Government and Fiscal Policy

Increasing wages sends stock markets into tailspin

Monday February 12, 2018 Dr Ganesh Nana

If the prospect of increasing wages is sufficient to throw global stock markets into a tailspin (as they did last week), then there is something endemically wrong with the economic mechanism.  This is further evidence of my statement last year that the neo-liberal economic model has failed us.

 

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Unfortunately, this model remains prevalent in New Zealand’s policy landscape, with last week’s Reserve Bank (RBNZ) Monetary Policy Statement announcing – yet again – that inflation was lurking around the corner because unemployment has reached the perilously low rate of 4.5%.  Further, during the media conference Acting Governor talked euphemistically about the ‘neutral’ rate of unemployment, which they estimated at anywhere between 4% and 5.5%.

 

Hence, the model remains the same.  If unemployment gets too low, wages will start rising, ergo inflation will be released from the bottle and plague, pestilence and generalised mayhem will result.  Hence, the RBNZ (along with all other ‘independent’ central bankers) stand ever vigilant to ward off the evil inflation genie.

 

I note that some policy makers prefer not to talk about the NAIRU (non-accelerating inflation rate of unemployment) anymore.   Presumably, this is because the messaging around targeting a ‘rate of unemployment’ doesn’t go down well with the broader public.  Hence, the euphemistic ‘neutral’ rate of unemployment.  Or, more technically, ‘the output gap’.  This is just the NAIRU in another guise.  If the output gap rises, labour (and other) capacity is stretched (i.e. labour unemployment declines) meaning wages are about to rise – thereby justifying central bank intervention to keep the inflation genie in the bottle.

 

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As context, unemployment may be ‘only’ 4.5%, but this is the equivalent of 122,000 people out of work.  And there is a further 221,000 who either don’t satisfy the ‘officially’ unemployed definition, or are under-employed part-timers wanting full-time work.  How this suggests that we are close to full capacity output remains curious.

 

The now not so ‘new’ Government faces a dilemma.  Its self-styled ‘Government of change’ moniker will be short-lived indeed if it remains wedded to this fundamental policy framework.  In particular, by definition, wages will have considerable difficulty shifting to a higher level with this framework and its associated mindset.  Any aspiration of incentivising a high-wage, highly-productive, highly profitable economy, will be nipped in the bud before it gets a chance.

 

Much will depend on the soon-to-be-announced Policy Targets Agreement with the new Governor.  The well signalled introduction of employment (growth?) as a target, as well as a policy-making committee including external (non-RBNZ) members will be a start.  But the effect of these modifications can easily be circumvented if the mindset remains unchanged.  Especially if the Governor and committee are left to decide that inflation control is more ‘important’ than employment (growth).

 

The success of this Government being one of ‘change’ will depend on whether it can effectively circumscribe the power of the RBNZ and enforce a more even-handed view of the importance of various economic indicators.  For example, employment, wages, inflation, external deficit, government deficit, infrastructure investment, and workforce development to name a few.

 

If the Government wants to ensure true change, it would make the RBNZ and its monetary policy measures subservient to the broader Living Standards Framework measures of wellbeing that are being considered by Treasury.  But, that may well be a bridge too far for this ‘Government of change’.