I heard this on RNZ News 11am 12 Feb 2026:

“The government’s finances are in better shape than expected due to lower [government] spending and a higher tax take. Treasury figures … show a deficit of $5.2b for the six months ended December, almost $1.6b below the half-year forecast. The tax take was $138m higher, while expenses were about $1b lower, because of lower spending on core government services: health, housing programmes, and the cost of carbon units. Net debt was slightly lower than expected, at 43.5% of the value of the economy.”

It was framed as good news, or at least as “better” news: government spending less than expected (despite the many dire needs for more, better funded, government-funded services and infrastructure) and a higher tax take (despite the needs of many people to have more spendable dollars).

I mention this quote from economic historian Adam Tooze, from his 2018 book Crashed, re the downward spiral that arises from policies of fiscal consolidation.

“Not only was [Greece, in 2010] slow to push through the changes the Troika demanded, but when it did the results were counterproductive; in a classic Keynesian downward spiral, demand fell and unemployment surged further, reducing incomes.”

We note that when private incomes are reduced, then income tax receipts are also reduced, meaning government income is reduced. (In idiomatic vernacular, this is known as cutting your nose to spite your face. “The idiom is often used in political and economic commentary to describe actions by a political actor, party, corporation or nation that appear to damage the actor’s own interests”.)

New Zealand is lucky at the moment in that it is benefitting from record high terms of trade – external stimulus, a commodity-led export-led boom – which is to some extent offsetting the fiscal doom loop that Tooze describes.

What will happen when those record-high export receipts fall-off? Tooze tells us: “a classic Keynesian downward spiral”.

Note that Greece was doing these policies, not out of political free-choice but because the EU Troika demanded that Greece follow this counterproductive policy path. At least Greece resisted, conferring upon itself some dignity.

New Zealand is today implementing similar policies; partly because the government is nominally free to choose, but also because it is heavily influenced by the false narratives peddled by another powerful Troika: the New York troika of Standard and Poor’s, Moody’s, and Fitch. New Zealand governments would rather lose elections than get on the wrong side of these big three.

Democracy or empire?

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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.

RNZ news item, 12pm 9 Dec 2025: “Finance Minister Nicola Willis has challenged one of her predecessors Ruth Richardson to debate her on how to best manage the country’s finances. Our political reporter Anneke Smith has more: ‘The taxpayers union is poised to launch a pressure campaign targeting Nicola Willis in a campaign to convince the finance minister to cut spending and reduce debt. Ms Willis says it’s clear the campaign is being driven by Ms Richardson, chair of the Taxpayers Union; and she has a clear message for her, “Come and debate me face to face, come out of the shadows, I will argue toe for toe on the prescription that our government is following. I reject your approach, and instead of lurking in the shadows with secretly-funded ads in the paper, come and debate me right here in Parliament.” Ruth Richardson says that the Taxpayers Union is simply doing its job by challenging the government to address its finances. “We are seeking to hold the feet of the Minister of Finance to this fiscal fire. Her Treasury are shouting ‘Fire! Fire! we have a structural deficit, this cannot go on, it needs to be addressed.” Ms Richardson laughed when RNZ asked her if she would debate Ms Willis, saying it was up to the Minister of Finance to front government decisions.'”

The narratives on the classical right and the fuzzy right

Where are the libertarian right and the fuzzy right coming from? There must be more to their visions than ‘balancing the books’; in Victorian times, families might balance their books by selling their children.

What are the narratives which these actors are speaking to? Who are the defunct economists whose ideas are driving them? There are actually three narratives of the liberal conservative right. Present Minister of Finance Nicola Willis represents the fuzzy fudgy right. Ruth Richardson represents one purist branch of the classical right; the other is represented by former United Kingdom Prime Minister Liz Truss.

Note this oft-quoted (and, here, slightly massaged) passage from John Maynard Keynes’ General Theory (published 1936): Practical [wo]men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Keynes used the word ‘practical’ with irony. One intellectual ancestor who Ms Richardson may not be aware of was the prolific Mrs Marcet, (b.1769 London, d.1858 London) who was praised by Jean-Baptiste Say as “the only woman who had written on political economy and shown herself superior even to men”.

We note the context that the present recession (in terms of total fall of per capita GDP, and duration of fall) is now understood to be the second-worst in New Zealand since the Great Depression (1930 to 1935 in New Zealand). The worst since 1935 is unquestionably that which peaked in the early 1990s, and was very much associated with the fiscal governance of Ruth Richardson. We should note that a structural recession, also known as a balance-sheet recession, is an extended period of near-zero growth which typically follows an initial fall of economic output and income.

Dramatis personae

Four defunct economists feature in this story about Richardson, Willis, and Truss; all four associated with the first two decades of the nineteenth century: Jean-Baptiste Say, James Mill, David Ricardo, and Thomas Robert Malthus. In the chronologies relevant to most people alive today, these four men are all very much defunct (and pre-democratic in outlook), though their ideas are increasingly driving western economic policy today. They are the founding fathers of the classical school of economics. (Mrs [Jane] Marcet was the midwife.)

Today there is a curious kind of intellectual Benjamin Button process going on, with the most important post- industrial revolution contributions to economic policymaking (those of Alfred Marshall, 1890, and Keynes, 1936) having been unpeeled, with the most recently written (Keynes) having been unpeeled first. Intellectually, economics – or at least the loudest economic narrative – is moving backwards in time.

The unpeeling process has further to go. The mercantilist economics of DJT precedes the classical political economy which became fully formed in the 1810s’ decade; and it precede the partial demolition of mercantilist economics undertaken by Adam Smith in 1776 (The Wealth of Nations). And it precedes the scientific revolution most associated with the name of Isaac Newton. The heyday of mercantilist ‘thought’ was the first half of the seventeenth century. (The most mercantilist of organisations in history were the Dutch East India Company, which ‘discovered’ New Zealand in 1642 [and subsequently named it, along with New Holland to New Zealand’s west], and the Dutch West India Company, which founded New York in 1624; these companies’ narratives give the best possible insight into the strategic thought of the current United States president, a man of New York, and his acolytes.)

The paradigm of classical economics was formed from 1798 to 1823, mainly in England; formed during the peak years of the Industrial Revolution, but almost completely without reference to (and with minimal application to) the dramatic economic events (also mostly in England) of that quarter-century.

Aggregate spending as a driver of economic growth

The central issue in New Zealand’s economic politics today is about whether (and how) aggregate spending is a driver of economic growth. The Richardson supply-side version, which denies that aggregate spending has any role, falls directly in line with the doctrine of the godfather of classical economics, James Mill, and his mentee David Ricardo. The Truss version, however, follows Malthus in his later dispute with Ricardo, and represents what has been popularly known since the 1970s as trickle-down economics. Conservative and centrist western policymakers today mostly follow a fuzzy fudge version of classical economics, where they selectively allow for increased aggregate spending to facilitate economic growth while disavowing the role of central government as an autonomous spender.

The first principle of classical economics is called Say’s law (of markets); though it could have been called Mill’s Law, and its ongoing presence in liberal-conservative economic narrative is more due to Mill’s role in overseeing the classical economics’ project than to Say after whom the ‘law’ is named.

Say, in looking for an argument to show that a general glut (the term then used for a recession) is impossible, noted that aggregate income must be equal to aggregate output, and believed that all income must be spent (on that output) in one way or another. He understood an apparent glut (ie unsold goods) to be a simple mismatch between what goods people produced and what other goods they wanted to buy. In other words, Say argued that an apparent excess of output was equally matched by a less visible shortage somewhere else. (In subsequent neoclassical economics, most associated with the name of Alfred Marshall, it was the price mechanism of markets which would resolve such an apparent glut, by providing the information required to ‘signal’ to firms what they should be producing.)

In the days of Say and Mill, it was true that producers blindly supplied goods to the marketplace. Today’s world is very different, as most of us do understand. Today, the norm is to produce goods and services for the market; in other words, today’s producers directly and indirectly respond to market forces. Today, when people buy more, firms respond by producing more. The connection between prior spending and output has become so obvious; yet few push back when economic policymakers and liberal conservative commentators repudiate that connection by constantly promoting the supply-side mantra of ‘increasing productivity’. (In reality, firms most increase their productivity when they have more customers, not when they reduce their costs. Henry Ford raised rather than cut his employees’ wages!)

Say’s law is easily repudiated; just look at any basic Economic Principles textbook. We see that some income is saved rather than spent, and that some previously saved income is spent; there is no necessity that the two will cancel out. As a result, much spending is (necessarily) a result of lending, and there is no simple relationship between saving and lending. It turns out that banks and governments act as pumps and sumps. If they don’t pump enough, then there will be a ‘general glut’, a recession; there will not be enough spending to buy everything that people would like to produce, and maybe not enough to buy all that they have produced. Falling prices (deflation), a possible consequence of insufficient spending, acts as a further deterrent to spending; that’s what happened during the doom-loop we now know as the Great Depression. (Irving Fisher described a debt-deflation spiral; when debtors stopped spending in order to repay debts, there became too little aggregate spending, meaning that prices and incomes fell and debts increased relative to incomes.)

Ricardian economics – named after its most precise theorist, David Ricardo – includes Say’s law of markets as a core axiom. Another core axiom was Malthus’s theory of population; first published in 1798. The central idea was that wages could never permanently rise above the level of absolute subsistence, because whenever wages did increase to higher levels then fertility would increase leading soon enough to competition in the labour market sufficient to beat wages back down to subsistence levels.

A third premise was that profits fall as rents increase; rents would inexorably increase as rising populations forced capitalist tenant farmers to rent lands of decreasing quality, meaning that the better lands would command higher landlords’ rents. (Famers, the quintessential capitalists in the Ricardian system, could slow down this profit decline by increasing their productivity.) The argument depended on competition between tenant farmers, comparable to competition between wage workers.

The end result of classical economic growth would be a dismal stationary state in which only landlords (the one-percenters of ancien régime times) would have access to discretionary income. The sociology which accompanied that perspective on agricultural capitalism was that the early capitalists would seek to acquire land and become one-percenter landlords; in the classical system, farmers had displaced merchants as the archetypal capitalists.

(David Ricardo was a particularly successful specimen of capitalist, though neither farmer nor merchant; he was a financial capitalist and speculator, who made sufficient money to acquire for himself the Gatcombe Park estate, now the country residence of Princess Anne. War times generally provided better opportunities than peace times for speculators to make fortunes; the backdrop to classical economics was the Napoleonic Wars – effectively World War Zero – which featured the most glorious years of the British Navy.)

Malthus’ contribution to classical economics went well beyond his renowned theory of population; the theory which begat the concept of the tragedy of the commons. That tragedy is playing itself out today, through both escalating military conflicts and the barely restrained use of fossil fuels; nobody is making the news today by advocating ‘green warfare’.

Malthus became the first dissenter, among classical political economists, to Say’s law. He argued that general gluts were perfectly possible, and that aggregate spending did need to be topped-up under certain circumstances. Malthus favoured policies such as debt-relief and tax-relief to landlords, so that they could buy more luxury goods, thereby helping to keep servants and the like employed and fed.

None of the classical thinkers came close to understanding that, in a mature industrial economic system which focusses on the mass production of consumable commodities (later known as ‘wage goods’), wage workers would need to have a sufficient share of overall income to be able to buy the mass-produced goods which they made. They should have. The John the Baptist (ie precursor) of classical economics – Adam Smith – made a detailed description of a 1770s’ pin factory; Smith had more to say about mass production than did the founders of the classical school.

Malthus, by favouring a stimulus which directly favoured the rich, became the founding father of trickle-down, the variant of liberal conservative economics favoured by Liz Truss.

In the meantime, namely the 1970s and 1980s, new classical economists (including Robert Barro, a sometimes visitor to New Zealand in the 1980s and 1990s; who I and colleagues lunched with on one occasion in Auckland in the 1990s) rediscovered a more technical version of Say’s Law, and called itRicardian Equivalence in honour of David Ricardo.

The pure classical school to which Ruth Richardson adheres uses the Ricardian Equivalence argument to claim that, at best, extra government spending makes no difference to the rate of economic growth. She is of the school of Mill and Ricardo that supply always creates its own demand, and that – exempting a few essentials such as national defence and the law courts – government spending simply crowds out allegedly-superior private spending.

The fuzzy Willis fudge

While Prime Minister Luxon inclines towards the ‘making-money’ mercantilist economics of DJT – mining, exporting, and acquisition of resources through one-sided deal-making and military threats; Luxon clearly emphasises exporting – his Finance Minister Nicola Willis is much more in tune with Treasury’s liberal conservative macroeconomics.

While essentially schooled in the new classical macroeconomics of the 1980s, and increasingly sceptical of the market-corrective economics of Marshall and his disciple Arthur Pigou, Willis adopts an ambiguous attitude towards the general proposition that more spending generates higher levels of GDP (gross domestic product) than would otherwise occur.

This Treasury view values foreigner-spending; and business-investment spending, believing that firms should invest liberally in cost-cutting techniques even if consumer markets are weak and getting weaker. Generally, the Treasury view substantially underplays the ways that working-class consumer spending and government spending can revive a stagnating economy.

But Treasury points to monetary policy as a source of stimulus. In the old days monetary policy as a stimulus meant a stimulus to new business borrowing and the funding of consumer durables through hire-purchase. Nowadays, this ‘price effect’ of monetary policy is understated. Rather, the story we hear is that ‘mortgagors will spend more when they refix their home loans at lower rates’, and that new spending by relieved mortgagors on middle-class goods will prove to be a critical factor inducing economic revival. This is called an ‘income effect’; traditionally neoclassical economics has downplayed income effects while upplaying price effects. The change we see today represents part of the disavowal of neoclassical economics, and the Benjamin Button style return to its predecessor, classical economics.

The supposition is that rational mortgaged homeowners will spend more when their mortgage liabilities decrease (including when the equity in their homes is decreasing as a result of ‘softening’ house prices), because their disposable incomes have increased. Yet that same rationalist logic is almost never applied to governments. We should be hearing Nicola Willis saying, now that interest rates are much lower the government can and should borrow and spend much more. But we are not hearing that. It worked in the late 1930s – increased government spending was very popular with households and businesses, and annual economic growth reached double-digit percentages – but is not even being considered today.

Despite what Ruth Richardson says, Nicola Willis is an austere money-woman.

Richardson is obsessed with the fiscal deficit. But the deficit is the result of our present recession, not the cause of it. (Look at the section on automatic stabilisers in the economics textbook.) Ricardian equivalence, if it truthfully applies under any circumstances, certainly does not apply to an economy in the midst of a recession. Arguably monetary policy is enough to get an economy out of a normal recession (a ‘gumboot recession’?), but spending by government (or some other ‘countercyclical players’) is the only known method of getting an economy out of a structural recession. (The only known method, that is, other than waiting for an export recovery. We’ve had our export recovery since 2024; so far it has not been enough, and is unlikely to bring the New Zealand economy back to its counterfactual growth path.)

The political problem is that you cannot simultaneously repudiate Keynesian economics and implement it. Unless you fudge it, of course!

The Debate?

Will Richardson and Willis have a media debate this week? I’m guessing not. If it does happen, will Ruth Richardson talk about the merits of Ricardian Equivalence? Probably not; but if she is to be honest, she must tell us that it is the concept at the core of her macroeconomic belief system.

At least Willis is a pragmatist, of sorts. Richardson and Truss are classical dogmatists, standing on opposite sides of the Ricardo-Malthus controversy.

(If the money-women have time to swot-up on their defunct economists, a debate could probably be hosted at short notice by the New Zealand Society for the History of Macroeconomic Thought. Thursday-week at the site of Unitec’s Penman House; “feet to the fire” not compulsory, bring your own umbrella and hose. We could invite, from London, Liz Truss; and a descendant of Charles Dickens who could reflect on the political economy of high-density housing. Complimentary screening of Christmas Carol the musical if a power source can be arranged.)

By the way, the way to remove the fiscal deficit is to invest in economic growth. Governments, like businesses, have to spend money to make money. Say’s Law is old hat. What is your real agenda, Ruth?

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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.

TVNZ’s special programme on Tuesday (News Special: You, Me and the Economy; 25 November 2025) included (about two-thirds of the way into the programme) among a number of helpful and unhelpful suggestions, a call for New Zealanders to get onto the compound interest bandwagon, the magic formula of getting rich in the never-never through thrift. Jam tomorrow, never today; which seems to be our main narrative towards fixing the West’s economic woes.

The spokesperson for compound interest on the program sort-of acknowledged that ordinary compound interest (ie “conservative” compound interest) was hardly good enough; she pushed for an amplified “high growth” version of compound interest.

She was correct, if understated, on her point about conservative returns.

Ordinary Compound Interest

If we go back 100 years, to 1925, the equivalent of today’s minimum wage was $120 per year. If a person saved $120 then, and allowed it to compound (say in the form of a one-year bank term deposit) through to 2025, an average after-tax interest rate of 4.23 percent would have been required to make that ‘investment’ worth $7,540 today. $7,540 represents compounded CPI inflation over those 100 years. Thus, in principle, $120 (actually £60) would have had the same purchasing power as $7,540 today. In reality, the average term-deposit interest rate over the last century was well under 4.23 percent before tax, let alone after tax.

(We note that tax on interest is charged at a person’s marginal rate – commonly known as the secondary tax rate – and is nowadays withdrawn at source. For most of the last 100 years, tax on interest was more easily evaded, and it was paid separately, meaning that the compounding appeared to relate to before-tax interest income.)

In 1925, $120 per year supported, in many cases, low-income families. Imagine any family trying to live on an annual income of $7,540 today! The better way of evaluating past compound interest is to compare the compounded present value with today’s annual minimum wage, which is $48,800. For $120 in 1925 to compound to $48,800 in 2025, an average after-tax interest rate of 6.2% would have been required. That’s vastly in excess of what term deposit interest rates actually were, on average.

We should note that an average interest rate of seven percent would have compounded the $120 term-deposit to $104,000 today, and that an average interest rate of eight percent would have compounded the $120 term-deposit to $264,000 today. So, the magical exponential outcome of compound interest can occur, but only if the interest rate is sufficiently above inflation (ie above the compounded growth of prices); or, more pertinently, sufficiently above the compounded minimum-wage rate.

Other starting years

My calculations show that if the approximate minimum wage was invested in 1935, an after-tax average interest rate of 7.1% would have been required to achieve today’s minimum wage. (Wages were about twenty percent lower in 1935 than in 1925.)

In late 1970, I was earning seventy cents an hour milking cows every Sunday morning. That was about the minimum wage then. In 1980 I was in a well-paid IT job, earning $13,000 per year, which was more than double the before-tax minimum-wage-equivalent of the time. I have estimated annual minimum-wage equivalents for those years of $1,500 (for 1970) and $5,000 (for 1980).

