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Lets restrain those damnfool knights eh?

Written By: - Date published: 10:52 pm, July 6th, 2015 - 20 comments
Categories: bill english, tax, wages - Tags: ,

A few weeks ago, The Economist led with this paragraph.

THE struggle has been long and arduous. But gazing across the battered economies of the rich world it is time to declare that the fight against financial chaos and deflation is won. In 2015, the IMF says, for the first time since 2007 every advanced economy will expand. Rich-world growth should exceed 2% for the first time since 2010 and America’s central bank is likely to raise its rock-bottom interest rates.

But anyone who has been through the start of a few downturns knows the feeling that is circling around the world at present. It isn’t that of successfully slaying the dragon and walking away to find the partner of your dreams. Jon Berkeley caught the mood for the Economist perfectly…

However, the global economy still faces all manner of hazards, from the Greek debt saga to China’s shaky markets. Few economies have ever gone as long as a decade without tipping into recession—America’s started growing in 2009. Sod’s law decrees that, sooner or later, policymakers will face another downturn. The danger is that, having used up their arsenal, governments and central banks will not have the ammunition to fight the next recession. Paradoxically, reducing that risk requires a willingness to keep policy looser for longer today.

In the rich world in particular (including New Zealand), this has been a wageless recovery. For the majority of workers, they have been getting bugger all wage rises, usually less than the nominal rates of inflation and certainly less than their cost of living. The increasing prevalence of casual work like the “zero hour” contracts and unpaid “internships” is a symptom of the issue. And it is only now starting to turn in some countries.

The good news comes mainly from America, which leads the rich-world pack. Its unexpected contraction in the first quarter looks like a blip, owing a lot to factors like the weather (see article). The most recent data, including surging vehicle sales and another round of robust employment figures, show that the pace of growth is rebounding. American firms took on 280,000 new workers last month. Bosses are at last having to pay more to find the workers they need.

 

This is about 7 years after the global financial crisis took hold. It is much the same here. Ordinary wages took five years after the GFC before they exceeded the level reached at the GFC. See “Recent Wealth and income trends in New Zealand” from Alan Johnson at The Salvation Army. Their rise since has been somewhat constrained despite a relatively low (by European and US standards) unemployment rate.

Changes in average real ordinary wages 2004-2014

On the cost side, the costs that the wages pay for has been kept creeping up despite the usage of saving devices. I have particularly noticed our power bill s creeping up even as we put in power saving devices that reduce what we consume.

Meanwhile looking offshore, the countries and areas that we market to or have influence on the state of our markets don’t look good. The Economist leader article nails the issue

Inevitably fragilities remain. Europe is deep in debt and dependent on exports. Japan cannot get inflation to take hold. Wage growth could quickly dent corporate earnings and valuations in America. Emerging economies, which accounted for the bulk of growth in the post-crisis years, have seen better days. The economies of both Brazil and Russia are expected to shrink this year. Poor trade data suggest that Chinese growth may be slowing faster than the government wishes.

If any of these worries causes a downturn the world will be in a rotten position to do much about it. Rarely have so many large economies been so ill-equipped to manage a recession, whatever its provenance, as our “wriggle-room” ranking makes clear (see article). Rich countries’ average debt-to-GDP ratio has risen by about 50% since 2007. In Britain and Spain debt has more than doubled. Nobody knows where the ceiling is, but governments that want to splurge will have to win over jumpy electorates as well as nervous creditors. Countries with only tenuous access to bond markets, as in the euro zone’s periphery, may be unable to launch a big fiscal stimulus.

Monetary policy is yet more cramped. The last time the Federal Reserve raised interest rates was in 2006. The Bank of England’s base rate sits at 0.5%. Records dating back to the 17th century show that, before 2009, it had never fallen below 2%; and futures prices suggest that in early 2018 it will still be only around 1.5%. That is healthy compared with the euro area and Japan, where rates in 2018 are expected to remain stuck near zero. When central banks face their next recession, in other words, they risk having almost no room to boost their economies by cutting interest rates. That would make the next downturn even harder to escape.

Since then the Greek austerity exit from the Euro looks ever more likely with the flow on effects and confidence issues that entails, just as was shown today. And not having the populists and conservatives oddity of forcing a British exit from the EU looks like it’d be tighter than a Scottish referendum. China’s stockmarket is having a long overdue bubble problem.  Plus the price war on oil and gas between OPEC and Texas and US fracking belt that has been largely buoying the world economy is slowly but inexorably heading into the fractured zone of their own finances.  That boost of cheaper energy isn’t likely to last for that long after the blood-letting starts and is already starting to stutter as the capital dries up.

