An economics professor and some Treasury staff believe the government and Reserve Bank of NZ should shoulder more responsibility for the inflation crisis, which will likely end in recession.
There has been much debate about who and what to blame for the runaway inflation—expected to still be at 7.2% in Thursday's consumer price index—and the engineered recession required to shut it down.
Pandemic-related shortages, government spending, monetary policy, the war in Ukraine, tight labor markets, and corporate greed have all been identified as suspects.
The Reserve Bank and the Labour government both prefer to emphasize the supply shock and downplay the importance of fiscal and monetary stimulus.
However, a fresh piece of research written by unnamed Treasury staff found both factors had contributed to inflation in roughly equal amounts.
"The surge in inflation from 2021 was initially demand driven by stimulatory monetary and fiscal policy, and rapidly increasing house prices which fuelled economic activity. However, from the second half of 2021, supply-side factors drove the continued acceleration in inflation," it said.
This paper was written by staff members at Treasury and reflects the view of those employees, but not the agency itself.
Some staff research is published to "inform and encourage public debate" but is not considered policy advice or an official opinion of the Treasury.
The authors of the paper said the pandemic disrupted the labour market, which created production bottlenecks, and which the war in Ukraine exacerbated.
However, demand recovered as economies adapted to the new environment while macroeconomic policy boosted demand and helped inflation to broaden into the services sector.
Supply shocks appear to have contributed less to inflation than in the United States and Australia. This may be because NZ was more insulated from energy price shocks and did more economic stimulus than many other countries.
About one-third of inflation was unable to be attributed to either supply or demand by the researchers. The authors also noted that using alternative price data in the model suggested supply shocks were responsible for as much as 60% of inflation.
A snatching defeat
Robert MacCulloch, a professor at the University of Auckland, said New Zealand had "snatched economic defeat from the jaws of covid victory" in a blog post on Monday.
He said NZ was “the envy of the world” in the first two years of the pandemic; we had eliminated covid and were out and about enjoying life.
"As a direct consequence, we enjoyed one of the smallest economic declines of any nation – only 0.7% for the year ended 31 March 2021.
"The UK, by contrast, suffered a decline of over 11% of GDP that year and its virus death toll ended up at nearly quarter of a million."
But policymakers failed to recognise the rebound and kept pumping cheap money into the economy.
Finance minister Grant Robertson set aside almost 20% of gross domestic product for covid relief funding, while the Reserve Bank printed another $53 billion buying bonds.
The great minor depression
These were policies designed to stave off a second Great Depression but they were still in place long after the country had brought the virus under control.
"We now face recession when most nations that did far poorer than us during the pandemic do not," MacCulloch wrote.
ASB Bank economists updated their economic forecasts on Tuesday to predict a deeper recession than previously thought.
Nick Tuffley, the bank’s chief economist, said the economy was experiencing a hangover from excess stimulus during the pandemic.
"It is a year of paying for the central bank and government punchbowl being more potent than anticipated at juicing up the economy,"” he said in a note.
The bank has predicted gross domestic product will have declined 2% by early 2024, which would be roughly half the size of the 2008 recession.
Inflation was expected to remain "stubbornly high" at over 7% year-on-year, even though the economy was stalling, and may not fall back into the target range until 2025.
"We expect the RBNZ will be in a position to start gradually pulling interest rates down to a more neutral level in the first half of 2024, the equivalent of monetary rehydration."
At its half-year economic and fiscal update, the Treasury forecast CPI inflation had peaked in late 2022 and will gradually decline over the coming years.
This was due to supply-side disruptions being resolved and resulting in lower freight costs and reduced pressures on commodity prices. While higher interest rates were reducing consumer demand for goods and services.
80 Comments
‘This paper was written by staff members at Treasury and reflects the view of those employees, but not the agency itself’
Nice back out clause - just in case the ministry of truth decides that this open and honest narrative is politically damaging for either the current government or reserve bank staff.
There's no doubt making the decisions at the time they needed to be made with the information at hand at the time was a poop sandwich. Nevertheless, it seemed clear to me that the Labour Government took every opportunity to show extreme hubris, stifle debate, control information, and gaslight us all about the situation when we could all see what was happening. That was the scary part to me. I'm no fan of any of the parties/candidates really but would be happy to see Labour/Greens reduced to barely a seat.
