It is true that New Zealand – and the rest of the world – now faces substantial inflation pressure. As the 2020s unfold, the biggest macroeconomic story – as in the 1920s after World War 1 – is likely to be about how we address these pressures in a context of even the experts having little understanding of the contemporary manifestation of the problem, or of how to address it.
Modern capitalism faces a 'new' cost structure that has evolved since the 1970s; and it faces supply complexities that are chaotically unravelling in the wake of the Covid19 pandemic.
The cost structure that has arisen mainly after the 1970s can best be summarised as Bullshit Jobs, the title of a 2018 book by economic anthropologist David Graeber. (The book was the Financial Times book of the year in 2018. Sadly, David Graeber died suddenly in 2020, age 59; not of Covid19. His final work, The Dawn of Everything: A New History of Humanity, is set for release this year.) These are mostly well-paid jobs that have bloated, in the wake of neoliberalism, in both the private and public sectors; jobs whose outputs, on balance, contribute almost nothing to human welfare but which represent a huge economic cost on those who produce the actual goods and services that contribute to our living standards. In economic analysis, most of these jobs come in the overlapping categories of 'producer services' and 'transaction services'; thus the associated costs are called, by economists, transaction costs.
(This category of costs, which appeared in the literature around the 1970s, has been narrowed and downplayed by economists – in part because much of the work done by career economists falls into this category. The concept has been over-narrowly defined by economists; a better, broader, definition of transaction costs is the costs of paying people to perform producer and managerial services. Further, a big gap in economic theory relates to the forces – market forces or otherwise – that facilitate excessive growth in these employment sectors.)
We may use the term 'bullshit services', not to describe transaction and producer services as such, but to describe their excess; as a label to their bloat, that accelerated in the 1980s. The costs associated with bullshit services can be called 'bullshit costs'. The most potent and effective anti-inflation policy would be to gradually eliminate bullshit costs, and to free up (and reskill) bullshit workers into spending their paid time productively.
Today's cost problem manifests itself as 'labour shortages', and is compounded by politicians whose experience is almost entirely informed by concerns about 'unemployment'; more generally, concerns about 'labour surpluses'. At the moment we have found ourselves in a capitalist world of dire labour shortages combined with substantial levels of 'structural unemployment'; meaning that these unemployed are not work-ready, they are not able or willing to meet the requirements of the non-bullshit component of the twentyfirst century labour market. The coming wave of inflationary pressure is purely a supply-side problem, yet we are about to treat this problem – once again – with a 'one size fits all' demand-side contractionary monetary policy.
Examples of 'Bullshit Costs'
- Costs of Hard-Sell Marketing (of 'pushing'); includes pushing in all manner of industries from selling military hardware to selling flavoured sugar.
- Speculative Finance; all employment in support of land-banking and other forms of enrichment that do not involve the provision of goods or services which households want to buy. Pure land-banking is a form of theft.
- Duplication; services in bureaucratic organisations which duplicate services in parallel organisations (such as District Health Boards).
- Positional Goods; goods and services which enable some people to increase their social status (their relative social standing), meaning that other people lose standing as a result.
- Defensive Goods; goods and services purchased to help bullshit workers to get to work, or to relieve their work stresses resulting from low morale arising from the meaninglessness of their work, or demanded by bullshit workers as compensation for their time poverty.
- 'Decision Hygiene' Management; this is the management of 'noise' or 'randomness' associated with the different personalities or moral compasses of different people in the same jobs. Decision hygiene management represents the roboticization of humans; arguably a bigger danger, in practice, than the humanisation of robots. (See, for example, A Conversation with Daniel Kahneman About 'Noise', Behavioural Scientist.)
We may note, also, that many people in non-bullshit jobs may have substantial (and often increasing) bullshit requirements imposed upon them by hierarchies of managers (meaning their line managers themselves have no autonomy); requirements that make these workers time-poor, and may thus compromise their ability to provide high quality services or goods to their customers. (Teachers, and many health-care workers, will understand this one.)
Workers supplying essential goods and services – and those supplying other consumer services and goods – have to support armies of bullshit workers as well as themselves and their families. Fortunately, we live in a high productivity society, which makes it possible for each actual worker in the market economy to support a number of faux workers.
From the point of view of formal economic analysis, bullshit employment is paid work (including self-employment) for which the 'marginal social benefit' equals zero. A closely related idea is that of the 'marginal product of labour' being zero.
What these concepts mean is, if someone stops doing bullshit work, total utility (think total 'enjoyment' arising from goods and services) does not diminish. In pre-industrial societies, most bullshit jobs were literally on the farm. Then, one of the most important processes of economic development involved people moving off farms (without reducing farm production) into urban centres where they added to the production of consumer goods and services that people wanted. One of the most important periods of such urbanisation in New Zealand was the late 1920s. And it is this process that has been the most important single driver of economic growth in China and India in recently past decades. (This is the Lewis Model of Economic Development, named for West Indian Nobel Laureate, Sir Artur Lewis.)
In terms of the present inflationary supply-chain problem being faced by countries like New Zealand, and in many ways being accentuated in New Zealand compared to our comparator countries in the Northern Hemisphere, the solution is to create incentives for labour to flow from bullshit employments and into the sectors of dire labour shortage. At the coalface of such a strategy is getting our young people to aspire to (and train for) real jobs instead of bullshit jobs.
Interest Rates and Inflation
Since the 1980s (and from the 1960s in elite academic circles), inflation has generally been treated as a 'one size fits all' monetary problem that can always be treated with a monetary cure (much as, in the 1970s, many thought of STDs as illnesses that could always be put right with a course of antibiotics).
