Analysis by Keith Rankin.
In Question Time in Parliament, yesterday, Finance Minister Nicola Willis was asked a question about the extent of the cost of government debt-servicing. The answer, in short, was ‘a lot’; and she mentioned that the cost had been assessed on an interest-only basis.
The ensuing round of supplementary questions never got to establish the contribution of the Reserve Bank’s high interest monetary policy (since late 2021) to the increased cost of government debt-servicing.
(We should note that New Zealand has one of the lowest government debt profiles of any advanced-nation economy. I also note that, when discussing the Air Force’s Boeing 757 crisis, Judith Collins noted that New Zealand has an aspiration to be a high-income country, before ‘correcting’ herself to say that New Zealand is a high-income country. New Zealand’s problem is the rate of interest, not the extent of government debt.)
We need to note that the first thing this 2023 coalition government did (in December) was to tighten the Reserve Bank’s ‘anti-inflation’ mandate. So, there can be little doubt that present ‘high interest rates’ represent core government policy, and not simply an independent monetary policy which the government has to contend with.
Raising Costs to Reduce the Cost of Living ?!?
‘Raising costs to reduce costs’ is monetary policy orthodoxy, with the context of reducing the cost of living being to have a lower cost of living than would otherwise be the case.
Interest rates represent the ‘cost of capital’, just as wages represent the ‘cost of labour’. Raising the cost of capital to suppress a ‘cost-of-living crisis’ is as counterintuitive as it would be to order an increase in wages to suppress the said ‘cost-of-living’ crisis.
(I would like to note here Chris Trotter’s 29 Feb piece The Clue Is In The Name. Trotter notes that, in 1936 when the National Party was formed, it should really have been called The Capital Party. Labour and Capital were the juxtaposing parties in the economic class war. It would be in the nature of the Capital Party to call for increases in the price of capital, just as it would be in the nature of the Labour Party to call for increases in the price of labour. But the Capital Party in 1936 would not have regarded higher capital costs as a means to reduce the cost of living.)
How does the National Party get away with its policy to jack-up the cost of capital as a cost-cutting measure? (In a free-market economy, interest rates should be set by the market, not by the authorities.)
Why does anyone think that raising interest rates does not aggravate a Cost-of-Living crisis?
Stupidity might be one answer. This National government certainly acknowledges that the high cost of capital aggravates its cost-of-living crisis; so why not apply that reasoning to the country as a whole, especially mortgagors and small businesses?
But the answer to the question goes back to the 1980s. It was only the Social Credit Party then that called out the National and Labour governments for allowing (or actively using) high and rising interest rates to aggravate CPI inflation. And Social Credit was laughed off the stage.
The argument against Social Credit’s assertion then was that interest payments were a comparatively trivial part of a nation’s business costs. Indeed the system of national accounts understates interest costs. In the national accounts, interest is only treated as a cost inasmuch as bank interest margins represent the trading profits of banks. What the system of national accounts covers-up is that interest acts as a transfer mechanism from poor to rich, from small businesses to large businesses; while interest is a cost to some, it is a benefit to others. A ratchetting-up of interest rates this decade represents a massive increase in the scale of poor-to-rich transfers.
The position of the 1980s’ monetarists was that interest rates were a demand-management mechanism, and not a cost of business. The monetarist position was later enhanced by the ‘rational expectations’ theory; the idea that once there was a CPI inflation in place, economic ‘actors’ would expect an accelerating process of inflation to ensue unless drastic deflationary policies were quickly implemented. Indeed, monetary policy as has been pursued by Reserve Banks since the 1990s (and the RBNZ since the late 1980s) has been a shock demand-management tool that in practice has been at best ineffective in achieving its stated goals – from the late 1980s, CPI inflation was coming down anyway – though powerful in achieving its unstated redistributive goals.
Easy monetary policy – sustained low interest rates and quantitative easing – neither produced inflation in the 2010s nor in the late 1930s, as the monetarists expected it would.
In my own teaching of macroeconomics at Unitec, I had little choice but to teach the monetarist and rational expectations’ theories which presented monetary policy only as a demand-management tool. But I did encourage my students to take a critical view of the textbook and other material they consumed. And I always rewarded them in essay-marking if they commented on the possibility that rising interest costs were a part of the inflation-problem rather than the unquestioned solution to a cost-of-living crisis.
Full Circle
The new government has re-invented the Social Credit position from the 1980s. But government people are not joining the dots. National continues to believe that raising the cost-of-living is the best (if not the only) way of lowering the cost of living. And (intellectually lazy) Labour is not contesting Capital on this point.
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Keith Rankin (keith at rankin dot nz), trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland, New Zealand.