For $1,500 in 1970 to compound to $48,800 in 2025, an average interest rate of 6.54% would have been required. For $5,000 in 1980 to compound to $48,800 in 2025, an average after-tax interest rate of 5.19% would have been required. (For the 1980 example, a before-tax annual average interest rate of about ten percent would have been required for such 1980 savers to have achieved three times today’s minimum wage.)

For a $30,000 term deposit in 2015 (again, set close to the minimum wage), an average after tax interest rate of five percent would have been required to compound that amount to today’s minimum wage.

Today’s one-year term deposit rate is 3.4% before tax, 2.4% after tax (applying a secondary tax rate of 30%). A $30,000 minimum-wage term deposit in 2015, compounded for ten years at today’s rate, would now be worth $38,000; well under today’s annual minimum wage (for a 40-hour per week job) which is nearly $49,000.

In the last 80 years, many people did make investment fortunes; but through property and other debt, not through saving.

Target Audience

We note that the target audience for this compound-interest narrative is young adults, because compound interest – like Mainland cheese – takes time. Most young adults in New Zealand today can only afford to save in this way if the money is taken from them ‘at source’ (eg through KiwiSaver), and then (if they are trying to live independent lives) they have to incur higher levels of debt than they otherwise would to be able to make those obligatory savings. Further, employer contributions to KiwiSaver are very much a part of the cost of labour, and are therefore factored in with employers offering lower wages than they otherwise would; after-tax employee remuneration is just a part – albeit a large part – of labour cost.

“High Growth” Compound Interest

The above simple mathematics show why the savings industry is trying to push products that simulate high-growth compound interest. In the years before 2008, and in the mid-2010s, these products rode the property bubble wave. Those ‘investments’ now appear rather naïve. But the industry of professional optimism always looks forward; it almost never looks back.

Today, amplified compound interest is (allegedly) being achieved through riding the world’s stock markets, with an emphasis on military stocks and ‘tech’ stocks (especially those of the ‘AI’ companies), and on cryptocurrencies. The ‘tech’ stocks (which the New Zealand Super Fund is highly exposed to) are one modern-day equivalent of mining-company shares; shares which historically have been amongst the most volatile. And crypto-currency mining is the virtual – and equally unsustainable – equivalent today of gold-mining as in the days of the Klondike, Ballarat, and Tuapeka gold-rushes. (Re gold rushes, 2025 is a global gold-rush year, though the years of the individual undercapitalised goldminer-made-good are in the past.)

Speculations on AI, Bitcoin, or African gold are no more routes to financial security or future abundance than is prosaic money-losing compound interest.

What are they thinking?

Compound interest without compounding economic growth.

We have to think about the compound interest narrative in two contexts, that of a static economy, and that of a perpetually growing economy.

The basic idea of a static economy is that there is no inflation nor economic growth. To keep it simple, imagine no population growth as well. And no taxes.

The mathematics of compound interest in this case are real. If you were able to save a sum of money and to wait for it to compound at two percent per year, you would more than double your money after fifty years, and increase it tenfold in less than 120 years. These gains to you and your entitled grandchildren would be fully funded by some other people and their impoverished grandchildren; every dollar of interest received is paid by someone else. It would be a zero-sum game for society; for every winner there would be a loser.

To propose compound interest like this sounds ludicrous, and it is. But, the whole object of monetary policy in New Zealand and like countries is to create a world in which the rate of interest is about two percent higher than the rate of inflation. That is precisely what I have described here. To achieve that goal, monetary policy ends up creating a structural recession, a perpetual state of zero economic growth; ‘green shoots’ only appear when the rate of interest is allowed to fall to at or below the rate of inflation.

In reality, compound interest has always been for the few, not the many. It’s an accounting trick that depends on the majority of the beneficiaries of compound interest never realising their apparent gains; never spending their paper bonanzas. Paper wealth can be converted to real wealth by just a few. Paper wealth – financial claims – can be inflated, infinitely, so long as it remains just that; paper wealth or its digital equivalent.

Compound interest with compounding economic growth.

The advocates of compound interest will respond by saying that compound interest depends additionally on economic growth, real economic growth.

In this story, there are two versions: either compound interest parasitically exploits economic growth, or it enables economic growth. Either way, the supposition is infinite exponential growth.

The simplest scenario here is of an economy with zero inflation, zero population growth, two-percent annual interest, and two-percent annual growth of real GDP. So, in this case, the two-percent compound interest simply represents the fruits of that economic growth; the only debtors would be firms, not households. In principle everyone could be doing it; the interest payable to every household would be paid by business growth.

There are two obvious problems. One is that real exponential growth cannot go on forever. If average real incomes today had been growing by two-percent per year since the early days of the Roman Empire, today we would on average have living standards 16 million trillion times greater than those of Jesus Christ and his Disciples.

The illusion (really delusion) of long-term sustained economic growth has been made possible by early-modern humans’ learning to extract energy in the form of fossil fuels, and to dump waste products into the environmental commons. Late-modern humans could have invested – financially and intellectually – in systems to maintain high living standards beyond the fossil fuel age; but haven’t. Our home planet, though forgiving in many respects, is finite.

The other obvious problem is that if too many households are saving rather than spending much of their incomes, then there would be insufficient demand for final goods during the long period of saving. This kind of saving behaviour breeches Say’s Law, which is the basis of the belief-system of classical-liberal supply-side economics – manifest today as neoliberalism. Say’s Law supposes that policymakers do not and should not concern themselves with matters of ‘upside demand’ – aka ‘stimulus’. Nor should they concern themselves with ‘downside demand’ – aka ‘counter-stimulus’ – yet that’s exactly what we got with the openly touted manufactured recession created by the Reserve Bank of New Zealand from 2021. (Refer Adrian Orr admits Reserve Bank is ‘deliberately engineering recession’, Stuff, 24 November 2022.)

The required economic growth would not continue, because there would be insufficient demand for the extra output; demand is created by the creation of and spending of claims, the prerogative of sovereign governments and of banks.

Saving must be balanced by investment; too much saving disincentivises investment spending, sometimes dramatically so. We can see that, the reason for today’s weak investment climate; so we depend on the Deus ex machina (or cargo cult) of exogenous foreign demand. Exports featured prominently as the principal narrative of You, Me and the Economy.

The other mantra word is ‘productivity’. Most cafes do not need more cost-saving devices to improve their productivity; rather, to improve their productivity, cafés need more customers.

See Our inability to understand the exponential function is our biggest weakness, YouTube, posted by Professor Albert Bartlett about a month ago. All exponential growth, in nature, ends; sometimes catastrophically.

Finally

Why don’t the people we believe to be experts tell us these things? Could it be that the experts we most see and hear are experts in the arts of storytelling and story-marketing; in this case, experts in the fantasy rather than in the reality of growth? (Refer Greta Thunberg’s radical climate change fairy tale is exactly the story we need, The Conversation, 28 September 2019.)

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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.

Labour Party Policies

Last month the New Zealand Labour Party announced two policies: a second sovereign wealth fund, and a capital gains tax on non-owner-occupier real estate. For me, both are worrying, representing further steps in the financialisation of an already over-financialised economy. Then yesterday, I heard a story (Report highlights benefits of Kids KiwiSaver scheme, RNZ 13 November 2025) about a group philosophically in tune with the Labour Party lobbying for compulsory KiwiSaver accounts for children; accounts to be opened at birth (and presumably, for those not born in New Zealand, from the date of their being granted permanent residence) and subsequently subsidised. Further promotion of KiwiSaver would be a third financialisation policy.

To understand the issues that I am concerned about – issues about capitalism as understood by mainstream western parties including, indeed especially, Labour parties – a useful metaphor is a ‘mansion’. Our mansion has four spaces: a downstairs commons, a mezzanine, an upstairs casino, and – at the top – a penthouse. The spaces become progressively less inclusive with their elevation.

We note that Aotearoa New Zealand has, since the mid-1980s, become the world’s poster-child for neoliberal finance capitalism. And many, including myself, would argue that New Zealand’s relative (and now absolute) economic decline since the 1980s has been due to its even greater commitment – compared to other western capitalist nations – to the neoliberal financial project.

The Mansion

Money circulates in the downstairs commons (the real economy where goods and services are demanded and supplied) and the upstairs casino (where existing assets are traded, and where derivative assets are created). The casino has an exclusive penthouse annexe – an upper casino – for high rollers.

To our metaphorical mansion we may add a mezzanine, consisting of the government and the banks. We can think of these as regulating the flows of money between the commons and the casino. Money is a special kind of asset – a liquid asset – which flows throughout the mansion, facilitating all the different kinds of trade which take place there. The mezzanine is an active mediator; a pump, a valve, and a sump.

Markets in the commons are primary markets; places where goods and services are produced and bought. Markets in the casino are secondary markets; the casino is a place of trading and speculative gambling. The mezzanine connects the two principal spaces within the mansion.

Though I’m mainly concerned here more about the normal casino, not the penthouse, there is a narrative common among many Labour policy people – many of whom are nine-percenter elites, people in the political class who are not one-percenters – that the ills of society can be placed upon the one-percenters, the penthouse dwellers. These Labour people want the penthouse to be super-taxed, regarding the penthouse as both a fount of grabbable wealth and a place of entitled behaviour. Tax the bads, not so much the goods; and tax capital, not labour. They say. Tax the high-rollers and the landlords. The one-percenters have become a scapegoat for capitalism’s economic failings, allowing the nine-percenters to bask in a bourgeois bubble of self-declared virtue.

Generally, a policy of taxing ‘bads’ for the purpose of raising public revenue must be a policy of supporting those bad activities in order to protect the bad revenue stream. (An ideal tax on bads will generate zero revenue, because it will eliminate those bads.)

While the mansion is a metaphor for a nation’s grand economy of outputs, markets, and money, we note the complication that money also comes and goes through the front and back doors; out of and into other nation’s economies. (While this complication is not unimportant, we can pull away from this by considering the global economy as a complex of commons, casinos, and mezzanines; but no entrances or exits. The global economy is a closed economy. For my purposes here, so is the mansion economy.)

Relationship between the Commons and the Casino

When inequality is high or growing, more money flows from the working classes to the top-ten percent – the ten percenters – than flows the other way; the casino grows faster than the commons. Much of that money being pumped upstairs is profits, royalties, rents; including managerial ‘profits’ in the form of oversized salaries and bonuses. This is income saved rather than spent, meaning it migrates from the commons into the casino.

A significant proportion of income goes into the mezzanine: taxes, savings, debt-repayments, interest payments. Banks and governments then make key decisions about cycling such income back (ie downstairs) into the commons – the economy – or forward (ie upstairs) into the casino. Or it may sit, parked, in the mezzanine.

Thus, the mezzanine has monetary conduits into both commons and casino. Governments spend and save and borrow. When borrowing, governments issue new bonds which are subsequently traded in the casino; but the money raised is generally spent, by the borrowing government, into the commons. Banks may lend to either the commons or to the casino. When, in the judgement of the banks, the economy of the commons is not looking too flash, the profit-seeking banks will lend less to the commons (meaning lending less for the purpose of spending, including genuine investment) and more to the casino (meaning lending more for the purpose of ‘investing in’ existing assets or new derivatives).

We note that, through the processes of production and commerce, economic wealth – useful stuff – is created in the commons. And through the processes of saving and asset trading, financial wealth is created in the casino. The two forms of wealth, commonly conflated, are fundamentally different from each other. Economic wealth – actual wealth – includes both hens and their eggs. (Not golden geese nor golden eggs!) Financial wealth is claims on actual wealth (or on other claims). Gold – except in its industrial and dental and purely artistic uses – is an example of financial wealth; a claim on economic wealth, as are all forms of money. Traded artworks, too, are financial wealth.

We note that employees within the finance sector themselves operate in the commons economy, selling and buying goods and services; albeit, financial services.

Circular Flow

In traditional economic description, the injection of investment spending (controlled mainly by banks) offsets the outflow of saving. And the injection of government spending offsets the outflow of taxation. This is known as the circular flow, and was modelled in the 1950s by the hydraulic moniac machine, invented by the economist Bill Phillips who had worked as a teenager in the early 1930s on the Waikaremoana hydroelectric scheme. (Detractors of descriptions of economies which emphasise the circular flow over the price mechanism, may refer to Phillips’ hydraulic Keynesianism.)

The main impetus to economic growth – growth of activity in the commons – occurs when injections slightly exceed outflows; creating excess demand. (This is refuted by the neoliberal advocates of supply-side economics, who believe that growth is natural regardless of demand, but may be hampered by price distortions and other cost impediments.)

Other injections into the commons from the mezzanine or the casino include dissaving – ranging from the withdrawal of money from savings’ accounts to the sale of assets for the purpose of buying goods or services – and new consumer debt. Consumer debt can take place through the wealth effect, meaning that people with increasing financial wealth are encouraged to borrow against that collateral in order to purchase goods and services in the commons.

Price inflation can stimulate the spending of money parked in the casino or the mezzanine. With inflation, the purchasing-power of money erodes, creating incentives to spend it ‘downstairs’. But inflation also creates incentives to deploy money ‘upstairs’, by buying non-money assets with expected returns above the rate of inflation.

Goods’ types

The ‘bread and butter’ of developed, industrialised, economies is the production of ‘wage goods’, essentially meaning the goods and services that working class people buy; indeed many fortunes have been made from selling wage goods, especially addictive goods, which enjoy economies of scale. The most important wage goods are food, rental housing, clothing, transport, basic personal services, and entertainment.

The wealth effect, however, tends to favour ‘bourgeois goods’ over wage goods; in that sense we may say that money from working-class taxes and savings is ‘laundered’ through the casino, re-emerging in the commons as discretionary middle-class spending. Another part of the economy, which connects the commons directly to the penthouse, is known as conspicuous consumption – ‘vanity goods’ – basically spending which can only be undertaken by aristocrats and other one-percenters; think the ‘gilded age’.

A fourth category of consumer goods produced in the commons are military goods, built by the military-industrial complex, and principally facilitated by governments.

A fifth category is ‘illicit goods’ – goods and services which are either illegal outright, or are otherwise disreputable; the most obvious examples are the consumption of illicit drugs and sexual services. An important and understudied aspect of this fifth category is the extent that elites and counter-elites – the ten-percenters – generate demand for illicit goods. Economic theory treats illicit goods as any other type of consumer goods.

In addition to consumer goods, in the circular flow there are investment goods, which are important for economic growth. Investment goods become, for general purposes, the built environment. The demand for investment goods is largely derived from the demand for wage goods.

The two main threats to the sustainability of capitalism are excess flows – net flows – from the commons to the casino; and spending flows from the casino to the commons which undermine the demand for – and hence production of – wage goods. Capitalism is at its healthiest when workers are also consumers; and when workers don’t have to incur debt in order to buy wage goods.

When outflows into the casino exceed injections into the commons

This is a state of systemic unbalance, likely to happen when wages fall behind productivity; ie likely to happen when the incomes of the upper income-decile increase the most. The casino gets more populated with money, with the commons less populated. More play for some, and less pay for others!

Such unbalance leads to a form of structural recession; a shrinking of the real economy as the financial emporium upstairs expands. In such a structural recession, the commons starve – or at least suffer malnourishment – whereas the casino bloats and inflates.

The attraction of the casino is ‘financial return’, which has two components. The first component is yield, which is revenue extracted from the commons by asset-holders participating in the casino. The second component is capital gain, which derives when demand for existing assets exceeds the supply of existing assets, pushing up the exchange prices of those assets. This quest for – indeed the gamble for – capital gains is the reason why it is appropriate to call the upstairs financial room of the mansion ‘the casino’.

Government policies which facilitate flows of revenue into the casino from the commons are policies which fuel the capital gain process, by generating excess demand for existing claims; in effect creating more claims by making claims more valuable. The capital gains process gives the illusion of wealth-creation; but it is really the creation of financial bloat or inflated wealth, of excess claims. It occurs when speculation gives – at least in the short term – better returns than investment in the commons. It increases the claims on real wealth of the casino class vis-à-vis the incomes of the commons class of mainly working people.

What happens most of the time, however, is that financial wealth is not spent on goods or services; rather it is left in the casino, to inflate. Inequality begets inequality. When capital gains are the norm, the casino operates as an alternative form of compound interest. Regular compound interest occurs when interest yields outpace consumer price inflation; interest payments augment financial wealth while draining the commons of demand for goods and services. Casino compounded interest occurs when capital gains exceed inflation. Leveraged compound interest occurs when casino punters borrow money to buy assets; while risky, the growth of financial wealth made possible substantially outpaces the more ordinary and passive forms of accumulating compounded claims. When leveraged compound interest is taking place, banks in the mezzanine look to upstairs-lending instead of downstairs-lending for more of their profits.

Capital gains, and Labour policies.

We in New Zealand have become most familiar with real estate as the asset class which generates capital gains; so it is that asset class for which there has been most agitation – especially from the established ‘Left’ – for a capital gains tax.

The Labour Party is proposing a capital gains tax on ‘investment property’ as a future revenue source. To achieve revenue from such a tax, there have to be such capital gains, and therefore that part of the casino needs to be nursed to convert this problem into a solution.

Yet, in the casino at present – especially in New Zealand – capital gains are being made from just about every category of financial assets other than real estate. And Labour has no plans to impose a capital gains tax on any of these others: shares, bonds, gold, crypto-currency being the main types. Labour also plans to exempt owner-occupied housing, creating disincentives to labour mobility (homeowners moving to other locations, renting out the family home). But they do not plan to exempt young aspirants to property-ownership who can most easily get onto the property ladder by buying (and letting) houses in towns or suburbs other than where they live and work.

NZ real estate is too overpriced relative to financial fundamentals at present and in the foreseeable future; substantial capital gains seem unlikely to restart so long as the commons is in the doldrums. Though it seems that northern European nations, which kept a lid on property prices in the 2010s, are now ‘enjoying’ the financialisation of housing.

An unremarked-on form of capital gain taking place at present is in the bond market, especially government bonds which are regarded in many jurisdictions as risk-free. When interest rates fall steadily – not too fast, not too slow – then bond prices increase for a period of years; especially the prices of ‘long-dated’ bonds. (Though New Zealand has a rather thin government bond market, given its official aversion to government debt. This chart shows yields on US 30-year bonds; these bonds can be expected to generate large capital gains when interest rates finally fall in the United States.) Falling interest rates do not necessarily restore the downstairs-upstairs balance, boosting consumer spending, as most commentators suggest. The revival of the commons needs to be kick-started by spending – such as government spending – not merely by cheaper debt. As well as stimulating the market for bonds in circulation, lower interest rates create the expectation that banks will lend more funds into the casinoand thereby further boost the prices of financial assets.

If governments tax some forms of capital gain, but not others, they simply distort the financial marketplace, creating more ‘investment’ in those classes of assets not subject to the tax.

