In Whose Best Interests?

On The Spot: The question Q+A host, Jack Tame, put to the Workplace & Safety Minister, Act’s Brooke van Velden, was disarmingly simple: “Are income tax cuts right now in the best interests of lowering inflation?”

JACK TAME has tested another MP on his Sunday morning current affairs show, Q+A. Minister for Workplace Relations & Safety, Brooke van Velden, once boasted the only economics degree in New Zealand’s Parliament. Since the general election, however, this select fellowship of the dismal science has been augmented by fellow Act MP, Andrew Hoggard. What he would have made of his colleague’s response to Tame’s seemingly innocent question we can only guess.

The question Tame asked was disarmingly simple: “Are income tax cuts right now in the best interests of lowering inflation?”

If looks could kill, then Tame would have died then and there. Van Velden is a very intelligent woman, so, in the very few seconds she had to formulate a response to Tame’s question, she assessed the consequences of providing him with an honest answer, realised that, in this case, honesty would be absolutely the worst policy, and so, summoning her most earnest tone of voice, and with only the tiniest hint of embarrassment, she replied in the affirmative.

At this point there should have been a very loud klaxon-blast, and the word “WRONG!” should have flashed across the screen – in much the same way as incorrect answers are blasted on the British television show “QI”. Because, as Van Velden, herself, Hoggard, economics graduates everywhere, and even the reasonably well-educated person in the street, knows: cutting income taxes right now is most assuredly NOT in the best interests of lowering inflation.

I was still a teenager in the early 1970s, when inflation began to take off in New Zealand, and I remember asking my father what it was. His answer still stands as the best summation of the phenomenon I have heard. “Inflation”, he said, “is what you get when too much money is chasing too few goods.” Economists can encumber the simplicity of that definition with all kinds of impenetrable jargon; they can make it difficult and mysterious by rendering it algebraically; but, boiled right down, that is what inflation is.

If Tame had asked Van Velden another question related to inflation, her answer would likely have been entirely sensible. Zimbabwe, with a current inflation rate of 55 percent, has just issued a new currency – the “Zimbabwe Gold” (ZiG) – backed, at least partially, by the nation’s gold reserves. For those who remember the hyperinflation of the Mugabe era (I still have a Zimbabwean banknote which promises to pay the bearer, on demand, $100,000 “on or before 31st July 2007”) this will be good news. Certainly, Van Velden, if asked, would applaud the Zimbabwean Government’s efforts. At the very least, Zimbabweans will no longer be forced to rely on American currency for their day-to-day transactions.

As an economist, Van Velden would not hesitate to condemn the idea of putting additional dollars in the hands of people already under severe cost-of-living pressures. She would know that the increased spending power being injected into the economy would inevitably lead to further price rises, as the extra money chased the same quantum of goods and services.

Van Velden would also know that the prospect of tax cuts fuelling inflation would place additional pressure on the Reserve Bank to keep the Official Cash Rate higher for longer – a strategy intended to ensure that the ordinary person’s pockets remain as empty as possible, for as long as it takes to reduce demand and lower inflationary expectations – even at the cost of inducing an economic recession.

Van Velden, wearing her economist’s hat, would also understand that Finance Minister Nicola Willis, in order to avoid the consequences of being seen to replenish the reduced state revenues occasioned by tax cuts by borrowing (the example of the British Prime Minister, Liz Truss, who attempted to do exactly that, is salutary) will have no other option but to slash state expenditure dramatically. The economic and social outcomes of such policies are readily predictable. The recession will deepen, public services will falter, and the population’s pain will intensify.

It is also possible, of course, that throwing the New Zealand economy into a deep recession, and increasing social misery, will bring the inflation rate down dramatically. It is even possible that such a strategy could produce deflation – too little money chasing too many goods – with a resulting fall in retail prices. Those tempted to welcome such a turn of events should ask themselves what falling retail prices are likely to do to business profitability and employment.

It should be clear by now why Van Velden the politician and Cabinet Minister chose to answer Jack Tame’s question as she did. Tax cuts in the midst of historically high inflation and a shrinking economy are not something any responsible government should be contemplating. Had she said as much, however, her comments would be leading every news bulletin and political journalists would be speculating avidly about her own, her party’s, and the Coalition Government’s future.

On the other hand, Van Velden could have thrown all caution to the wind and affirmed that the planned tax cuts were definitely in the best interests of the country, because they would necessitate policies aimed at shrinking the size and responsibilities of the state – something hardline neoliberal economists like herself and her boss, David Seymour, have wanted for a very long time.

