The Government’s Covid 19 response, mainly via Reserve Bank measures, has enabled a mind-boggling increase in inequality, according to influential financial commentator Bernard Hickey in his blog, The Kākā.
Unquestionably, the government’s Covid response has saved multiple lives, but its refusal to simultaneously address inequality via capital gains, wealth or inheritance taxes raises uncomfortable questions about how a leftist government has overseen a once-in-a-generation shift in wealth.
Hickey, in an interview with Kathryn Ryan says the policies of Jacinda Ardern’s government have made the already wealthy “hundreds of billions of dollars” richer, while beneficiaries’ debt to the government itself has risen $400 million to over $1 billion.
The end result of that has been an absolutely massive increase in inequality.
He says emergency Covid response measures, such as the RBNZ’s $50b money printing exercise, euphemistically called “quantitative easing”, fuelled an explosive rise in asset prices, including a whopping 40 percent lift in house prices over two years.
You are effectively doing social policy as a central bank by engineering inequality and that’s not what central banks should be doing.
Hickey bases his comments on this week’s Statistics NZ National Accountants figures that assess how households, businesses and the government have used their cash and how their net worth has changed.
By following the money through the Covid crisis the SNZ data show the government gave $20 billion in cash, via wage subsidies and resurgence payments, to businesses. Additionally, the RBNZ purchased over $50b of government bonds via its QA program. The result was that over the 21 months of the Covid period, the net worth of businesses rose by more than $300b and the net worth of the households rose by over $600b.
Hickey told Ryan
What we can see is that Covid has actually been fantastic for people who already had assets at the beginning of the crisis, but for those people who are renters and who don’t have assets, they are now significantly worse off.
The latter group received relief amounting to just $48m while their incomes have been whittled down by inflation running at a 30-year high of 5.9 percent.
Hickey said that while many businesses in the early stage of the crisis needed cash support, it became clear after a few months that many no longer needed it. Gross operating profits over the 21 months was $27b which compares with just $11b in the previous 21 months pre-Covid.
What we have seen here is that businesses increased their collective profits by $15.5b, which, magically, is not much different from the extra $18.9b that was given in cash by the government.
Hickey says while it quickly became apparent early in the crisis that the economy was recovering strongly, there has been no attempt to claw that money back.
On the other hand, looking at people who needed personal assistance via such things as Ministry of Social Welfare & Development grants, the government has been very aggressive in reclaiming that money from people on benefits.
Now, those who want to jump the gap from renter to asset owner are almost out of options. Ironically, the ability to bridge the gap has been made harder by further RBNZ actions, clamping down on access to credit to try to tamp down runaway house prices.
In effect, Covid was the moment that blew away a generation’s hope for their first home.
Simultaneously, the precarious class are much, much worse off because rents have risen twice as fast as wages and the costs that the poor must pay has hurt them far more that the rest of society.
Hickey acknowledges there was fear of a full-blown depression and that businesses receiving cash hugely boosted confidence and saved jobs. But he says there are two things the government and RBNZ could have done differently. When it was clear that the economy was rebounding quickly, the payments kept going. There had been little reflection by the government on how useful the wage subsides were and where the money has gone. In fact, the National Accounts measures of cash holdings show it has largely gone into bank accounts of the wealthy households.
The SNZ figures show that from the beginning of Covid, businesses collectively increased their cash balances and term deposits by $26b. Households increased their balances by $25b.
That tens of billions of dollars of government cash, effectively went straight into the cash accounts of businesses over that period.
Hickey said that many of the small businesses that have struggled during Covid even struggle in the best of times. They only exit because of the continually-rising and leveraged value of their equity in their homes. The value of those homes and property rose in total by $952b, post Covid.
The government has failed to address the question of whether those businesses really needed that money. The accounts of companies whose accounts are publicly available show many made substantial profits during Covid, paid shareholder dividends, but refuse to return government support cash.
They include the likes of Harvey Norman, Kathmandu, Fulton Hogan and many, many others.
He said that the fact that businesses have pocketed via extra profits nearly all the $19b cash of the wage subsidies means that the Social Contract is not being fulfilled. Hickey expressed surprise at the business community’s lack of initiative to rebuilt that contract.
Hickey also questions why the government and the RBNZ has not unwound its economic stimulus, particularly as it relates to the housing market. Prime Minister Ardern has even stated that one of her roles is to protect the main savings vehicle of most families – their house.
In effect, the government has given an implicit guarantee that houses prices only ever rachet up, or when they go down, they don’t go down by much.
Hickey said RBNZ made a fundamental mistake at the start of Covid by removing all loan-to-asset ratio (LVR) restrictions at the same time as drastically lowering interest rates and also telling banks to lend more.
We then had an 18-month frenzy of lending to people who were leveraging up the equity in their own homes to buy rental property.
Hickey believes the economic stimulus provided to get us through Covid should have been more weighted towards fiscal policy, which can help people directly, rather than through the central bank to underpin asset prices. Many countries gave one-off cash payments to each citizen, which Hickey argues is a much fairer method of stimulus.
The method this government and the RBNZ chose, to massively boost asset prices of those who already had assets and a refusal to unwind it
…has changed New Zealand society for decades to come. The scale is enormous. We are talking a trillion dollars of wealth has landing in the hands of those who are already wealthy.
This happened as the government refused to increase benefits by $50/week at Christmas because it was worried it would increase government debt.
Hickey called on the government to put in place measure to claw back some of the asset wealth it has helped create for businesses. He also called for MSD to forgive all debt to beneficiaries and substantially increase beneficiary incomes as advised by the Welfare Advisory Group nearly three years ago.
Simon Louisson reported for The Wall Street Journal, AP Dow Jones Newswires, New Zealand Press Association and Reuters and briefly was a political and media adviser to the Green Party.
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