Chris Trotter pillories Act’s Brooke Van Velden for her response to Jack Tame in Q+A last Sunday. While Act deserves all the scorn we can muster, this attack makes me very uncomfortable.
Jack had disingenuously asked her a patsy question: “Are income tax cuts right now in the best interests of lowering inflation?” Trotter had a gleeful ‘gotcha’ moment from her affirmative reply:
“ the word “WRONG!” should have flashed across the screen – in much the same way as incorrect answers are blasted on the British television show “QI”. Because, as Van Velden, herself, Hoggard, economics graduates everywhere, and even the reasonably well-educated person in the street, knows: cutting income taxes right now is most assuredly NOT in the best interests of lowering inflation.”
For Chris, it is a simple matter: inflation is what you get when “too much money is chasing too few goods”. He says:
As an economist, Van Velden would not hesitate to condemn the idea of putting additional dollars in the hands of people already under severe cost-of-living pressures. She would know that the increased spending power being injected into the economy would inevitably lead to further price rises, as the extra money chased the same quantum of goods and services.
I am an economist and I have a different interpretation. Yes, she may have given the answer that Jack Tame was trying to elicit with a trick question, but I also heard in the interview her frustration at the lack of understanding of the multiple and subtle causes of inflation.
While for Chris, it is black and white: income tax cuts give people more money, ipso facto, they must be inflationary, Van Velden’s hesitation was because she was seeing the whole picture more clearly than either Jack or Chris.
The old ‘money chasing too few goods’ explanation of inflation is far from satisfactory and leads to punitive recessionary policies and tight monetary policy. It is better to think of inflation in terms of demand and supply in the context of the state of the economy.
First, there are numerous reasons to sheet home a lot of the problem to supply side issues, for example, overseas bottlenecks, profit seeking distortions in the banking and supermarket sector, and cost pressures from deliberate policy changes such as in transport. These cost side pressures affect supply and won’t be cured by fiscal cut-backs.
On the demand side, those at the bottom of the heap supported by benefits and part time work are unable to meet their basic living costs fall further behind. Giving this group less in order to curb inflation is stupid and only further reduces their productivity and the supply side of the economy. If they can’t eat, what do they do? They spend even more energy and time trying to squeeze extra assistance from hardship grants or charities, or institutionalised foodbanks, loans and support from friends and relatives, or by taking on more debt. They get what they need in a highly inefficient way.
The next group are those struggling to live on low paid work. They are carrying an extraordinary tax burden. When a parent earns more than $48,000, surely a very low income, every dollar extra over this threshold is taxed at 30% but they may also lose 27% for Working for Families, 12% for their student loan, 25% in housing assistance. If for example they earn an extra $20,000 they might retain only 6 % or $1200 (or even less after ACC and KiwiSaver). And then, when they spend their extra disposable income 15% is taken for GST. Why would they bother to work harder to help the supply side of the economy?
Now think of a self-employed sole parent who offers much needed nursing services to the private healthcare sector. Working hard and conscientiously, she suffers the claw backs detailed above, but furthermore, as soon as her gross client fees exceed $60,000, she has to register for GST. This threshold has been unchanged since 2009. GST is an effective charge on her labour unless she can increase her fees adequately to compensate. When she puts up her fees, it directly adds to inflation while reducing demand for her vital services.
I don’t necessarily endorse the tax package that the coalition has in mind, but giving low income people some relief from terrible poverty traps that come from fixed thresholds is unlikely to cause more inflation and may usefully enhance the supply side of a desperately inefficient economy.
The other group paying the price of inflation reduction are those who have large mortgages because of the highly distorted housing market that was not of their making. With crippling interest payments, many of these vital productive members of society are simply leaving NZ.
The group that has not been asked to sacrifice are the top one third who hold most of the wealth and for whom cost of living pressures are irrelevant as they can buy whatever they want. They don’t need to know the price of a litre of milk or a block of cheese. They are the super wealthy who have benefited from untaxed gains and who as landlords think nothing of increasing rents regardless of justification and social impact. It is their spending that is the most damaging.
Chris notes,
It is also possible, of course, that throwing the New Zealand economy into a deep recession, and increasing social misery, will bring the inflation rate down dramatically.