Cuts in spending would also reduce the ordinary working family’s room for economic manoeuvre. With more expected of them financially, the importance of holding onto their jobs, which are (just) keeping them afloat, could only grow – making them much less likely to resist their employers’ demands to work longer and harder for less. From Van Velden’s perspective, that can only be good for productivity, good for business, good for the country.

Honesty on that scale, however, would likely have a devastating impact on Act’s performance in the opinion polls. A party that grows increasingly excited at the prospect of a large proportion of the electorate sinking into poverty, economic exploitation, and despair is hardly likely to see its poll numbers rise.

Better by far to engage in a few seconds of outrageous flannelling: “I think [the tax cuts] are. I think they are for those New Zealanders who have really, really, really been struggling […] Giving them that little bit more money in their own back pocket makes it easier for them to keep up with that rising cost of living.”

Bullshit economics, but better-than-average politics. So: Jack Tame vs Brooke van Velden? I’d call it a draw.

This essay was originally posted on The Democracy Project Substack website on Monday, 8 April 2024.

Fighting Inflation – What Would A Democratic-Socialist Government Do?

Think Big: A democratic-socialist government could remove GST from basic food items. It could re-nationalise and centralise the generation and distribution of electric power, and then retail it to citizens at an affordable price. A democratic-socialist government could nationalise the public transportation system and make it free for everyone. A democratic-socialist government could even impose a “Carbon Footprint Tax” on imports. Only among neoliberals are “subsidy”, “tax”, and “tariff” dirty words.

CONFRONTED WITH THE CHALLENGE of a worsening cost-of-living crisis, what would a democratic-socialist government do? Right now, answering that question coherently and believably is the Left’s most important assignment.

The Right’s response to this challenge is relatively clear: throw the economy into recession, maintain strong downward pressure on aggregate demand; reduce public spending. The Centre-Left’s approach to the crisis differs in no serious respect from the Right’s. It hopes to achieve the same goals, using the same methods, but in such a way that their inherent social violence is masked by the rhetoric of “kindness”.

Unfortunately for Jacinda Ardern and her Cabinet, there is no “kind” way of bringing inflation under control while remaining within the ideological parameters of neoliberalism. The classical definition of inflation: too much money chasing too few goods; more or less writes the neoliberal government’s policy for it.

The first and most important objective is to reduce the amount of money in circulation. Neoliberals achieve this key goal by raising the cost of borrowing money. Those with mortgages are required to pay more, leaving households with less to spend. The price of capital also rises, applying the brakes to business expansion and investment. In the face of these developments the labour market contracts: raising the level of unemployment, increasing workers’ fear of “the sack”, and setting off a steady decline in real wages.

In short order, the problem of too much money in too many people’s pockets simply disappears – along with their cash and credit. But wait, there’s more. If a farmer cannot make a dollar by supplying the market with one cabbage, then he will supply it with two. There will be more cabbages to buy, and at a lower price.

And there you have it! The cost of living falls. The inflationary tide recedes. The problems confronting neoliberal economists and politicians are solved.

All well and good for the neoliberal economists and politicians, but not in any way good for the human-beings on the receiving end of their decisions. The great virtue of these macroeconomic measures, from the neoliberals’ perspective, is that they save them from having to deal with the devastating micro effects of their policies.

They don’t have to witness the expression on workers’ faces when they’re told that their employer is “letting them go”. They don’t hear the sobs of the young couple leaving the house they struggled so hard to buy, but whose mortgage they can no longer afford. The small businessman who cannot make the numbers add-up, no matter how hard he tries, suffers alone – a casualty of capitalism’s “creative destruction”. The real-world effects of a neoliberal government’s economic policies occur in places where the politicians who set them in motion seldom visit.

In the long run, though, everyone is better-off for having helped to beat inflation and bring the cost-of-living under control. Such is the refrain of the neoliberal decision-makers. It is a bleak sort of consolation, akin to that of the General who praises the sacrifice of thousands of conscript soldiers – all of them killed by the murderous ineptitude of his military tactics. There are ways to win battles that do not necessitate slaughter. There are ways to beat inflation that do not depend on simultaneously beating-up the nation’s poorest and most vulnerable citizens.

But, what are these ways? How can inflation be beaten without inflicting economic pain on the weakest members of society?