Replenishing the Commons

Money that flows into the casino and stays there is effectively withdrawn from the real economy, so the commons need to be replenished by the mezzanine with new money. In essence, that process of replenishment is known as quantitative easing; it’s essentially a process of expanding government debt – creating new liabilities on governments’ balance sheets and new assets on banks’ balance sheets. The requirement is that the new money is lent into the commons, and in the process spent in the commons; not lent into the casino or left in the banks’ sumps.

Super-Inflation

In near-normal times, replenishing the commons depleted of money maintains that normality, and therefore minimises financial risks. It’s normally OK if money – effectively play-money – circulates in the casino, so long as that money doesn’t interfere with vital markets such as the housing market. But such monetary bloat acts like a Sword of Damocles dangling over the commons.

A super-inflation problem comes when there is a sudden and unexpected cascade of reactivated money descending from the casino to the commons. When there is panic in the casino – as there was in 2008 – the mezzanine may replenish the casino with money, in the hope that the panic will ease and the money in the casino will stay in the casino. That’s what happened at the end of the 2000s, indeed with a degree of deflation; yet there was plenty of scaremongering that dramatic inflation might be a consequence of the monetary easing which took place then.

The principal Sword of Damocles which we face today is the world’s corporate casino-dwellers – the many private and public pension funds, and sovereign wealth funds.

Sovereign Wealth Funds

Sovereign wealth funds are funds which ‘invest’ public savings in the global casino. Some such funds may have restrictions placed upon them; these are usually funds which seek to promote certain sectors of the real economy, and are sometimes nationalistic in nature. This is the kind of second fund proposed for New Zealand, and is similar to sovereign wealth funds promoted by Roger Douglas in 1973, and the fund promoted by certain elements of the First Labour Government in 1937. (New Zealand’s present sovereign wealth fund is commonly known as the Cullen Fund, a superannuation fund, and is scheduled for liquidation in the coming decades.)

Countries for which sovereign wealth funds are appropriate are mainly those with large stocks of in-demand export commodities. The obvious examples in recent history are those of the oil-producing countries, such as Saudi Arabia and Norway; these countries have had large trade surpluses. Another country famous for its sovereign wealth fund is Singapore, which also has had large trade surpluses. Singapore borrows money, in Singapore’s own currency, to fund its fund. Singapore has a huge pool of private savings, which are channelled into that country’s public ‘investment’ fund.

New Zealand is the very opposite; it’s a country with a very long history of current account and trade deficits. The New Zealand government, like the Singapore government, effectively borrows to fund its fund. The new Labour-proposed fund is intended to divert certain monies (profits of publicly owned businesses) into this new fund – money that would normally be spent into the real economy and thereby supportive of the commons – and shunt it into the casino. It has been conceived of as a magic-money tree – a compound interest scheme – which will create future financial wealth. In reality, it will simply augment the Sword of Damocles which is already hanging over the economies of New Zealand and like countries.

Likewise KiwiSaver, which is a set of private pension funds, made semi-compulsory, shunting lots of money into the casino, and funded by incomes which could otherwise be being spent into – supporting – the commons. KiwiSaver breaks two of the most commonsensical rules of monetary literacy. It requires working-class New Zealanders to save money while simultaneously incurring debt, and requires them to prioritise this building of casino assets over their paying down mortgage and other personal debt. In addition, it requires New Zealanders to hope that their KiwiSaver balances will outpace inflation; indeed the balances are outpacing inflation in part by policies which boost the casino at the expense of the commons – hence facilitating structural recession – and which require Kiwi savers to take on systemic risks in order to achieve those above-inflation returns.

Magic Money Trees?

For modern mercantilists, the metaphor for money – as a strictly finite commodity – is ‘gold’. (In the mercantilist epoch in the past – the era of merchant capitalism in the sixteenth to eighteenth centuries – the practical metaphor for money was silver.) The mantra of contemporary mercantilists is that “money doesn’t grow on trees” or that there is “no magic money-tree” or that there are “no money-making pixies”.

The mercantilists lampoon the idea of a magic money-tree, while themselves upholding their own implicit (compound interest) concept of a magic-money tree. (The different placements of the hyphen are so important here.)

The people who really promote the casino at the expense of the commons are the ones who believe that money has magic powers. In the end, money can only buy what is being produced at the time that it is spent. If there is a future cascade of casino-money landing in an economy which is in a state of collapse – and it was a near-run thing after 2008, and after 2020 – then saved money will become close to worthless. The only thing that will matter in a collapsed economy is the capacity of the commons to produce the necessaries of life.

The neoliberal financial project is a political programme of liberal-mercantilism; the conflation of private-property interests, governments that support those interests, and the fairy-tale view that wealth and claims on wealth are the same thing. This magic-money view is predicated on the idea that whole societies can become wealthy by destructively mining the world’s resources in order to create claims on the world’s resources. It is a project of linear economics in a world in which real and sustainable economies must, by the very nature of life, be circular. Money’s power lies in its circulation, not its extraction.

Intergenerational Equity

Intergenerational equity is not achieved by funding the casino and the magic-money tree of enhanced compound interest. This is what the ‘financial literacy’ industry claims. Through this approach, the young of today can only expect to be dumped-on tomorrow. Intergenerational equity is achieved by investing in a sustainable commons, not in magical compound interest.

The Global Arms Race

What seems to be happening is that, in addition to boosting the casino, western capitalism is becoming increasingly devoted to militarising the commons, and to forcing non-western countries to do likewise. A degraded militarised commons, with more guns and less butter, is – among other things – a second Sword of Damocles poised over us all. Yet our political classes are conspicuous in the lack of attention they are paying to the problems of militarisation and unsustainability, and most of the rest of us are too busy making ends meet or looking the other way.

Conclusion

The future of western capitalism depends on its investment in – support of – the commons, not the casino. While the casino may operate in parallel to the economy, largely as a sort of irrelevance, it also imposes a kind of severe danger – an avalanche risk, if you will – to the real economy upon which we all (including our elites and would-be elites) depend. The heightened risk is that the casino has been and is being supported by governments – indeed Labour governments – at the expense of the increasingly impoverished commons. The mansion depends on its lower floor; not its superstructure.

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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.

Earlier this week, in The Truth about Prices in New Zealand, (on Evening Report, and on Scoop), I showed how the Consumers Price Index (CPI) is a lagging measure of inflation, and that the Producers Price Index (and the use of six-monthly rather than annual data) gives more timely information about turning points in inflation.

In this chart I look at the two published components of the CPI: inflation in the “tradable” and “non-tradable” sectors. And, because the CPI is a lagging measure, I have used the best presentation for historical reflection rather than for timely headlines. (This measure is annual, and it compares whole 12-month periods with each previous whole 12-month period. The latest data point in the chart matches to 31 March 2025, which is at the centre of the year-ending 30 September 2025.)

Consumer prices are retail prices, whereas producer prices are wholesale prices. Tradable CPI inflation mainly represents the retail prices of traded goods; goods New Zealand mainly exports and goods New Zealand mainly imports. Much of their pricing includes the markups of domestic retail outlets, domestic transport, and domestic customisation and packaging of imported manufactures and foodstuffs.

The non-tradable sector is mainly domestic services, utilities, and construction. Sellers of these services and goods do not compete with foreign suppliers.

In addition, the chart shows the monetary policy setting of the Official Cash [Interest] Rate; set by the Reserve Bank.

Interpretation

In the 2000s the OCR was set at what was then understood as normal levels, in the order of six percent. The received narrative of the time was that interest rates should be significantly above inflation rates. The achievement of such high real interest rates, then (and globally, not just in New Zealand), was probably the main single cause of the subsequent Global Financial Crisis in 2008. It created an environment in which money was transmitted en masse from borrowers to savers, and the ‘investor-class’ enjoyed ever-increasing demand for financial assets which would supercharge their ‘paper’ returns. In those years there was nothing like the degree of debt-phobia that exists today; leverage was the name of the game.

Despite the dubious anti-inflationary narrative which justified these high interest rate settings, high interest rates did not force countries’ domestic inflation rates towards the target rate of two percent. Due to globalised competition, the wholesale price inflation of traded goods remained low; even negative at times. In addition, for individual countries such as New Zealand, exchange rate appreciation also served to keep ‘tradable inflation’ very low. Indeed it was those high interest rates which facilitated the currency appreciations of ‘commodity currencies’ such as the New Zealand dollar.

Nevertheless, by the late 2000s, high ‘wealth effects’ – including (indeed especially) among indebted home owners – saw world commodity prices soar, leading to high inflation in the tradable sector despite commodity currency appreciations.

The Global Financial Crisis of 2008 and 2009 saw the collapse of a number of financial asset prices worldwide. Central banks cut interest rates dramatically, to revive a failing and flailing world economy. New Zealand’s annual inflation fell to below two percent. And it stayed below two percent for more than a decade. While non-tradable inflation sat between two and three percent, tradable inflation brought the overall CPI to one percent and even less (especially in 2015, ten years ago). (Note that the 2011 inflation ‘spike’ in New Zealand was due to the increase in the rate of Goods and Services Tax; GST.)

Interest rates in New Zealand were slashed to one percent in 2019, in the belief that that change would induce an upwards movement in the rate of inflation; and in the full knowledge that – if such monetary policy changes were to be effective – there would be a time lag of at least one year between the policy and the outcome.

Inflation did increase in 2021, though it would be foolish to attribute much of that to reductions in the OCR. Reductions on the OCR from 2015 had had minimal if any impact on inflation. And we know that 2021 and 2022 were very trying times indeed in the world’s supply chains, with pandemic and war. The supply chains quickly adjusted however.

Tradable inflation – even for a lagging measure such as the CPI – clearly turned downwards in 2022. And was plummeting in 2023. The steep rise in interest rates in 2022 could not have been the cause of the substantial tradable disinflation in retail prices; a falling inflation which began about the same time as the monetary policy squeeze.

Those increases in the Official Cash Rate almost certainly had an impact on non-tradable inflation, however. But not in a good way! Just as OCR settings between five and six percent in the early 2000s seem to have held non-tradable inflation at high above-target levels, so also do they seem to have held non-tradable prices in New Zealand in 2024 (and, based on recent quarterly data, continuing to have such an impact in 2025) at distress-inducing above-target levels.

The cost-of-living crisis since the National-led government took office is both the direct effect of the counterproductively high interest rates, and the laggard high non-tradables CPI-inflation which has extended well into 2025.

The real agenda for high interest rates would appear to be to recreate the early 2000s’ financial environment, whereby interest rates were well above inflation, and the elites of New Zealand and elsewhere were embarking on their ultimately destructive journey of inflating paper-wealth.

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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.

The first chart shows annual price increases in New Zealand for businesses (PPI: Producers Price Index) and consumers (CPI: Consumers Price Index), since 1999. We note that the latest CPI datapoint is for the third quarter of 2025, meaning that it’s centred on mid-August. The most recent PPI data is for the second quarter of 2025, meaning that it’s centred on mid-May.

For the whole period, the first important points to note are that the PPI is more sensitive to changing influences on prices than the CPI, and that the PPI tends to lead the CPI. Indeed, annual CPI inflation is a lagging measure of price change; meaning that it’s a poor measure to base policy decisions on.

The other key point to note is the unusually long lag of the CPI after 2022. Using the more sensitive and timely PPI measure of price inflation, we see that inflation in New Zealand troughed in 2023, and that, using the ‘outputs’ PPI, annual inflation in New Zealand was bang-on the two percent policy target at the time of the 2023 general election.

Despite the claims of our Prime Minister that he inherited “seven percent inflation” from the previous Labour government, in the two years since the election, actual inflation (based on the more sensitive PPI) has been rising.

It is very clear that there was a double ‘price spike’ in 2021 and 2022, periods exactly corresponding to the disruptions to global supply chains caused first by the Covid19 pandemic and secondly by the Russia-Ukraine war. Commodity price increases (PPI-inputs) fell almost to one-percent once those global supply disruptions were resolved. After that, the main source of ‘cost-of-living’ increases – suggested by the CPI lag in 2024 – was panicked and counterproductive domestic policy measures.

Historically, we note that, at the onset of the 2008 Global Financial Crisis, inflation in New Zealand was far worse than anyone realised at the time. We also note that, while the 2011 ‘spike’ in CPI-inflation was due mainly to the increase in the GST rate, there was also a spike in producer price inflation at that time. Normally the amplitude of PPI-inflation is greater than for CPI-inflation; because of GST, this amplitude difference did not happen.

Best leading measure of price variation: biannual price change

The most-timely measure of price variation is the quarterly change of the PPI [inputs]. However, quarterly measures are notoriously ‘noisy’, so the first reliable measure of price variation is the six-monthly [ie biannual] change in prices. The measure here takes six months (the two most recent quarters, averaged) compared to the previous six months.

The second and third charts clearly show both the annual and annualised biannual rates of PPI-inflation. The chart clearly shows how the six-monthly (biannual) inflation rate reveals the key inflation turning points first. By the August 2023 release of the PPI data, it was evident that – by the first available measure of prices – inflation in the first half of 2023 was below two percent. Yet, in election year, the Labour Government never mentioned this very favourable piece of economic news! Why was the actual data not being discussed? Presumably because the truth conflicted with the narrative about inflation; the narrative which New Zealand society succumbed to and was cowered by. Part of the problem is the time-poor (and sometimes credulous) media having been, in effect, trained to follow certain statistical indicators but not others.

These charts also plot the Official Cash Rate (OCR), the principal (though typically misplaced) policy lever to push-back on inflation and deflation. They show that anti-inflation policy commenced late in 2021, and peaked in 2023 and 2024. Thus, the ‘anti-inflation’ policy was persevered with well-after the leading indicators had shown that the inflation problem had disappeared.

The fourth chart shows the annual and annualised biannual rates of increase of consumer prices, again showing the OCR as well. Once again, even though the CPI is a lagging price-level indicator, a proper look at the CPI data shows that CPI-inflation was falling markedly in 2023, and that there was no case for anti-inflation policy in late 2023.

The explanation for the unusually long lag of the CPI (compared to the PPI) lies in the fact that the perseverance of anti-inflation policy itself created an ongoing ‘cost-of-living crisis’. If we go back to the first chart shown, it is the long lag in CPI inflation in late 2023 and in 2024 that is in fact the essence of the ‘cost-of-living crisis’. Rather than the crisis being cured by the contractionary monetary policy settings (of the OCR), that extended CPI lag was caused by the anti-inflation policy.

The fifth chart goes back to the PPI-inflation, using the ‘outputs’ measure of business prices, as in the third chart. This chart shows the OCR settings shifted by 18-months, to simulate an 18-month lag. The reason for this is that we are told that monetary policy takes at least a year – with Reserve Bank research in the late 1980s claiming as much as five years – before monetary policy ‘does its work’. If 18 months is the correct lag between policy and outcome, then we should see upturns in the OCR coinciding with downturns in inflation; and downturns in the OCR coinciding with upturns in inflation.

Instead, considering the two years from mid-2023, we see the very opposite, the upturn of the OCR almost exactly coinciding with the upturn of business inflation. We know that the short inflation spike of 2021 and 2022 was caused by global supply-chain disruptions; this kind of causation is probably true of some other inflation spikes. Also exchange rate fluctuations contribute to spikes in price variation. If we look at the late 2010s, we see falling interest rates accompanying falling rates of price increase; contra to the policy narrative. In the early 2010s we see fluctuating inflation while interest rates were essentially unchanging. In the late 2000s, we see interest rate increases matching inflation increases; again, contra to the policymakers’ narrative.

The conventional neoliberal narrative about inflation is that there is a substantial lag in policy effectiveness, and that inflation is principally driven by expectations of inflation. In this narrative, the inflation data should not be ‘spiky’ at all; rather, once set in, inflation supposedly establishes its own momentum or inertia. The PPI data clearly refutes this ‘momentum’ narrative; inflation is not driven by expectations arising from immediate past inflation. And the alleged momentum in CPI-inflation in New Zealand in 2024 is clearly false; rather there was a lag in CPI-disinflation caused by interest rates being too high; not too low. (Disinflation is falling inflation, whereas deflation is falling prices.)

Accepted reasons for an OCR-increase to PPI-outcome lag include the fact that business loans – like home loans – are typically set at fixed interest rates, for say two or three years. In the case of a falling OCR, however, businesses may quickly repay (or break) high interest loans and refinance as quickly as possible with the new low interest rates. So, policy reductions in the OCR are likely to affect outcomes more quickly than increases in the OCR.

It is looking as if anti-inflation policy actually achieves a mix of neutral and pro-inflationary outcomes. My suspicion is that anti-inflation policy is substantially pro-inflationary – counterproductive – with a lag of 15-24 months; and anti-deflation policy is actually pro-deflationary, with a shorter lag.

It is likely that the lag from anti-deflation policy (as in these years: 2001, 2008, 2015, 2019; refer third chart) to consequential deflation is quite short, in large part because the commencement of disinflation commonly precedes the policy. (Like trying to end a war that’s already ending.)

2026 and 2027 will be interesting because the longer outcome lag from high interest rates in 2024 and the shorter outcome lag from falling interest rates in 2025 suggests a wait until later in 2026 before there are marked falls in PPI-inflation, and early 2027 before marked falls in CPI-inflation.

There are at least two disruptors, however, given the global environment in flux. First is the 2025 American-led haphazard disruption to the already disrupted global economy, including the redirection of global supply-chains in favour of military goods and services. Second, for New Zealand, there is the ever-present possibility of a domestic financial crisis which would see a rapid fall in the value of the New Zealand dollar and therefore a 2027 spike in high rather than low inflation.

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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.

New Zealand’s monetary policy decision today was presented as a “line call” (RNZ news) between a cut of 0.25 or 0.50 percentage points. In that context, the correct decision was made; 0.50%. In the context of the understood policy narrative, it was a binary choice.

In the mainstream expert and pundit commentaries, there was as usual a confused mix of comments about should-expectations (what the Reserve Bank should do, within the constraint of the options ‘on the table’) and would-expectations (what the Reserve Bank would actually do). Outside of that mainstream groupthink, there are of course potentially other could-expectations; about what else the Reserve Bank could do, if allowed and/or encouraged.

(See my comments on Modern Monetary Theory to get a sense of how monetary policies and governments’ fiscal policies represent two sides of the same metaphorical coin. And how the easing only of monetary policy during a structural recession is equivalent to another metaphor: pushing a string. Aotearoa should and could have more money spent into circulation as more government debt.)

The recent commentary we have been getting was that the Reserve Bank was facing contradictory ‘stagflationary’ pressures; a recession which would require a greater fall of interest rates, and rising inflation which – the groupthink alleges – requires a lesser fall (or even no decrease) of the OCR. Would the Reserve Bank prioritise an anti-recession or an anti-inflation policy position? We held our breath until 2pm!

