Farrar Fluffs Inflation

Ol’ Davey is huffing today because inflation might near 4%.

According to Farrar, twice Nobel-laureate for Economics: “The target is 2% (it should be 1%) with the allowable range being 1%  to 3%. Bottom line is no drop in interest rates for a while”

a). The target is not 2%. There is a target band of 1-3% over the medium-term. That means if inflation sometimes goes outside that band it’s no big deal and it certainly does not mean that 2% is the target.

b) As we have seen, interest rates are low by historic norms, and well lower than when National was last in power.

c) Let’s examine Farrar’s hollow “(it should be 1%)”. Why should it be? Inflation at anything in the low single digits is a minor annoyance, and as long as the rate is relatively stable it does no harm to investment. It is stability that leads to confidence to invest, not whether inflation is 1% or 3%. It is only when inflation is high that it has a negative effect on the economy and living standards. That’s because some prices are more fluid than others, and ’sticky’ prices include wages. In other words, when prices rise rapidly, wages don’t keep up and buying power is eroded. But that’s a hyper-inflation problem, when you’ve got 10%, 50%, 100% inflation. We see this in Zimbabwe now and most famously in Wiemar Germany.

There is high inflation in certain sectors in New Zealand, oil and dairy prices. These are rising so fast that to keep buying the same amount you have to increase the percentage of your income you spend on them but, overall, wages in New Zealand are rising much faster than inflation. And what would Davey have National do about oil and dairy inflation? Those are international prices that no New Zealand government can change.

There is one way National could cut inflation though, and that’s by bringing down wages and rise unemployment. Less consumer demand would result and that would bring the economy out of the top gear it has been running in for the last nine years. Is that Farrar and National’s real game? Talk up these inflation and interest rate ‘problems’ as an excuse to cut kiwis’ pay so their business backers can pocket more profits themselves?

Putting pay to National’s fiscal management

Thanks to posts by us, The Standard and now Idiot/Savant, the differences between Labour and National’s economic management is becoming clear. Wat’s excellent analysis shows how economic growth has been stronger under the Labour-led government than it was under the National-led government. The Standard’s item shows how the much vaunted wage gap with Australia actually opened up under National - with a 50 percent increase during their last 9 years in power. Under the Labour-led government, the wage gap has not got any worse - despite the Australian economy’s massive fillip from its extractive industries. Idiot’s post brings the Kiwiblogblog and Standard analyses into one killer chart. As Idiot succinctly put is, this type of analysis shows, “the real obscenity behind National’s policies: while people’s living standards were falling, the economy was in fact growing”. All this nonsense that National spout about productivity and wage growth masks the reality that The National Party’s record of governance shows it to be disinterested in giving workers a fair dividend from increased productivity.

Growth Still Strong

The economy grew a quicker-than-expected 1% in the December quarter last year, and 3.1% in 2007, compared to 1.6% in 2006 (long-term trend is 2%-2.5%). That means the economy was in a stronger position than most analysts thought heading into the drought March quarter and is another reason to think a recession this year is unlikely (it is a pity the growth statistics are not available until they are nearly a quarter out of date but it is a massive job collecting them).

So, how does the record of the Labour-led government stack up against National in the 1990s, and against Australia?

 

National average: 2.6%. Labour average: 3.5% (Australia: 3.3 and 3.2%)

The economy continues to grow faster than it did under National, and while National let us fall behind Australia, Labour has closed the gap.

Weathering The Storm

Before the 2005 election, National and its allies spent a lot of time talking down the New Zealand economy, predicting a recession that never came. They’re playing the same game this year, pointing to persistent inflation (caused mostly by global rises in oil and food prices), the slowing housing market, the likelihood of a US recession, and instability in the global credit markets (caused by lax US regulation) as factors that will push New Zealand into recession. It’s part of National’s strategy of talking down New Zealand and talking up its problems.

In fact, our economy is in excellent condition to weather this ‘perfect storm’. Unemployment is at record lows, wages are growing fast: people are confident they’ll still have a well-paying job next year and that makes them confident to spend this year. Prices are going up because of global inflation of oil and food prices. Fortunately, New Zealand exports vast quantities of food and increasing amounts of oil, meaning that as prices at supermarkets rise so do export receipts and that flows into higher wages. Government finances are healthy. Unlike the US, our government has the luxury of being able to inject more demand into the economy by cutting taxes and increasing spending without going in deficit (if it cuts GST, the Government will boost demand and make a one-off negative impact on inflation too).