For democratic-socialists, the answer lies in using the enormous power of the state to regulate the economy. Exactly the same power that neoliberalism currently uses to entrench the power and privilege of the capitalist elites.

Because the power of the state does not have to be used to keep the private sector profitable. The power of the state could just as easily be used to freeze mortgage rates, cap the prices of necessities, and control rents; to raise appreciably more revenue from its wealthiest citizens; and to levy “windfall” taxes on all those corporations guilty of racking-up excessive profits during the Covid-19 pandemic. (Even Boris Johnson’s Conservatives did that!)

At the same time, a democratic-socialist government could remove GST from basic food items. It could re-nationalise and centralise the generation and distribution of electric power, and then retail it to citizens at an affordable price. A democratic-socialist government could nationalise the public transportation system and make it free for everyone. A democratic-socialist government could even impose a “Carbon Footprint Tax” on imports. Only among neoliberals are “subsidy” “tax” and “tariff” dirty words.

To be fair to Jacinda and her Finance Minister, Grant Robertson, they have made a modest effort towards subsidising petroleum and public transport. They have also provided many New Zealanders with a “Winter Energy Payment”. These are good moves, but they are nowhere near enough.

Sadly, the full mobilisation of the state’s powers to bring down the cost-of-living, tax excess profit and  wealth out of circulation, and reconfigure the ownership of what are, in truth, “social” industries for the benefit of the many, not the few, is still beyond the range of this Government’s political imagination. Nearly 40 years of neoliberalism has robbed Labour of the courage and creativity that, in the 1930s and 40s, made New Zealand a model democratic-socialist state.

Conservatives reading this post will shriek “Muldoonism!” And, they will be right. But there is another way to look at Rob Muldoon’s economic management, apart from using it as shorthand for everything that was wrong with New Zealand in the 1970s and 80s.

It is possible to recast Muldoon’s policies as proof of how deeply ingrained the determination to look after the interests of ordinary people had become in the New Zealand political system. Muldoon subsidised and regulated and controlled because the alternative – letting “market forces” rip – would leave far too many casualties in its wake. When Rob Muldoon promised “New Zealand the way YOU want it” – he meant it.

That the Labour Party was willing to inflict those casualties; that to keep the good opinion of Treasury and The Business Roundtable it was willing to abandon its democratic-socialist principles; and that, to this very day, its political creativity remains stunted by the neoliberal dogma it cannot seem to abandon; strikes me as a far greater crime than any Rob Muldoon may have committed. In the end, even the Springbok Tour made New Zealand a stronger country.

But, neoliberalism has not made New Zealand a stronger country, it has made it weaker. When the instinct of both its major parties is to use the nation’s weakest citizens as economic cannon-fodder, then surely it is time New Zealanders made “neoliberalism” a dirty word? Imposing cruelty in the name of kindness has only ever left humanity with more that is cruel, and less that is kind. It is not what democratic-socialists do.

This essay was originally posted on The Daily Blog of Friday, 22 July 2022.

The Recession New Zealand Has To Have?

Going Down? Governments also suffer in recessions and depressions – just like their citizens. Slowing economic activity means fewer companies making profits, fewer people in paid employment, fewer dollars being spent, and much less revenue being collected. With its own “income” shrinking, the instinct of most government’s is to sharply reduce spending. 

CONVENTIONAL ECONOMIC WISDOM insists that the only effective cure for rising inflationary expectations is a short, sharp recession. Easy to say, but much, much harder to accomplish – especially if you are at least nominally a party of the Left. The ghost of John Maynard Keynes is forever whispering in the ears of Labour parties – even those which long ago embraced the precepts of Neoliberalism – and his message is always the same: Spend, spend, spend.

The problem with spending in an inflationary environment is that it does nothing to discourage the notion that the price of basic items in six months’ time will be appreciably higher than they are now. In such circumstances, simple logic dictates that it is better to make a substantial purchase today, than tomorrow. They also encourage the idee fixe that one’s income must be increased to match, at the very least, the rate of inflation. Understanding this expectation, employers budget to recover the cost of increased wages and salaries by increasing the price of their goods and services.

Once stimulated, inflationary expectations, and the upward spiral in wages and prices they set in motion, are very difficult to suppress.