The reality is, given that this was a binary contest – ‘matchplay’ to use the sporting metaphor – the bigger interest rate decrease represented a win (albeit a small win) on both the growth front and on the inflation front; a win-win decision. That’s at least something. History is littered with well-meaning (and, sometimes, not-so-well-meaning) lose-lose policy decisions.

The Interest Rate and the other two prices of money

For our purposes, the Official Cash Rate (OCR) is the interest rate.

In my historical review of monetary policy – I noted that there were three prices of money: the internal price (which is the inverse of pure inflation), the external price (the exchange rate between one kind of money – such as the New Zealand dollar – and a weighted-average of other kinds of money), and the interest rate (which is the price of inter-temporal trade, or what economists more commonly call the price that balances saving and investment).

Note that, in a simple economy, saving is the withdrawal of money from circulation and investment is the injection of money into circulation. (That’s not the way most pundits use the word ‘investment’, however.) Saving is a withdrawal from today’s economy with the underlying presumption that it will be invested into the future economy; or, as in the case of loan repayments today, they were invested in the past. Investment is either the injection of past saving into the present economy, or (through borrowing) the injection of future saving into the present economy.

Today, withdrawals from circulation are too great; and injections too little. (The Reserve Bank might want to switch on the Moniac machine in its museum, to see a simulation of this.)

Trickle-Up and Compound Interest

As noted in my earlier writing, the principal monetary objective of the socio-political elites is to have, on an indefinite basis, an interest rate that’s higher than the inflation rate, thereby creating a positive real rate of interest. This policy objective applies to both of the three elite ‘tribes’; the centre-right tribe (think National), the centre-left tribe (think Labour), and the tribe of economic liberals (think ACT).

Another name for this implicit but underlying policy objective is ‘trickle-up’; a policy to facilitate the accumulation of compound interest. Compound interest may be broadly defined as any financial situation whereby financial wealth appreciates over time, meaning that a dollar saved today buys more tomorrow than it will buy today. Under trickle-up, there is an unrequited flow – tribute, in reality – from debtors to creditors, from poorer to richer.

Real interest rates are positive when nominal interest rates (eg the OCR; or term deposit rates) are higher than the rate of inflation. We note that this definition applies also when inflation rates and/or interest rates are negative. Otherwise, real interest rates are zero or negative. Compound interest is a state of affairs whereby unspent money appreciates exponentially, as if by magic. Every dollar of compound interest gained by A is funded by B.

When real interest rates are positive, A is ‘creditors’ and B is ‘debtors’. Conversely, however, compound interest works the other way when real interest rates are negative. Further, the predominant story since say 1935, at least in New Zealand, is one of negative real interest rates. Our parents actually became rich (as if by magic) because they were debtors for much of their lives, and because compound interest flowed from creditors to debtors. That was trickle-down.

But the elites, most of whom benefitted from trickle-down in their younger lives, now want trickle-up. New Zealand Historian David Thomson documented this in 1989; it was called Selfish Generations? How Welfare States Grow Old (revised edition 1996).

Real Interest Rates are determined by the market, not by edict

The nominal rate of interest is now set by edict. But the other two prices of money are set by markets. The end result will be a positive real rate of interest if ‘investment demand’ exceeds ‘saving supply’. And the end result will be a negative real rate of interest if ‘investment demand’ falls short of ‘saving supply’. The later situation is very much the truth of the present structural recession in New Zealand, and to which much of the capitalist world is veering into. This means that inflation rates will be higher than ‘risk-free’ interest rates, such as the OCR.

It means that a reduction in the rate of interest will ease pressure on the rate of inflation. Under present conditions, the lower the interest rate the more room there is for price inflation to ease. The bigger the reduction in the OCR, the more present ‘investment’ will be enabled (leading to a greater positive or smaller negative rate of economic growth) and the less pressure there is for prices to rise in order to achieve balance between investment and saving.

The Open-Economy Complication: The External Price of Money

Under floating exchange rates, market adjustment in the price of money may take place through the exchange rate (external price) as well as through inflation (the internal price).

New Zealand’s OCR is now significantly lower than the equivalent rates in the United Kingdom, United States, and Australia; it’s the same as Canada and South Korea. It’s still a bit higher than in the European Union, Taiwan, Sweden, and Denmark. It’s still much higher than in Japan and Switzerland which, by not indulging in high post-covid interest rates, never had high post-covid inflation.

By all our conventional understandings, there should be a run on the New Zealand dollar, given that there are so many other-nation options where interest rates are higher and economic activity is less depressed. Two things are propping-up the New Zealand exchange rate; record high commodity export prices, and a history of giving good returns in the past to foreign creditors. Many foreign creditors remain loyal to their historic ‘golden goose’. How long can these circumstances last?

Finally

Historically, the migration of capital has often matched the migration of labour. Just think of flows of money and people within the British Empire over 100 years ago.

I recently took a look at the year-to-August international migration data for New Zealand. Out of 31 countries listed by Statistics New Zealand, only Samoa, Japan, Sri Lanka, Pakistan, had more citizens migrate to New Zealand on average in the last two years compared to the previous year. And the only ones with significant immigration into New Zealand after 2023 were Pacific countries, India, China, Philippines, Nepal, Sri Lanka and Japan. Japan has seen the recent return of those who left during covid. There has been a substantial increase in migrant departures by passport-holders of all of these 31 nations in Asia, Europe, South America, and Africa; and that’s despite the fact that some people who entered New Zealand on one of those passports have exited with a New Zealand passport.

New Zealand is crashing and burning economically, and still its best monetary policy options remain ‘off-the-table’. New Zealand’s recession-recovery policy is tantamount to ‘pushing on a string’. How long will it be before capital emigration matches the net emigration of people with New Zealand passports and the incipient net emigration of New Zealand residents with passports from high and highish income countries? How soon will it be before financial crisis follows economic crisis?

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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.

Last week I looked at how, for modern day purposes, monetary policy started around 1750. It began with the departure from the presumption that money is wealth to the idea that money is a veil and that therefore wealth is something else. That was, in a sense, the beginning of political economy as a branch of philosophy, morphing into economics as a social science. In the then new (now ‘classical’) utilitarian view, wealth came to be seen as useful ‘product’ and money as a ‘veil’.

The liberal view arose that the best monetary policy was no-policy; that is, no policy beyond the steady coin production of each sovereign’s Royal Mint. While no longer the definition of wealth, across the capitalist world, money was understood as central (as a lubricant or a catalyst) to the workings of a self-regulating productive super-machine. Money came to be understood (correctly) as a technology – a flow technology – rather than as wealth itself. The mercantilist idea of money as wealth – and of gold or silver as money ‘to be made’ – never disappeared, however.

With that view of money as a lubricant in mind, we today can understand that a shortage of money is always going to be a bigger problem than a surfeit of money. (A car with an oil leak will eventually grind to a halt. A car with an overfilled sump, on the other hand, will still function; it will function near-to-perfectly if there is a place within the car to park the excess oil.)

This new laissez-faire view of monetary policy changed once it was realised that the mechanism didn’t work in practice as it did in theory. While it didn’t work for multiple reasons, there was a continuation of the pretence that it did work. In order to maintain that pretence, senior bankers and political leaders – the emerging ‘lords of finance’ – turned to interest-rate manipulation within the context of the ‘gold standard’.

Ultimately, what societies’ elites wanted was to have a form of ‘liquid’ wealth that they could store over time, and which would maintain (or even increase, through the ‘magic’ of compound interest) its purchasing power across time. The merchant capitalist mindset came to prevail over the realisations of progressive bankers and economists. The elite-classes still wanted a monetary policy which would operate as if mercantilism was true.

The elite-classes wanted money to come at a cost, so that they could be sure money would remain scarce. Gold and silver mining (and latterly crypto-currency mining) have been the primordial costs of commodity money. Interest rates would have to serve as the entry costs of modern ‘as if’ money.

Modern Monetary Theory

There is a known and substantially correct story in academia – albeit ‘heterodox’ academia – about money, monetary policy, and the relationship between public finance (fiscal policy) and money. It’s called Modern Monetary Theory or MMT. The conceptual relationship between OMT (orthodox monetary theory, though a better name might be PMT ‘prevalent monetary theory’, or even better LMN ‘liberal-mercantilist monetary narrative’) and MMT is akin to the relationship in the 1850s between miasma-theory and germ-theory in epidemiology. (Many people died of cholera in Europe and the Americas because the scientific establishment clung onto the miasma theory, despite the overwhelming and increasing weight of evidence to the contrary.) MMT dispenses with the requirement that money must enter into circulation at a cost; and disposes of the argument that the public and private sectors are each-other’s rivals.

I was fortunate to meet Randall Wray at an economics’ conference in Sydney in 2011, and found that he and his academic collaborators already had a well-developed theoretical framework which matched some statistical work I was doing at the time. I had been exposed to the work of Japanese/Taiwanese macroeconomist Richard Koo, and his studies of the Japanese structural recession of the 1990s and Japan’s recovery from that event. Of importance was Koo’s concept of a balance-sheet recession.

The central idea is that core money is public debt; a set of promises spent into circulation and backed by sovereign governments. A simple example of this is traditional coin money, made from bronze or silver or gold. In MMT, what gives the coin its value as a token of circulation is the depiction of the sovereign’s head, and not the amount of precious metal in the coin. A second example lies in the history of central banking, whereby the original three central banks (in Stockholm, Amsterdam, London – all in the seventeenth century) pioneered central banking through their roles as bankers to their governments; in particular, they managed their governments’ historical war debts. Those debts became private assets; and the core assets on these banks’ balance sheets.

These banks evolved to become bankers to the other banks as well as bankers to the state. Almost all the world’s central banks – ie Reserve Banks – are now publicly owned; they are very much part of the apparatus of the state. While governments sub-contract monetary policy to semi-independent central banks, MMT suggests that monetary policy is in reality undertaken by nations’ Treasuries. As a result of Treasuries’ monetary misunderstandings, modern capitalism risks becoming like an under-lubricated car with leaks.

Public debt(s) are private assets, just as a bar of gold is an asset. The world’s effectual money supply is the ‘liquid’ – ie flowing or circulating – component of (or derivative of) any monetizable asset; the core monetizable asset being public debt. This chart (from my Governments run financial deficits; it’s their role to do so, Evening Report, 17 October 2023) shows that, this century, public debt – the monetary base – increased each year from 2008 to 2022 by an average of about four percent of global GDP. That’s about how it should be, and with significantly larger injections of money required whenever a financial or economic crisis threatens to undermine the circulation of money in the real economy, as occurred in 2008 and 2020.

The real economy is the purchases of goods and services. The ‘unreal economy’, into which much money leaks, is the ‘casino economy’ whereby money is spent on financial assets; non-money circulating promises such as shares, bonds, and property titles. The ‘upstairs’ casino economy acts as a dynamic treasure hoard, fuelled by leaks from the real economy, with players buying and selling assets at mostly increasing prices.

While according to MMT, public debt (not gold or silver) is the foundation rather than the pariah of capitalism, that is not to say that more public debt is always better than less public debt; just as, in the classical schema, more gold is not necessarily better than less gold. Though in 2025 Aotearoa New Zealand, more public debt would certainly be better than the present constricted amount. The growth of public debt is always limited by tax revenue arising from the circulation of money; as they say, nothing is more certain than taxes. One efficient way to increase public debt – and thereby enhance the liquidity of the economic machine – is through ‘negative income taxes’; for example, universal tax credits (which should act like the credits received in the game Monopoly whenever a player passes ‘Go’).

The prices of money

There are three important prices associated with money: the internal price (which wavers with pure inflation and pure deflation, and does reflect the idea of money ‘as if’ it’s a commodity like silver); the external price (the exchange rate between one form of money and another, eg $NZ vis-à-vis £UK); and the interest rate which is best understood as the price of ‘inter-temporal trade’ (although OMT treats it as the ‘necessary cost of money’).

Inter-temporal trade simply means exchanges when, unlike direct barter, selling and buying do not occur simultaneously. Wage workers effectively sell their labour on pay-day, and buy stuff (say at the supermarket) on another day. When they ‘save’, then it may be months or years before they spend that saved money; that is, months or years before they use it to buy stuff. Alternatively, workers may spend some of their wages in advance; for example, with a payday loan or a credit card. Interest rates are a market-clearing price which – if correctly set in the money market – ensures the balancing of income spent late with income spent early.

People who tend to spend their money before payday are usually net payers of interest. Likewise, people who spend most of their money after payday are net receivers of interest. Thus, interest rates should be high when few people want to spend late and many want to spend early; and low when many people want to save and few want to borrow. There is no reason why interest rates cannot be very low; that is, negative.

Negative real interest rates are indeed commonplace; they occur when the rate of inflation is higher than the interest rate. For example, if the internal price of money is falling by five percent a year (ie annual inflation is five percent) and the interest rate is three percent, then the real interest rate is minus two percent. Under such conditions, interest effectively flows from savers to borrowers; rewarding early spenders over late spenders.

(For a while in the late 2010s, Switzerland had a published interest rate of minus three-quarters of a percent and inflation at minus one-and-a-quarter percent, meaning that the real rate of interest was plushalf a percent. Everything worked fine; interest effectively flowed from borrowers to savers. Switzerland then needed negative interest rates in order to limit the appreciation of its currency the Swiss Franc; otherwise, the external price of Swiss money would have been rising too much. In that episode, all three prices of money came into play.)

Looking at the three prices of money dispassionately, we see that they all play a role in free market capitalism, and that the inflation rate is itself a part of the price mechanism. This indeed has been grudgingly accepted by the mainstream, with today’s monetary policy proposing the optimum annual inflation rate as two percent rather than zero; and there are advocates today for higher inflation targets. The internal price of money should fall, policymakers agree, albeit in a predictable manner. Australia indeed has a higher inflation target than New Zealand.

(If inflation is 2.1% every year for 100 years, two $20 notes put under the mattress today should buy one loaf of bread in the year 2125; $40 would become equivalent to today’s $5.)

One important benefit of inflation is that it encourages the circulation rather than the hoarding of money. The biggest danger arising from large caches of non-circulating money is that such money may reactivate at short notice, creating substantial ‘excess-demand’. Just as we are used to seeing money regularly leaking into the casino, money in the casino can be injected into the real economy at short notice.

Bimetallism as a way of favouring Inflation over Deflation

An early attempt at monetary reform during the gold-standard period was the advocacy of bimetallism.

The United States election of 1896 was fought, in effect, on the issue of inflation versus deflation. At that time, due to gold scarcity, the gold to silver exchange rate was high (16:1) and rising. There was a substantial world depression in the early 1890s; an event that hit Australia very hard, causing New Zealand to resist overtures to join the incipient Australian federation.

In the world of the gold standard, prices were at an all-time-low and many small businesses had become distressed; especially farmers who were selling their produce at prices which were falling even faster. In the United States the free silver movement was prominent, and the Democrat Party chose a candidate – William Jennings Bryan – who favoured that political position. He failed to get elected because there was an effective party split, with many urban voters in opposition to the policy to shift from the gold standard. (As a result of the Democrat split, many Gold Democrats aka Bourbon Democrats voted Republican. The new Republican president was the recently hyped imperialist William McKinley. The gold-silver exchange-rate issue largely dissipated following the 1897 Alaska gold rush.)

The anticipated effect of a switch to a silver or bimetallic standard was that prices and wages would go up, and the highly indebted small businesses would be able to service their debts in an environment of inflation rather than deflation. City workers in 1896 tended to favour deflation; many were unable to make the connection between their future standard of living and the retention of a thriving small-business sector.

As we have seen, this position of favouring inflation over deflation is now mandatory in most capitalist jurisdictions. The largely successful monetary policy attempts in the 2010s to ward-off deflation ensured that there was no general depression in that decade. The policy, strictly, was largely unsuccessful in achieving its inflation target. That’s because of one of the fundamental flaws in orthodox monetary policy; low interest rates generate lower rather than higher costs, and therefore low rates of CPI-inflation.

Examples of ineffective and effective monetary policy from (mainly) New Zealand history

There were antecedents of MMT (and other pragmatic initiatives) in New Zealand and elsewhere during the recovery from the Great Depression which peaked in the early 1930s.

In the 1920s New Zealand had no Reserve Bank. New Zealand’s (mainly Australian-owned) banks did their banking in London, the world’s pre-eminent financial sector. From 1926 until 1928, New Zealand’s Minister of Finance was William Downie Stewart, an economic liberal and a monetary conservative. Gordon Coates – more of a pragmatist, but largely untested – had been endorsed as Prime Minister in the 1925 election months after the death of William Massey.

1927 was a disaster year for New Zealand, exacerbated by Stewart’s unresponsiveness in his role. Australia had its economic meltdown a year after New Zealand, reversing the trans-Tasman migration flow. This made the government even less popular, as unemployment in 1928 was blamed on immigrants. Coates’ Reform Party – the principal precursor of today’s National Party – went from 48% of the vote in 1925 to 35% in 1928, losing power as a result. In 1929 there was a United minority government, initially facilitated by Labour. The winning policy of United – the former Liberal Party – was increased government borrowing. The result was 20 months, in 1929 and 1930, of relatively good times despite the unfolding international crisis.

Reform went into the December 1931 election as junior partner in a United-Reform Coalition (a formal coalition which formed that September). While gaining many more votes and seats that election than United, Reform remained the junior partner. Stewart was restored to Minister of Finance at the worst possible time; going into 1932, the most difficult year of the Great Depression. Labour’s doctrinaire socialism was unappealing to voters, despite the growing unpopularity of the United government in the months following the retirement and death of Prime Minister and Finance Minister Joseph Ward.

As a ‘sound-money’ man, Stewart had been a stickler for the revised gold-standard rules. However, before the 1931 election, Britain’s government collapsed due to the financial crisis. Britain had to suddenly withdraw from the Gold Standard. The ensuing rapid depreciation of the British pound (largely reversing deflation in that country) kick-started the British economy, and also brought the New Zealand economy out of its 1931 ‘free-fall’. But New Zealand, being an agricultural commodity economy facing severe terms-of-trade issues, needed an even bigger (and longer-lasting) currency reset. Eventually, in January 1933, Stewart did the right thing and resigned on a matter of monetary principle. Coates – Stewart’s replacement – now pragmatic and worldly-wise, immediately devalued the New Zealand pound against the British pound, in line with the recommendations of the young generation of economists.

New Zealand’s recovery remained slow, but at least it was under way. The management of New Zealand’s financial reserves in London remained too conservative. Nevertheless, many subsequently iconic new businesses began their lives in 1934 and 1935 (for example Wattie’s, Fisher and Paykel, Sleepyhead).

Coates did two more things of great importance. First, he established a reform-minded Brains Trust made up of three young economists – Campbell, Sutch, Belshaw – who would argue for monetary pragmatism. And Coates established the Reserve Bank of New Zealand in 1934. Though created with conservative monetary principles in mind, the means had become available to introduce heterodox monetary policy in the event of a future government willing to flirt with an alternative narrative.

