The Cyclops Adrian Orr & the real way to fix inflation
PART 1 – Understanding inflation
The homeric cyclopes is not known for its intelligence and raising interest rates to create a recession does seem a stupid way to fix inflation. But is he one-eyed or is there only ‘one tool’ in the toolbox and in the past that tool has seemed to fix inflation. But is this right, what are the critics ideas to fix inflation? The strongest critics, e.g., Michael Reddell, are not against raising interest rates but rather that Mr Orr has done it too late and therefore is of poor ability, yeah right (And I have to ask; – Is Michael a neo liberal lunatic? I thought so). But when I look round for solutions all I find are neo liberal, ‘it’s the money supply’ rubbish. Let’s look at it.
To be clear, too much inflation is a very bad thing as it makes us poorer; but not everyone. We know not everyone because of the large windfall profits large companies have made. The media inflation talk was its cost-push inflation from supply chain problems and energy price rises from Ukraine war. But if it was just cost push inflation then surely profits would go down as costs have risen. But no these firms also create inflation by raising prices in ‘anticipation of inflation’ rather than raise prices when their costs actually go up. This is a very good reason to promote and introduce a windfall profit tax. The fear of, or the introduction of such a tax should encourage firms to drop prices. Perhaps they would be better off letting customers have lower prices rather than paying a tax?
I know the arguments against what I just said; those arguments are rubbish. A bit of history. The Third Labour government to prevent this very problem of business driven inflation, introduced a ‘maximum retail price scheme MRP’, e.g., a business bought say a large box of chocolate bars at a $1 a bar. Oil crisis 73/74, and droughts around the world creating food shortages and prices went up. Fear of inflation was stoked. So the business instead of selling the bars as originally intended at $2.00 a bar to reflect real costs, would charge $3 now in anticipation the next box of chocolates will cost more, say $1.75 a bar. So Labour made businesses put a price on a product at production, a maximum retail price, based on actual costs not expected costs; to slow the growth of inflation. Because businesses were making a killing.
The business argument was we have to raise prices now or we can’t afford to buy product/stock in future. Funny how that argument isn’t applied to the need to raise wages. Workers wage claims, after inflation has gone up, are said to drive inflation??? No, its only workers who have to tighten their belts and not get wage rises. Business doesn’t have to reduce their profit expectations they are simply allowed to raise their prices as they see fit. And as they see fit is to maximise profit (and everyone else is doing it – aren’t they) and their windfall profits show this is their thinking.
But the business argument about buying future stock is bogus on economic grounds. If you have product sitting on your shelf and your worried about the cost in future. Turn your stock over more quickly, so your next box is bought sooner without a large price rise i.e. drop your price to clear the product more quickly. Which would lower inflation. The MRP tag on the product is an especially good encouragement to do this. I.e. a customer knowing lower prices can be on the shelf can encourage them to go elsewhere to find it, e.g., a dairy might have older stock with a lower price. And large businesses don’t want that.
But I don’t think we need to do MRP; my point is just to show that we have recognised before that inflation is not just about money supply. (National dropped MRP before it had any effect). Controlling inflation is not just about having to beat up ordinary salary and wages earners and their demands for food, accomodation and a bit of fun. It is simply 40 years of political and economic indoctrination to say interest rates are the only way to control inflation. It is overly simplistic to say the money supply is the cause of inflation. So stop drinking the Kool aid.
A key point of indoctrination is how we understand and talk about inflation. It is described as an impersonal aggregation of data, an outcome from forces like; Demand-pull, Cost-push, wage rises, etc. But inflation is not just an impersonal aggregation of a huge amount of data. Inflation is a strongly political force. Opec is a very small group of autocrats; it reduced oil production for political purposes. To keep oil prices high to help Russia pay for its fight in Ukraine. And for Mohammed Bin Salman to undermine Joe Biden with inflation in the US midterms, so he could get a more favourable government in. Trump was good for strategic interests. And if you look back to the media as soon as Biden won, the political machine quickly kicked in, politicians McConnell, Cruz, right wing commentators, quickly raised the spectre of inflation, a dog whistle to businesses to raise prices in expectation of inflation. All to put inflation pressure on the Biden government in order to shut down economic policy changes that may help people, and create economic head winds to reduce Democrat chances of re-election. And inflation allows firms to collect money from the government, using inflation to hoover up fiscal stimulas, even though their party is not in government. So there is often a relatively small number of events and decisions that create inflation.