Exactly right, this is a government that very much likes to muzzle debate on things they are doing.
The "NZ Journalism Fund" springs to mind, media companies need to "actively promote" Te Tiriti to be eligible for any of the $55 million, so I guess that completely shuts down any debate about anything the government is doing in this area, of which there is a lot.
OK, but you have to compare that with the media companies income from private companies - "The advertising revenue across main media was $3.389 billion dollars for the 12 months ended 31 December 2022." - Nobody knows any conditions placed on that funding, as it is all confidential.
https://www.asa.co.nz/industry/asa-advertising-turnover-report/
No, you don't. Parliament is supreme, it can do what it wants. There is a huge power difference between advertisers in the form of private companies vs. the government, who also exist as a source of advertising revenue for the media outside of special interest funds that have specific, arguably political qualifications.
The level of scrutiny on government interaction with media should be far, far higher.
There should be high level of scrutiny on all government spending, I agree.
I was just saying that that fund was only 1.6% of the overall funding of the NZ media for 2022. But people on here seem to think the government is 100% in control of all media because of it.
RNZ gets 48 million every year to run. Way, way more than the journalism fund, and I expect the government makes the rules for their operation. Why not pick on their existence? What about NZ on air funding? I expect that is a lot bigger?
I just dislike these political memes that people get worked up over small things without using critical thought. There is lots to be upset about, why choose the wrong things?
The Government is the largest media advertiser in NZ, so not all that amount of money is from private companies. Labour spent $35M in covid vaccine advertising in 2021 alone. This is in addition to the public funding the media receive.
https://www.1news.co.nz/2022/03/27/govts-covid-advertising-tips-past-35…
Fair enough on the govt being the biggest advertiser, I didn't take that into account. Still my point stands that media funding of 55 million over four years is nothing compared to the rest that they spend on media. So I don't understand why it is always singled out.
The covid advertising seems cheap to me for how pervasive it was. Remember the scene was they were fighting a worldwide pandemic worse than any in living memory. What is your thoughts on it?
"But policymakers failed to recognise the rebound and kept pumping cheap money into the economy."
It's all easy looking back.
What would we be saying today if we'd recognised the rebound, and it wasn't?
The past is the past. We'll reflect on it as we are. All that matters now is "Where do we go from here?" and whichever fork in the road we choose, just as we had the choice at Rebound Corner, it will be a matter of luck that we go the right way. (And decision between a choice of a final 2 is always luck. Otherwise, there would be a decision to be made)
Ahhhh everyone knew what they were doing was HUGELY inflationary. But they did it anyway. Full blame on Orr and Robertson I don't understand people who are sympathetic of these so called experts. They both get paid enough to get it right.
Update as I am livid about this. The Gov printed BILLIONS and gave it out like candy just so people could still buy new TVs, cars, etc or even worse, so owners of large companies could buy a new launch or bach. That is where all of those billions went instead of hospitals, schools, roads, paying nurses, or anything else that could of actually helped NZ long term. Now we are being told to accept that they got it wrong, so sorry buddy you loose your job, and sorry mate you'll default on your mortgage...and those are the people who didn't reap the benefits of that free money like those at the top (i.e. they wage earners who likely got 80% of their wage over that time while the bosses creamed it).
Is anyone else pissed off or is it just me?
I think you are bang on the money. 20% of GDP printed as stimmy and not one health, education, or infrastructure investment to be found. You're also absolutely right in my opinion about who bears the brunt. Did we forget that Jacinda largely campaigned on saving first home buyers from rich foreign property speculators? How's all that gone Labour voters?
Government printed billions so that people could sit at home and not produce as many goods and services as they usually would, while the paying their wages.
Now government is trying to cut costs on key infrastructure projects because we can no longer afford them at the same quality/scale (see Dunedin hospital issues recently).
Spending billions for excessively long lockdowns = not smart. All this means is that the COVID experience is collectively going to make us poorer and the quality of our lifestyles and infrastructure is going to be worse as a result. There are no free lunches in an economy. Printing money instead of producing goods and services doesn't lift a society - it pushes it down.