Essentially, a government is required to make it a lot more expensive for people to borrow money. At the macro level, sharply rising interest rates have the effect of slowing economic growth. At the micro level, employers stop hiring and start firing. Those forced onto the dole face a dramatic loss of income and all discretionary spending ceases abruptly. The rest of the workforce, fearful of losing their jobs, stop demanding wage and salary increases. They also stop spending on non-essentials and start saving. Retailers now have the strongest of incentives to keep their prices stable.

Pretty soon, economic growth stalls, and then shifts into reverse. Pessimism reigns supreme. Inflationary expectations, along with inflation itself, come to a shuddering halt.

The trick, of course, is in knowing how long to keep the interest rates going up, when to hold them steady, and when to let them drop. Keep them high for too long and the economy risks transitioning from recession to depression. Those with money, ill disposed to risk it, satisfy themselves with government-guaranteed returns. Unable to borrow, or meet their higher interest payments, businesspeople go bust, and property-owners with mortgages lose their homes. Unemployment rises, spending decreases still further, and retailers are forced to contemplate lowering their prices.

What the economists most fear now is not of inflation but deflation. The prospect of the economy not simply grinding to a halt – but shrinking.

At this point, all eyes turn to the government. Something must be done! But governments also suffer in recessions and depressions – just like their citizens. Slowing economic activity means fewer companies making profits, fewer people in paid employment, fewer dollars being spent, and much less revenue being collected. With its own “income” shrinking, the instinct of most government’s is to sharply reduce spending. Now it is the turn of those businesses, organisations and institutions dependent on government money to feel the pinch. Exactly the same contractionary spiral that wound down the private sector, now grips the state and its hangers-on.

But the trials and tribulations of the state do not stop there. The huge number of unemployed and otherwise impoverished people have nowhere else to turn for assistance but their government. Meeting that need from a dwindling treasury, however, is the stuff of political nightmares. Just keeping the education, health and transportation systems functioning is a huge drain on the state’s resources, feeding and housing the hungry and homeless threatens to render it insolvent.

But you can’t just let people starve – can you? The hungry and the homeless themselves are likely to answer that question, as they did in New Zealand’s hungry winter of 1932, when riots tore the main streets of Auckland, Wellington and Dunedin apart. Terrified, the conservative coalition government postponed the 1934 general election by 12 months and passed the draconian Public Safety Conservation Act. Not that it did them much good. On Tuesday, 26 November 1935, New Zealanders elected their first Labour Government.

And what did that government do? It spent, spent, spent.

So, what should Jacinda and Grant do? Continue to spend, spend, spend? Or allow Reserve Bank Governor, Adrian Orr, to push up the Official Cash Rate (OCR) to 5 percent and watch economic activity nosedive?

From a left-social-democratic perspective, at least part of the answer would be to embark on a massive political education campaign. Explain to Labour’s voters the havoc inflation wreaks upon the lives of ordinary people, and why it must be driven out of the New Zealand economy. Tell them defeating inflationary expectations will require the full co-operation of the whole population. Then announce a two-year wage, price and rent freeze. Further announce the state subsidisation of basic foodstuffs and energy supplies, to be paid for by higher taxes on the wealthy, the restoration of Death Duties and a Capital Gains Tax.

A return to the bad old days of Muldoonism? Damn straight! It certainly beats asking the poorest and most vulnerable New Zealanders to carry the full burden of eliminating inflation. Few people appreciate that the whole purpose of destroying Muldoonism – which was simply an eccentric form of Keynesianism – was to free the wealthy from their obligation to contribute their fair share towards the maintenance of a decent society. That was all Rogernomics and Ruthanasia were ever about: making the poor pay more so the rich didn’t have to.

Not that Jacinda and Grant are at all likely to adopt a left-social-democratic economic agenda to deal with the impending crisis. They will make the poor pay, pretend they’re not, fool nobody, and be bundled out of office in 2023.

Ironically, their policy choices may end up decisively reducing inflationary expectations. To the limited degree permitted by Neoliberal economics, the economy will recover, and the National Party will kick-off another nine year term on a thoroughly sunny note. Who knows, by the time the next election rolls around in 2026 they might even be in the mood to: Spend, spend, spend.

This essay was originally posted on The Daily Blog of Friday, 10 June 2022.

Omicron and 6% Inflation – May The Saints Preserve Us!

Everything Is On The Up-And-Up: 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. 

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.

Racing To The Bottom, Or Chasing Our Tails?

