OMICRON HAS ARRIVED and, not unreasonably, its spread will monopolise the attention of our news media for weeks to come. But this latest variant of Covid-19 is very far from the only challenge facing New Zealanders. A highly disruptive economic phenomenon, not seen in this country for a whole generation, is making a disconcerting reappearance. An inflation rate significantly higher than the 1-2 percent per annum tolerated by the Reserve Bank since the late 1980s is threatening to further complicate an already fiendishly complex socio-economic equation.
The eradication of excessive inflation was the most important short-term objective of the neoliberal revolution. Squeezing constant price rises out of the system would be an achievement consumers were bound to notice. Indeed, the restoration of price stability would be presented – and largely accepted – as justification for the many other, often wrenching, upheavals of the reform period.
For the neoliberals, knocking inflation for six came with added benefits. At a stroke, the key justification for cost-of-living adjustments to wage rates would be removed. Back in the days when most wage-workers belonged to a trade union, rapid rises in the cost of goods and services was compensated for with corresponding rises in the cost of labour. This was the “wage-price spiral”, which most economists characterised as the fundamental explanation for inflation becoming economically “entrenched”. Their favourite metaphor was of a dog chasing its own tail.
It was absolutely crucial, they argued, not only to eliminate high inflation, but also to remove high “inflationary expectations” from the minds of wage- and salary-earners. So long as workers believed that prices were bound to rise over the period of their union-negotiated wage agreement, they would not only take care to secure an increase to cover the price rises that had already occurred, but also to secure an additional margin sufficient to cover future increases. Should the employers be prevailed upon to meet their employees’ wage demands, the standard response was to recover the additional wage costs by raising prices. Upwards and upwards inflation spiralled, to the general frustration of the whole population.
Particularly aggrieved were those on fixed incomes: pensions and benefits whose value, in almost every case, was progressively whittled away by excessive inflation rates. Even if adjusted to accommodate historic inflation, pensions and benefits were almost never adjusted to meet future increases in the cost of living. The inevitable loss of purchasing power meant that those on fixed incomes became poorer and poorer.
Not everybody living under high inflation was unhappy. People who borrowed heavily to purchase a house, for example, watched in glee as what had seemed a colossal mortgage continued to shrink, in a relative sense, until, after a few years of high inflation, it was reduced to a mere bagatelle. Thanks to the steady increases in their salaries, paying off the bank got easier and easier. What was not to like?
Plenty, if you were a coupon-clipping investor. If the rate of inflation exceeded the fixed rate of interest on a long-term investment, then your purchasing power was bound to suffer. The sum agreed for making your funds available to the borrower may have seemed generous when originally negotiated, but its value, in real terms, upon maturation could be much less so. Small wonder that the neoliberal economists’ recommended solution for excessive inflation – a sharp increase in the price of money – i.e. high interest rates – could always count on the vociferous support of the rentier class.
Jacking up interest rates, suddenly and substantially, certainly reduces inflation, but only at the deliberately incurred cost of crashing the economy.
Without easy access to credit, marginal businesses falter and fail. Workers are laid off in their thousands, and the consequent, often savage, reduction in overall purchasing power precipitates further waves of business failures and lay-offs. With demand for goods and services plummeting, any attempt to preserve a business’s income-stream by raising prices becomes commercially suicidal.
With unemployment rising steadily (along with the supply of labour) the ability of workers’ unions to extract pay rises from their bosses falls away to nothing. Increasingly, the individual worker’s purchasing power is maintained by his taking on of more and more debt. An indebted worker is a quiescent worker, so the wage-price spiral ceases as abruptly as the effectiveness of the unions which set it in motion. Such inflation as remains in the system now works against the income share of the workforce, who find themselves working longer and harder for what is, in real (i.e. inflation-adjusted) terms – less.
Right now, New Zealand is at the pre-crashing the economy stage of the battle against inflation. But, with annual inflation nudging 6 percent, a level New Zealand has not seen for more than a decade, the demands of the neoliberal economists for a series of quite sharp interest rate rises are becoming ever more strident. They are deeply concerned that the combination of supply-chain interruptions raising demand (and, hence, prices) and a serious labour shortage allowing workers to bid-up their wages, are embedding high inflationary expectations in the nation’s consciousness.
There is a great deal the neoliberal establishment will risk to eradicate those expectations – up to and including deliberately throwing the New Zealand economy into recession. As always, that will be very bad news for most of us, but quite encouraging news for some.
Any significant rise in interest rates will see thousands of mortgage holders default on their loans and lose their homes. The resulting surge in mortgagee sales, by expanding the supply of properties on the market, will precipitate a sharp fall in house prices across New Zealand.
While that is not an outcome likely to recommend itself to older home-owners accustomed to seeing the value of their property going up and up – not down and down – there will be many younger New Zealanders who are willing to admit, quietly and privately: “This anti-inflationary thing – it’s not so bad”.
This essay was originally posted on The Daily Blog of Tuesday, 25 January 2022.