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On Luxon’s Landlord Myths, And The Needless Nightmare Of High Interest Rates

During the PM’s post-Cabinet press conference yesterday, Christopher Luxon claimed that renters will be feeling “grateful” for the way the government is putting “downward pressure“ on rents. Really. Allegedly, the coalition government is doing renters a massive favour (a) by giving landlords a huge tax break on the interest payable on the loans they took out to fund their property speculation and (b) by pulling back on the bright line test. According to Luxon, it will be renters who will benefit from landlords getting cheaper finance and being able to flick on their rental properties more quickly. Because landlords like to share.

Back in the real world, and especially in constricted markets like Wellington, many landlords have long been charging the maximum rents the market can bear. As has often been pointed out, many of them are in the rental housing business mainly to make untaxed capital gains. The rental income merely sustains them in the meantime.

Call me cynical, but landlords pocketing a handout is unlikely to result in spontaneous acts of altruism. If the bulk of landlords cared for their tenants, many of them wouldn’t be so reluctant to do the maintenance work and carry out the improvements to make their rental properties warm and healthy. Such costs should be absorbed by landlords as the natural price of running an ethical business. Instead, such costs are routinely passed on to tenants.

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At yesterday’s press conference, the high/low point came when Luxon quickly shut down an attempt by one journalist to find out if he - as a landlord himself – would be doing what he is claiming his fellow landlords will do:

Journalist: Will you drop the rent?

Luxon: That’s a decision for me, and my personal finances.”

Let's keep in mind the wider context for that exchange. Luxon is giving a huge tax handout to landlords – worth almost $3 billion on latest estimates - while preaching the need (to everyone else) of austerity, reduced public services and job losses. To conceal that contradiction, he is ascribing socially benign behaviours to landlords and mis-representing the way that many of them commonly treat their tenants. While doing so, he will not answer questions about whether his own actions will comply with his fluffy rhetoric.

That’s not exactly leading by example, right? If Luxon truly believed his own spin, he’d be dropping his rents, and urging his fellow landlords to do the same. Not happening.

The Erring Orr-acle

Over the last fortnight, trading banks have been engaged in a flurry of tiny, competitive interest rate cuts. In doing so, they’re largely ignoring our own Reserve Bank and – instead – are taking their cues from the Americans, given that the US Federal Reserve is likely to begin cutting interest rates by June, with us bound to meekly follow suit soon afterwards.

Yet in a rearguard action, Reserve Bank governor Adrian Orr continues to delay the inevitable, and talk up the need for eternal vigilance against inflation, despite the ongoing costs to households, and whatever the damage to his own credibility.

Not that Orr has come under much media pressure, not even after admitting in November that he has been trying to tip New Zealand into a recession. High interest rates are simply not a sexy issue. As the 24/7 news cycle flicks from one topic to the next, the constant worry and pain being imposed by high interest rates becomes mere background noise. It's hard to keep finding new angles on chronic pain.

Yet given that the decisions made by the Reserve Bank have such a serious impact on peoples’ lives, it is odd that the sweeping powers that have been surrendered to central bankers are rarely commented upon. In a democracy, why should the power to set monetary policy be handed over to an unelected official and his team? Shouldn’t a government be able to be held accountable for the mistakes made in the setting of monetary policy? As things stand… When the RB governor screws up, the buck stops nowhere.

It's not as if the RB governor exercises this power with much consistency, either. Back in the mid 1990s, then RB governor Don Brash would raise interest rates instantly at the first sign of economic growth – supposedly, in order to stamp out the demon fires of inflation, even when no sign of inflation actually existed. Ah, Brash would repeatedly explain, but my brief is not to look at economic conditions as they currently are, but at where the economy will be in 18 months time – because if left unchecked, inflation would surely by then have raced away like a runaway train.

Right. But now it's 2024, and in its infinite wisdom, the Reserve Bank has been doing the exact opposite for months. Look forward 18 months and there would be no reason to jack up interest rates, or hold them at their present levels. Ceaselessly though in recent months, the Reserve Bank has been scouring the economic landscape for any signs of the dying embers of inflation. Because now it isn’t where we’re going that matters to the Reserve Bank, but where we’ve been.

Allegedly, those embers could become a raging fire at any moment. And who cares if, in the meantime, lasting damage is being done to household finances and to firms trying to afford to invest, productively. In the real world, we are living in the shadow of (a) imminent public service job cuts and (b) AI’s disruption of white collar professions, and (c) the coalition government’s shredding of the welfare safety net. Regardless, the Reserve Bank has been doing its level best to ensure that household finances have entered 2024 with the least possible capacity for resilience.