(note I have no issue with initial lockdowns....but I do with the later lockdowns).
It creates inflation as people still have money to consume but are not creating, fortunately we can import goods to soak up demand and then we can sit back and blame inflation on imported goods and we will worry about the current account deficit caused by importing more than we export for another day.
Yep I work for one of those companies that got the hand out, there was a discussion should we give it back as we had a record year in the end, the decision was not too as we followed the criteria the government gave. Then the shareholders got a big dividend and big bonuses were paid the executive management.
I lived thru those conditions - as did everyone. That does not alter the fact that what is happening is criminal. I would also like to suggest that you think before defaulting to personal attack. The value of interest.co is in exchange of ideas - it is not improved by personal attack
It is absolutely mindboggling that during a health pandemic, not a single cent was spent on improving the health system. No new hospitals, no additional health care workers, no more patient beds, nothing. Except a rebrand to a new Maori name and a new Maori Health Authority that duplicates all the same resources as required for non-Maori. And now our health care system is actually even worse than before the pandemic, along with the roads, education, crime, and pretty much everything else. What was the point of shutting down the entire country if they were only going to destroy it anyway?
"What would we be saying today if we'd recognised the rebound, and it wasn't?" My question would be does the rate at which the money is pumped into the economy matter? Could that rate be dialled back to assess the ompact and then either ramp it back up if needed or conversely dial it further back?
Food for thought https://flip.it/oNdQyf
Everyone except the Govt and RBNZ recognised that the spending was irrational and unneeded - just look at the RBNZ Funding for Lending programme that ran until Dec 2022, fueling a 3 year major house price bubble. "Emergency measures" should be shut down as soon as its apparent there is no emergency, not several years later after they've done innumerable damage to the housing market. And Labour diverted Covid budgets to their pet projects instead of cancelling the spending.
Robertson and Orr should take the most blame, but Cabinet should also take some responsibility, and the staff in Robertson's office and the RBNZ.
So lets give them a sendoff in October they can reflect upon. Orr should resign immediately after the change in government.
Did you read the analysis? I guess this sort of take is evidence of why politicians can choose to obfuscate, and run deliberately misleading comparisons to excuse their mistakes. Those countries all have inflation driven more from supply side constraints than NZ...
NZ didn't get it's main energy source cut off like Germany did lol, if we did we'd be sitting at 30% easy.
I'm glad we're asking the questions now at least, even if the answers are likely to he ignored. It should be obvious at this point however that we didn't perform an economic miracle with our world-leading COVID response. We simply delayed the inevitable, probably amplifying the problems the process.
Similar story for the effects of the disease itself. We'll probably never be able to perform a meaningful comparison here though, since we changed the definition of "death" and "hospitalisation" right about the time we started opening back up, from a completely insane definition which inflated the figures, to a slightly less insane one which makes it look like our measures are working.
We are waiting on a Royal Commission of Enquiry at the end of this year (I believe?). It will be interesting to see if the conclusions match with what people are discovering at the front lines, or if they decide that the only mistake we made was not doing more of the same.
We should all be showing support for TOP.
This what one political pundit says about the TOP leader.
"Raf Manji is a very likeable, very smart, uber cosmopolitan voice of reason and genuine commitment to see some real fundamental change. He is Cabinet Level entry ready and has remarkable intellectual muscle.
You want this guy at the top table.
TOPs pragmatism is going to be and is being, incredibly attractive to many voters who are burnt by National and Labour.
With Brownlee standing down, Raf has a real chance of taking Ilam and by doing so, bring in a coat tail of maybe as many as 3 or 4 MPs.
That would give TOP an enormous amount of political leverage."
Not a wasted vote , but a waste to not vote for TOP
I don't mind TOP, but if they end up taking a 3 or 4% chunk of the right leaning vote and then don't get in, they are nothing but a massive hinderance that could curse NZ to another loony left government, which given what this one has been doing would be an absolute disaster.
The focus needs to be on getting rid of this government by any means possible.