Another important development was the rise in the United Kingdom in the 1920s of Social Credit, then known as Douglas Credit, a ‘lay’ movement (counter to the political economy traditions of Marshall and Marx) reminiscent of the previously-mentioned American ‘free silver’ movement. Social Credit largely antagonised academic economists, by making anti-orthodoxy generalisations which were simplistic and too broad. Nevertheless, Social Credit gained a substantial political influence, not least in New Zealand; and it did have policy prescriptions helpful for extracting economies from a state of structural recession and inequality.

In the Labour Government elected in 1935, there was a substantial Social Credit faction; and there were a range of other monetary reformers with varying degrees of sympathy towards Social Credit. Social Credit’s central argument was that the orthodox monetary system had a permanent and structural deflationary bias, and that a public institution – such as an appropriately modified central bank – would be required to offset this bias. In effect, Social Credit argued for quantitative easing, and a national dividend (and food price subsidies, called ‘compensated prices’) as means to inject new money into circulation while addressing monetary poverty and inequality. (See A National Dividend vs. a Basic Income – Similarities and Differences, by Oliver Heydorn, 2016.)

Unlike the quasi-Marxian form of socialism advocated by New Zealand Labour from the 1910s until 1933, the party under the leadership of Michael Joseph Savage became infused with monetary radicalism and a desire to unite rather than divide diverse economic interests.

A commitment to monetary reform within Labour in 1935 led many rural voters to vote Labour for the first time ever (including voting for my great-aunt’s husband in Kaiapoi). Those voters remained loyal to Labour in 1938, in light of Labour’s subsequent monetary achievements. Particularly effective was the State Housing programme, politically managed by John A Lee, a working-class monetary reformer. Labour made full use of the new Reserve Bank to create-through-spending the money required. Economic growth boomed (about 25% in two years) while inflation remained low; a big recovery from a big depression.

In New Zealand, Social Credit split from Labour in the 1940s, and formed its own political party. While often polling highly, it could not break the two-party system, and was eventually broken as a political force – in 1984 losing two-thirds of its 1981 vote – after having been lampooned by Bob Jones. Jones was leader of the one-election-wonder New Zealand Party; an ‘unsuccessful’ party which successfully acted as a political catalyst for the return of economic liberalism and the floating-currency version of classical monetary orthodoxy.

While much of what Social Credit claimed as chronic weaknesses of the orthodox monetary narrative has turned out to be true, the successful albeit piecemeal monetary reforms which took place in the middle-third of the twentieth century eventually undermined Social Credit’s critique of monetary orthodoxy. Social Credit had indeed contributed to its own seeming redundancy as an economic force in New Zealand. (There was a Royal Commission on Money in 1954, in which Social Credit had a chance to make a substantial case. Although there had been a near-recession around 1953, after the Korean War, and Social Credit gained 10% of the vote in 1954, there was little evidence then of structurally unsound monetary arrangements.)

A third important development was the publication in 1936 of The General Theory of Employment, Interest and Money by John Maynard Keynes, an already famous British economist. This was a largely technical book which extended and reconsidered Keynes’ earlier views on money and monetary policy (1930 A Treatise on Money), while emphasising the critical roles of public debt and government spending in getting a country out of structural recession. Keynes also recognised in 1933 that import protection through tariffs would help with national economic recoveries, and that national economic recoveries would enable the restoration of the international capitalist economy. Keynes criticised international capitalism in order to save it.

Keynesian analysis led to the pushing a string critique of monetary policy.

It was the Keynesian critique which created the post-war international expansion; underpinned by an emphasis on government spending as a curative for the kinds of unemployment which widely prevailed in the 1930s. But Keynes believed that the problem of the 1930s was more cyclical than structural; hence he argued – in contrast to the MMT argument – that governments should run budget surpluses during periods of full-employment.

Keynes was the architect for the post-war monetary system that might have been. But the alternative American-led version won out, with politics prevailing over good argument, and with Keynes’ premature death.

Keynesian and other insights from the Great Depression of the 1930s informed monetary policy during the global decolonisation period from 1946 to 1976. Newly independent countries emerged, all with central banks. Central banks became, more explicitly than before, an arm of government. In New Zealand, with its substantial historical national debt (a result of imports exceeding exports for around 100 years) the development of import-substituting and export industries became central to economic policy. Interest rates remained below the rate of inflation through sufficient costless money creation. Organisations close to government – especially the producer boards such as the Dairy Board, forerunner of Fonterra; also, the State Advances Corporation which funded mortgages – gained direct lines to practically costless money through their Reserve Bank accounts.

While those monetary reforms worked in their time, future fiscal-monetary policies will need to be more about sustainability and private-choice than through a single-focus on selling more goods in a stormy world marketplace.

Unfortunately, monetary policy from the 1980s regressed into the spirit of 1920s’ economic liberalism and monetary conservatism. The result has been the nonsense of simultaneous economic growth and deteriorating living standards through stagnant wages, overwork, unaffordable housing, and weak environmental stewardship; the inequality norm of the neoliberal era matches that of the early twentieth century.

Money is inherently public. Unfortunately, there is a ‘groupthink’ in the economics profession; the profession which describes economies with a very limited vision of capitalism’s public sphere. Modern monetary theory straddles capitalism’s public-private interface.

Financial Mercantilism and Labour Mercantilism

In the neoliberal counter-revolution of the 1980s, the Reserve Bank of New Zealand was mandated to use interest rates as a weapon to suppress inflation by creating a recession. Although government debt was costless to create, governments were obliged to pay high ‘market’ rates to borrow. A new ‘expensive-money’ era of neoliberal-mercantilism was born, in which money was required to have innate scarcity value. Money reverted to its former status as a commodity to be made and stored.

The neoliberal era is best characterised as a new period of financial mercantilism; an era in which money is king, and the objective of economic life is – through capital or through toil – to ‘make money’.

This neoliberalisation took an unusual path in New Zealand, in that the figure after whom these changes were identified – called ‘Rogernomics’, after Labour Minister of Finance, Roger Douglas – had a deeply set philosophy which can best be described as ‘labour mercantilism’. The philosophy dates to conservative working-class practices in the Victorian era, the Fabian era, and which gave a nod to Marxian class consciousness. In that era of working-class self-help, worker welfare came through worker-funded contributory societies in which all contributors had an equal stake and expected equal benefits, though spread out over time. To be a beneficiary, you had to be a contributor to the fund from which you and your family expected to benefit. Money earned in one period would be paid out much later. Pension-fund benefits, for example, paid out of saved money, needed to purchase new goods and services. While this idea presumes economic growth through the accumulation of physical capital, the initial withdrawal of money from circulation could inhibit such growth.

This funding idea forms the basis of ‘savings-funded’ pension schemes, as distinct from ‘pay-as-you-go’ taxation-based schemes. The savings-funded schemes create huge financial liabilities which must be liquidated in an inherently uncertain future; the fiction is that wealth is stored in the past to be consumed in the future. The current-tax-funded schemes, on the other hand operate entirely in the present tense; a person’s pension is determined by today’s economic conditions, not yesterday’s conditions.

Financial mercantilism is a ‘store-money-today’, spend it decades later perspective. Labour mercantilism is the variation applied to the savings of wage and salary earners.

In the late-1930s’ Labour Government there were three factions, which Michael Joseph Savage (Prime Minister) had to manage. There were the monetary radicals – the radical centre – which included Social Credit. There were the left-wing redistributors, who wanted to ‘tax the rich’ and ‘pay pensions and tax concessions’ to workers. And there were the ‘right-of-the-party’ labour mercantilists who wanted to withdraw money today to build sovereign wealth funds from which future retirement and other benefits would be paid to workers’ families. These last two groups squabbled intensively behind the scenes. (A very useful source is the 1980 book, The Politics of Social Security, by Elizabeth Hanson; another is A Civilised Community, 1998, by Margaret McClure).

That first Labour caucus included Bill Anderton, Roger Douglas’s maternal grandfather (MP for Eden and then Auckland Central from 1935 to 1960; no relation to Jim Anderton, whose father’s surname was Byrne and mother’s birth-surname was Savage, though no relation to Michael Joseph Savage). From 1960 to 1975, Norman Douglas succeeded his father-in-law Bill Anderton as MP for Auckland Central. Norman and Roger Douglas were in Parliament together from 1969 to 1975.

In 1937 there was a push from Labour’s right to abandon the 1935 policy pledge of universal pensions (and other benefits) in favour of an actuarial scheme – what we would today call a sovereign wealth fund – that was conceived-of as a kind of ‘magic money tree’ based on the ‘principal of compound interest’. Minister of Finance Walter Nash, returning from the United Kingdom in 1937, was accompanied by accomplished British actuary George Henry Maddex. Much time was spent with Maddex – some would say wasted – trying to supplant the promised ‘pay-as-you-go’ universal pension with this scheme which promised some people – mainly men – with large benefits in the distant twilights of their lives. Further, because the people who financially contributed the most would get the most, the scheme in essence promised an avalanche of future-spending by people other than those with the most needs. In the end the left and right factions cancelled out, resulting in a universal welfare state funded for current beneficiaries with current money.

Compound interest only works if interest is less than inflation over the medium-long term. In practice such ‘pension funds’ play about for decades in the casino economy, trying to replicate the promise of compound interest. Further, they represent capitalism’s greatest financial risk; the possibility that financial assets, dynamically-parked in the casino of capital gains, will sometime in the future return at scale and at short notice to the real economy. Flooding the future economy with excess demand. Or eventually providing deferred benefits which would buy much less than promised.

Fast forward to 1974, Roger Douglas devised and established such a sovereign wealth fund, which commenced operation in 1975, and was cancelled months later. In the midst of high inflation and a global economic crisis, the greater monetary priority was addressing the issues of that time, not stashing away stocks of money for the never-never. The National Party under Robert Muldoon fully exploited that misplaced priority.

When in power again in 1985, Douglas turned to the redistributive face of Labour, means-testing the ‘universal superannuation’ which had existed in one form or other since 1940.

Nevertheless, still alive and well at 88 – and long-after he established New Zealand’s most right-wing party, ACT – Roger Douglas is still pushing for the same sovereign wealth fund that his grandfather wanted in 1937 and that briefly operated fifty years ago. This time he has University of Auckland Economics’ Professor Robert MacCulloch at his side, claiming this pension fund as a magic bullet solution to New Zealand’s present stagnation (refer GDP drop sparks calls for Willis to step aside, RNZ, 19 Sep 2025). One-again, withdrawals from the ‘circular-flow of money’ will not rejuvenate an economy which desperately needs injections of ‘money-in-circulation’.

Kwasi-nomics

An interesting recent episode was the Fall 2022 rise and fall of Liz Truss as United Kingdom Prime Minister, and her hapless Chancellor of the Exchequer Kwasi Kwarteng. Truss and Kwarteng were right-wing monetary mavericks, willing to expand the United Kingdom’s public debt through ‘unfunded’ tax cuts. Yet the structure of those tax cuts was principally to allow the already rich to become richer, rather than to inject the money into where it was most needed. Subsequent to her effective dismissal, she went on to laud Argentina’s hatchet (aka chainsaw) President Javier Milei whose modus operandi is to drain money from those sections of Argentine society which most need it. Kwarteng and Truss were co-authors of Britannia Unchained, which argued ‘for a radical shrinking of the welfare state in order “to return it to the contributory principle … that you get benefits in return for contributions”. That’s the same quasi-economic principle which underpins labour mercantilism.

Ricardian Equivalence

Ricardian Equivalence is an idea gleaned from classical macroeconomics which became fashionable within neoconservative economics in the 1980s. It claims that fiscal policy is futile; that increases in government spending are ‘internalised’ in such a way that private spenders adjust by spending less. It has been widely used as an argument for the futility (rather than the centrality) of government spending as an engine to establish a healthy full-employment market economy.

Neoconservatives push the liberal-mercantilist monetary narrative as the only valid macroeconomic policy programme. Ricardian Equivalence, much-touted by economic liberals to justify fiscal conservatism, puts all their policy eggs into monetary policy. Meaning the monetary policy, based on innate money scarcity, of using interest rates to recreate the primordial costs previously associated with gold and silver mining.

Ricardian Equivalence is a ‘straw man’ argument. In as much as the data supports it, that conservative characterisation of government spending does not apply to economies stuck in depressions or structural recessions. Only programmes of active government spending – or waiting for too long – can resolve a structural recession.

And the monetary system always requires enough public debt to act as the banking-system’s ‘modern gold’.

Finally

Modern Monetary Theory is a valid description of money as it actually is (and was), and a policy recipe for economic growth. There are important twenty-first century stories which require money to be something more; in particular, a means to generate higher living standards and productivity without requiring economic growth. This is partly an issue of work-life balance, better enabling those who wish to choose more leisure and less work. And a prosperous future without economic expansion will be a requirement of a future of demographic contraction, as is forecast for the end of this century.

To achieve these ends, we have to go beyond public-debt-induced peoples’ money to achieve ways in which ordinary people – households of people who consume goods and services among other things – can choose their own balances between consumption and other facets of good living.

It can be done. Public equity dividends – dividends arising from public domain capital, equal and unconditional, complementing private incomes – can enable the overworked to work less and the underworked to work more. That could be the future direction of modern money.

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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.

Back in the day, Economics 101 students learned that trying to recover from a depressed economy using monetary policy alone was like ‘pushing on a string’.

Easy monetary policy is supposed to work by getting people – households, businesses, and governments – to incur more debt; in a phrase, to borrow and spend. Easy money alone sometimes works; for example, in an ordinary downturn of the trade cycle. It does not work in a depression or a structural recession (see my Chart Analysis – Structural Recession, Evening Report 21 September 2025); because – for most parties – the overwhelming priority is to get out of debt rather than to recover through debt. The carrot of cheap loans does not appeal to overextended and technically insolvent borrowers.

Recovery through easy monetary policy depends on there being enough potential borrowers willing and able to respond to the monetary carrot.

The central government is such a potential borrower. When the government responds to the incentive, the policy is called easy fiscal policy. It’s a game-changer. Easy monetary policy may mean there’s plenty of money sitting in banks’ balance sheets; sitting waiting to be borrowed and spent. For the economy to recover, that money has to move; money – to be money – must circulate. It requires a spending agent able to take on the risk of more debt in a recession to get money moving once again. The government is generally best-placed to be such an agent, though not necessarily the only one; larger domestic corporates should also be motivated to help with the recovery of the economy which represents their home base.

In a structurally recessed economy, the banks need to create the extra money and the spending agents with deepest pockets need to borrow and spend. It’s not rocket science. Banks will almost always create the money when good customers come to borrow; that’s a central feature of profitable banking.

Will governments which borrow more end up with more debt; with too much debt? The answer is, generally no. By spending, governments generate income and therefore income tax. There’s a multiplier that is particularly powerful during a structural recession. (In 1937, the New Zealand economy had double-digit annual growth, as state-housing funded by new money created the necessary stimulus to get New Zealand out of the Depression.) Customers of governments generate income and therefore income tax. And customers of those customers also generate income and therefore income tax. And so on.

It’s widely known that income tax grows faster than income in an expanding economy, especially a growing economy with two-to-three percent inflation. (And it’s known that income tax shrinks faster than incomes in a contracting and/or deflating economy.) That’s why the Australian government has a Budget surplus (0.6% of GDP) at present and New Zealand has a deficit (-3.1% of GDP); as well as why Australia has less government debt as a percent of GDP (data from Trading Economics; though data users should be critical, that source gives the latest United States quarterly economic growth data at four times what it really is – note the presence or absence of the word ‘annualized’). Australia has a Treasurer who’s not afraid to spend (and despite Australia having higher interest rates, tighter monetary policy); hence the healthy revenue of the Australian Treasury.

In a depressed economy, fiscal policy is the answer. Monetary policy helps of course. But relying on monetary policy alone is like pushing a string. The economy just goes slack. This is not a revelation. It’s basic Economic Principles, as it was once taught.

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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.

Yesterday the provisional Quarterly Economic Growth data was released. It showed that, seasonally adjusted, remunerated output (ie GDP, gross domestic product) fell 0.9% in April-to-June compared to January-to-March. While the resulting media hoo-ha overstated the significance of this result, there was still very little coverage of the underlying problem; New Zealand appears to be at the peak (not the trough) of a structural recession.

I have represented the same latest New Zealand growth data in three charts: biannual (rather than quarterly) economic growth; annual growth, and biennial growth.

Biannual Growth

In the chart above (and the other two charts, below), the black dot represents the latest datapoint. To the right of the black dots are ‘slightly optimistic’ and ‘slightly pessimistic’ forecasts projected to early 2026.

The first thing to note is that the latest biannual growth datapoint is 0.7%, which translates to annualised growth of 1.4%. The policy target for annualised growth is three percent (equivalent to 1.5% for biannual data, and 0.75% for quarterly data). The 0.7% statistic is the seasonalised GDP for the first half of this year compared to the second half of last year.

In the present scheme of things 0.7% biannual growth is rather good. The most important feature of the data series is the surprisingly high figure for the first quarter of 2025; a bounce-back from the 2024 disaster. The second quarter ‘slump’ does no more than reverse the first quarter rise, suggesting a ‘flat economy’.

The chart shows the data series as released by Statistics New Zealand; that quarterly GDP series begins in the second quarter of 1987, when ‘Rogernomics’ was in full swing. The first available biannual growth datapoint is for the beginning of 1988. We also note that I have omitted the wildly swinging short-term growth data for the two years of the Covid19 lockdowns. The dashed line for 2020 and 2021 indicates average growth for those years.

The chart shows the economic crises of the last 40 years. In doing so it shows that there is a common pattern of above-average growth immediately after a crisis; this is the easy re-employment growth that follows a period of high unemployment. This did not happen so much in the period of the early-2010s, when the New Zealand government pursued a policy – moderate by European Union and United Kingdom standards – of ‘fiscal consolidation’.

We also note that the high bounce-back in 1993, when Ruth Richardson’s ‘dead hand’ was being eased off the tiller, was not enough to prevent – in the election that year – ‘the Right’ suffering its biggest electoral deficit since 1938.

The most recent part of the biannual chart suggests that New Zealand is currently at (or just past) the peak of a structural recession. Biannual growth will be negative for the period April-to-September, even if quarterly growth is positive. We note that the early 2025 growth ‘spurt’, linked to New Zealand’s near-record-high terms of trade (the record was in 2022), is still well below the biannual growth target of 1.5%.

Annual Growth

The second chart shows the same data, but comparing a whole year with the previous whole year. Here much of the nasty 2024 recession is incorporated into the most recent datapoint. The whole experience looks much like the global financial crisis which troughed in 2009; though this time New Zealand has performed relatively worse compared to other developed nations.

The long structural recession of Rogernomics and Ruthenasia (Roger Douglas and Ruth Richardson) remains a standout, however. Those years of the late 1980s and early 1990s represent fiscal and monetary austerity at its silliest.