The neoliberal monetarists of the 1980s were actually more cunning than they themselves realised. They applied their remedy to a 1970s' inflation problem that was already in the process of self-correction; and they then took all the credit. While claiming to have solved the inflation problem, they, semi-inadvertently, created a decade of economic disorder (1985 to 1994).
They treated inflation with a 1980s' constipatory monetary cure that came to be formalised as 'raise interest rates to disinflate a country's economy'. (The earlier discussion in the 1980s emphasised 'money supply', the quantity of money, over interest rates, the price of money. The image was that inflation was 'always and everywhere' a kind of monetary diarrhoea, that could be cured through the administration of anti-laxatives. I read, in the Guardian Weekly, one critic likening Margaret Thatcher's monetary policy as like using a cork to prevent diarrhoea.)
What the policy really did was to raise business costs by pushing interest rates to absurdly high levels – levels much higher than the equilibrium price of loanable funds. The result was essentially the deindustrialisation of 'the west', and the rise of finance capitalism. In terms of the narrow object of the policy – disinflation – its initial impact was the exact opposite; in the first two to three years after application of such policies, inflation was substantially higher than it would otherwise have been, thanks to the cost-impact of rising interest rates.
After about three years, the real deflationary impact of these policies set in, creating nasty economic recessions and financial crises, especially in the late 1980s and early 1990s, and creating a perfect opportunity for China's industrialisation to take hold. Technical deflation – falling prices – did not occur (except in Japan) because the policy included both cost-inflationary and demand-deflationary components.
The essence of the monetarist idea was that it didn't really matter how inflationary events started; it was that any process of price inflation could always be countered by monetary deflation. What it meant was that economies would have – for a few years – two simultaneous problems; inflation and deflation. Economists of the time invented a world for this conjoint condition: 'stagflation', something that macroeconomists had hitherto though to be impossible. (A health equivalent would be simultaneous diarrhoea and constipation.)
At an academic level, the monetarist argument (and its 'rational expectations' successor) went like this. After an inflationary event (maybe a large oil price increase, or maybe groups of workers gaining a union-negotiated wage increase that went beyond what productivity increases could justify, or maybe a bout of deficit-financed public expenditure) there would be a 'secondary inflation'. In fact, this secondary inflation is a normal process of economic readjustment, much like the ripples in a lake after a stone landing in it, or like the wake that trails a boat. But the monetarists argued that people in the marketplace would 'expect' that the ripples would not recede unless a 'credible' monetary policy was pursued; they even argued, sometimes, that such expectations would generate an accelerating ripple process of secondary inflation that could only be cured by a drastic and single-minded interventionist policy of high interest rates. (New Zealand's 'world-leading' contribution to this policy framework – formalised in the 1989 Reserve Bank Act – continues to be noted in international textbooks on macroeconomics.) The purpose of monetarism was to suppress the ripples.
Of course, as we know, the deflationary aspect of the policy won out in the 1990s. Annual inflation above five percent disappeared, initially through disastrous recessions, from 1988 to 1993 in particular, and then as a result of the resulting entrenched inequality in western 'liberal democracies'. We might note that the ripples of New Zealand's mass unemployment in the early 1990s remain with us in a number of ways. I will note three. New Zealand's 'infrastructure deficit' today is largely a result of a policy preference then to have huge numbers of young men idle and unemployed instead of building and maintaining public works. A second result of that political choice is that many of those hitherto working-class young men emigrated to Australia, arriving there just in time for Australia's 1990/91 financial crisis. The inevitable result is that many of those men turned to crime in Australia; we are now seeing some of these back in New Zealand as '501 deportees'.
The third impact to note is the ongoing obsession of New Zealand's political class with 'prudent management of the public finances'. The view is that, under all conditions except the immediate aftermath of a financial crisis, government deficits are inflationary (either through setting off inflationary expectations, or through crowding out private businesses, raising their interest costs). While empirical evidence suggests that this is nonsense, and that the circumstances in which government deficits are inflationary are exceptional, we still retain the dogma that the public purse must be protected at all peacetime cost.
The drums are beating once again for policies to raise interest rates; refer Monetary Stimulus Reduced (RBNZ) and Interest rates and inflation - shifting sands, what next? (Radio NZ). Rising interest rates will only aggravate inflation pressures in the short term, and they will create new rounds of financial and social distress in the medium and long terms. They will not do anything to resolve current labour-shortages and supply-chain problems. And they will probably only add to house-price inflation, as finance moves out of productive businesses and further into lending to people holding secured assets. People expecting annual capital gains of over ten percent will not be deterred by mortgage interest rates of five percent or higher.
We only have to look at the period from 2004 to 2008. Rising interest rates then did huge damage to New Zealand's core tradable sector (think manufacturing, including high tech, and primary production) and really inflated residential property values. Money went into housing and land-banking, as it went out of core production.
We need to be more observant of history, including unfashionable history, and less entranced by institutionalised dogma.
I note that annual inflation in New Zealand has just jumped to 3.3% (from 1.5%); that's a quarterly rate of price increase of 1.3%, which some commentators may note is equivalent to an annual rate of 5.3%. (See Statistics' NZ: Consumers price index: June 2021 quarter, and Monstrous Inflation Shock, in the New Zealand Herald.) Yes, the inflation we are concerned about has started. We need to treat this by addressing its cause: labour shortages and supply-chain mayhem. Higher interest rates – and higher interest rate expectations – are not the solution.
Keith Rankin, trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland, New Zealand.