Lets be realistic here, NZ has not progressed for 25 years, no improvement in education, no improvement in health, no improvement in infrastructure, so we keep on voting for the same parties and expect a change. There is no leadership in NZ, just idealogical bullshit.
So who is wasting their vote.
P - we probably discuss at a higher level hereabouts.
Neither major Party (and no smaller, including the Greens and TOP) are anywhere near where we have to be.
And 'Time' has clearly been called.
The discussion in my circles 30 years ago, was that there was time to transition to a powering-down paradigm, and time to influence leadership.the media/academia into making this happen. They all chose avoidance and BAU, via strenuous effort (I could tell you a tale of one so-called NZ journalist, and the cover-up of my complaint by the then Press Council - absolutely disgraceful).
Now, the pidgies are coming home to roost - bu the vast majority are still ignorant (Nate Hagens nicely calls it: Energy Blind) ans so we get (presumably vested-interest?) comments like yours.
Absolutely true, I have never met Raf Manji, but I have read about him, and discussed Raf with people from CHCH. He is a leader for our times is my humble opinion someone we should be at least considering if not promoting.
So yes I will do my best to promote him and his ideas, because the media do little in this space.
Every time I discuss TOP, helps open peoples minds, which in itself has to be good for NZ.
Nobody could have done better, given the predication on GROWTH.
And that is taken as read, by Left, Right, rich, poor, the media......
The problem is one of real inputs (the key one being energy); decline thereof. And that decline is beginning to look exponential - but in the wrong direction.
Seem my link, 1st comment / Gareth's piece. Take the time to read it properly. That is the problem, and the question is:
WHO WILL ADDRESS IT FIRST?
The Greens are further away from it that than they ever were, and accelerating. They rest are even further away. Maybe no Party in the current construct, can get there due to a GROWTH-brainwashed voting mass?
Aaaagh. That Treasury Paper - where to start...
Firstly it is based on a basic supply / demand curve because economists love doing complex maths based on dumb assumptions using only two variables. This is why Nordhaus concluded that 4 degrees global warming would be economically optimal, and why the monetarists' Phillips Curve ignored the other two key variables put forward by Bill Phillips in his fabulous 1958 paper. Bill recognised that unemployment levels might impact prices but thought that the rate of change of unemployment and imported price shocks were at least as important. If Bill were alive today he would look at the imported price shocks and the rapid post-lockdown re-start of our economy and say 'there's the cause of your inflation, you idiots'.
Anyway, that Treasury Paper concludes that we have roughly 50/50 supply / demand driven inflation. It is based on work done by the San Francisco Fed, which essentially assumes that if you have increased supply / demand of a product at the same time as you have increasing prices, this suggests that this price increase is demand-driven. Similarly, if you have increasing prices of a product at the same time as supply / demand is falling, then you are likely to have supply-side driven inflation. I won't go into the underlying assumptions around elasticity of demand etc; it's all standard reckonomics.
So, why is this wrong? Take a couple of critical prices for our economy - petrol and diesel. What happened after COVID restrictions lifted in 2021? We started using more fuel again at exactly the same time as global oil prices went up. The methodology used by Treasury would assume that the rising price and demand for of petrol and diesel was evidence of demand-driven inflation. As if increased NZ demand for petrol and diesel is what moves global oil and refinery prices!
Yes, but Jfoe doesn't identify the bigger implication.
https://euanmearns.com/eroei-for-beginners/
First graphic down; the net energy cliff. Note it is exponential - so as fast as we attempt to assuage it incorrectly (so-called liquidity injections, interest rates), the greater the problem. Abstention could have reduced, but not eliminated, inflation. At the same time, the correct interest-rate to fit that negative exponential is ...................... negative. Increasingly....
Yes, but Govt is not juicing demand. Net Govt spending (fiscal stimulus) has been low or negative for the last 6 months at least (Govt has taxed back about the same as it has spent). The peaks in fiscal stimulus were, as you'd expect, during and straight after lockdowns (mostly wage subsidy).
