OMICRON HAS ARRIVED and, not without reason, its release will monopolize the attention of our news media for weeks to come. But this latest variant of Covid-19 is far from the only challenge facing New Zealanders. A very disruptive economic phenomenon, unseen in this country for a whole generation, is making a disconcerting reappearance. An inflation rate well above the 1-2% per year tolerated by the Reserve Bank since the late 1980s threatens to further complicate an already devilishly complex socio-economic equation.
The eradication of excessive inflation was the most important short-term goal of the neoliberal revolution. Eliminating constant price gouging from the system would be a feat that consumers would be sure to notice. Indeed, the restoration of price stability would be presented – and widely accepted – as a justification for the many other, often heartbreaking upheavals of the reform period.
For the neoliberals, cutting inflation to six came with additional benefits. In one fell swoop, the primary rationale for cost-of-living adjustments to wage rates would be removed. Back when most wage earners belonged to a union, rapid increases in the cost of goods and services were matched by corresponding increases in the cost of labor. This was the “wage-price spiral”, which most economists have called the fundamental explanation for the economic entrenchment of inflation. Their favorite metaphor was that of a dog chasing its own tail.
It was absolutely crucial, they said, not only to eliminate high inflation, but also to eliminate high “inflationary expectations” from the minds of workers. As long as the workers believed that prices had to rise during the term of their union-negotiated wage agreement, they would ensure not only that they secured an increase to cover the price increases that had already occurred, but also that they would secure enough additional margin to cover future increases. If employers were to meet the wage demands of their employees, the typical response was to recover their costs by raising prices. Inflation soared higher and higher, to the general frustration of the entire population.
People on fixed incomes have been particularly hurt: transfer payments whose value, in almost all cases, has been progressively reduced by excessive rates of inflation. Although adjusted for historical 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 people on fixed incomes became increasingly poor.
Not everyone living under high inflation was unhappy. People who borrowed heavily to buy a house, for example, watched with delight as what had seemed like a colossal mortgage continued to shrink, in a relative sense, until after a few years of high inflation it was reduced. to a trifle. Thanks to the constant increases in their salaries, reimbursing the bank has become easier and easier. What was wrong?
A lot, if you were a coupon-cutting investor. If the rate of inflation exceeded the fixed interest rate on a long-term investment, your purchasing power was bound to suffer. The sum agreed to make your funds available to the borrower may seem generous at the initial negotiation, but its value, in real terms, at maturity could be much less. No wonder neoliberal economists’ recommended solution to excessive inflation – a sharp rise in the price of money – that is, high interest rates – can always count on the vociferous support of the annuitant to classify.
Raising interest rates, suddenly and dramatically, certainly reduces inflation, but only at the deliberately incurred cost of collapsing the economy.
Without easy access to credit, marginal businesses falter and fail. Workers are being laid off by the thousands and the resulting sharp reduction in overall purchasing power is precipitating new waves of corporate bankruptcies and layoffs. With falling demand for goods and services, any attempt to preserve a company’s revenue stream by raising prices becomes commercially suicidal.
With unemployment (as well as labor supply) steadily rising, the ability of labor unions to extract wage increases from their bosses is waning. Increasingly, the purchasing power of the individual worker is maintained by taking on more and more debt. A worker in debt is a worker at rest, so the price-wage spiral stops as abruptly as the efficiency of the unions that started it. The remaining inflation in the system now works against the income share of the working population, which finds itself working longer and harder for what is, in real terms (i.e. adjusted for inflation), less.
Currently, New Zealand is at the stage of fighting inflation before the economy collapsed. But, with annual inflation at 6%, a level New Zealand has not seen in more than a decade, neoliberal economists’ demands for a series of fairly steep interest rate hikes are growing. more vehement. They are deeply concerned that the combination of supply chain disruptions that increase demand (and, therefore, prices) and a severe labor shortage allowing workers to increase their salaries, installs inflationary expectations in the consciousness of the nation.
The neoliberal establishment will risk a lot to eradicate these expectations – up to and including deliberately plunging the New Zealand economy into recession. As always, this will be very bad news for most of us, but rather 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 mortgage lender sales, by expanding the supply of properties on the market, will precipitate a sharp drop in house prices across New Zealand.
While this is not likely to be a result to recommend to older homeowners accustomed to seeing the value of their property go up, not down, there will be plenty of young New Zealanders who will be willing to admit, quietly and privately: “This anti-inflation thing – it’s not that bad”.