The politics of high inflation – can governments do anything?

13 comments on “The politics of high inflation – can governments do anything? ”

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1. barry 1

   19 May 2022 at 11:32 am

   Many economists were surprised that QE didn't lead to runaway inflation. The decoupling led to modern monetary theory https://www.investopedia.com/modern-monetary-theory-mmt-4588060

   Of course the money had to go somewhere, and there has been severe asset inflation. If the price of art goes up nobody (who matters) really cares, but the price of land and housing has real effects (and is mostly excluded from CPI). Asset inflation didn't lead to higher grocery prices, but still devalued money and discouraged saving.

   The real reason that CPI stayed low is because of outsourcing manufacturing to low wage economies. Even though that led to wage increases in the manufacturing countries, the cost of labour is still so low as to make it irrelevant. Immigration from low wage countries also kept the wages in NZ and other countries lower.

   The pandemic lockdowns, travel restrictions and logistics problems broke that. Import costs have gone up (partly due to shortages). Lack of immigrants have driven local labour costs higher. Financing costs have increased as well. This would have happened anyway, but the pandemic accelerated it.

   So the government is not responsible for the current inflation, but government policies over the last decades (here and overseas) have led to it.

   We won't fix it by doubling down on the policies that caused it. Outsourcing and relying on high paid service jobs, while allowing high immigration to keep wages low is not sustainable. We need a proper balance to stop this sort of periodic, economic disaster.
   • pat 1.1

     19 May 2022 at 12:14 pm

     Indeed….however we have even more pressing reasons for change.

     Limits to growth.
   • gypsy 1.2

     19 May 2022 at 2:37 pm

     Many economists were surprised that QE didn't lead to runaway inflation.

     It's long been accepted that QE doesn't necessarily cause inflation.

     We need a proper balance to stop this sort of periodic, economic disaster.

     You haven't defined what this 'economic disaster' is, but the 'proper balance' is carefully targeted government spending, and policies that strategically promote growth in the private sector.
     • barry 1.2.1

       19 May 2022 at 4:27 pm

       From your cite "If the economy is close to full capacity, increasing the money supply will invariably cause inflation."

       For most of the last 10 years we have been close to capacity.

       The disaster is cost of living outstripping the earnings of a large portion of the population. QE created wealth for a few, while the labour policies have kept wages low. Balance would have higher wages for the workers, and less wealth going to capital.

       Government spending is not the problem. If low government spending was the answer we would be one of the richest economies in the world. Growth and productivity improvements are important, but why restrict it to the private sector? Workers should get the reward for such growth and productivity. By keeping wages low, we have created an environment that discouraged investment.

       The point about inflation is that we have had high inflation which was not represented in the CPI. The inflation has rewarded the rich and the property owners and punished those who found themselves renting or looking to buy their first house. Now the shit is hitting the fan and we are seeing it reflected in the CPI.

       Ideological – public bad, private good – doesn't answer the question. It is more about how do we reward people properly for their work, and how do we look after the least well off.
       • gypsy 1.2.1.1

         19 May 2022 at 5:29 pm

         Thanks – good responses.

         "For most of the last 10 years we have been close to capacity."

         If we're smart, there are solutions to that. For example, I've just been listening to Paul Goulter, CEO of the NZ nurses association talking about the budget. We are 4,000 nurses short, and yet he claimed there was little or nothing in the budget to attract people to nursing. Now in this case capacity shouldn't be an issue – there are nurses ready and waiting to come to NZ, but they can't get in!

         "Government spending is not the problem. "

         Totally agree, The problem is the quality of government spending, and I would also say the proportion of government spending to GDP.

         "Growth and productivity improvements are important, but why restrict it to the private sector?"

         Productivity improvements, absolutely, but growth? That depends. If the public sector is delivering services to the economy efficiently then sure. The problem is that governments have a tendency to exhibited an unfortunate largesse without corresponding results. Mental health is one obvious example. And then there's the number of civil servants earning over $400k almost doubling in one year.

         "Now the shit is hitting the fan and we are seeing it reflected in the CPI."

         Indeed, but the government can't escape responsibility. Successive governments have failed to correctly manage the housing market, and the current government has increased landlords costs at a time when those costs are able to be passed straight on to tenants.

         "It is more about how do we reward people properly for their work, and how do we look after the least well off."

         Yes. We may not agree on the journey, but we can certainly agree on the destination.
2. Incognito 2

   19 May 2022 at 12:18 pm

   Nice paragraphs, Nick
   • lprent 2.1

     19 May 2022 at 2:17 pm

     I fixed them for him by reading his post on his own site. Does need a better paste. He should try with the block editor.
   • Nick Kelly 2.2

     19 May 2022 at 8:55 pm

     Yes, sorry the para’s were there in the draft but when a published not so much.
     I will try another method next time 🤦‍♂️
     • Incognito 2.2.1

       19 May 2022 at 9:05 pm

       No worries. I only saw the tidy version, which looked heaps better than your previous Post qua formatting – it was funny when I found out that I was giving Lynn a pat on the back instead
3. Blazer 3

   19 May 2022 at 12:43 pm

   The cornerstone of western Capitalism,is interest bearing debt.

   Along with Q.E =the perfect recipe for ramping…inflation.
4. Just Saying 4

   19 May 2022 at 1:36 pm

   Who is not prepared to make sacrifices?

   Maybe with the global clusterfuck reaching endgame the international mega-rich elite want to ensure it is everyone else who pay the price. Our democratic rights, including our abilities to freely communicate, to form political parties, and to vote within nation-states might be seen as a danger to their continuing power and control, including to their extravagant lifestyles and to their legal impunity. Maybe it is they who are becoming most antsy as things get worse and worse.

   Maybe as the crunch hits, everyday people might be expected to become less and less tolerant of the very wealthy and their enablers being the exception to making sacrifices. Because their virtue signalling as opposed to actual sacrifice might not cut it any more.

   As an aside it is the Ardern government. Ardern is the Prime Minister of a nation, a position that is not referred to by Christian name, as is the case with, say children and close kin. Something to do with the dignity of the office, from memory.
   • mac1 4.1

     19 May 2022 at 5:26 pm

     "As an aside it is the Ardern government."

     Absolutely, Just Saying. Margaret Thatcher got a proper reference. So should Prime Minister Jacinda Ardern.

     More that just saying…worth saying.
   • roy cartland 4.2

     20 May 2022 at 6:44 am

     +1 re sacrifices: we've made plenty. And watched on as the beyond-absurd antics of the unconscionably rich waste resources on rockets, yachts bunkers. With never a single wtf from our media.

     I'd happy sacrifice their wealth, as well as continue to make sacrifices of my own.

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