And in NZ, National’s over dependence on a commodity price boom in whole milk powder over the last  7 years is starting to constrain our economy.

The Economist has some good advice for policy makers world wide, but especially those in the US.

Raising rates while wages are flat and inflation is well below the central bankers’ target risks pushing economies back to the brink of deflation and precipitating the very recession they seek to avoid. When central banks have raised rates too early—as the European Central Bank did in 2011—they have done such harm that they have felt compelled to reverse course. Better to wait until wage growth is entrenched and inflation is at least back to its target level. Inflation that is a little too high is a lot less dangerous for an economy than premature rate rises are.

Indeed, the very last thing that the world needs today is to drop into another widespread recession too fast – especially from ideological idiots. Looking worldwide, what recession recovery has happened looks way too fragile to disturb much. To reduce the levels of debt that much of the developed world has incurred over the last 7 years will take a number of years of taxing solid wage growth to refill the government coffers so that they can be ready for the next recession.

Crazed conservative ideologues like Bill English wanting to give tax cuts to the rich will have to wait until they have at least got the finances ready to face the next recession. After all the watch cry of tax bracket creep beloved by the crazies of Act hardly shows up with ordinary wages like those above. Most people would prefer to have real wage rise above what they were earning nearly a  decade ago.

Perhaps MP’s should just constrain their own wages to a similar rate of increase (it has been highly noticeable that they have been acting like pigs in a trough in the last seven years). It’d probably help with their sense of proportion.

 

20 comments on “Lets restrain those damnfool knights eh?”

  1. Stuart Munro 1

    Bill will never have our finances ready – his only hope is to hand his mess off to someone else. A $100 billion in about seven years – so we’re losing about 13 billion a year – such a trend won’t be turned around just by spouting fatuous bullshit.

    • John Shears 1.1

      So we are going down a large financial sewer at an alarming rate in NZ thanks to the boy from Dipton.

      13Billion is $13,000,000,000 owed by $4,000,000 over $3200 each every man woman child new immigrant, everyone yes you and it is increasing every day.

      There is no treatment plant at the end of the sewer either.

  2. gnomic 2

    News reaches me that some think the Great Financial Cockup was dealt with, all over, done and dusted, lessons learned, never going back there. Is there a link for that aside from victims of wishful thinking or plain old shills? Haven’t the Powers That Be just been papering over the cracks with funny money since 2008? And notice how the world has moved into a new age of peaceful coexistence aside from a few regional conflicts none of which could possibly lead to a global war? Any proof the fat lady (due respect to her) has sung out the GFC yet? What Long Depression?

  3. b waghorn 3

    http://agrihq.co.nz/article/pulpit-cut-fonterras-staff-wages-not-their-jobs?p=6
    You’re not the only one suggesting wage cuts.
    At what point does nzs huge public /private debt plus the crash of dairy prices see the lenders place us in the high risk basket and force interest rates on lending to climb.?

  4. Sable 4

    I’d be inclined to say the Economist’s article is “fanciful” at best. Wages have most definitely not kept pace with inflation. How this translates into a lasting economic recovery is anyones guess. Perhaps a better question is an economic recovery for whom?

    • Phil 4.1

      Wages have most definitely not kept pace with inflation

      Wrong.

      According to Statistics New Zealand, the CPI has averaged 1.1% annual growth over the last three years. Meanwhile salary and wage rates have grown at about 1.8% annually over the same period.

      • Draco T Bastard 4.1.1

        Meanwhile salary and wage rates have grown at about 1.8% annually over the same period.

        That’s on average but all the gains are going to the top whilst the bottom are going backwards.

        • Phil 4.1.1.1

          Wrong again.

          1) Salary and wage rates are measured in the Labour Cost Index – it’s an index; not the same as an average and not skewed by high income jobs. In effect the weighting is based on number of employees in an industry or profession.

          2) Growth in wages and salaries in the year to March 2015:
          Managers, profs, technicians, and trades workers: 1.5%
          Service, clerical, and sales workers: 1.6%
          Machinery operators, drivers, and labourers: 2.4%

          You can see a more detailed breakdown of the results here:
          http://stats.govt.nz/browse_for_stats/income-and-work/employment_and_unemployment/LabourMarketStatistics_HOTPMar15qtr-cor.aspx

          (I am not good at HTML)

          • Draco T Bastard 4.1.1.1.1

            Nope, that’s still the average. We need the information broken down into deciles or better.