Biennial Growth

For some purposes, even annual growth is too ‘short-term’. For fifty-year-plus analysis, I sometimes favour quinquennial growth calculations. But biennial growth gives a good big picture when looking back three to five decades.

Here we can see the substantiality of the Ruthenasia policy crisis and of the global financial crisis; and how a relatively normal crisis such as that of the late 1990s should be placed in context.

Looking at today, even my slightly optimistic projection (of one-half percent biannual growth) shows a structural recession comparable to the global financial crisis. We note that interest rates in most developed countries were reduced to near-zero as a rapid policy response to the 2008/09 global crisis. (Global inflation didn’t happen in the 2010s, as the woe-betiders claimed it would!) We see none of that urgency this time, noting that something like the present New Zealand malaise is emerging in United Kingdom, France, Canada, and especially Germany. Others are likely to follow these.

Reflection

New Zealand’s economy is stuck in a mire. With other major economies following suit, it’s much more likely that things will get worse not better, as the decade progresses. As the first chart shows, the New Zealand economy has recently ‘enjoyed’ a peak – albeit a low peak – not a trough.

Lower interest rates will not solve the problem. That’s like ‘pushing on a string’ as the textbooks used-to-say. Governments need to generate revenue by spending more, not less; more spending means more income means more income tax, and means more investment in the economy rather than in the casino.

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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.

Public policy in New Zealand is paralysed by an unwavering mis-framing of the current economic stagnation. A key part of the problem is the popular attachment to the phrase ‘cost of living crisis’ as a catch-all for contemporary economic malaise.

The first task towards clear thinking is to disentangle ‘cost of living’ from ‘inflation’. To do that it helps to separate the words ‘price’ and ‘cost’. We should get out of the habit of saying ‘cost’ when we mean ‘price’. A commonplace expression of the crisis is that ‘prices are too high’, though that is often translated in the minds of professionals – economists, journalists, politicians – as ‘inflation is too high’. Inflation is the rate of change of certain prices, not the prices themselves. We note that the CPI – the consumers’ price index – is a direct measure of average prices; and is thus the measure from which inflation is usually calculated.

Rising (rather than high) real costs of production are important contributors to price increases. Real contributions to high consumer prices may include ‘profiteering’ by retail or wholesale firms with the market power to set high margins; ie high price markups. Although this situation begs the question as to why firms with such power would wait for a crisis to exploit their power. Such firms – such as supermarkets or banks or power companies – may or may not contribute to high costs, but are unlikely to be contributing to high inflation. By and large, these industries are being used as scapegoats; distractions from the real problems.

We note that the word ‘real’ serves critically as a contrast to the word ‘nominal’. A real crisis (or real crises) can easily set off a monetary inflation that’s presented as the main crisis. Indeed, that’s what has happened in the world economy in the 2020s so far. The real cost-crises (the disruptions to the global supply chains in, especially, 2021 and 2022) were the primary events, and the subsequent inflation – by definition a nominal (ie non-real) event – has been a secondary event. By ‘nominal’, economists agree that inflation happens, but that it’s simply a fall in the price – that is, the purchasing power – of a dollar. Inflation is deemed to be a problem, because people with money in the bank – or under the bed – wish their dollars to be able to buy as much tomorrow as they will buy today.

The quite simple story of price increases has however been complicated and perpetuated by poor narration and poor policymaking, by both central banks (such as the Reserve Bank) and by governments (such as New Zealand’s from 2022) pursuing policies of ‘fiscal consolidation’. Thus, as occurred with the Great Depression of the 1930s, a potentially simple crisis of real shocks and monetary adjustment has morphed into a fullscale crisis of inept policymaking, weasel words, and technocratic butt-covering.

We start by noting that real costs must be borne, whereas nominal price adjustments only have a distributional impact. The costs of pandemics, wars, and global warming are real and must be borne; whatever their causes.

The Malaise: a Mix of Non-Inflation and Inflation

The present ‘high price’ crisis is not an ‘inflation’ crisis; although some inflation is symptomatic of the crisis. ‘CPI inflation’ is a measure of how fast prices are increasing. Prices don’t have to be increasing to be problematically ‘high’. Further, increases in the CPI – our favoured ‘metric’ for the general level of prices – represent a mix of real price increases (due to higher costs) and nominal price increases attributable to (monetary) inflation.

(Milton Friedman, the renowned Chicago School ‘monetarist’, was right. ‘Inflation’ is everywhere and always a monetary phenomenon, by definition. But not all increases in the general level of prices are inflation. Further, such academic monetarists have a naughty ‘remedy’ for non-inflationary price increases; that remedy, ‘monetary deflation’ – negative inflation – can be used to conceal real price increases. Monetary policy can, seemingly, counter any crisis of higher prices; not just an inflation process. ‘Inflation’ can be defeated, even if it isn’t inflation. But at a cost.)

So, we have two definitions of inflation. Many commentators – including economists – switch backwards and forwards between the two meanings. The statistical measure (definition one) is called ‘CPI- inflation’. The economic process (definition two) is ‘monetary inflation’. The two definitions overlap, but are not the same. The latter is the correct technical definition of ‘inflation’.

The difference is important. To give an example. Perhaps the annual rate of increase of ‘CPI inflation’ is three percent. Quite possibly two percent of that (strictly, ‘two percentage points’) is due to an increase in ‘real costs’. And the other one percent is technical inflation. If so, then we can say that the ‘price of money’ has fallen by one percent, not by three percent. Monetary inflation – the economists’ definition of inflation – is the rate of depreciation of money. (And we note, given that money is a social technology rather than a pottle of wealth, any depreciation of money may or may not be a bad thing; and if it is a bad thing, it’s probably – like physical pain – a symptom of a problem rather than a problem in itself.)

(We do not have a way to accurately measure how much of a CPI increase is due to rising costs vis-à-vis inflation. While economists can estimate the proportions of each contribution to a ‘headline’ CPI number, many – especially those who wish to interpret a rising ‘cost-of-living’ as an inflation crisis – prefer not to make the distinction. What we can always say, however, is that a ‘headline’ CPI-inflation measure – like many measures – is an overall estimate for an underlying but unknown composite reality. While standard textbook remedies for inflation are quite different from remedies for cost overruns, some economists have an ideological predilection for anti-inflation remedies. For those economists, such remedies can represent a solution looking for a problem.)

So, what do we mean by an increase in ‘real costs’? (Price increases arising from such costs represent the non-inflationary component of CPI-inflation.) A good example is the cost of picking fruit from trees. If we only pick low-hanging fruit, then the cost of fruit picking (and hence the price of fruit) is ‘low’. If there is only high-hanging fruit on the trees, then the cost of fruit-picking is much higher; the price of fruit will be higher, because more labour was required to pick the fruit. A switch from low-hanging to high-hanging fruit can be expected to cause a price increase of fruit; this is not inflation.

We can apply this insight to other products, such as crude oil. If the oil is seeping out of the ground, then it’s the equivalent of low-hanging fruit. If the oil is deep under the North Sea or Alaskan ice, then it’s the equivalent of high-hanging fruit. Another possible source of rising real costs is increased bureaucratic compliance. Any situation where the economy is supporting more bureaucrats than is really necessary is an example of excess cost. A further source of real cost is a ‘primary increase’ in ‘factor costs’ such as interest rates (capital cost) or wages (labour cost); primary cost increases set off an adjustment process; secondary increases are the adjustment process itself. A primary increase in interest rates or wages may be due to a policy; for example, a ‘tightening of monetary policy’ or a ‘general wage order’. (On the matter of general wage orders and the like, see my Equal Pay, Pay Equity, and Cost-of-Living Narratives, 22 August 2025, here or here.)

A ‘secondary increase’ is an increase which represents a market response to a ‘non-clearing market’. Primary events are destabilising ‘shocks’ or ‘stresses’; secondary events represent stabilising adjustment processes, corrective ‘ripples’. Inflation is, for the most part, a secondary event. There is an important exception – called primary inflation – which is the impact of a demand-shock or a demand-stress; in my account so far, I have confined the discussion to supply shocks and supply stresses.

Generally, a ‘supply shock’ is a name for a sudden and unexpected increase in real costs (ie an acuteadverse event). And a ‘supply stress’ is a slow and ongoing increase in real costs, or an anticipated cost increase, such as we get from carbonisation of the atmosphere. A supply stress is a chronic malaise. Both kinds of increase in real cost have to be borne, to be paid for; in themselves they have no impact on the price of money.

A ‘cost-of-living crisis’ is a supply shock or a supply stress; or, very likely, both.

The capitalist marketplace has a mechanism for distributing the cost burden efficiently; it is an aspect of what is sometimes called the invisible hand. It is inflation, secondary inflation. It involves price increases; in effect the shocks and stresses ‘rippling’ through the whole economy. This shock-absorbing process of decelerating inflation works best when there is an accommodating monetary policy, meaning that – through banks’ double-entry bookkeeping – the money supply is allowed to rise to smooth this adjustment. This is inflation, but not problematic inflation; this inflation is the cure, not the disease. Problems occur when this process is suppressed by monetary authorities.

If the inflation process was initiated by a supply shock, the process settles down so long as it’s not disrupted or aggravated by further shocks or stresses; just as ripples in a pond eventually settle. (If the supply shock is a war, and the war comes to an end, there may then be a ‘benign supply shock’; ie falling real costs. The appropriate resolution is to facilitate CPI inflation to remain at the target level – eg two percent – despite a fall in real costs potentially decreasing average prices. This is an example of beneficial monetary policy, in this case seeking to prevent an adjustment which could be interpreted as deflationary.)

In the case of supply stresses, optimal market adjustment likewise requires a degree of ongoing secondary inflation. Again, such monetary inflation is a solution, not a problem. In this case the ripple-effect may not decelerate; it’s as if a continuous supply of stones is being thrown into the pond. (Another obvious part of the solution, of course, is to address the supply stress – by removing or mitigating that stress – the stress being a ‘root cause’ of a rising ‘cost of living’ burden. Stop throwing stones.)

Contractionary monetary policy can be a supply shock or a supply stress.

The contractionary (ie ‘tight’, or austere) monetary policy of jacking-up interest rates (mainly performed by Reserve Banks) in itself creates or perpetuates ‘cost-of-living crises’. These are direct policy interventions to increase the cost-of-living.  The initial supply shock of high interest costs becomes a supply stress if persevered with for more than a year. As a shock or stress, tight money is a problematic policy response either by exacerbating some other supply shock (such as the major 2021 [pandemic] and 2022 [war] disruptions to the global supply chain) or by adding an adverse supply shock to an adverse ‘demand shock’. (Both kinds of ‘adverse shock’ cause prices to rise.)

A ‘demand shock’ or a ‘demand stress’ constitutes a primary inflation; an increase in spending that is too great or too sudden to be accommodated by the economy’s surge capacity. (The technical term for ‘surge capacity’ is ‘supply elasticity’.) Tight policy – monetary or fiscal – was initially devised as a countershock to a demand shock. With a demand shock, the risk of problematic inflation is greatest when the economy has zero or very little surge capacity. The next and biggest coming inflation of this ‘demand shock’ type will arise from the world’s pension funds being liquidated as baby-boom generations either retire or are retired.

If this projected demand-side inflation gathers pace before the present supply-side CPI-inflation subsides, the two events stand to be conflated by future historians into a single inflation event. In the coming case, if future historians look back closely, they will come to see a demand-stress inflation as the ‘second-half’ of a conjoined 2020s’ and 2030s’ inflation event.

In the 1970s the reverse happened; a global demand stress inflation got underway from 1968 – the main source of the stress was the financing of the Vietnam War – followed by oil-supply shocks emanating from the 1973 Arab-Israel War and the 1978/79 Iranian Revolution. This ‘great inflation’ of the 1970s was perpetuated well into the 1980s by the problematic monetary-policy-induced supply shocks of the early 1980s; in particular those associated with Margaret Thatcher in 1980, with ‘Reaganomics’ in 1981, and in New Zealand with ‘Rogernomics’ in 1985. (I use the word ‘problematic’ rather than ‘counterproductive’ or ‘mistaken’ because, while the policy aggravated rather than ameliorated inflation, the policy did effectively serve other somewhat opaque purposes. While this is not the place to discuss the power-realigning unstated or understated reasons behind this type of policy, we may note that many – maybe most – policies have multiple objectives including unpublicised objectives. See The New Zealand Economy 1900-2000, by Geoff Bertram, New Oxford History of New Zealand, 2009; one of Bertram’s main themes is “the rise of a business and political elite based in the service sectors, particularly finance”, using the analogy of a political “coup”.)

Change in Real Costs plus Monetary Inflation equals CPI Inflation

This has been the main technical point of this article. When we hear in the media of ‘the inflation rate’, it means ‘CPI inflation’. Since 2021, both the ‘change in prices due to real costs’ and the rate of ‘inflation’ have been positive numbers. I have argued that the ‘monetary inflation’ has been the smaller of these two, and that the ‘real cost’ problem has been due to global supply-chain disruption and to the contractionary monetary policy of jacking-up interest rates. This policy response was done earlier and harder in New Zealand than in most other countries; though has now eased, in comparison with Australia, the United States, and the United Kingdom. (CPI inflation remains stubbornly high in those countries which continue with their supposedly ‘anti-inflation’ settings. Canada, with lower interest rates than New Zealand, also has lower CPI inflation.)

In past times of low CPI inflation, typically either the ‘change in real costs’ or the rate of ‘monetary inflation’ have been negative numbers. In better times such as 2013 to 2019, productivity (crudely measured as real gross domestic product per person) was increasing, meaning that real costs were decreasing. (We may note that, according to classical and neoclassical economics, in growing economies the CPI should for the most part be falling rather than rising; as indeed occurred in the nineteenth century.) So, in March 2018 for example, the annual change in real costs was around minustwo percent, and the rate of inflation was about plus three percent (together adding up to one percent). This is another example where inflation – a fall in the ‘price’ of money – was beneficial, because it averted CPI deflation and encouraged the circulation of money.

A further reason why inflation can be beneficial is that inflation tends to improve the distribution of monetary wealth (making wealth slightly less unequal), whereas deflation – negative inflation – tends to aggravate such wealth inequality. So, the combination of negative real cost growth and positive inflation is one of macroeconomic success; wages rise faster than prices.

An Engineered Deflation

What policymakers have been trying to do since 2021 is the opposite; they have been trying to engineer a deflation (a rise in the price of money) as a way of hiding non-inflationary increases in the ‘cost-of-living’; a real ‘cost-of-living crisis’ means a sustained period in which disposable incomes – meaning annual after-tax incomes – increase more slowly than prices. (This is how real costs are borne; typically, the burden unfairly falls on those least responsible for the problem.)

The way to achieve such a monetary deflation is to engineer a recession through, among other methods, maintaining a supply-stress policy of having interest rates jacked-up to levels higher than they would be if left to the market. Businesses, needing to reduce their selling prices, then act to cut their costs by paying workers and suppliers less. Those businesses with a decree of market power, such as supermarkets, lead the way by reducing the real wages of (mainly female) low-wage workers, and reducing the prices they pay to their suppliers of fresh foods. If anyone has a case for a pay-equity wage increase it is supermarket checkout workers; but policy in New Zealand – shared by recent National and Labour governments – is to press down the costs of supermarkets.

I have suggested that currently in New Zealand real costs are increasing at about plus two percent per year, and monetary inflation is plus one percent. An overly-engineered recession might see real costs rising by plus five percent a year, and inflation at minus three percent. That would show up in the official statistics as a CPI-inflation of two percent. Policy target achieved?! We note that such a policy would fail to address the ‘real cost’ problem – indeed it would exacerbate that problem – while trying to claim success by hiding the problem through monetary constriction and deflationary wage settlements.

A monetary deflation (or inflation) is very difficult to engineer, however (because of the ‘secondary’ nature of such processes); what usually happens instead, and as a result of the policy attempt, is a recession or depression. In order to engineer an offsetting deflation, monetary policymakers have to aggravate the supply stress; they have to aggravate the ‘cost-of-living’ problem in order to deliver their monetary ‘solution’.

Money is an economic lubricant, not a fuel. Neither the family car nor the national waka (aka NZ Inc.) will function well if decision-makers choose to economise on lubricating oil.

The Great Depression, in contrast

During the Great Depression of the early 1930s, real costs were decreasing (for the most part, though much of that was labour short-time), and there was a difficult-to-stem monetary deflation, aggravating a problem of growing wealth inequality. The main problem was one of deflationary demand-stress; insufficient spending. That spending problem was substantially aggravated by most of the world’s governments; a big shortfall in government outlays – whether reduced government benefits, reduced government spending on core services, or reduced government investment in economic capacity – creates future supply stresses.

In the mid-2020s in New Zealand, the present crisis is morphing from a cost crisis into a demand crisis more like the Depression; a crisis of too little spending, aggravated by government retrenchment. Australia, on the other hand, is about two years behind New Zealand; while it’s going through a greater supply stress from monetary policy, the government and consumers are forestalling such demand-stress by maintaining spending levels. Australia, if its government policymakers continue to be wise, will not choose to starve the economy of the public contribution to demand. Australia, by being more relaxed about its fiscal deficits, has upheld its fiscal revenue base; indeed, it has achieved fiscal surpluses in 2025 through more government spending rather than through less. New Zealand, on the other hand, cannot achieve fiscal surpluses because the fiscal policy wonks have generated a downwards expenditure-income spiral.

The next global economic depression will be different from the 1930s and the GFC (global financial crisis). Expect a combination of global supply shocks aggravated by national (policy-induced) supply stresses, and demand shocks in the western world as the older population cohorts seek to spend their retirement savings on the kinds of goods and services that older people most require. It will be a depression without the CPI-deflation which characterised the early 1930s. Most likely it will be what economists call ‘stagflation’. Nevertheless, there will be hidden (monetary) deflation amidst substantial real cost increases. It will not be pretty, and the world is unprepared.

Finally

The notion that jacking-up the cost of credit – interest rates, a critical cost which permeates the whole economy – is a cure for a ‘cost-of-living crisis’ is one of the all-time-great confidence tricks humankind has been subjected to. Let’s challenge the people who intimidate us, wittingly or unwittingly; they intimidate through the use of agenda-appeasing weasel-word narratives.

There is a solution, in addition to ending so-called anti-inflationary policies, and it’s called Public Equity. (See my Public Equity and Tax-Benefit Reform, a report prepared for The Policy Observatory, Auckland University of Technology, December 2017. Or see Public Equity and Tax-Benefit Reform – Scoop, 14 December 2017 – for a summary.)

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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.

The Initial vote on Kiwibank in the Labour-Alliance government in 2000 was 16 Labour against to 4 Alliance for.

