Papering over the cracks?
Papering over the cracks?
The Reserve Bank’s logic for lowering the Official Cash Rate recently is sound but are we, MALCOLM AITKEN asks, papering over some economic cracks?
After months of conjecture and anticipation by the finance and economics media commentariat, RBNZ Director Graeme Wheeler, recently signed off a lower base interest rate. Mr Wheeler cited lower demand in the economy due to lower milk pay-outs and higher petrol prices as a prime reason to lower rates, along with a struggling export sector.
Sure enough, lower rates decrease demand for our dollar, devaluing it, which makes life easier for farmers and other exporters (the former whose plight vis-à-vis milk pay-outs has been the subject of so much comment) and mortgagees and other borrowers have more money in their pockets, stimulating the economy.
It all makes sense really.
However, putting aside the tricky issue of what lower interest rates may do to our housing affordability crisis, when we’ve heard so much about sturdy growth projections of three per cent annually why do we have a problem with demand? Farmers are economically important including as consumers, but there are so many other facets to our economy and other actors involved. So why does demand require stimulation when the Government has trumpeted a current surplus of sorts, we have low inflation, net employment is tracking upwards and petrol prices have gone down so much?
Well, one has to wonder about how much money New Zealanders have to spend, or more specifically, are paid. Our propensity to not save and get into debt must surely be understood from a lower than optimal remuneration perspective, which, incidentally has hardly had a look in during the public debate on housing affordability.
Although you can accept that despite coming down a lot ,petrol prices are still very high; as economists, especially those in the union sector will tell you, New Zealanders are not paid that much. The past shows that many employers view reducing wages and conditions as a plus, or at least not improving them. The bad old win-lose scenario.
We wonder out loud about demand and affordability a lot, yet we fail to tackle our long term problem of not providing enough well-paid jobs for a more successful economy and fairer society.
One doesn’t have to look far to read business reporters’ glowing reports of our “rock star” economy, including, for example, our average wage and salary increases now finally being higher than Australia’s as we “close the gap” on our TransTasman cousins. Yet it’s well accepted among economists that median figures provide a much clearer picture than averages when it comes to such figures for obvious reasons. This is just one example of the economic sophistry and frankly, bullshit, that’s part of the New Zealand media diet for Mr and Mrs Average media consumer.
There’s evidence to show New Zealand’s doing well on some counts, but even more to show the benefits are not being shared (as the gap between the median and average remuneration figures grows, the classic indicator of growing inequality).
We need action on demand that’s based on both growing the economic pie and sharing it around intelligently, while increasing our environmental sustainability. The next few months will be very telling.