Always Playing Catch-Up: Throughout the 1970s, the purchasing power of the ordinary worker’s pay packet – the only meaningful measure of his or her wealth – was being eaten away every passing year by seemingly inexorable rises in the cost-of-living. Small wonder that New Zealand (and the rest of the Western world) was plagued by strike after strike, as the unions made increasingly desperate – and ultimately futile – efforts to catch-up. Neoliberalism has many faults, but encouraging inflation isn't one of them.

A NEW FRONT has opened up in an old battle. The New Zealand Initiative (NZI) a think tank funded by this country’s largest corporations, has come out swinging against this government’s proposed “Fair Pay Agreements” (FPA).

As the linear descendent of the Business Roundtable, of unhappy memory, this is hardly surprising. For the NZI’s principal funders, preserving the gains of the dramatic changes in employment law which rounded-off New Zealand’s neoliberal revolution remains a high priority.

In the ears of New Zealand’s biggest bosses, the FPAs sound too much like the old “Industrial Awards”, which, for nearly 100 years, underpinned the industrial relations system swept away by the Employment Contracts Act 1991 (ECA).

It has been an article of faith among trade unionists (and the Left generally) that the passage of the ECA led directly to a decisive shift in the balance-of-power in the workplace. Not only between the boss and the union, but also – and more generally – between wage and salary earners and shareholders. The ECA has caused the share of national wealth claimed by the workers to shrink, the Left insists, while growing the share claimed by the capitalists.

All the other arguments advanced by the labour movement: that the employment relationship, as modified by the ECA and its successors, has grown increasingly one-sided and unfair; is based upon this crucial statistic. If the size of the Capitalists’ slice of the national pie has, indeed, grown relative to the workers’ slice, then change is justified. If, however, the slices have remained more-or-less the same, or, if the workers’ slice is growing (albeit very slowly) then the Left’s case for change is weakened – perhaps fatally.

Hence the NZI’s latest offensive: a statistical dagger-thrust at the unions’ key argument that unjust employment laws are keeping the workers poor, weak and exploited. Here’s the point of the dagger:

“[I]t is claimed current labour market settings have seen a decline in the share of New Zealand’s gross domestic product (or “share of the pie”) going to workers. This concern is a myth. The share of GDP going to workers did decline in the late 20th century, but this fall largely occurred in the 1970s and 1980s (at a time when New Zealand had a system of industrial awards similar to the FPA arrangements proposed by the FPA[Working Group]). Since the 1991 reforms, the decline in workers’ share of GDP has been arrested and is now trending upwards.”

Could this possibly be true? Actually, the NZI just might be right.

A week or so ago, while researching another topic entirely, I had cause to refer to my late mother’s amazing collection of Encyclopaedia Britannica yearbooks. In the entry devoted to New Zealand in the year 1977, I read with astonishment that the rate of inflation recorded for 1976 was 15.6 percent. In March of 1977, however, the Wage Hearing Tribunal had awarded wage workers an across-the-board increase of just 6 percent. The unions had asked for 12.8 percent. In other words, the purchasing power of the ordinary worker’s real wage had shrunk by at least 6.8 percent – probably more.

No matter that union membership was compulsory in 1977. No matter that industrial awards mandated a minimum set of wages and conditions across entire occupational groupings. The purchasing power of the ordinary worker’s pay packet – the only meaningful measure of his or her wealth – was being eaten away every passing year by these seemingly inexorable rises in the cost-of-living. Small wonder that New Zealand (and the rest of the Western world) was plagued by strike after strike, as the unions made increasingly desperate – and ultimately futile – efforts to catch-up.

Clearly, there were more ways of killing the poor old worker’s cat than by hitting it over the head with the ECA.

The Council of Trade Unions may be right about the ECA and its workplace bargaining setting off a “race to the bottom”, whereby wages are constantly being suppressed by employers competing aggressively to reduce the size of their wage bill. But, the very same rigors of competitive neoliberal microeconomics are also preventing employers from simply passing on the wage rises secured through collective bargaining into the price of their goods and services.

While neoliberalism holds inflation in check – allowing workers’ real wages to rise – the trade unions will struggle for members – and relevance.

This essay was originally published in The Otago Daily Times and The Greymouth Star of Friday, 12 July 2019.

Inflation Is Defeated - But At Whose Expense?

Inflation Buster: As Governor of the Reserve Bank of New Zealand from 1988 until 2002, Dr Don Brash oversaw the anti-inflation programme of the new neoliberal order he had played such a vital role in unleashing upon New Zealand. The financial sector and the ticket-clipping classes were delighted by his success, workers and borrowers paid with stagnating real wages and diminished expectations. And now, an even more frightening spectre looms: Deflation.