I was there when this was reversed, and in 2001 the 4 insurgent Alliance Ministers – Jim Anderton, Sandra Lee, Laila Harre and Matt Robson- received our foundation Kiwbank cards in Jim’s office. New Zealand once again had a popular publicly owned bank to aid its development and counter the strangling grip of the privately owned foreign banks. Finance Minister Cullen said, begrudgingly, that the bank, operating from New Zealand Post premises, would get an $ 80 million loan , but not one cent more. Helen Clark continued her opposition by announcing she would remain an Australian Big 4 customer.

Kiwibank had been a long journey. Why had Alliance members campaigned so long and hard for this goal? Jim Anderton had  spelt out the reason in 1988 as the Lange Labour government continued its crash sale of public assets by putting the Bank of New Zealand with its 20 percent share of the banking sector on the auction block. In a 1988 parliamentary speech that led to his expulsion from the Labour caucus Jim Anderton said:

The sale of State Owned Enterprises transfers ownership, control, wealth and resources from the public sector to the private sector…Once it is sold the policy options available…are almost certainly removed…Even after the worst stock market crash in New Zealand’s history…the Bank of New Zealand made an operating profit of $182 million in the 1987-88 financial year… (it) is virtually a perpetual asset…(and) commands 20 percent of the current financial system”

As a highly capitalised bank the BNZ, meeting its huge taxation and dividends obligations to the government and with its long history in the development of New Zealand as an arm of government, the BNZ limited the destructive side of  private banks and kept profits and investment capacity in New Zealand.

Within a short time, an expanding  Kiwibank kept local branches open, and rapidly attracted customers. It paid back the initial government capital within 3 years. It now has over one million customers, including over 40,000 businesses.

Michael Cullen, resiling from his initial hostility , was to praise Kiwibank in his autobiography as follows:

But Kiwibank proved its real worth to New Zealand in the early stages of the global financial crisis. The Australian  banks withdrew substantially from the New Zealand mortgage Market. Kiwibank stepped  into the breach. Despite its very small size compared with the Aussies, it was for a year or two the largest provider of new mortgages…since Kiwibank was set up, the Australian banks have emphasised their New Zealand character…

The former Finance Minister then warned, and Minister Willis would do well to heed,  about the true character of the private banks:

…when the crunch comes , one should never be fooled  about where their primary accountability will lie.

In his 1988 speech to Parliament, opposing his own public asset selling Labour Party,  Jim Anderton also outlined the vision which in 2002 was to underpin both the  Kiwibank and  a newly minted  ministry of economic and regional development, of the public bank playing an essential role in national economic development:

…if it were decided to run an active regional development policy the geographical spread of the branches of the Bank of New Zealand makes the bank the only Government agency with the detailed knowledge required to act of the Government…of providing long -term development funds for viable projects in all the regions…sale of such an extensive economic power…may lead to the operation of the bank for purely financial commercial reasons…small borrowers , and even Governments, suffer when dominant banks  are run for short term financial reasons and profits.

All of these advantages are now at risk as the government , using the excuse of the need to raise capital for the bank to take on the Big 4, sets out to gift an essential economic tool to the private sector. The New Zealand Herald revealed the government’s intentions on 25 July:

In a routine letter of expectation sent to Kiwibank’s board chairman David McLean in April, shareholding ministers suggested they were open-minded as to how Kiwibank grew… ( Minister of State Owned Enterprises ) Goldsmith said the Government had no plans to privatise state assets, but conceded a possible outcome of the purpose statement exercise could  be that it decided it no longer wanted to own an asset.

Renationalisation Pledge

Warning bells should ring for Labour and the Greens. Labour members and voters triumphed over the initial opposition to Kiwibank of Helen Clark and Michael Cullen to Kiwibank. The Green Party has pledged to oppose asset sales. As Alliance MPs, Green Party founders Jeanette Fitzsimons and Rod Donald campaigned for Kiwibank . Labour and the Greens must form a united front in defence of Kiwibank.  A pledge to re-nationalise and expand through government financing ,there are multiple financing methods available , will deter the circling sharks which include the Australian bank competitors.

Governments of all stripes throughout the world recognise the crucial developmental role of a large state bank as an essential tool for long term investment and development. Labour and the Greens can unite to build on the vision of Jim Anderton and  ensure that New Zealand is not, once again, deprived of its state-owned bank by a short-sighted government acting in the narrow interests of the private sector and not in the best interests of New Zealand.

References:

• Building-a-new-public-banking-ecosystem
• BNZ Bill speech in the House
• LF Grant R 21.11.2022
• NZH 18 September 2024 Arena Williams MP

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This year, the heated non-debate in Aotearoa New Zealand about pay equity, has left important answers unquestioned.

Equal Pay versus Pay Equity

The first point that must be made is to distinguish ‘equal pay’ from ‘pay equity’. Equal pay means, for different identity groups, the same pay for the same work. The concept has been mainly applied to sex, and to employees paid by the hour; with equal pay, a woman with the same qualification and experience receives the same hourly pay rate as a man.

In New Zealand, this was mandated into law in 1972 – the 1972 Equal Pay Act – and has been an unwavering centrepiece of New Zealand’s labour law ever since. Before 1972, women gained a ‘market wage’, and men – presumed to be current or future ‘family breadwinners’ – received a privileged wage. (This privileged wage was enabled, especially from December 1938, by a regime of import protection – tariffs and customs’ duties – which meant that New Zealand breadwinners were sheltered from direct competition with foreign workers earning much lower wages.)

As recently as last week, supporters of ‘pay equity’ (including the great-grandson of Elizabeth McCombs), were claiming that ‘equal pay for equal work’ is a current aspiration rather than a long-standing reality. (Refer First female MP would have been ‘appalled’ by pay equity changes, says great grandson, The Post, 11 August 2025: “I grew up with … ‘women [and] girls can do anything’, you know – equal work, equal pay. It just seems absurd that my daughters and granddaughters are still fighting for the same thing that my great grandmother and her sisters fought for.” The Post article, in making no attempt to mention the 1972 introduction of Equal Pay, was perpetuating a kind of politics based on assertion rather than knowledge. Also note this RNZ article: Unofficial People’s Select Committee Starts Pay Equity Hearings, Scoop, 11 August 2025. ‘Equal pay’ is mentioned three times. Of those three, the only mention relevant to the theme of ‘pay equity’ was by the Minister, Brooke van Velden. No effort was made by the authors of the story to reconcile the contradictory references to ‘equal pay’. Not even basic fact-checking, re 1972.)

Pay equity is something different from equal pay. It is corrective remuneration in a case where a whole occupation is underpaid on the basis of employer-discrimination against an identity group. In the situation which has been politicised in Aotearoa in 2025, that identity group is women. A pay equity correction is made by the authorities proclaiming and enforcing a new relativity re some ‘comparator occupation’ whose work is deemed equivalent.

Clearly, like the privileged men’s wages of the distant past, success here would be a privileged wage in the sense that it is imposed by ‘the state’ onto the labour market. Before such a pay-equity correction can be authorised, the alleged discrimination itself needs to be verified (beyond reasonable doubt?). Under present and past law, to be allowed to establish inter-occupational discrimination, the claimant occupation’s employees should be predominantly women. I would define female-dominant as meaning at least twice as many women as men in non-managerial roles. (On this basis, primary school teaching would meet the criterion; but secondary school teaching would not.) To prove discrimination, you have to be able to make a very strong claim that the reason for alleged under-remuneration is the sex-ratio, meaning that if two-thirds of the workers were men then that under-remuneration would not have occurred. (Is it credible that female secondary-school teachers are significantly meeker than male secondary-school teachers?)

By definition, remuneration based on pay-equity is a departure from a market-clearing outcome, so a pay-equity settlement would need to address the problem of an overpriced market; such as an employer subsidy (for an occupation in the economy’s non-tradable-sector) or an export subsidy (for an occupation in the tradable-sector). We note that the pre-1972 ‘privileged wage’ paid to men had coincided with some forms of protection, such as import protection. In a 2020s’ fiscal environment, we have already seen that higher nurses’ pay has led to fewer nurses being hired; that is, given the financial constraints imposed on the principal hiring authority.

We need to note that the fact that an occupation is female-dominant does not in itself mean that there must be inter-occupational pay-discrimination. Conversely, it is also possible that some occupations which have a majority of male workers may be subject to adverse discrimination; occupations with large numbers of immigrant workers come to mind.

Equal pay in 1972 was a revolution which both reflected societal changes (from the 1930s) of sex roles – from prescribed household economic roles towards individualism within households and towards greater diversity in household structures – and also facilitated such changes, even towards the adoption of subjective notions of what ‘male’ and ‘female’ actually mean. While the practical effect of equal pay was to replace the legislatively privileged male real wage with an unprivileged market wage, the wider effect was to incentivise individual labour force participation, making paid work (as distinct from ‘pay’ itself) come to be understood more as a ‘benefit’ and less than the ‘cost’ that it unequivocally is in neoclassical economics. Households needed to supply more hours of work. And paid work came to be interpreted as ‘liberation’. (We note that New Zealand’s benefit system remains the major discriminator against women; the Ministry for Social Development continues to uphold the view that unemployed people with employed partners cannot receive a job-seeker benefit.)

Ironically, in the year after the Marshall-Muldoon National government introduced Equal Pay, Roger Douglas, a junior minister in the Third Labour Government, introduced a comprehensive New Zealand Superannuation Scheme; a scheme which was fully predicated on the traditional view of the male householder as a breadwinner supporting female and junior dependents. It was Robert Muldoon, once again, who rescued the progressive new individualism over the increasingly quaint and regressive ‘working-class male-breadwinner’ social milieu; Muldoon scrapped New Zealand Superannuation in its infancy, replacing it in 1976 with National Superannuation, a Universal Basic Income for seniors (defined, practically, as all New Zealanders aged over 60); this was a comprehensive reinstatement of the ‘Universal Superannuation’ legislated for by the First Labour Government – the Savage government – in 1938.

New Zealand is still one of the few countries in the world to have any kind of rights-based Universal Basic Income, although today the age of eligibility is 65; and it now has the name of Douglas’s very different scheme, New Zealand Superannuation (NZS). As important way in which NZS reflects the liberal ambitions of Equal Pay is that it creates a liberal retirement-income regime, individualised, facilitating individual choice over when to retire; and acknowledging the societal contributions of those in their ‘working-age’ lives (including many women) who did not ‘make lots of money’. (Sadly, one of the first things the Labour Government quietly did in 2020 was to disqualify people – about 90% of whom were women – from accessing NZS as a ‘non-qualifying spouse’; this former provision for retired couples ensured that partners aged under 65 of persons aged over 65 could gain an income-tested version of NZS.)

The rise of the Funded Sector

It’s always been a bit of a puzzle as to why, in the late 1980s, barely 15 years after Equal Pay, the Trade Union movement started to clamour for something else; for Pay Equity. Part of the answer is that ‘organised labour’ changed fundamentally after 1984, under the auspices of ‘Rogernomics’ and ‘Ruthenasia’. And part of that fundamental change was the decline of the traditional male-dominated trade unions which in some cases fought valiantly, but in a fated struggle, to retain high wage jobs for their members.

In its place, we saw the rise of ‘white collar’ unions, which proved to be a substantial feminisation of unions. We saw a dichotomy between what is now called the ‘funded sector’ and New Zealand’s traditional export-focused private sector with its freezing workers, railwaymen, seamen, wharfies, miners, and workers in protected manufacturing industries such as car-assembly. The ‘funded sector’ is a wide interpretation of the ‘public sector’, where employment opportunities are directly linked to governments’ fiscal programmes and policies; it includes crown entities, state owned enterprises, state-contracted organisations such as the ambulance service, and local government.

There emerged substantial numbers of women in a new ‘upper working class’; women in their twenties and thirties earning relatively low salaries, employed in the ‘brave new funded sector’ following the neoliberal reforms. While most of these women were glad to be seen and treated as equals in their workplaces, many were pushed into fulltime work while they had young children; the mortgage had to be paid. So, we also then saw the emergence of a substantial childcare industry (and the decline of kindergartens and play-centres), which is – in effect – also part of the funded sector. As is, also, the growing age-care industry, especially the nursing homes (distinct from the new retirement villages which cater for retired elites and members of the privileged generations – born circa 1935 to 1960 – who have been downsizing from mortgage-free standalone houses on large sections).

Differences between male and female pay on average are linked to the nature of the funded sector itself, as the dominant employer of women; and in particular the unnecessary realities of prioritising ‘fiscal consolidation’ over ‘duty of care’ and societal investment.

The feminist premise which underpins pay equity

Feminism has two contradictory premises. The first premise is that women are the ‘meeker sex’, and therefore require collective intervention to support equitable outcomes for female individuals vis-à-vis male individuals. The idea is that women have been muscled out – figuratively and almost literally – from opportunities for individual self-realisation and influence. The alternative premise is that women are not meeker than men; indeed, that there is no ‘meeker sex’. The idea is that women have achieved lives equally as fruitful as men; but that the many individual and collective achievements of women have not been adequately reported by (mainly) male historians and journalists.

Neither premise is entirely incorrect. Thus, the two feminisms differ more on emphasis than on one being true and the other false. Pay equity is informed by the first of these feminisms. And the substantial and visible successes of women in public life in the last fifty years or so suggest that changes such as Equal Pay have enabled women’s many very real contributions to become more visible. One feminism favours directive policy; the other favours enabling policy and equitable recognition.

The Pay Equity argument is subject to an important ‘catch-22’. To gain the desired policy outcome women have to argue that women are subject to adverse discrimination because of their meekness. Yet, for women to successfully pursue this argument, they have to reveal women to be anything other than meek.

Indeed, the female leaders of the labour movement (who have been substantive leaders of organised labour since at least the 1980s) have revealed that women can be and have been at least as assertive – indeed stroppy – as men. Further, we have for many years now seen that such female-dominant professions as nursing and primary school teaching have assertively advocated for their interests for many years. And it’s not new. Magazines such as Woman Today and Working Woman were doing this in the 1930s. And we openly acknowledge the contributions of strong women in the past, self-realisers and community-realisers, such as Jean Batten and Dame Whina Cooper.

On the matter of catches-22 see ‘Turning women’s wages into a political piggy bank’, Newsroom, 12 Aug 2025. The argument here seems to be that pay-equity claims would first have to be initiated to establish if the claims have merit; but that the prior establishment of merit has become a pre-requisite for a claim to be initiated. I would like to have seen that ‘catch-22’ argument put to a government spokesperson. The resolution here would be the reality of ‘degrees of merit’. Some merit would have to be present from the outset; the adjudication of the claim would then evaluate sufficient merit to adjudicate in favour of an intervention.

My understanding is that there remains a clear pathway to lodging a ‘pay equity’ claim – and hopefully available to any employee group who feels they are underpaid on account of their predominant sex, religion, ethnicity etc – but that it must place emphasis on evidence indicating adverse discrimination. It can never be enough to evoke correlation; causation is the idea that an occupation is subject to low remuneration because of the demographic mix of its employees, meaning that a less-meek employee-mix would, of itself, yield higher wages and better working conditions.

Wage activism and pacifism in New Zealand’s history

New Zealand once (from the 1890s to the 1980s) had a directive system of setting ‘award wages’; the 1894 Industrial Conciliation and Arbitration Act, “The brainchild of Minister of Labour William Pember Reeves”. It morphed into a system of relativities; wage increases would be set for one occupation, and wages for other occupations were effectively indexed.

Or there would be general wage orders. As a result of compliant male-dominated trade unions, by the mid-1960s wages in New Zealand were substantially lower than they should have been, given substantial per capita economic growth. When in 1968 the Arbitration Court mandated a zero wage increase despite five percent CPI inflation, the creaky system of general wage mandates collapsed. It was up to the new Finance Minister, Robert Muldoon, to pick up the pieces, which he did successfully. From 1969 to 1973, wage increases outpaced productivity growth. The new regime was what the stronger unions had wanted – ‘free-collective-bargaining’ – and it took place during the inflationary 1970s. Real wages in New Zealand reached their post-war peak in 1981, although after-tax wages had to wait until 1982 to be corrected through a substantial new tax scale.

While wage relativities between occupations were finally scrapped in Ruth Richardson’s 1991 Employment Contracts Act, in that same neoliberal era a system of salary-relativities was introduced for Members of Parliament and senior public servants. Their pay would be ‘indexed’ to the pay of corporate executives, in full knowledge that the deregulations of the late 1980s would start a process in which the remuneration growth of business executives would substantially outpace the remuneration growth of ordinary private sector employees. The MPs had hitched themselves onto an inequality bandwagon.

We note that, in the very uncertain 2020s, workers in the ‘funded sector’ have been relatively privileged. There now appears to be a new aristocracy of labour, and it is large parts of the highly unionised funded sector. In the 1950s in New Zealand, the aristocracy of labour were the seamen, wharfies, miners, and meat-workers; and the strongest unions represented their interests over the interests of workers more generally. That ‘aristocracy’ was undermined in the 1960s by relativity processes largely connected to Labour Governments in the 1940s and 1950s. In the 1980s an elite ‘salariat’ formed, a new kind of aristocracy of managerial labour; more like traditional ruling-class aristocrats in their consumptionist mores. Nowadays, from the 2000s, we have a unionised funded salariat – the core of a new ‘upper working class’ which is closely linked to Labour politics – and an inherently insecure and under-unionised passive ‘lower working class’ precariat.

Economic ‘games’ (a technical term in economics) – such as ‘pay equity’ activist games – have become increasingly tone-deaf. This is especially true for this week’s secondary school teachers’ strike action – which appears to be a somewhat piqued reaction to its thwarted ‘pay equity’ submission – for a profession with employment security and reportedly having already achieved six-figure average salaries. And it is ‘tone-deaf’ in the context of what both National and Labour have framed as the present ‘cost-of-living’ crisis. Clearly, New Zealand can never match Australia for teachers’ salaries; that ship sailed more than 35 years ago, when suffocating macroeconomic policies created a decade of near-zero growth in New Zealand but not in Australia. For decades now, New Zealand has been to Australia much as what Poland or Czechia is to Germany. The fact that 63 percent of secondary teachers are female cannot be, in itself, a justification for raising the pay relativity between secondary-school teachers and (say) prison workers or defence force workers. Those other occupations have their issues, too.

Inflation, Cost-of-Living, and Economics 202

Setting wages on the basis of occupational relativities rather than in accordance with the market forces of demand and supply has not served New Zealand particularly well. In the 1960s compliant wage-setting had been counter-inflationary. In the early 1970s, the necessary wage catch-up almost certainly contributed to escalating inflation, though international factors were then the main drivers of inflation. I remember 25% CPI inflation in the United Kingdom in 1976, significantly higher than for New Zealand’s peak year.

