sign up log in
Want to go ad-free? Find out how, here.

Economist Brian Easton takes a government-eye view of the 'cost of living crisis'

Public Policy / opinion
Economist Brian Easton takes a government-eye view of the 'cost of living crisis'
cost-livingrf3
Source: 123rf.com

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.


A conversation between a minister and advisor.

Come in, Sit down.

Thankyou Minister.

We have to deal with the current crisis. You know what a crisis is?

No, actually I don’t, Minister. I looked it up in a dictionary. None of its answers matched the way the term is used in public.

Exactly. It’s about perception rather than reality. It’s a term used when something is going on which people don’t understand but they think something should be done. Now, about the current crisis.

Which one Minister?

What do you mean which one?

The public is fickle and jumps from crisis to crisis. Some describe any incident as a ‘crisis’, proposing exactly the same policies. I made a list of current crises. There are thirty-one on it.

Well, the one at the top of the list.

The list is alphabetical order, so at the top is ‘avocados; shortage of.’ ‘Apprenticeships’ are further down in the ‘Megapolytech merger’ crisis.

I mean the ‘cost of living’.

It’s there on the list, Minister, in with other ‘C’s like ‘co-governance’ and ‘climate change’. The trouble is that there is no rigorous notion of ‘cost of living’.

Don’t economists have one?

No. When I was trained, I was taught to avoid the term like the plague. That is why the notion is so popular; it can mean anything. Like much public discussion it is a slogan to justify some public policy like income tax cuts, or capital gains and wealth taxes, or cutting government spending, or increasing government spending.

Whatever you were taught, the public thinks there is a problem and expects me to deal with it.

But what is the problem, Minister?

That’s what I have advisers for.

As far as we can assess Minister there is a confusion of three issues. Some people think their incomes are too low compared to their purchasing power.

Everyone does.

Yes. Some shout louder than others. Those who shout least tend to be the least well-off – which is why, I suppose, nobody addresses their concerns. A second group are not getting their usual real income increases because the economy is growing more slowly. A third group are experiencing cuts in their purchasing power.

I thought everyone was in the third group.

That’s the way the public rhetoric tries to present it, especially if it is trying to promote some policy or promote self-interest, but it can’t be true.

Well, how many are in the third group?

We don’t know. The data base does not exist and even if it did, it would be out of date. Distributional economics is quite tricky which is why everyone depends on anecdotes, like the shortage of avocados, even if the poorest never buy them.

But some key voters do. Who do you think are in the third group?

There seem to be two main categories. First there are those whose incomes have not been rising as fast as consumer inflation and second there are those who are facing higher interest rates on their house mortgages.

So it is rising consumer prices and debt servicing? That sounds like it is the Reserve Bank’s responsibility.

That was the idea behind the 1989 Reserve Bank Act, especially as it shifted responsibility for inflation from the politicians to the RBNZ Governor. But the public never bought that one, so you remain in the gun, Minister. In any case the economic theory on which it was based was never very robust.

Why did economists not tell us at the time?

Some did but they were shouted down. The public loves a theory which is simple, direct and wrong. The current inflationary pressures are quite different from those the theory was about.

Should we not be dealing with the pressures?

If we can. But we don’t control the weather, we don’t control international supply chains, we don’t have much influence over our import prices, and international interest rates are rising too. We did not start the invasion of Ukraine.

Tell me. I hope this does not seem a stupid question, but how do we expect the Reserve Bank, to deal with these pressures over which it has no control?

I told you it was not a very good theory. What the Bank is actually trying to do, is make sure these pressures do not trigger a permanent inflationary regime.

But I still don’t get it. There are a group they think are worse off. The Bank has said it wants them to have even lower incomes.

It’s a kind of ‘the flogging will continue until morale improves’.

Even so, we have households – voters actually – suffering from higher interest rates. So we are increasing their debt servicing further.

It’s partly because world interest rates are rising and we cannot lag too far behind. They are rising as everyone unwinds the massive borrowing we did as a part of the fight against Covid. But it is also because it is the only policy instrument the Reserve Bank really has.

Does that mean we should use other policy instruments.

You can try, Minister.

So I cut taxes?

How are you going to pay for the loss of revenue?

Cutting government spending?

But what? That’s handwaving that opposition parties do – never any specifics of course; not enough to cover the gap from the tax cuts. Every budget cycle, the government goes through a detailed, onerous review of government spending which identifies areas which can be cut – useful gains but never enough. Of course you could abandon some of your big projects; they can make a difference. We no longer have your media-merger on the crisis list, Minister.    

