Liam Dann: Don’t let inflation panic overshadow jobs success


It appears, to my ageing eyes, that there are many things making life in 2021 tough for young people.

Thankfully getting a job doesn’t seem to be one of them.

Low unemployment is a big deal and for all the current concern about inflation we shouldn’t forget to stop and celebrate last week’s extremely strong labour market data.

I don’t think we should confuse serious labour shortages limiting business growth with the need to make sure all Kiwis have a job.

The shortage of workers is very much a symptom of the pandemic and the border closures.

I have argued that the Government should be moving with more urgency to address the issue within those tight constraints that a safe pandemic response allows.

It looks like it is starting to.

In the past week we’ve seen a move to more horticultural workers from the Pacific Islands.
I suspect we’ll also see it respond to growing calls to offer some amnesty to workers trapped here with expired visas.

With unemployment so low, it is a luxury the Government can now afford.

Another low-unemployment bonus for the Government is that it means paying out less in benefits and getting back more in tax.

The Crown accounts are already looking much better than Treasury forecasts.

Lower unemployment will super-charge that.

On Friday, BNZ head of research Stephen Toplis noted: “Given the current run rate it looks like the Government’s accounts could be in surplus by June 2024.”

Of course, the best bit about a low unemployment is it means fewer Kiwis are having their lives torn apart by the grim reality of life without a job.

For many New Zealanders, the era of high unemployment, from the late 1980s to the late 1990s, was devastating.

Unemployment became inter-generational. A strong case can be made that this is when the worst of our social inequalities became entrenched.

That part of the story is sometimes omitted by those talking up New Zealand’s inflation-slaying heroics during this era.

When I left university in 1992, the unemployment rate was 10.7 per cent. The youth rate (15 to 24) was 19.2 per cent.

I spent time on the dole. It was confidence-destroying and depressing.

I was lucky. I had strong family support and a good education.

History tells us that New Zealand ran world-leading, inflation-targeting, central bank policy.

We did chase inflation down. The government of the day also slashed spending and chased down the deficit.

But we should not forget the price paid.

Economics is always a trade-off. It’s a balancing act.

With the benefit of hindsight, some might say that the internet was coming to drive down inflation regardless of policy.

In the 21st century, inflation disappeared as an economic threat almost everywhere in the world.

With hindsight we could say that New Zealand did more damage to a generation of workers than it needed to.

We are still living with the consequences of that damage.

This, I believe, is what underpinned the move by our current government to include unemployment in the Reserve Bank’s monetary policy mandate.

It’s provides a useful counter weight to overly hawkish inflation chasing.

For now, though, unemployment is under control.

It is annual inflation (at 3.3 per cent) that has jumped outside the mandated target range.

That’s why odds are that the OCR will rise -probably at the next RBNZ call on August 18.

Local economists are now unanimous in forecasting it will.

But forecasts are not predictions – something some in the media seem unable to get their heads around.

Just because 100 per cent of economists forecast a hike doesn’t mean those economists think a hike is a 100 per cent certainty.

Economists make forecasts based on the balance of probability.

So if they see a 51 per cent chance that the OCR will rise in August that’s what they’ll lock in as a forecast.

In theory, 100 per cent of economists may also be forecasting a 49 per cent chance of rates not rising.

As it happens, most economists see the probability of a hike as being much higher than that.

The strength of conviction that an economist has in their forecasts is something they write about in their commentary.

That’s why we shouldn’t take a forecast at face value, as a binary prediction.

We should always frame it with the commentary.

Every economic forecast right now comes with a caveat about the pandemic.

So, the OCR is forecast to rise if we don’t get hit with another Covid outbreak and lockdown.

Or, unless the Reserve Bank decides that the risk of these things happening in the near future remains too high.

Several economic commentators (including the Herald’s Brian Fallow) have made this case in the past few days.

It’s a compelling counter-view to the rate-rise narrative that has taken hold.

The Reserve Bank faces a very tough call.

Its stated policy through the pandemic has been to “follow the path of least regrets”.

What would it regret more – letting inflation get a head start on the economy? Or having to reverse rate hikes if Covid shuts down the economy again?

Well, at least it does not have worry about unemployment for now. That box is ticked.

Many big issues remain in this economy but the social destruction caused of large-scale job losses is not one of them.

We should be thankful.

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