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  • rmacculloch

I've Been thinking: Media Economist Bagrie is Wrong

Former Labour Minister & ACT President, Richard Prebble's 1996 book, "I've Been Thinking" has such a great title, I can't resist plagiarizing it. On that note, seems to me the AM Show economist Cameron Bagrie maybe wrong to say, "The real litmus test regards getting inflation down is .. you got to get unemployment up .. We're way beyond maximum sustainable employment so, unfortunately .. to get inflation down, you've got to get unemployment back up .. I don't think we're going to see unemployment rocketing back up at the moment, that will be a 2023 story".

First, no one knows what is "maximum sustainable employment". Second, it's unlikely unemployment will "rocket up" in 2023. Why? The reason reveals Labour's (gently hidden) economic strategy. This government's aim is to reduce the "capital share" & increase the "labour share" of GDP. David Parker hasn't got his way with capital taxes, but that won't stop this government diverting wealth from firms to workers.

So this is how I think things will play out. Firms are suffering from chronic labour shortages due to immigration constraints & our low Kiwi salaries compared with "competitors" like Australia. What's more, we're in the midst of a labour shock as employees want to work from home, post-Covid. As Elon Musk will tell you, the productivity of such types is dubious. Yet Labour has embraced the trend: office attendance in Wellington has been decimated . My prediction is that these sources of labor shortages / low unemployment will persist.

Now this is the crucial point: whereas in past recessions the cost of bringing down inflation fell squarely on workers as firms laid them off, the Labour / RBNZ strategy is to make firms pay. Businesses are finding themselves caught between a rock & a hard-place: the "rock" is rising demands for higher pay from workers who are not easily replaced in the future due to problems hiring from abroad and difficulties getting folks into the office. The "hard place" is a rising inability to pass-on wage increases by putting up prices due to weak domestic demand as interest rates are hiked.

The end result will be a shrinkage of profits and drop in the capital share of GDP as workers grab a bigger share of the cake. Now here's the rub. Labour think it's a cunning plan, since they suspect there's a lot of monopoly power in NZ, so putting pressure on firms' profits will not lead to much of a rise in bankruptcies. Instead Labour figure that business owners who were earning "super normal" profits will see them disappear in favor of workers earnings.

What's the weakness of Labour's cunning plan? It doesn't address our abysmal productivity growth, does nothing to sharpen incentives and does nothing to increase competition. It's solely a plan to redistribute wealth. Anyhow, that's my prediction - namely that the costs of bringing down inflation will fall way more on Kiwi business than Kiwi workers over the next couple of years and we will not see unemployment "rocketing" sky high in 2023.



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