We could borrow.

We did that as a part of the fiscal package to deal with Covid. Borrowing can be kicking the can down the road, loading costs to haunt future generations. The Covid cans are haunting us at the moment. They add to the risk the country faces if there is another global financial crisis – a real crisis.

Will there be another one?                                                     

That’s a question which haunts your economic advisers. We hope one will not happen soon. But it is fifteen years since the last one.

Well we have to do something. Our political discourse requires the government to deal with crises. If we are not seen to be doing anything, the other side gets elected.

And they will be equally as effective.

I have a speech on the cost of living crisis next week for a business breakfast for avocado growers. Will you get me a draft setting out what we have just decided?

Yes Minister.


*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

31 Comments

Surely a highly inflationary budget with 5 billion of new spending when revenue is down must count as such poor decision making that virtually any opposition could do better than that?

Up
8

But actually less spending in real terms.

Up
3

Robbo's so poor at economics he doesn't understand what he is doing. "I FOUND $4b OF SAVINGS! Cos we won't spend that $4b, it will help to bring inflation down".... next breath... "Here's $5b of extra spending! Which we will be borrowing for! Because I just saved $4b, that extra $1b won't be inflationary!"

Shocker of a budget. Should have cut a lot more, directly from overblown budgets (here's looking at Kainga Ora whose budget has gone stratispheric), then used the surplus to pay down some of his drunken sailor spending he has been doing.  Then the RBNZ may actually hold or lower the OCR.  Instead he is making everything worse. 

Up
7

Too hard. Why bother?

Up
1

Aside from the slant where the RBNZ is responsible for the borrowing choices of those who took mortgages they couldn't afford - that was hilarious.

Up
2

Tell me - what right does the RBNZ have to impoverish people based upon past spending that the RBNZ actively encouraged?

Up
8

Ever heard of personal responsibility? I know, a lot of people haven't, and spend their lives blaming the consequences of their decisions on other people.

If the RBNZ suggested it was a good idea to jump off a cliff, would you? (And this is an oddly appropriate metaphor...)

Perhaps if NZ had fixed-rates for the full term of the mortgage, or non-recourse mortgages,  it would be different. But we don't, and anyone who didn't factor that in only has themselves to blame.

Up
6

The banks too I assume?  Or are they innocent parties with a gun held to their head by a 25 y/o FHB who, inexperienced in finance, demanded test rates be dropped to below 6%?  Surely the banks too knew interest rates couldn't stay low forever.  

Borrower beware sure, but the banks make a huge profit and I would have thought part of that is adequate risk assessment when selling a mortgage product to their customers.  Otherwise, what's the point in having retail banks?  

If an electrician told you a 10a appliance can run off a 30a breaker, and your house burns down, then should the insurance company claim "personal responsibility" because you should have known?  

 

Up
1

How interest works is a fairly basic principle much like how to drive a car or order groceries online.

If a 25 year old doesn’t understand that interest rates can rise there’s something fundamentally wrong with our education system.

 

Up
1

"...there’s something fundamentally wrong with our education system."

You got there in the end.

Up
7

Well the banks certainly didn't know interest rates could rise and they do this every day for a living!  Hence they drastically lowered their test rates, and then found themselves scrambling to rise them from 5.8% up to 9% in the space of 12 months (or less).  

But I agree, education is lacking.  My point is in every other industry the consumer is protected from bad judgement except banking?  Buy a dirt cheap fridge from a retailer, you're still guaranteed even if it breaks outside of warranty.  Does buyer beware not apply in this case?  Nope! 

Up
0

I wouldn't say they have 'only' themselves to blame. Lots of fingers can be pointed, for example at successive governments for creating an economic environment in which houses are seen as being safe investments, driving up the prices of family homes as well as investment properties.

You are correct that ultimate responsibility falls on the mortgagor though.

Up
3

Short memory, huh?

When the OCR was at 0.25% the RBNZ and retail banks were telling people it'll be a long time before rates return to 'normal'. Even when the OCR made it's first move up the RBNZ and the retail banks were predicting a slow return to normal. And even when inflation started to show we were told to the RBNZ would 'look through' the effects of energy markets and rates would stay low for quite a few years.

Look, I've studied economics (and continue to study it) and I never believed the RBNZ or the retail banks or even the ARB who explicitly said this. But to deny the experts at just about all levels of banking were saying "rates will be low for some time" is nonsense. Need I go and search for the relevant articles and statements?

To lay "personal responsibility" upon the suffering is nothing more than victim blaming.

I stand by what I said.