            New Zealand Income Survey: June 2014 quarter

            Key facts
            Median hourly earnings increased slightly by 36 cents.
            Average hourly earnings increased by 78 cents.

            Even the median increase hides the fact that some people didn’t get any increases at all and some would have even gone backwards.

            And I hate the StatsNZ website – it’s like they’ve gone to a great deal of effort to make it impossible to use. I was looking at a page that showed a sector had income go down by 1.6% over the last quarter but I’m damned if I can find it now.

            EDIT:
            Low proportion of positions have pay increases this quarter

            Over the latest quarter, 11 percent of all salary and ordinary time wage rates increased. While the proportion of salary and wage rates increasing in a March quarter is usually low, this is the lowest proportion since the March 2010 quarter. In the year to the March 2015 quarter, 59 percent of all salary and ordinary time wage rates increased. This was unchanged from the year to the December 2014 quarter.

            So, was it 11% of all people got pay rises or 59%?

            Either way, not everyone’s getting wage increases and, after inflation, that means that some people have wage decreases.

            • Phil 4.1.1.1.1.1

              I hate the StatsNZ website – it’s like they’ve gone to a great deal of effort to make it impossible to use.

              I’m keen to respond more substantively later, but in the mean time I want to say: I used to work for Stats NZ and have an enormous love of all the work they do and the information they produce and I could not agree with you more! The site is a nightmare.

  5. Tracey 5

    GREAT post Lynn. In down times workers get laid off and those in jobs told to hang on with what they have, it’s that or close the business… then the good times… be happy with your lot cos there’s plenty like you knocking on my door looking for work.

  6. M Scott 6

    Oh dear, I wonder if anyone is regretting flag referenda, luxury flats in New York, big spending by lil Stevie Joyce’s mob in Wellington, single commodity concentration?
    Probably not, it’s being covered by the low and middle wage tax payers.

    • Tracey 6.1

      I don’t have a problem with the $$ spent on staff function. treating staff well is good for loyalty and retention which is about productivity and reducing costs of recruiting.

  7. RedLogix 7

    When you do get around to writing a post Lynn, they always give excellent food for thought. Although I have to say for a moment there I thought you were channelling Steven Keen.

    One of Keen’s pivotal arguments is that debt to income ratio matters because it when rates rise the total interest bill rapidly gobbles up available income. And this is the point where virtually the whole world has arrived at.

    How did we ALL finish up being in debt for such staggering sums of money. And WHO to?

    Part of me wants to resist presenting the UBI as a silver bullet. It isn’t. But Keen has repeatedly pointed out that allowing banks to create money when no-one can carry more debt is like pouring water into a reservoir while the outlet valve is closed tight.

    By contrast the UBI delivers new money directly to the location in the economy where it can do the most good – consumers.

    • Tracey 7.1

      “How did we ALL finish up being in debt for such staggering sums of money. And WHO to?”

      Not by accident but by design. Greece has played the money lenders at their own game. They have popped the air-filled balloon which suggested loans were entirely one-way traffic/rules. Many Greeks have already lost the house and the job, and some struggle for food. Not sure the banks could win that opinion poll.

  8. G C 8

    IMF economists contradict themselves all the time.

    • lprent 8.1

      Good economists contradict themselves all of the time. It is a human chaotic system where the awareness, expectations, and even postulated theories change the outcomes. Economists try to model parts of the systems knowing that even looking at it and communicating about it will have a Schrodinger’s cat effect.

      • Tracey 8.1.1

        I sometimes think Economists adhere to a certain model and then find ways to make the information/world fit it.

        • Naturesong 8.1.1.1

          Some do for sure. They are still people (and subject to all the flaws we see within ourselves and others)

        • lprent 8.1.1.2

          Cutting out a theory usually demands that you look for things that either directly prove or disprove it. You tend to ignore anything that is irrelevant.

          What that means in most fields of science is that if you are interested in (say) germanium alloys, that you get pretty uninterested in puddling steel alloys.

          In the art of economics, the same general process results in economists being pretty uninterested in whole groups of people that aren’t relevant to their theories. Metals don’t care. People do.

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