What kind of economic theory treats the human sacrifice of rising unemployment as a sign of its policy success? Which do you think is worse (a) paying jacked up prices at the supermarket checkout (b) not having a job or (c) not being able to meet your mortgage repayments? We have come to regard an arbitrary level of inflation as the ultimate evil, and accepted (b) and (c) as the collateral damage. It needn’t have been that way. A couple of months ago, the celebrated economist Joseph Stiglitz described the conventional trade-off that’s been embraced by central bankers post-Covid, world-wide:

....Tight monetary policy, until workers felt enough suffering to cry uncle, accepting declines in living standards and lower real wages, thereby reducing wage and price pressures. Larry Summers most forcefully exemplified this position in a speech at the London School of Economics: “We need five years of unemployment above 5 percent to contain inflation—in other words, we need two years of 7.5 percent unemployment or five years of 6 percent unemployment or one year of 10 percent unemployment.”

This. as Stiglitz says, has been the mainstream wisdom since mid 2021: “Increase interest rates enough to raise unemployment and lower inflation to the arbitrarily selected threshold of 2 percent. In short: put the burden of adjustment [to Covid-related inflation] on workers.” As politicians weep crocodile tears about the cost of living crisis, essential household spending has been blamed for it, and workers have been used as cannon fodder.

There was always another school of thought, and – for a brief period in mid 2021 – the Reserve Bank followed it, before it suddenly began to gallop in the opposite direction:

The other school of thought [nicknamed Team Transitory] focused on the unique characteristics of the pandemic and the war in Ukraine—the way in which these events induced changes in where people wanted to live, and how they worked, as well as the extent of supply chain interruptions. Once the pandemic passed and markets had a chance to adjust, the surge in inflation would pass.

There is now little doubt that Team Transitory has won this debate, although victory took a bit longer than expected. The point of contention was not whether interest rates should rise above their near zero levels in order to offset the temporary effects of the pandemic stimulus. The real argument was over whether they had to be jacked up as high as they have been, and held in place for as long as they have been. The answer all around the developed world, says Stiglitz, is now a resounding “No.”

...,Once the predicted responses took hold, inflation came down more quickly, without the alleged necessary increase in unemployment. And no one, no one, should think that there is a risk of an inflationary spiral.

Here’s Stiglitz’s conclusion:

Seldom in history do we see such a quick test of alternative theories. We’re not fully out of the water and we’re still facing new risks...Just as no one could have predicted the Ukraine war in all of its dimensions, so too for Gaza. But we’re at a place where we in Team Transitory can rightly claim victory. And credit for this achievement goes not to the Federal Reserve and central banks around the world. Their mis-diagnosis of the problem, egged on by the other [conventional] school [has] imposed enormous, continuing risks on the global economy and on those least able to bear the weight.

In other words, just as our Reserve Bank overshot (with more justification) on its Covid stimulus package, it has now overshot again in the opposite direction, via the prolonged use of the OCR to combat what was always going to be only a temporary surge in inflation. Recent inflation has borne no resemblance to the early 1980s spiral that caused such enduring mental trauma to an entire generation of central bankers.

In sum, the economic and human damage that the RB has been doing – and is still doing - is disproportionate to the actual risk posed by the post Covid burst of inflation, which (in any case)had contributing causes left untouched by high interest rates. Supply chain shortages for example, created an opportunity for the supermarket duopoly here to jack up prices. Neither major party wanted to do anything significant about that. Shoppers copped it instead, both at the checkout and on their mortgages.

Think about that, as you sweat over making your bank loan repayments. The extent of the pain that households are still being forced to endure is in the service of an outdated and mis-applied ideology. A lot of the pain has been unnecessary. Surely now… It is time to take the power to set the Official Cash Rate away from the Reserve Bank, and give it back to elected governments.

Chris, Cross

Last year whenever Christopher Luxon wanted to show how sympatico he was with The People And Their Problems, he’d haul out that dire “Bills, Bills, Bills” song… Yet judging by Luxon’s visible irritation at yesterday’s post-Cabinet press conference, the original lyrics for this early Lynyrd Skynyrd track seems to speak more accurately to his current state of mind:

Don’t ask me stupid questions

And I won’t tell you no lies

[Like] what’s your favourite colour

And do you dig the brothers?

Its driving me up the wall

And every time I think I can sleep

Some fool has got to call...

Don’t ask me about my business

And I won’t tell you goodbye..

I said, don’t ask no stupid questions

And I won’t send you away

If you want to talk fishin’

I guess that would be okay....

Here’s Ronnie Van Zant and the classic Skynyrd crew doing an abbreviated, pissed-off live version of the song, from 1975...

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