But the figures show we are already in a recession and its effects are evidenced daily by welfare agencies dealing with increasingly high needs. This means there is slack in the economy and suggests that a tax stimulus of the right kind, along with other regulatory controls, could help slow a further downward spiral without reigniting inflation.
While what you have written makes sense I suspect that what you call the top third will gain the most from any tax changes with the rest of us getting a minimum amount so that the government can claim to be helping all taxpayers, it would be nice to be wrong although it seems unlikely.
Yes, the movement of even the lower thresholds will deliver the most to the top end–that doesn’t mean it should be done but there needed to be a separate tax base of some measure of capital to recover more from the top
The government claims its a fair tax cut. A fair tax cut would have been to make the first $10k of income, tax free or remove gst on food and fines or cut gst by 5%. May be in the future their will be left government that gives fair tax cuts.
During the campaign when National committed to tax cuts, I said (to National Party people) it was a dumb move. They had no idea just how many landmines they would discover in the finances when they took over and no idea what the state of the economy would be 6 months on. They’d have gained just as many votes by saying “we’ll deliver tax cuts as soon as we can”, thus avoiding the silly commitment. So now they feel obliged to deliver, regardless of the circumstances.
But the false argument you cant (or shouldnt) give more to the poor because their spending will cause more inflation is wrong in my view:
To quote myself
“I don’t necessarily endorse the tax package that the coalition has in mind, but giving low income people some relief from terrible poverty traps that come from fixed thresholds is unlikely to cause more inflation and may usefully enhance the supply side of a desperately inefficient economy. “
A thoughtful article, well done Susan. I wasn’t impressed by Trotter’s take on the interview either.
thanks equanimouse. It is shameful that giving extra to the poorest is bad because it must be inflationary- while propping up the speculative property market is never mentioned.
Yes, but that is not they key issue.
If you double the amount of currency in an economy (through QE and/or fractional reserve banking) while the amount of wealth (real assets) remains the same then the value of everyone’s dollar halves. It’s not rocket science!
If this continues decade after decade at a rate (10% pa on average since the 70s) that outstrips the rate of wage growth (<5% pa) then you will end up with a cost of living crisis.
For economists to not scream this from the rooftops is to do a serious injustice to the societies they should be serving.
The QE money was spent by ordinary folk and SME on goods and services and this huge amount of extra money ultimately flowed in to the hands of the already wealthy and is has increased house prices and will continue to increase house prices. Housing unaffordability and wealth in equality is solved by good inflation, ie. wage inflation. https://youtu.be/PGZ4ADmQbZE?feature=shared
In a way, but this is again reinforcing the narrative that those who create inflation (the rich and powerful) want to continue. Wealth is not really flowing anywhere so much as real assets are just compensating for the dilution in the value of the currency. This is important because the middle class think their houses are going up in value (a voter winner) rather than realising the powers that be are giving them a massive pay cut every year (a vote loser). Yes COVID was slightly different, but again blaming covid is all part of the fake narrative, its significant because of the Boling frog analogy – the single year jump was too large to hide, but it’s been hidden for the previous forty years.
“Wealth is not really flowing anywhere”. Disagree.
True, house prices are jacked up and the currency is diluted but who gets to own the houses the real assets? The covid monies ended up with the already wealthy. The government debt incurred to stop the economy being destroyed during covid is now going to be paid off from income tax paid by working people and service cuts endured by working people which results in a lowered ability of the next generation of working people to buy real estate. Evidenced by falling rates of home ownership for workers.
The parent generation now live longer after retirement and increasingly fund their life end by selling or reverse mortgaging their home. The homes are bought by investors.
The main form of wealth working families have is their housing and this form of wealth across generations is flowing from ordinary people to the rich.
That’s fair. A better way of saying it is that the existing wealth is being redistributed to those who live off assets (the rich) away from those who live off wages (the people who do the work).
Part of the reason they get away with that is because the middle classes think they are getting rich when their house prices go ‘up’. In that case their house prices (asset wealth) real value is really just staying the same while their real wages (used to pay off the borrowing on that asset) are going down.
