Analysis by Keith Rankin.
Role: Economic historian.
Keith Rankin, 13 July 2026 – One way to entrench an ideology-motivated political policy – typically a solution looking for a problem – is to get the timing right.
We know from medical science that many conditions come right – heal themselves, without treatment – after a certain amount of time. This is true for many pathogen-caused conditions, which are resolved by the immune system. Likewise, orthopaedic conditions often heal themselves; they just need a bit of time, and common-sense routines on the part of the affected persons.
Economic ailments can be similar. Indeed the social science of economics is all about self-healing through market mechanisms. Often, but not always, the best thing to do is nothing. Economics is a wonderful and insightful social science; though it has had experiences of being highjacked by groups of people promoting narratives, often self-serving narratives which are beliefs passing as truths.
Two such economic ailments are recession and inflation. Recessions – unless being aggravated by some exogenous problem – are part of a business cycle. Hence they come, and then they go. The implementation of a policy during a cyclical recession may: hasten the recovery, have no impact on the recovery, delay the recovery, prevent the recovery, or turn a recession into a depression. A pre-emptive anti-recessionary policy may: prevent a recession, hasten a recession, or have no impact on subsequent events.
My focus here is on the two italicised cases. That an implemented policy may have no (discernible) impact on what happens afterwards. The important thing is if authorities implement what they say is an anti-recessionary policy during a recession, and the recession ends some time afterwards, they cannot (on the basis of ensuing events) conclude that the policy caused or contributed to the favourable outcome.
Likewise with a pre-emptive policy. If you say that you are doing something to prevent a recession, and a recession doesn’t happen, that does not in any way prove that your action was effective in preventing the recession which didn’t happen.
Inflation
Last week I wrote Interest Rates: Is the NZ Economy Presently Overstimulated? Scoop 9 July 2026. I criticised Wednesday’s monetary policy initiative by the Reserve Bank, raising interest rates pre-emptively to prevent, they said, a renewed bout of inflation.
I have one further comment about that policy. If there is no inflation next year (outside the 1%-3% policy target band), then last week’s policy may be lauded as a success; whereas the counterfactual – what would have happened otherwise – might have been that there would also have been no inflation. Or there might have been even less inflation had there been no rise in the OCR (Official Cash Rate); say 1% instead of 3%.
Further, if CPI-inflation goes up next year – eg sits at about 4% in 2027 – then the policy may still be lauded as a success, on the basis of claims that it might otherwise have gone up to 5% or more.
The point is that the anti-inflation policy hawks knew that July 2026 was a good time to implement an anti-inflation initiative, because the likely inflation outcome – which most likely would be what would happen anyway, regardless of the monetary policy intervention – could be presented as evidence that the policy did prevent inflation; that the outcome did justify the hawkish policy. In reality, an acceptable inflation – the most probable outcome regardless – would most likely be unattributable to the policy; the ensuing acceptable inflation would be what would have happened anyway.
New Zealand’s History
The classic example of this policy malfeasance – indeed it’s entered the international literature, including American economics textbooks, as a policy success – is the New Zealand Reserve Bank Act of 1989. This legislation continues to perpetuate the activist policy approach of repeated intervention to stop inflation; intervention against inflation despite there being no evidence that the policy has done anything other than create recessions.
In New Zealand the inflation of the 1970s and very early 1980s was clearly decelerating by 1984; indeed Treasury and other forecasts offered in the second half of 1984 suggested that there would be some return to inflation after the 1982/83 price/wage freeze, but nothing like a return to the CPI-inflation levels of 1979 to 1981; price increases linked to the 1979 Iranian Revolution, and the price of oil.
In 1985, however, CPI-inflation shot up, briefly, to 1979 levels. The clear evidence is that, under the new Labour government, it was partly due to high wage increases paid to unionised workers, a political quid pro quo. Any above-forecast inflation could always be – and indeed was – attributed to the previous government. (Don’t all governments in their first year – or first two years – blame the previous government when policy initiatives have adverse consequences?) Further, the very-high interest rate monetary policies implemented early in 1985 may have aggravated the unforecast 1985 ‘cost-of-living’ problem.
Yet in 1986, inflation came down again. So there was no case for the belief of the policy hawks that employers and employees were, in 1986, anticipating accelerating inflation. The clear evidence was that inflation in 1986 was decelerating, albeit after a 1985 boost that was not anticipated in 1984.
After that, the waters got muddied. GST (goods and services tax, a value-added tax) was introduced and implemented (at 10%) in October 1986. So CPI-inflation went back up in 1987, for another one-off reason. Once again, CPI-inflation went down in 1988; but it went up in 1989 when GST was increased to 12.5%.
It was in 1989, amidst thoroughly ‘muddied waters’, that the New Zealand Reserve Bank Act was implemented, requiring the Reserve Bank to set – one way or another – interventionist interest rates as a tool to manage inflation expectations. The claim was that New Zealanders, thanks to two decades of history, had expectation that annual inflation in the 1990s would be at or close to double-digit levels, and that inflation at those high levels would inevitably create expectations of accelerating inflation (ie hinting that hyperinflation was just around the corner if the Reserve Bank did not intervene).
It was all nonsense, and easily verified as nonsense. New Zealand’s inflationary trajectory in the 1990s was almost identical to the inflation trajectories of other countries which had not yet implemented inflation-targeting monetary policies. The only evidence offered that the 1989 policy was counter-inflationary was that inflation in the 1990s was significantly lower than it had been in the 1980s.
There was no nuance in the policy hawks’ narrative. No admission that 1980s’ inflation was very much ‘yo-yo’ in nature – due to a sequence of clearly identifiable one-off circumstances – and no admission that, except in a few very extreme cases in distant history (relating to individual countries, not the whole world), inflation is a decelerating rather than an accelerating phenomenon. The theoretical case as posited by the monetary hawks – that employers and employees would have inflated expectations of inflation – remained very weak both logically and empirically.
But this kind of interventionist policy was a core part of an ideology which then captured an influential and monied constituency. And by implementing the policy at a time when inflation was coming down anyway, the policy extremists were able to get away with pointing to the low-inflation aftermath and saying that it was their policy elixir which had brought low inflation to the world.
Further, because the commentariat was intimidated by the monetary hawks – who used lots of impenetrable, inappropriate and irrelevant mathematics and jargon – too many commentators and politicians simply went along with what these experts (the ideologues) said was true. (We note that the experts on witch-burning were the witch-burners!) For academics and bureaucrats, the easier life – the successful career – is had by joining rather than opposing the groupthink; soon enough, a new generation is taught by the previous generation of groupthinkers. 2020s’ economists were taught in large part by 1980s’ groupthinkers.
Summary
Narrative-building by interested parties may be built on a tactic of repeatedly proposing a favoured policy intervention, and managing to get it implemented when what you say you want to happen is most likely to happen regardless of the policy. Generally, policies of ideology are solutions waiting for apparent problems; policies that justify themselves through certain problems (commonly overstated problems) but that really serve other undisclosed purposes.
If authorities intervene when the object of their intervention is already self-resolving, then they cannot claim to have performed an effective intervention. But they generally do make that claim! And get away with it.
About the writer:
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.