The only problem is the Reserve Bank, which insists it will not lower the interest rate until next year. Higher interest rates have succeeded in deflating the housing bubble. The Reserve Bank justifies keeping them high (to the cost growth and of our exporters, high interest rates mean a high exchange rate) because inflation is around 3% but there is actually little underlying domestic inflation. It is ridiculous for the Reserve Bank to keep rates high when that does nothing against high international oil and food prices. Ideally, the Reserve Bank Act should be changed to allow the Bank to take note of growth and unemployment when setting the interest rate (just as most central banks do) but that is not necessary, the Bank could just take a more real-world approach and stop punishing the New Zealand economy for the world’s inflation problems.

Bunnings Hop

Your favourite pollster and mine tries another shifty numbers trick on us with his post on the Bunnings strike.

Davey professes not to have a clue of the details of the dispute but basically sides with the company (he even says the fact that the CEO earns millions while ordinary workers get minimum wage is a “red herring”) and prints a long piece of spin from Bunnings on why they won’t give their workers the same pay as they give the same workers in Australia.

Bunnings says that 80% of their workers are shareholders (they have the choice to purchase $1000 of shares for $1, which is a classic cheap way for a company to give a bonus that may never be realised) . Davey thinks that’s great: ‘I absolutely love the idea of a company where 80% of the staff are shareholders’. You’re meant to think ‘hey, this is a worker controlled company, great!’ and ‘hey, what is the union doing getting in the way? workers benefit from higher wages or higher profits’. But it’s that slight of hand at work again: 80% of workers have shares but that doesn’t mean they have any control over the company. They don’t own 80% of shares. The $1000 holdings of a few thousand Bunnings staff represents a mere fraction of its total stock. The $1000 share gift is simply a disarming tactic designed to make workers identify with the companies’ owners, rather than their own interests as employees. That appeals to righties like Farrar because this little crumb, that the company doesn’t even have to pay anything for, can help to break unions’ collective power and reduce future wage rises.

Worker-owned companies are a great thing, but don’t be fooled in to Bunnings is one.

Key: “We Would Love To See Wages Drop”

Wow. What can you say. National wants wages to fall. National wants New Zealanders to be poorer so businessmen can take home bigger profits. National wants you poorer.

Key has finally, irretrievably, exposed himself and his party for what they really are. After all his public horror over the wage gap with Australia, all the feigned concern, and vague calls for wages to go up, we find that Key, behind closed doors, when talking to his friends in the business community, actually wants wages down.

If you vote for National you are voting for a pay-cut.

Echo-Chamber

National party insider David Farrar quotes a blog post by Fairfax media’s Bernard Hickey writing on stuff, which bases its evidence on a study by the Australian-based Centre for Independent Studies, a right-wing think-tank with close ties to the National party.  The basic line is ’so many people are going to Australia cause they can earn more there, what’s the solution: tax cuts!’

But let’s look at the evidence put forward for this case by Hickey.  First he has Australia’s higher GDP per capita.

 First, it should be obvious that GDP per capita and typical incomes are totally different things.  Just becaue GDP per capita is higher in a country does not man you will get paid more there.

Second, where is it that GDP per capita diverges?  Oh, during the right’s economic reforms.  Now, the gap is steady, and New Zealand has actually grown faster than Australia nearly every year this decade.

Next, Hickey refers to some dodgy figures from the CIS (everything the CIS produces is dodgy, they’re the laughingstock of serious ecnomic researchers) to argue that doctors and truck drivers earn more in Australia than New Zealand after tax.

First, we can’t check if the numbers are valid because they don’t explain the purchasing power parity conversion they are using.

Second, both the examples show that its in Aussie that the doctor and truck driver pay a larger percentage of income in net tax.  So it doens’t look like it’s tax that’s the problem.  Could it instead be that a) Australia is more highly unionised (true) b) the Australian states have been able to afford more to invest in health and paying health professionals, whereas National here would cut helath spending (true)

Lastly, Hinkey has these figures that 40,000 kiwis are leaving for Aussie each year.  Problem is they’re not there.  The Australian census shows that the number of kiwis in Australia has been increasing only 6,600 a year.  It’s a myth that tens of thousands of New Zealanders are leaving for Australia permanently.  Yes, that many head over for OEs every year, but they’re not staying forever, they’re coming back to New Zealand.

National Conjures Up An Issue

National’s latest trick to put out a press release huffing and puffing over the increase in staff members at ministries earning over some arbitrary amount (say, $100,000).  They take a department, say ‘hey, in 5 years the number of people earning over a $100,000 has doubled, the horror, the scandal’ and hope we will buy it.

