Luxon didn’t lower interests rates – the global economy after Covid did

Here’s the good news – and reasons to be cautious – about the economy

Reserve Bank Governor Adrian Orr was jocular and jovial when he announced that the Official Cash Rate (OCR) was being cut on Tuesday afternoon.

During his press conference he asked, “who’s the daddy?” (context: Stats NZ or him?), and offered some real optimism (with a few big caveats) on the future – saying there was light at the end of this gloomy economic tunnel.

He had reason to be gleeful. As Reserve Bank Governor, it’s his job to lay down tough love on the economy. To bring down inflation – which raises the price of everything – his team increased the OCR, which pours cold water on the economy. It’s a blunt tool, but their only tool, that brings pain on households.

Luxon and Willis are attempting to claim that their Austerity Budgets where they borrowed billions for tax cuts while hollowing out public service budgets is the reason Orr is cutting the OCR.

Bullshit.

Since Covid ruptured supply chains and geopolitical tensions changed just-in-time supply chains to just-in-case supply chains. The realignment of those supply chains is what is driving inflation lower than where it was but there are limits because the West is now importing inflation…

US inflation unexpectedly increases

US inflation increased by more than expected last month, as higher egg and energy prices helped to push up the cost of living for Americans.

Inflation rose to 3% in January, its highest rate for six months, and above the 2.9% expected by economists.

The rise comes weeks after the US central bank decided to hold interest rates, saying there was significant uncertainty about where the economy might be headed.

It poses a challenge to US President Donald Trump, who made tackling inflation a centrepiece of his election campaign last year, but has put forward policies, such as higher tariffs on imports, that economists say risk pushing up prices.

The other driver of inflation was price gouging by Price Makers that crushed the working classes with a cost of living crisis.

As Professor Wayne Hope pointed out in 2023 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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