Eventually the number of people gaining from that Ponzi scheme will go down to the point where it’s no longer a vote winner. We’re now seeing entire generations unable to buy a place to live (because real wages have been decimated). I guess the ‘solution’ then will be to repossess the wealth of those earlier generations and pretend to redistribute it the poor (while really redistributing it to the rich who provide government ‘services’). AKA wealth tax – something the actual rich will avoid through clever accounting or moving overseas while still owning the businesses that own all the houses.
A better solution would be to stop printing money and for the government to provide long term fixed rate home mortgages and keep the repayment money in the economy – instead of sending it to Black Rock via Australia.
@jameshegarty5454
3 hours ago
There is a lot that could be said about that interview but the end did make me think about inflation and how we deal with it. Here Richard Wolff, a guy who not only has an economics degree but is an actual economist, talking about inflation. I have heard him be more succinct in the past but I think these clips are interesting.
I couldn’t possibly be price increases and the quest for profits. Could it?
https://www.youtube.com/watch?v=tQRCL6RYPhg
If you are pushed for time start at about 1:37 or at around 4 minutes
and
https://www.youtube.com/watch?v=RH1tT4NW8NI
Chris Trotter and Jack Tame represent the left?
I must have strayed into an alternative reality
TOUCHÉ—–esp Chris
The major driver of inflation in the NZ economy in my lifetime seems to have been untaxed capital gain, chiefly in the form of property inflation. This has become so vast that even the supposedly productive sector, agriculture, has a greater proportion of capital than conventional earnings.
Taxation on conventional earnings is frankly trivial in comparison. So where are the economists? Surely not hiding under their beds, counting their ill-gotten earnings, and waiting for everything to fall apart?
spot on stu
Capital gain is more likely to be a side effect of inflation rather than a driver of inflation. Accompanied by a static income level, capital gain, which increases housing costs, would leave people less to spend on the other necessities of life, a situation more likely to be deflationary rather than inflationary.
Sounds good on paper – except all that rental income is leveraged by ANZ, and plowed straight back into the property market, inflating it even further.
It’s a classic inflationary spiral, with banks stepping up as incomes tail off.
Want to guess how it ends? Tears before bedtime.
Almost all of the current inflation can be traced to the covid response of the previous government (combined with the same policy mirrored around the rest of the Western world which we import a lot of good from). It boils down to literally paying people to sit at home and do nothing during lockdowns and generally restricting economic activity in the name of public health. Add to that crazy government budget blowouts (especially in healthcare), and the current inflation cycle was all but guaranteed. Every economist with a working brain predicted this was going to happen a year or so after the pandemic (there are always delays).
So supply chain issues caused by Covid and War in Europe (Ukraine – especially wheat and products dependent on wheat) had nothing to do with current inflation … so, exceptional weather events (likely caused by global warming), and the impact of these on local supply of fresh fruit and vegetables, had nothing to do with inflation … frankly, it is absolute rubbish to suggest that the domestic response to Covid is the singular cause of our current inflation. It is more than ignorant to suggest that a Covid response that saved the lives of 20,000 kiwis was of less importance to NZ than ensuring the business community could function “business as usual”.
The budget blowouts were caused by dealing effectively with a once in a 100 year pandemic – and also ongoing population increases being unmet in health during the entire period of Keys National government.
What is your solution to the current crisis outside the standard BS neoliberal response of austerity – you really have nothing? Or do you? Economists are only ever useful when analysing something AFTER the event. Hindsight is a great thing but during the pandemic a human response was must preferred over a business approach that you appear to advocate.
Poppycock.
You are wrong. As you may have noticed, there is no massive inflation in wheat-based products because the wholesale prices of these items is insignificant – all the inflation is in labour extensive and imported goods due to untaxed money chasing after goods, which people equate as “free”. Housing inflation in NZ is still a systemic long-term issue not associated with covid.
And everyone got covid. The draconian health measures were all for nothing. No lives were were ultimately saved. You need to accept the “L” here and move on (and learn to live with the hopefully one-off inflation spike it caused).
No, you are wrong. Inflation in NZ is caused by BOTH internal AND external factors. To suggest that one or the other is ‘entirely’ responsible is misleading at best and pure propaganda otherwise. Stop spreading your disinformation masquerading as truth.
I don’t know about NZ, but Robert Reich has put forward the idea that one of the major causes of inflation in the US is corporate greed. Apparently corporations are making record profits but still putting prices up. I don’t think anyone he would be surprised at that.
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