The Economy is Stuffed
A cost-of-living crisis and mortgage madness is compounded by a media disaster.
Rising interest rates implemented by the Reserve Bank of New Zealand (RBNZ) to combat inflation have placed a significant strain on homeowners, forcing some to consider selling their properties, taking on extra jobs, or even emigrating, was the report by Newshub over the weekend.
No sooner had Newshub reported the strain on homeowners than the axe came down on Newshub itself, the news service that airs on the television channel Three, and on digital platforms. Suddenly the cost-of-living crisis has become a cost-to-our-democracy issue.
On the same day, the Governor of the NZ Reserve Bank, Adrian Orr, confirmed that interest rates would stay high – certainly no relief there.
And today, a STUFF report shouts: “Price of common foods soars more than 50% in NZ”.
The question has to be asked: “Is the economy stuffed?”
While the RBNZ's use of interest rate hikes aligns with global central bank strategies to combat inflation, critics argue that these measures often inflict collateral damage on the economy, causing financial hardship for individuals and businesses. Articles like one published by nzherald.co.nz suggest that central banks, including the RBNZ, may have "overreacted" to the inflation challenge.
The impact of RBNZ's decisions is amplified by the direct link between the official cash rate (OCR) and mortgage rates. However, New Zealand's unique position as a country with its own currency and independent monetary policy raises questions. Some argue that the RBNZ governor could potentially consider deviating from global trends, leveraging this autonomy to pursue policies that better tailor economic solutions to the specific needs of New Zealand.
The introduction of dual mandates (controlling inflation and maintaining employment) by the previous government has sparked debate regarding the RBNZ's independence. Some argue that this move politicised the institution, potentially hampering its ability to objectively analyse and respond to economic challenges.
Finding a solution amidst this complex situation is no easy feat. While there are no definitive answers, exploring alternative approaches and fostering open dialogue can pave the way for effective strategies to navigate the current economic climate.
One alternative to raising interest rates is to use fiscal policy to control inflation. Fiscal policy refers to the government’s decisions on spending and taxation. For example, the government could reduce its spending, increase its taxes, or both, to reduce the aggregate demand and inflationary pressure in the economy. This would also reduce the budget deficit and public debt, which could have positive long-term effects.
Fiscal policy does have drawbacks, such as political constraints, time lags, crowding out effects, and negative impacts on growth and employment, and we all know politicians are reluctant to make decisions that break from perceived wisdom and voter support.
Another alternative to raising interest rates is to use supply-side policies to increase the productive capacity and efficiency of the economy. Supply-side policies are measures that aim to improve the quantity and quality of the factors of production, such as labour, capital, land, and technology. For example, the government could invest in infrastructure, education, research and development, or deregulate certain industries to promote competition and innovation.
These policies could lower the costs of production and increase the potential output of the economy, which could reduce inflation and stimulate growth. However, supply-side policies may also have limitations, such as high costs, uncertain outcomes, trade-offs, and distributional effects.
A third alternative to raising interest rates is to use alternative monetary policy tools to influence the money supply and credit conditions in the economy. Alternative monetary policy tools are instruments that the central bank can use to affect the availability and cost of money and credit, without changing the official interest rate.
Adrian Orr, governor of the New Zealand Reserve Bank, has already tried quantitative easing (QE) during Covid times, which is the process of creating new money and using it to buy government bonds or other assets from the financial sector. The problem was, he held interest rates low for too long. The liquidity and lending in the economy boosted both demand and inflation to dangerous levels. Hence the pickle we are now faced with.
The Reserve Bank could use macroprudential regulation, which is the use of regulatory measures to limit the risks and imbalances in the financial system. This could include setting higher capital requirements, loan-to-value ratios, or reserve ratios for banks and other financial institutions. This could reduce the excessive credit growth and asset price bubbles, like in the housing market, that cause inflation.
Our central banks' use of interest rate hikes to combat inflation is having negative consequences on the economy and the people, and it is essential to explore alternative solutions to this problem. Ultimately, the key is to find a balance between short-term economic stability and long-term growth and prosperity. Interest rate hikes have negative consequences, and policymakers grapple with finding the right balance between controlling inflation and maintaining economic growth. Raising interest rates is a lazy tool.
Increasing taxes on high earners or corporations can reduce demand for goods and services, helping curb inflation without directly impacting borrowing costs. National’s policy of cutting taxes mitigates against this, and these promises may need to be reviewed, despite being politically unpopular. It may also discourage investment.
The coalition government could increase spending on essential goods and services, like affordable housing or energy, to help lower prices. This can be effective, but choosing the right targets and avoiding waste can be challenging. Or they could reduce the amount of money circulating in the economy, although this leads to cuts in important services and impacts jobs.