Incomes are distributed in a bell-shaped curve:  a few at the bottom, most in the middle, and a few at the top.  (technically, it’s a truncated normal curve, but who cares).  National is just exploiting the strange fact that, because of this ‘bell’ shape, a small increase in wages will result in a large percentage increase in people earning wages above a point near the top of the scale to try to trick us into thinking wages in the public sector are rising faster than they are.

Say, we have an organisation where every employee gets a 3% pay rise for 3 years.  After 3 years all the income have risen roughly 10%:

The area under the bell curve that is above $100,000 (ie the number of workers earning more than $100,000) has increased 333%, formerly 1% of workers earned over $100,000, now 4.33% do.  If you just looked at the increased number of people earning over $100,000 you could be forgiven for thinking wages are out of control, but they clearly aren’t when you see the whole picture: all wages going up 3% a year.

And this is the game that National has been playing recently.  They’re distorting one part of the picture and hoping you won’t be able to see how they’re doing it.

It’s pretty low and stupid stuff from National, trying to concoct scandal out of a statistical inevitability.  Unfortunately, not many journalists seem able to see the mathematical wool being pulled over their eyes.

(PS. Mardy, that dig about my graphs: ouch, dude)

Inflating The Issue

It may come as a surprise to some of you that I’m a fan of the ol’ statistics.  Why?  Because so often you see a piece of information come out and protrayed in the media without context; statistics provide that context.  For example, inflation hit 3.2% in the December Quarter, that’s bad news for growth we’re told, which got me thinking: what is the relationship between inflation and growth?

First off, the correlation between inflation and growth is weak; that is, a given level of inflation is associated with a wide range of growth levels.  At 2.2% inflation, for example, growth has ranged from 6.3% to -1.7%.

There have been 11 quarters in which inflation was 3% or higher, in 9 of them growth was at or above the average (2.9%).

There have been 11 quarters in which growth was negative or flat, in 9 of them inflation was below the average (2.3%).

Overall, there is a weak tendency for higher levels of inflation to be paired with higher levels of growth (shown by the trend line).  This is the opposite to what we are given to expect by the constant focus on inflation; shouldn’t high inflation be hurting growth and therefore be associated with lower growth levels?  No, because the causality goes the other way round: the main cause of inflation is growth.  Higher growth causes higher inflation.

But, wait, doesn’t inflation hurt growth?  Yes, at high levels it does: hyperinflation (10%+) has a significant impact on people’s behaviour, it encourages immediate consumption and necessitates high interest rates to make saving worthwhile, which in turn makes investment harder.  Likewise, deflation (a fall in the general price level) hurts growth because people are strongly incentivised to save and not consume, just sitting on your money will mean you can buy more with it later, and that hurts demand in the economy.

But at levels of a few percent inflation is really neither here nor there.  As long as wages do not lag inflation too much and rise enough to counter it, there is negligible cost to wage earners when inflation is, say, 3.5% rather than 2.5%.  People on fixed incomes see their buying power eroded slightly faster, but most of those people are receiving government transfers (mostly superannuation), so as long as the Government ensures those payments maintain their purchasing power there’s no harm done.  For business, the main thing is that price levels are predictable and the rate of increase is reasonably steady – it is uncertainty that hurts growth.

Neoliberal economics, embraced so whole-heartedly by the Fourth Labour Government and the 1990s National Government brought with it a myopic obsession with inflation; New Zealand was the first to adopt inflation targeting as the basis for its monetary policy, and one of the only countries to only consider inflation (and not other factors, like employment and growth) when setting interest rates.  That’s why when inflation hits 3.2% its broadcast as if it’s the end of the world (whereas 2.8% would presumably have been fine and dandy).

In fact, the slightly higher level of inflation we are experiencing is the inevitable outcome of an economy that has been performing better for longer than anyone expected.  The impressive record of growth New Zealand has amassed since our last recession in 1998 under National is something to be proud of, and a tiny bit of extra inflation is a price worth paying for the benefits we have gained of higher employment, higher wages, lower crime, more infrastructure investment and more funding for better public services.

Not The New Zimbabwe Afterall?

How does New Zealand fare in terms of economic freedom under the Labour-led Government compared to some countries the Kiwiblog Right and the Farrar Speech Coalition like to equate us with?

Let’s ask the right-wing Heritage Foundation’s Index of Economic Freedom 2008

Pretty well, it seems. In fact, any claim of equivalency is clearly stupid.

(countries’ ranks beside names at bottom of graph, we rank below Hong Kong and Singapore only because this is a measure of economic freedom, not political and social freedom)