The ramifications of Orr surrendering inflation to the market are still being digested, but it is a clear signal from the Reserve Bank Governor that NZ Free Market Monetarism alone will not and can not get the Government out of the neoliberal straightjacket both National and Labour have collectively agreed to to strap themselves into.

Orr will now refuse to burn the economy to save the economy.

Despite the enormous inflationary pressures about to rip through NZ in the wake of Orr’s capitulation, Orr is telling Government they can’t rely on him screwing the scrum any longer and they have to either borrow more for the infrastructure or raise taxes on the rich to pay for it.

Inflation softened in our last quarter because of softening oil prices caused by Biden tapping the US strategic oil reserves. OPEC responded with cuts which take effect next month on top of the 25cent fuel subsidy relief coming off meaning the deflationary item that caused cooling inflation (softening oil prices) won’t be available next quarter.

This on top of the unprecedented 100 000 new migrant workers, on top of 12.4% food inflation on top of the full impact on our horticultural industry from the storms and there is a very good chance food inflation will push past 20% before the election.

Orr risks all that to spell out it is the Government’s responsibility for all of this and they are going to either have to grow wages to compete or reign in the corporations whose price gouging is generating most of the inflation in the first place!

As Professor Wayne Hope pointed out earlier this week on The Daily Blog

Behind this policy correspondence lies the fundamental truth of New Zealand party politics. Labour and National are both die-hard monetarists, the Reserve Bank Act is their unspoken article of faith. On this doctrine, advanced in the late 1970s, excessive public expenditure and real wage growth will increase aggregate demand and inflation levels. If central banks can adjust the money supply to increase commercial/investment bank interest rates, demand will contract, and inflation will be manageable. Unemployment rise is a necessary if unfortunate side effect.

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Research from William Phillips, Paul Samuelson, Milton Friedman and others seemed to indicate a trade-off between inflation and unemployment. Fiscally responsible governments would target the former through monetary policy. Well-meaning spend-up governments would over-inflate and damage the economy. In New Zealand, Labour’s 1989 Reserve Bank Act effectively ended the debate. Both major parties concurred with the legislation. The 2021 RBNZ Act modernised operations and tweaked the legal wording but didn’t change the basic doctrine. 

Aside from older macro-economic arguments, the doctrine is wrong. Inflation today does not have monetary causes and monetarist solutions cannot work. Edward Miller, economic researcher for FIRST UNION, cites a US Federal Reserve study which debunks the Phillips Curve. Organised labour’s declining bargaining power weakens the relation between unemployment and inflation. Wage-push inflation growth is just not there, so why contract the economy? In New Zealand, between 1991 and 2023, union density declined from over 50 to 20% of the workforce. Clearly, today’s stunted, uneven wage growth is not going to trigger an inflationary surge.

…exactly, this isn’t a wage generated inflation, it’s naked price gouging in a weak regulatory environment!

As Emeritus economics professor Tim Hazeldine noted:

It’s COVID inflation that was driven by a supply push from the pricing side of the market. The initial transportation logjams caused by lockdowns gave shippers—especially container shippers—the excuse to drastically hike their prices. In the confusion, many other sellers of many other products discovered that they suddenly had, as one analyst put it, ‘real pricing power’. And boy did they use it! 

…this Price gouging inflation is backed up by International research

For US economists Isabella Weber and Evan Wasner, evidence acknowledged by US and European central bankers indicates that “price setting by firms with market power drive inflation”. Giant corporations have the product portfolios, dominant market positions and revenue management systems to maintain margins and customers. With global reach, they are less dependent on any single national market and can shape prices. By contrast, small businesses cannot easily raise prices as costs go up and interest rate repayments increase. Creditworthiness and access to loans will therefore diminish.  

…which is exactly what we are seeing in NZ

Sound familiar? As Tim Hazledine would attest, supermarkets, power companies and banks are pricemakers who drive up inflation while the rest of us struggle. Most obviously, the four largest Australian banks in New Zealand collectively made over NZ$6 billion in 2022. They exploit, ruthlessly, the margins between the interest rates of wholesale money for them and the mortgage rates for captive homeowners.

…into this debate Orr has clearly drawn a line under how far the Reserve Bank Governor now sees the limits of NZ Free Market Monetarism.

I’m no longer looking for Socialism from Labour, just basic regulated capitalism and even the Independent Reserve Bank Governor seems to be communicating that to Treasury.

The message is clear.

Borrow more, push up wages, regulate the market and tax the rich!


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