What did go wrong in 2020/21 was that we had a combination of:
- Govt fiscal stimulus (net govt spending boosted business and personal bank accounts) +
- Monetary policy stimulus (banks creating billions of dollars through mortgage lending) +
- Reduced consumer spending as a result of lockdowns
This meant that when the economy opened up, there was a huge surge of spending, and this created opportunities for profiteering, put pressure on stressed supply chains (enabling higher shipping costs for eg), and so on.
Not sure I follow your oil price example. Oil prices fell off a cliff during covid as demand contracted heavily with everyone unexpectedly working from home/sitting on the couch.
Oil prices rose again as lockdowns were progressively lifted as demand came back as well as dealing with supply chain issues caused by lockdowns.
I don't think the Treasury paper is making the point you are claiming, that NZ demand was pushing up those global oil prices, but aggregate demand globally certainly was...
Thoughtful reply - this is global; we are flotsam in global energy and NNR trends.
The 'price' we 'pay' is neither:
https://ourfiniteworld.com/ (first two posts will give you the idea).
It currently takes MORE than a $ of global debt, to ' add' a $ of 'GDP'. Even by that flawed metric, the system is in trouble. The rich will out-bid the poor as the ship sinks - but when it founders (2008 nearly and the pumps are clogged since) all bets are off. Meantime yes, the right hand and the left hand counter each other (Consciousness of Sheep link), but neither address the exponential-shoehorn problem.
The Treasury paper looks at the causes of inflation in NZ and concludes that half of our CPI-measured inflation was due to high domestic demand. This conclusion is based on a method that would consider higher domestic petrol prices + increasing domestic use of petrol to be domestically driven inflation. This is patently daft.
Thanks for this critique! I included the note about different models showing different outcomes as I always suspect this type of analysis is pretty speculative, but I lack the economic skills to critic them myself.
The story about the economy experiencing supply-side inflation which then spilled over into other sectors because of strong demand feels intuitive to me. But my vibe-based analysis isn't worth much!
Appreciate the response Dan - and enjoying your prolific output.
We have definitely had supply side inflation cascading through our economy. The pass through of high imported fuel and fertiliser costs to food prices is an obvious example. Another is the impact of high international shipping costs on the cost of domestic building materials in 2021 and 2022. Ironically we are now seeing high interest costs + high price of imported food combining to give us crazy food prices too.
Where I struggle with the demand-driven inflation narrative is that analysts should really split this up between:
(a) the 'market' rationing scarce goods using higher prices (e.g. limited number of tradies only doing the most highly paid jobs in late 2021), and
(b) firms increasing their profit margins because they have the market power to do so regardless of demand (e.g. Air NZ boosting airfares in 2022, or wholesalers price gouging in late 2020 / early 2021).
These two get lumped together under 'demand-driven' but they are very different. The answer to (b) is not hiking interest rates to reduce disposable income / consumer demand, because so many firms in NZ have the market power to hold their prices high whatever is happening to demand. If people buy less at New World, will Foodstuffs get into a price war with Woolworths, or buy less stock and employ less shelf stackers?
QE is not money printing, why can't our own economists get even that basic fact right. Economist Silvana Tenreyro who works for the Bank of England states this in a speech that she gave,
"QE is an asset swap: it does not create new private-sector assets, which is how some may understand ‘money printing’ descriptions. Nor does it involve spending money in the sense that fiscal policy does. No private-sector banks, firms, households or governments end up with higher net worth from QE transactions themselves. QE affects the economy only to the extent it affects interest rates".
https://www.bankofengland.co.uk/-/media/boe/files/speech/2023/april/qua…
https://www.investopedia.com/terms/q/quantitative-easing.asp
"...reduce interest rates and increase the money supply."
Which liquidity looks for & inflates the monetary price of assets eg. Real estate & shares.
Standard and Poor's, Banks Cannot And Do Not "Lend Out" Reserves.
"the ability of QE to lead to credit creation that otherwise would not have occurred being severely limited, one should not put much store in monetary policy's stimulatory potential in a deleveraging environment once the central bank has cut the policy rate to or near to zero and still needs to ease policy more. That is not to say central banks should not use QE. It is to say that expectations for how effective a policy tool it can be should be appropriately modest, and therefore due consideration should be given to using fiscal policy more actively and aggressively to calibrate overall macro policy to the required stimulatory level".
https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/programs/…
A number of us were on here and making submissions left right and centre to the RBNZ and finance minister about how they were getting it wrong and showing them the data to back it up. I personally got fobbed off by all of them various times with "I understand what you are saying, but we think otherwise and we are economists and you aren't, so we know better".