In the late 1970s, following a coup in academia (most associated then with the name Milton Friedman, and the Chicago School), ‘expert thought’ about inflation was returning to the monetarist ideas which gained currency during the mercantilist era; ideas associated with the likes of Jean Bodin (16th century), John Locke (17th century), David Hume (18th century), and David Ricardo (19th century). Money was understood then to be gold and silver coin (specie); inflation was understood as a fall in the price of money; effectively a fall in the price of gold or silver. In the 1970s, after the gold-exchange standard was abandoned, the ‘fall in the price of money idea’ was adapted to modern fiat money, with Friedman’s provisos that a seemingly insignificant (at the time) over-restriction of the money supply could cause a ‘great depression’, and a seemingly insignificant (at the time) over-expansion of the money supply could cause a ‘great inflation’. In Economics 202 (intermediate macroeconomics), this idea is embodied in the Rational Expectations Hypothesis for which Robert Lucas won a Nobel Prize in 1995.

While the rational expectations’ theory is false in one key respect – the idea that it is normal for an inflationary ‘spiral’ to accelerate in the absence of macho policies of monetary restriction and credibility brinkmanship (noting that the present Governor of the Australian Reserve Bank is ‘macho’ in this respect) – it does offer a valid understanding of ‘demand-shocks’ and ‘supply-shocks’ as the beginnings of inflationary events; as the beginnings of ‘secondary inflation’.

A demand shock, such as an ‘over-stimulus’ (or a bout of animal spirits), brings about primary inflation. Whereas a supply-shock is not inflation at all; it’s simply an unexpected or unwarranted cost that has to be absorbed, such as the 2021 Covid19 supply-chain disturbances and the disruptions to food supplies in 2022 due to the Russia-Ukraine War. Secondary inflation can be understood as the adjustment ‘ripples’ emanating from the primary event. The idea that such ripples naturally accelerate – through an expectations’ mechanism – is metaphysical nonsense. Ripples settle – in this case through market mechanisms – unless invigorated by misplaced policy settings.

(A critical missing ingredient of the theory of inflation is the notion of ‘supply-elasticity’, also known as ‘surge capacity’. A sustainable anti-inflation program needs to create a destressed norm, which allows settled economies to respond to shocks – such as wars – in a responsive ‘quantitative’ way, through output flexibility rather than being thrown into inflation or deflation. The monetarist theory of ‘too much money chasing too few goods’ overemphasises the ‘too much money’ and underemphasises the reasons why there may be ‘too few goods’. Recent restrictive monetary policies have created supply rigidities by requiring the emigration of skilled workers, and by forcing sawmills and similar industries to downsize their capacity; see More Jobs at Risk in Tasman Sawmill Closure, 21 August 2015.)

One of the most-cited examples of a supply-shock in the literature is the ‘accommodation’ of a primary wage bid, such as a Pay Equity bid. The best way to think of a primary wage bid is to consider an economy that’s in a settled state (‘equilibrium’), and (for some ‘perverse’ reason) a group of workers seek to gain an advantage over other groups of workers. (Of course, ‘the economy’ is never in a ‘settled state’; nevertheless, careful analysis can establish whether any particular wage bid is stabilising or destabilising. An example of a necessary wage shock was the previously mentioned catch-up wage growth in New Zealand from 1969 to 1973.) A classic example of a destabilising wage bid is one which a strong union seeks to forge a new relativity.

To a classical macroeconomist, pay-equity claims in general – and including pay-equity-like claims such as the present teachers’ dispute – look very much like (if the employer grants the wage demands, that is) a textbook supply-shock which can initiate a spiral of accelerating inflation. The monetarists’ medicine to any ensuing secondary inflation (or to anticipated secondary inflation) is to suffocate the economy by ‘restricting the money supply’ ‘as much as it takes’ to terminate or prevent that event. (To use the ‘ripple’ analogy, it’s a ripple-suppression policy.)

In addition to the suffocating nastiness of that policy medicine, the interest-rate method of anti-inflation monetary policy adopted since the 1990s, such aggressive policy itself is a supply-shock (a ‘cost-of-living’ shock, albeit a non-textbook shock). An upwards intervention in the price of borrowed money adds to the cost-of-living, creating secondary inflation much as textbook supply shocks can create secondary inflation. The treatment of the ‘inflation cancer’ is itself such a cancer. Sometimes – though not typically with medical cancer – the best treatment is to wait with a watchful eye; to allow the ripples to subside.

Careless and tone-deaf Trade Union actions can precipitate the adoption of harmful and unnecessary policy interventions.

From a Trade Union viewpoint

The first thing a trade union should do is to contest the economic analysis of ‘the other side’. If it cannot or will not do this – if it cannot demonstrate that a pay claim is benign to the wider working and non-working classes – then it should not pursue the claim. The current teachers’ pay claim has made little attempt to contest the prevailing ‘cost-of-living’ narrative. This in a fait accompli political environment of ‘fiscal consolidation’ (aka ‘austerity’) and sensitivity to high prices. Unions’ priority should be to contest these uncontested and under-contested narratives.

All I have heard from the secondary teachers’ Union is that ‘the government could have done other things’ in 2024 – such as not granting ‘tax cuts’. They say that what their members have been offered is “less than the rate of inflation”, meaning a real pay cut. They have a credibility problem here, because in real terms (ie after adjusting for CPI inflation), the 2024 income tax adjustments were a tax increase rather than a tax increase; those income tax adjustments only partly compensated for CPI price increases.

The second problem is that only a part of the CPI-inflation that we have experienced is actual inflation. It is likely that the major part of the CPI increases this decade have been due to (ongoing) primary supply shocks, and not to (secondary) inflation at all. The sad thing about supply shocks is that we all have to bear them. Though some try to make others bear these real costs; for example, those who favour forever-wars tend to want others to pay the costs. (We should of course recommend ways to minimise future supply shocks; for example, to advocate peace over war, sustainability over profligacy, sufficiency over the quest of a few to make more-and-more money by selling more-and-more stuff.)

Our trade unions need to ‘read the room’, and to offer analysis and critique of the problematic narratives which enmesh us, and prevent the human world from evolving in the gentler and more sustainable ways which most of us favour. They should not be pushing the interests of one identity group over others.

Pushing for pay relativities vis-à-vis other occupational groups is not the answer; rather it’s part of the problem of some groups trying to ‘get ahead’ while others cannot or should not. Women – certainly modern women – are not meek. The assertive pretence of female meekness cannot achieve much. Thoughtful analysis and courageous counter-narrative can achieve much more. Governments – and the funded sector generally – need to see ways beyond their own financial housekeeping, and to emphasise their ‘duty of care’ and societal investment roles. If privileged wages in the funded sector are the answer, the wrong question was probably asked.

We have Equal Pay – equal pay for equal work. And we have a Universal Basic Income for seniors. Those are achievements we should celebrate, and draw inspiration from. Women assertively pursuing the narrative that women are paid less than men because women are meeker than men, could instead be critiquing the false macroeconomic narratives which represent the real problem.

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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.

In the wake of the recent release of labour force data (Household Labour Force Survey, HLFS, Nicola Willis bemoans ‘glass half empty’ view of unemployment figures, RNZ 6 August 2025), 1918-1920 National Party Leader Simon Bridges, has called for economic “stimulus” to rescue in particular the dire Auckland economy. (See Call for government to help Auckland as unemployment rises, RNZ; contrast the Minister of Finance Nicola Willis’s retrospective and ongoing advocation of fiscal suffocation Dangers of Excessive Spending Highlighted, Scoop; both 7 August 2025.)

My focus here is to look at the historical and recent employment rates of older women (aged over 55), and to consider the importance of their spending to the health or otherwise of the New Zealand economy. My reference is the first chart highlighted in Employment in New Zealand – especially of women – at the Age Margins, Evening Report, 7 August 2025.

The chart shows that there is a huge increase in the percentage of older women who meet the official definition of employment. (This generous definition includes wage/salary workers – fulltime or part-time – self-employed workers, active employers, and people working without wages in a family business.) The data reveals a huge increase in the ‘participation rate’ of older women in the labour market.

The age group 60-64 had a particular impetus to retire later, namely the rise in the early 1990s of the age of entitlement to New Zealand Superannuation from age 60 to age 65. But the pattern is essentially the same also for women in their late fifties and in their late sixties.

The appropriate benchmark year is 1987, by time the HLFS was bedded in and before the economic consequences of the financial crash in late 1987. While the high period for employment of older women is 2022 or 2023, when jobs were plentiful, we can be sure that the actual participation rate has not fallen since 2022, and has probably continued to rise. (We can disregard participation rates published in the HLFS; they are based on definitions of unemployment which only realistically apply to men aged 30 to 60. There is much ‘hidden unemployment’ amongst older women.)

For women aged 55-59, we see a rise in labour market activity from 43 percent to 80% in 2018 and 2023. For women aged 60-64, we see a rise in labour market activity from 18 percent to 70% in 2022. (The dip for this early-sixties age group in the late 1980s and early 1990s is unemployment masquerading as ‘retirement’.)

For women aged 65-69, we see a rise in labour market activity from 8 percent to 44% in 2022. For women aged over 70, we see a tenfold rise in labour market activity from 1995 to 2025. (We desperately need a ’70-74′ age category in the published data; this ‘early-seventies’ cohort is likely to now be New Zealand’s fastest growing employment demographic.)

Overall, this truly massive labour force participation of older women in the last thirty years has been a barely noticed social revolution. The increase of employed older women is even more dramatic than these figures look, because New Zealand’s highest birth numbers were in the late 1950s and the early 1960s. These women are now in their sixties, and born with higher life-expectancies than their parents.

It seems unlikely that this increased labour force participation is a result of the rise of feminism in the 1970s; an increased advocacy for paid work was one plank of that feminism. Though feminism may have played a significant but lesser role in this huge social change. It seems far more likely that the main driving force is economic pressure upon households; stresses that have increasingly required all adult household members to be attached to the labour force, rather than the pre-1980s’ emphasis on an individual (typically male) ‘breadwinner’.

The stresses initially hit households hardest in the late 1980s through massive rises in mortgage interest rates, and in the more frequent revision of interest rates by banks during the lifespans of home loans. To that we can add an increased reliance on other forms of personal debt, such as credit cards. The ongoing stresses relate to both the increased precarity of paid work for men and women – meaning women increasingly having to make significant contributions to household budgets – and the failure of hourly wages to keep up with gross domestic product per capita. In order to be able to buy the goods and services which made up our GDP, we needed ever more hours of household labour.

Older households were able to hold out for longer against these pressures, but not forever. Hence, most of the increases of labour force engagement for these households have taken place in the last thirty years.

Older Women’s Spending

What all this means is that, in the 2020s, a critical component of consumer spending is done by older households, and in particular older women. Their spending is a major source of ‘stimulus’ in the 2020s’ economy. It is already apparent that suburban cafes, for example, survive very much with the help of patronage from groups of older women.

By and large, most policymakers worldwide have now forgotten the lessons of the Great Depression of the 1930s. One of the most important lessons was that countries which had inbuilt means to keep incomeless households spending suffered much less in the peak years – the early 1930s – of that Depression. (These countries included the United Kingdom and Sweden; they contrast with France and the United States, which were still in Depression in 1939.)

France in particular could not get out of that Depression. In part because of World War One deaths and injuries, it relied very much on immigrant labour (mainly from North Africa). It also relied on female and male urban labour from people with rural connections. So, when the Depression hit, the redundant workers – having no access to benefit incomes – simply returned to either Africa or to their parents’ small farms.

Most of Aotearoa’s older women cannot emigrate if they lose their incomes. But most of them will not be able to draw on a benefit to offset their lost wages. Some are already receiving New Zealand Superannuation, and that will rise a little as the marginal tax rates on their ‘Super’ will come down. What of those under 65 who lose their incomes, noting that many employed women age 55-64 live in households which pay mortgages or rent? Most will not qualify for an MSD benefit; they will be fully reliant on their partners’ or adult children’s wages. Some, who do qualify for benefits, will face stand-downs of several weeks or months; and time engaging with MSD that would be better spent with their grandchildren or elderly parents.

One particular group of older women is those, mainly in their early sixties, who used to be able to get a ‘non-qualifying spouse Superannuation benefit’, ie if their partners were superannuitant pensioners with minimal other income. (With zero fanfare, one of the first things the Labour Government did, in October 2020, was to cancel these women’s entitlement to what was an important form of transitional income support.) These women, grandmothers in large part, are the ‘breadwinners’ in their senior households. If they lose their jobs (or their ‘roles’ as we are now supposed to say), that means a potentially catastrophic loss of household income. (We should note as an example that the New Zealand Polytechnic sector, currently undergoing significant restructuring and financial downsizing, has a particularly important portfolio of older female employees; many of these workers have substantial institutional memory, keeping their organisations functioning more than many of the younger managers appreciate.)

MSD should be focussed on helping young people to find paid work, and not having their resources logjammed by older women who would have previously had access to income support without red tape.

The Laws of Stimulus

The First Law of Holes, is ‘stop digging’. (We note that a ‘depression’ is, literally, a hole.) Finance Minister Nicola Willis is digging furiously, burying alive suffocating Kiwis.

The first law of stimulus is to stop public-sector retrenchment. That is the main single lesson from the near-forgotten Great Depression. The second law of stimulus is to have rights-based alternative sources of income that individuals of all ages can fall back on. The third law of stimulus is to stop pursuing a monetary policy that jacks-up interest rates; the ‘cost-of-living crisis’ is substantially a ‘cost of jacked-up interest rates’ crisis. (As I have already noted, debt is something that drives more people into the labour force; it’s not just the amount of debt, it’s also the cost of that debt.)

We may note that New Zealand got out of the Great Depression by adopting all three laws of stimulus. And a fourth law, by using the cheap money to embark upon a very successful ‘state housing’ program, New Zealand recovered in 1936 to 1938 with double-digit economic growth and near-zero inflation. Some of those houses, well-built, are worth a fortune now. Fletchers and other capitalists made a fortune, too; this is the kind of stimulus which would meet Simon Bridges’ business-perspective criteria. Homelessness was not acceptable to New Zealanders back then, as it seems to be now. Are we looking at a coming decade of escalating homelessness for older women?

When just about every adult is ‘in the labour force’ – unhidden or hidden – desperately needing income while employment ‘roles’ are in decline, the social stresses cannot be contained forever. Younger people may revolt, turning to the underclass-politics of the street. Older people are more likely to die unseen, as too many did in July 2022 (many denied desperately-needed second-booster vaccines) when the Covid19 pandemic really hit Aotearoa New Zealand.

Do any groups of influential people out there have the imagination and capacity to answer the call for humane economic revival? Or is it a case of those who would can’t, and those who could don’t?

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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.

The above chart shows – in red – the annual percentage increase (since 1988) in numbers employed of women aged 65-69, based on Household Labour Force Survey employment data. (And it shows, for comparison, males aged 30-34; in blue, their percentages are shown on the right-hand side of the chart. I explain below why I contrast older women with younger men.)

The employment growth of older women is particularly variable. But there are some clearly discernible patterns. To help show these, I have used “vertical gridlines” 33 months apart; 2¾ years is the persistent period of New Zealand’s trade cycle.

There are several reasons why employment may go up or down. First is simply the growth of the population for the demographic portrayed. For the latest data, the most recent women portrayed (the 2025 data point) were born around 1957 (ie born in 1957±2). Birth numbers in New Zealand peaked in the decade from 1955 to 1964; so, there will be many more women still alive in this birth cohort than in previous cohorts, and recent international migration will be low for that age group. Especially as life expectancy has been rising, population growth is a major reason for an increase in women aged 65-69 who are employed. So, growth of employment in this demographic should be well above the zero showing for the last two years.

Another reason for higher employment numbers is ‘labour force participation rates’. Charts that I posted recently from the same dataset show participation rates for women aged 65-69 having risen to 44% in 2022, the last peak of the cycle. (See my Employment in New Zealand – especially of women – at the Age Margins.) It’s unlikely that the actual participation rate has fallen since 2022; more likely it has risen in line with the trend this century (participation up from 10% to 44% of the available population); although the official participation rate has fallen. The difference between the actual and official participation rates is known as ‘hidden unemployment’)

The third reason for changing employment for ‘retirement-age women’ is the ‘added-worker effect’. This effect, highly apparent for this demographic, means that employment and actual labour force participation move essentially counter to the economic cycles (including the 33-month trade cycle). This countercyclical effect, similar to the enrolment patterns for tertiary education, is particularly apparent from 1988 to 1997. And it’s understated by the employment data, because the times when more older women want to be employed will be times of generally high unemployment. The data peaks here – eg in late 1988 and mid-1991 – reflect both the increased desire for paid work, and the reduced ability to secure paid work.

The ‘added-worker effect’ operates when other sources of household income are reduced, or when major costs such as mortgage interest or rent are high and/or rising. For this demographic there is also a ‘subtracted worker effect’, meaning that these women choose to retire whenever they can afford to retire.

It is apparent that, for the most part, the peak increases in the employment of older women follow the 33-month trade cycle. The red peaks are on or close to the charts’ vertical gridlines. There were however disruptions to the cycle caused by the 2008/09 Global Financial Crisis, and in the 2020s thanks to the Covid19 pandemic.

Males aged 30-34

The blue graph for males aged 30-34 shows the economic cycle as we would expect. This is a demographic with a very high and stable labour force participation rate. As is apparent, the blue plot is to an extent countercyclical to the red plot. The main male employment cyclical peaks were in the mid-1990s, the mid-2000s, the late 2010s, and in 2023.

We particularly note that employment growth for youngish men was weak in the late 1990s and the late 2000s. Rising young-male employment was particularly strong between 2024 and 2018, reflecting strong immigration for this demographic.

Since the present government has been in power – ie from November 2023 – employment growth for youngish men has plummeted, despite high levels of net immigration, and despite this being the baby-blip generation born in the early 1990s. Basically, the economy ‘tanked’ in 2024 and 2025.

Female birth cohorts

The second chart shows women’s employment/participation for different ‘generations’. For women born around 1957, employment peaked at just under 80% of the available population, when they were aged about 47. For the next generation, that peak is even higher, at about 83% of available women; and this is despite more women having babies later in life.

Generally, younger generations of women have had markedly higher participation rates, especially between ages 25 to 40.

Finally

Once upon a time ago we ‘worked to live’. Since the neoliberal and feminist revolutions, we have ‘lived to work’. I am not convinced that this is progress. Progress is supposed to be productivity growth; more outputs per unit of (labour and other) inputs. What we have seen is much more input – with labour inputs being shown here – yet economic growth if anything seems to have slowed.

To have a sustainable future, we should be stabilising output, while contracting inputs. Employment counts, as defined by the HLFS, are crude measures of inputs. It is perfectly possible to have more people employed, wanting and getting fewer hours per week on average. That’s not what we have here. Rather, we have more and more people desperate for employment to pay the bills, and a substantial decline in time committed to the other non-income-focused aspects of life. Women have been on the frontline of this seek-more-work play-less zeitgeist.

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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.