, with price gouging perhaps being the more primary cause here.
And instead of wages going up, rental prices increasing, and property prices increasing ever more, cementing an infatuation between Kiwis and residential real estate, the economic climate indeed would benefit from measures like rent control, albeit temporary and in the three, four, or five most expensive cities or areas. By temporary, maybe one or two years?
Once a monopoly has reached the profit-maximizing level of price and volume, it is against their own interests to continue raising real prices. Demand will fall, and sales will decline. The rise can only be temporary.
Wage rates can only continuously increase if the supply of currency increases to cover the cost (i.e. not a continuous rise in real terms, due to the devalued currency).
If companies tried to finance wage raises by constantly hiking real prices, the purchasing power of the wages would collapse. Sales would fall as the customers ran out of money, the unsold products would pile up, and workers would end up being laid off.
During periods when sound money was used (i.e. no currency devaluations), the general level of prices consistently fell, as production becomes more efficient over time.
Thank you, I appreciate that. I still feel that our economy should respond to the pressures it has faced over the past half decade. This includes the pandemic.
What this would mean for me personally, from an ideal perspective, is the possibility of rent controls in Urban areas; retaining the age of superannuation at 65; an increase in the budget for transport and roading; increased budgets also for health & education; and the continuation of the recent increases to benefits.
Wage increases are not causing inflation, what a load of B/S it is price gouging by the Supermarkets/Corporates and the Banks, when you have Supermarkets making 100% mark up on fresh fruit and vegetables, and high prices due to whether conditions of course inflation is going to increase. It ain’t Rocket Science ???
Price gouging, where is the Commerce Commission on this?
The Commerce Act (1986 ) allowed the predatory behaviour of the market players to exploit loopholes unabated for decades.
Hence, the new changes to the Commerce Act, particularly to S36 in April 2023, were essential to even establish more legal powers to chase down out of control exploitation.
The stripping of regulatory teeth ( that dirty word – deregulation) from the Commerce Act in 1986 left the ‘market’ open for unrestrained greed. Whilst the Act was there to supposedly protect consumers too, it has taken 30 years of this subterfuge to legally allow for large scale
”
• single firm conduct by a large player to increase its
monopolistic power or damage competition by smaller
rivals or new entrants;
• conduct by more than one firm in concert, through
contractual or informal arrangements (which can be
benign in intent but still affect competition or can be
more pernicious such as deliberate collusion and cartels);
• transactions by merger or acquisition through which firms
combine and grow to the size of a large player (increasing
the risk of abusive large firm conduct in );
and allowed unfair anti competitive practices in manipulating
• sector-specific price controls, typically for infrastructure
monopoly providers, when market failure is evident or the
other three competition law controls above are ineffective. ”
A further very readable interesting article is
” Why the Commerce Act 1986 is Unfit for Purpose.” Geoff Bertram ( 2020).
Yes but we need to define ‘rich in NZ’
Being muddle class is not rich.
And if we tax the top 5%to much , they will just run off to tax havens and we are worse off without the capital and jobs they provide.
Need s a little bit of regulated capitalism, but not much. The public sector and private sector both need and depend on each other.
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