Bunch of deluded nincumpoops as far as I am concerned, if a non economist can see the mistakes they are making (and continue to make), it shows you how good the people are who are in these roles.
Agree - spent some time working in Wellington among various government agencies and realised the place was a complete lost cause. The more you attempted to influence change and resisted group think, the more that you would be bullied, have a manager (reporting to the minister) gaslighting and ostracising you into thinking that you were crazy for not towing the agency line (which was whatever was going to please the minister the most, and not what was going to be the best/most efficient/productive use of taxpayer funds).
Left Wellington realising that modern western democracies were/are in trouble as there was something fundamentaly wrong with how our society was functioning and be lead/mislead by government agencies.
it may not be possible:
https://en.wikipedia.org/wiki/Henry_Kissinger
In his PhD dissertation, Kissinger first introduced the concept of "legitimacy",[38] which he defined as: "Legitimacy as used here should not be confused with justice. It means no more than an international agreement about the nature of workable arrangements and about the permissible aims and methods of foreign policy".[39] An international order accepted by all of the major powers is "legitimate" whereas an international order not accepted by one or more of the great powers is "revolutionary" and hence dangerous.[
The GROWTH paradigm is deemed legitimate, but ain't. That para explains western media coverage of Putin, btw.
Who's to blame...
1. MMP. Allows minorities to dictate, push expensive and wasteful policies and break mandates.
2. Winston Peter's. Ignored the majority for a deal that suited him.
3. Ardern Sold out her policies and people for power.
4. Ardern and Robertson. Poorly managed The COVID fiscal response.
5. Orr. Allowed the government to controll his thinking.
6 40% of Dumb Kiwis who will take the quick easy $$$ rather than the long term benefits of good policies for the needs and not the nice to haves.
7. The 50% of kiwis that say nothing and keep taking the hits
Just heard, major speech by Robertson next wednesday 26th April.
Is this the annoucement of a wealth tax of some sort????
No probably not, as I am sure Chippy would want to be on the scene for that type of announcement
I stand corrected, it is David Parker giving the speech
Orr and Robertson not questioning or worrying about (and reacting to) why nz house prices rose 20% or whatever at a time when our economy was on hold and everyone was stuck at home......
Was and is the very key question.
It wasnt rocket science to think to increase rates, and slow money supply then and try alternatives like helicopter payments to make sure the exonomy didnt freeźe.
They did it to cause everyone to think they were both economic miracle workers and tl get relected and reappointed. Which worked. But the deliberately ignored the obvious downstream economic depression (we now face) that would result.
Assuming a National led coalition this year, what will their response be? I know of 2 off the bat.
1) Repeal removal of tax deductibility on investment interest payments.
2) Repeal 39% tax bracket.
Both of those will cut Government tax income, so they will have to find the money elsewhere. Perhaps.
3) Claw back rural project payments.
4) Cut Government spending on essential services.
5) Sell off Government owned assets.
6) Get local government to cough up more for central Government meddling.
What they won't do is.
7) Introduce a CGT that isn't full of holes to get around paying it.
8) Introduce a land tax for those sitting on undeveloped land because of 7).
9) Reduce or remove GST from essential goods like food and clothing which adversely affects the less wealthy.
10) Break up the construction monopoly, the supermarket duopoly, or the banking oligopoly.
11) Punch the banks in the face for taking the cheap money and frittering it away on stuff that only benefitted a minority of this entire country, and made this whole problem a lot worse while posting record profits for their overseas owners.
Personally, I think we're in a situation where the squeezed middle are not going to be able to just soldier on to get us through this, and any Government NZ gets over the next 2 decades is just going to be a complete failure.
I imagine a 2% decline by 2024 is a minimum as farmers change to planting trees and everybody with any sense packs up and moves to Ozzy.
Just see what this pack of greedy,woke, racist numsculls have done to this great country. At best it will take 2 decades to fix
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