And even the consequential decisions from those political decisions are made by small numbers of people; executives in multi-national firms that dominate our economy. There is no huge impersonal mass aggregation of decisions, the individual consumer goods and service going up in price maybe a large aggregate, but not the decisions. There is no wisdom of the crowds/the market at work here. Inflation is a force in itself that can be used to maximise profit. If we are going to pull out wage—price spirals as a force that causes inflation then we have to include profit maximisation as a cause of inflation. Perhaps some ignored communist in the old Soviet Union said this self evident truth.
So poor Mr Orr, who can’t fix political decisions from overseas, running round yelling ‘inflation’ is the problem, is like yelling, ‘Nobody did it’. But someone did do it. And now we know who did it, we can find other tools to fix it. There is simply not enough pressure on the supply side not to raise prices. Their must be more pressure on them to share the burden of inflation to prevent a bad recession. Mr Orr raising interest rates is simply increasing costs, creating inflation, and he knows banks and businesses simply pass those costs on creating inflation. All the weight of the recession falls squarley but not fairly on the people, the demand side of the economy. The demand side of the economy is the lifeblood and the purpose of the economy, i.e. to supply the needs and some of the wants of the people.
So inflation is a real thing and it must be dealt with, but the central problem in New Zealand with inflation is the pricing process, not the money supply.
Part 2 to follow.
“Trump was good for strategic interests. And if you look back to the media as soon as Biden won, the political machine quickly kicked in, politicians McConnell, Cruz, right wing commentators, quickly raised the spectre of inflation, a dog whistle to businesses to raise prices in expectation of inflation.”
No
Biden administration got into office driven by a green / left agenda to “kill the oil and gas industry” (quote) and did their best to achieve that through various means. The result was that the oil price doubled and that underpinned global inflation for the medium term. Like NZ, they also created a lot of money out of nowhere and that also added to the dumpster fire we now face.
These ideologically driven radicals should take a leaf from the medical profession:
“First, do no harm”
Did Trump not run deficits?
The worst in American history.
So far !
With a pricing decision its made based on what the market can bare. If the customers are told to expect prices are going up, then you can put prices up, if they grizzle then sorry its just inflation, doesnt matter if you are selling old stock or dont even use imported materials you can suddenly increase price or miss out on additional profit. Price setting is based on what competitors are charging. Currently if competitors increase price then your looking at profit fomo.
Banks also hate inflation when coupled with workers getting some compensatory wage increases. Why? Because the situation erodes the relative value of their loans and loan interest. So in some respects, that is when wage compensation can be bargained, inflation is good. Of course those on fixed incomes suffer. Generally, some inflation if fine, but excessive inflation is bad. Actually firms really hate not so much inflation as uncertain inflationary change. You can plan when things are changing in a steady way, but not when change is more chaotic. I remember the massive inflation in the UK I the early 70s. Unions were strong and could bargain high compensation. So for many, including me in a high tech industry, things felt good. The only concern for me was the rapidly escalating prices of housing – for I was not then a home “owner” (or rather mortgagee).
We certainly have price rises, but is it inflation as defined by too much money chasing too few goods? Could it be supply chain disruption causing shortages, or merely specific inputs in short supply or high price?
Im asking this as I don’t believe our tea leaf and chicken entrails readers (economists) actually know, and consequently have no idea of a fix.
What I can say is that if we have diminished money supply in relation to available goods that is deflationary. The problem with too much of that policy is that it destroys spending power, then jobs as production fails.
No easy fix.
Marx,,Capitalism always invent its profit exploit as it invents its greed profit exploit.
I have heard it said that banks lend mostly into the housing market, so I would be guessing that that is where the main impact of interest rate increases would be felt, and the likelihood is that it would effect a reduction in house prices. This, in theory, should leave homeowners feeling poorer and they would then be inclined to spend less. So interst rate incrases may well be good when it comes combating inflation.
House prices have certainly fallen. Probably this is due to higher rates of interest combined with measures taken by Robertson on the rental front.