 

THE PROSPECT of zero inflation is difficult for many New Zealanders to grasp. Those of us over fifty will recall the years when the annual inflation rate was this country’s most contentious political issue. Hardly surprising, when rates of up to 18 percent were recorded. A nation experiencing that sort of monetary pressure has reason to be concerned.

 

But, persistent high inflation affects different groups in different ways. Like most human creations, it produces both winners and losers.

 

In a country where most wage-workers belonged to a trade union, and there were powerful political incentives for the annual round of wage negotiations to produce results roughly reflective of increases in the cost of living, inflation was more of an irritant than a danger. If a worker’s union was strong, he and his family could keep ahead of inflation. The members of the weaker unions, however, were forever playing catch-up.

 

If those workers were the recipient of a 3 percent (!) State Advances loan, however, inflation was their friend. Every year that high inflation persisted, young couples could pay off the mortgage on their first home with dollars that were, in real terms, worth less than when the debt was originally incurred. Persistent levels of high inflation were a huge boon to borrowers.

 

Between 1965 and 1985, governments of both the left and the right were content to see inflation lift tens-of-thousands of young baby-boomers onto the lower rungs of the property ladder. Indeed, it is possible to argue that the creation and maintenance of National’s “property-owning democracy” would have been all-but-impossible without a persistently high rate of inflation.

 

Persistent high inflation was also of crucial assistance to running an effective welfare state. Thanks to the phenomenon known as “fiscal drag”, inflation-driven increases in wages and salaries were constantly lifting workers into higher tax-brackets, allowing the government’s own revenue needs to be met without recourse to more regular, explicit, and, therefore, politically unpopular, tax adjustments.

 

Persistent high inflation’s biggest losers, obviously, were those whose loans were being repaid at a fixed rate of interest in devalued dollars, along with people attempting to live on incomes that could not easily be adjusted for the effects of inflation. Returns on investment; the real value of private pensions, annuities and legacies; all tended to fall in circumstances of persistent high inflation.

 

It is never a good idea for politicians to antagonise those who control their nation’s financial system. Equally unwise is a government that even looks like it is prepared to beggar the social class most dependent on legacies, annuities, private pensions and the income generated from investments. That persistent high inflation, with its beneficial impacts on workers, borrowers and social-democratic politicians, would, by the end of the 1970s, convince bankers, rentiers, and other sundry members of the ticket-clipping classes that some pretty major reforms were long overdue, was entirely predictable.

 

That a constant theme, running through all of the dramatic economic changes of the next 30 years, would be “driving inflation out of the economy”, was equally foreseeable. Nor should we be surprised that these reforms neatly reversed the position of winners and losers. That the banks and the ticket-clipping classes would benefit disproportionately from their anti-inflationary crusade was really the whole point of the exercise.

 

And who, now, can say that inflation isn’t beaten? With the inflation rate hovering tantalisingly above zero - nobody. The costs, however, have been substantial.

 

The radical reduction of trade union power by the Employment Contracts Act shattered the mechanisms that had allowed workers and their families to keep pace with inflation. Despite improvements in workforce productivity, the purchasing power of New Zealand workers’ wages has stagnated or declined.

 

Politicians, too, lost their ability to turn monetary policy to the advantage of workers and borrowers. The moment controlling inflation became the Reserve Bank’s first (and some would say only) priority, the old social-democratic goals of full-employment, home ownership for all, and a generous welfare state funded through progressive taxation, became inoperative.

 

There’s a paradox here. As New Zealand’s inflation rate declines towards zero, the Reserve Bank must confront the possibility of deflation. But, persistently declining prices are a reflection of declining demand, which is, in its turn, a reflection of oversupply and a market that cannot clear itself except by selling below cost. Deflation is, therefore, the sign of an economy that’s slowing down. It is the harbinger of busts, slumps, recessions and (God forbid!) another Great Depression.

 

Some economists argue that inflation allowed the Free World to pay-off World War II in record time. Others affirm that it underpinned the great post-war boom. Is it pure coincidence then, that at the peak of the boom, inflation was suddenly branded Public Enemy No. 1?

 

If zero inflation is a triumph, then perhaps we should ask: “For whom?”

 

This essay was originally published in The Press of Tuesday, 17 March 2015.