Dr Oliver Hartwich writes, we are paying the price for economic mismanagement:
We can reasonably expect New Zealand’s economy to enter recession after the Reserve Bank raised its Official Cash Rate again by 50 basis points.
No one likes being in recession, but current circumstances make it almost desirable. Accelerating price increases and tight labour markets are both signs of an overheated economy.
The Reserve Bank therefore wants to engineer an economic downturn to let off some steam. This would relax both the labour market and consumer price inflation. . .
That’s what it wants, but it won’t be easy with a very tight labour market.
With Kiwis leaving and fewer migrants coming here, labour constraints could therefore remain, even in the face of a recession. That would make the Reserve Bank’s job much harder.
However, our central bankers will be concerned about more than just the labour market.
Because next year is an election year, the Government will be tempted to soften the downturn. This might take the form of fiscal stimulus and transfer payments – but both would counteract the withdrawal of aggregate demand the Reserve Bank wants to achieve.
It is possible that the Reserve Bank would struggle to meet its goals despite sustained increases in the OCR.
Instead, it would see the economy showing simultaneous signs of overheating in the labour market, declining economic activity and consumer price inflation. In a word: stagflation.
Some will argue that it is mainly the Reserve Bank’s fault for having led us into this mess. And they would be right. This is a recession we did not have to have. . .
It could have been avoided had the Reserve Bank not flooded the country with cash, and the government been disciplined in its spending.
The Reserve Bank can only do so much. The best it can do is emphasise the return to price stability as its main goal.
The remaining responsibility for economic management, however, rests with the Government.
Demand-side management must be avoided, no matter how tempting it may seem. And in order to boost the supply side, the Government must make doing business easier and cheaper.
The Government’s economic competence will determine how long and how deep our economic downturn will be.
How much confidence can we have in the government’s economic competence?
Worry not, Dr Bryce Wilkinson writes ‘from’ the Beehive to rebut our misplaced fears:
We in the Beehive are aware of some unfounded dissatisfaction amongst the great unwashed.
There are stories of a health system in crisis. This is not so. If it were, we would have told you.
The real emergency is, as everyone knows, climate change. Think not of hospital shortages today. Think instead of all those who are going to drown in 2100 because they did not notice sea-level rise. Subsidies for electric cars are more important than yet more money for hospitals.
There are also stories that the amalgamation of Polytechnics has destroyed their creativity and independence.
This is absurd. Our new structure has at least 21 people with “chief executive” in their titles. The 21 oversee the chief executives of the 16 polytechnics. What chief executive would not welcome such support?
Some are complaining that the top boss is earning $13,000 a week while on ‘special’ leave. That is what we call a fair go for the ordinary bloke. Others can learn from it.
School truancy. Another problem inherited from the other lot. What everyone is missing is how much worse it would be if parents were paying directly for their truant children. Private schools are the pits.
Some are concerned that around 40% of school leavers are barely literate. Will they be able to pay enough in taxes to support our retirement? Perhaps not, but again think of how much worse it would be if parents had greater school choice.
We had to shut down partnership schools because too many parents did not understand that state schools were best. Imagine if we told parents which schools were poor performers. There would be chaotic disruption. People need government to protect them from themselves.
There are stories that people are feeling unsafe in the streets. There are shootings. It is said that police are powerless to prevent reoffending by ten-year olds because of the laws protecting minors. Nor can they do much about hardened criminals given our lenient courts. Our judges even struck out Parliament’s three strikes legislation, before we did. If they do not understand our constitution, who does?
All such complaints are unkind. You are paying for approaching 450,000 public sector employees who wake up each morning thinking only of how they can best help you each day.
Our excellent governance arrangements ensure nothing stands in their way.
Tax is love. Enjoy its fruits.
Feeling reassured now?
Enjoying the fruits?
Or worried that the fruits are rotten?