Tuesday, April 29, 2014



Economic sadomasochism

New Zealand has a problem: an independent Reserve Bank with an inflation target. In the 90's, this meant that whenever unemployment dropped, they Brashed the economy, hiking interest rates and throwing people out of work to prevent the spectre of "wage-inflation" (AKA ordinary people getting jobs and pay rises). Now the main driver is the Auckland property bubble, which pushes up inflation even when the rest of the economy is going downhill. Fighting this leaves us with a toxic combination of high interst rates, high unemployment, and a stagnant real economy. Worse, it doesn't even work, as those higher interest rates attract hot foreign money, which is then loaned out to property speculators.

Today Labour released its stab at a solution. The headline? Allowing the Reserve Bank to adjust the KiwiSaver savings rate. Which, combined with their universal Kiwisaver policy means that their "solution" to inflation is automatic universal wage cuts. So, when prices are rising, ordinary people will have less money in their pockets to pay for stuff. Thanks, Labour!

Its a bit more complicated than that, of course, in that savers will get their money back in the long run. What it really does is redirect money from higher mortgage payments to an Aussie bank to your future self. But the immediate effect is the same: less money in people's pockets while prices are rising. And the effect will be felt most by those who do not contribute to the problem: young people without mortgages. Somehow I don't think they'll be thanking Labour for this policy.

(I'm beginning to seriously worry about Labour's seeming devotion to inflicting pain on its core supporters in pursuit of economic abstracts. Combined with their superannuation policy it makes them look like the party of economic sadomasochists. And again, if a "Labour" Party doesn't defend and improve the living standards of ordinary kiwis, what fucking good are they?)

The non-headline stuff is where the real meat in the policy is. First, amending the Reserve Bank's purpose to manage the balance of payments. There's a consensus on the left that there needs to be some amendment, but whether it should include employment, the exchange rate or the balance of payments is disputed. Whichever it ends up as, it means the Reserve Bank will have to think about the consequences of its interventions, and should stop them from Brashing the economy to target a single part of it.

Secondly, there's a commitment to "[take] the pressure off the Reserve Bank's OCR by using government policy to address the sources of inflation in the non-tradable sector". I suspect this is the bit which is going to be doing all the heavy lifting. The core drivers of inflation are house and electricity prices, and Labour has strong policies to target both (Kiwibuild and a capital gains tax; NZPower). Deflating the housing market by taxing the crap out of speculators and increasing supply to the people who need it should remove the need for the Reserve Bank to intervene in the first place. So we might not need their economic sadomasochism after all.