Up
3

So, taking responsibility for their actions makes them victims? No wonder our society is so screwed.

Up
1

RBNZ stated in 2021 the OCR would rise by 2% in the next year then they hiked it by 4% in that year. That caught all the economists by surprise.

Up
1

That was the idea behind the 1989 Reserve Bank Act, especially as it shifted responsibility for inflation from the politicians to the RBNZ Governor. But the public never bought that one, so you remain in the gun, Minister. In any case the economic theory on which it was based was never very robust.

I told you it was not a very good theory. What the Bank is actually trying to do, is make sure these pressures do not trigger a permanent inflationary regime.

But I still don’t get it. There are a group they think are worse off. The Bank has said it wants them to have even lower incomes.

It’s a kind of ‘the flogging will continue until morale improves’.

Never a truer word spoken in jest !!!

The "theory" that hammering (impoverishing!) a select group of NZ's population using the OCR while enriching another select group should be attacked using provisions NZ's Bill of Rights. In essence, it is ageism and reverse-weathism! 

It is neither fair nor just. In fact - it's nothing more than a con job. And worse? A con job perpetrated by NZ's political class!

Up
1

I mean, as long as you ignore the asset bubbles that had inflated market cap due to their exclusion from the metric used to determine the control variable, what do you expect?

If the rising market caps (companies, shares, house prices) had been measured as part of the CPI (and it really doesn't make sense to exclude them - cars, tvs, etc., don't disappear when bought either - unless you deliberately want to blow a bubble), then interest rates would never have been as low as they are, and this problem may not have appeared.

You can't blame the tool just because it's mis-applied.

Interest rates reflect the value we place on the future, and the last 15 years in particular have shown a callous disregard for that.

Up
3

.

 

Up
0

Cost of living crisis?? Where mate? 

The house pieces are exorbitant and been for few years and 50% increase in last two years have not stopped people from buying or paying over the top. So what crisis is it? No crisis mate, it's all talk and in the news.

If people were really struggling, there be mortgagee sales or people won't be paying the top price.

The bars ans restaurants are full. The Malls have parking crisis. Ask uber eats, they will say it's all go with so many orders that restaurants are taking longer to cook.

So yeah what crisis. Have you seen the amount of cars on the road even over the weekend. The Tesla's are running out the show room like no ones business. 

Either we are spending beyond our means and on borrowed money which no one is asking to pay back or really there is no real crisis and everyone has a lot of moolah to spend. 

Up
5

Your comment matches my observation too.

Up
3

Satire?

Up
2

Turning and turning in the widening gyre   

The falcon cannot hear the falconer;

Things fall apart; the centre cannot hold;

Mere anarchy is loosed upon the world,

The blood-dimmed tide is loosed, and everywhere   

The ceremony of innocence is drowned;

The best lack all conviction, while the worst   

Are full of passionate intensity.

-------------

Things have been weird since the first outbreak of COVID.

Up
0

I agree. Spending by the landed gentry has not slowed one bit. Picking a 75 increase on Wed then.

Up
3

Agree, people are spending like crazy, I just don't know where they are getting the money from? 

Up
1

They are borrowing into oblivion.....believing that with property,  they simply just cannot lose.
 

Two words explain it:  Ponzi and Tulips.

Up
1

They are borrowing into oblivion.....believing that with property,  they simply just cannot lose.
 

Two words explain it:  Ponzi and Tulips.

 

Really? Very poor comparisons.

Borrowing into oblivion. No they are not borrowing into oblivion, have you tried borrowing lately? You have to be in a very sound financial position to do so and thats all at current rates with a higher test rate

And only 21% of purchases are by investors borrowing with a mortgage (15% are by investors buying with CASH ie not borrowed)

Ponzi? Buying a house to live in or upgrading your home is not a ponzi scheme. 

Investors account for just over a third of purchases in total) so two thirds of buyers are home owners, so are they the ones fuelling a ponzi scheme?

Tulips? You cannot live in a Tulip.

 

 

Up
0

Entry level for a house at Millbrook resort is $3-4million. The one the builder was working on was $17million. Not a problem.

Up
0

Masses are drunk with naive delusion…. Let them eat cake!

Up
1

The ignorant are blinded by emotion so become blind to facts whilst they hold to their ignorant views.

Up
0

 

 

Up
0

50% increase in last two years 

This is the sort of distorted factually incorrect and emotional view that is clearly high on emotion, whilst devoid of reality.

Where exactly is this 50% increase in the last 2 years?

See this https://www.interest.co.nz/charts/real-estate/median-price-reinz

Up
0