Investing in infrastructure and education would improve productivity and competitiveness, increasing the supply of goods and services, leading to lower prices in the long run. However, the benefits may take time to materialise. Fortunately, the coalition government is attacking regulation and red tape, helping businesses to identify and resolve bottlenecks in production and transportation, which can lead to price increases. This requires collaboration and can be complex.
Policies that promote competition in various sectors can help keep prices down by incentivising businesses to be more efficient. However, striking the right balance between competition and regulation can be tricky.
Perhaps New Zealand should look to the policies of Javier Milei, the newly elected president of Argentina, who has announced a number of economic policies aimed at reducing government spending and stimulating economic growth. These policies include a reduction in the size of the government bureaucracy, a freeze on public sector wages, cuts to subsidies for utilities and transportation, a reduction in import tariffs, and increased investment in infrastructure.
After just nine weeks of Javier Milei in power, the government of Argentina has its first budget surplus in over 12 years, when Argentina's economy ministry reported a January budget surplus of 518.41 billion pesos. It has been reported that Milei is to introduce a bill with jail time for any Central Bank official that prints money to finance deficits, something not likely in New Zealand.
Milei was inaugurated in Argentina in December 2023. Since then, he has fired 5,000 government employees and ended a large number of government regulations, which is very much like the new Zealand coalitions agreed policy.
The New Zealand coalition government is already aiming to reduce the size of the government bureaucracy, but perhaps a freeze on public sector wages should accompany it. Certainly, New Zealand’s infrastructure requires a major boost.
Milei’s policies have been met with mixed reactions. Some economists believe that they are necessary to reduce Argentina's high inflation rate and stimulate economic growth. Others are concerned that they will lead to job losses and increased poverty. New Zealanders will be watching with interest.
No single solution is universally applicable, and the most effective approach depends on the specific causes of inflation in each context. Additionally, some alternatives may have unintended consequences that require careful consideration. Economic policy is a complex field with trade-offs, and there's no perfect solution. Understanding the different tools available and their potential impacts is crucial for informed discussion and debate.
The future of economics will likely be shaped by a combination of philosophical shifts, technological advancements, and growing environmental concerns. While it is difficult to predict exactly what this will look like, it is clear that the challenges facing the global economy will require innovative and adaptive solutions.
As the philosophical underpinnings of postmodernism, nihilism, and neoliberalism continue to evolve, it is essential to consider how these changes will impact the future of economics. The future of this field will likely be influenced by a blend of philosophical shifts, technological advancements, and growing environmental concerns.
It is challenging to predict the precise nature of this transformation, but it is clear that we can expect significant changes. These transformations will require us to adapt our understanding of economics, while also acknowledging the complex issues that society faces. As we navigate this evolving landscape, it is crucial to maintain a balanced perspective and promote open dialogue, allowing individuals from all backgrounds to contribute to shaping the future of economics.
Neoliberal economics has been a dominant force in shaping global markets and policies. However, it is now facing scrutiny and challenges. The traditional left-right political divide is evolving. Instead of the old battle lines, a new split is emerging between those advocating for growth that is less concentrated and those seeking to dismantle concentration by closing open markets and societies.
Neoliberalism’s focus on deregulation, privatisation, and market-driven solutions has led to both diffusion (empowering new players) and concentration (benefiting select industries and firms). This tension between diffusion and concentration is intensifying across economies.
Rising economic inequality is partly a consequence of concentration effects. Sectors like finance and information technology have secured a growing share of profits, contributing to this disparity.
Policymakers’ decisions play a crucial role. As neoliberalism took hold, concerns shifted from big firms converting profits into political influence to worries about governments protecting uncompetitive companies – a concern exacerbated by the Public Interest Journalism Fund and now the Newshub debacle.
The neoliberal “left,” as represented by the Ardern-Hipkins-Robertson government showed an inability to offer a meaningful alternative that left them irrelevant as voters turned away. Voter dissatisfaction has disrupted the status quo and has posed many questions. While Labour attempted to build a dam that confined meaning within a circumscribed comfort zone, the new coalition government seeks to tear down pieces of that dam, freeing up meaning.
As New Zealand navigates this complex landscape, we must consider how to balance growth, equity, and meaning in a rapidly changing world.
Rapid advancements in technology will continue to shape the future of economics, with the potential for new industries, jobs, and economic opportunities. This may include the growth of artificial intelligence, automation, and the sharing economy, which could lead to new challenges and opportunities for economic growth and stability.
While investments in education and skills training are crucial, they cannot single-handedly address inequality. Current economic thinking has reached its limits, rendering the traditional left-right dichotomy obsolete. A new conflict is emerging between those seeking a less concentrated form of growth and those advocating for closing off markets and societies entirely to eliminate concentration.
Both sides challenge the established order. One seeks to reform neoliberalism, while the other aims to dismantle liberalism altogether.
The future is uncertain but it’s time to chart a new course. Something needs to be done before we all become impoverished and lose our best and brightest to Australia.