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The way we run the economy isn't working
It’s just not working.
We’ve known this for a long time, but we felt it being seared into the body of our political economy all over again yesterday. The Reserve Bank tightened monetary policy to slow economic activity again. It wasn’t a mistake. It hiked the key interest rate in order to reduce jobs and wages growth, as well as investment. All because it has one blunt tool, the Official Cash Rate, and one target, to keep inflation around 2%.
This way of running our economy isn’t a bug. It’s a feature. The RBNZ acted yesterday as it was directed to do by the latest version of the Reserve Bank Act (1989). It decided that hurting consumers and workers more in the short term was necessary to ensure they weren’t hurt in the long run by higher inflation. It believes it has no choice but to increase unemployment in order to reduce inflation.
It was burning the village again to save the village.
Our primary macroeconomic manager did this at the same time as the Government is also tightening fiscal policy to slow activity. All because it believes it has one aim, to reduce deficits and borrowing to get the size of Government back under 30% of GDP and to get public debt back around 30% of GDP. All because it believes, without evidence, the world’s bond markets might punish New Zealand by not lending to our Government in the event of a crisis. Even though our Government actually has more assets than debts, and a net worth of over 30% of GDP, more than most other countries.
Our Government — and this has been a bipartisan approach for decades — did this because it interprets the Public Finance Act (1989) as meaning it should almost always put a sinking lid on spending, not raise taxes, and tirelessly strive to reduce deficits and borrowing.
Gallingly, both tightenings are happening at a time when:
* 20.3% of young women and 14.4% of young people overall are unemployed;
* a million people, 20% of the population, have so little money after paying for their rent, power, fuel and insurance that they need donations of food to stay alive; and,
* there is an ongoing and desperate need for investment in hospitals, schools, roads, railways, water pipes and, especially, the skills and health of our youngest and oldest.
We are saving for a rainy day, even though we’re in the middle of our second 1-in-100-year flood in a year. And we are putting up the cost of building rain shelters at the same time.
A scarred generation being scarred even deeper
Yesterday’s hike was especially galling because it demonstrated that this way we run our economy deliberately puts more young people out of work for longer, in order to solve an inflation problem that was created overseas and/or is administered by Governments and monopolists. Our poor and young people are being punished for the sins and accidents of people overseas and rich people here. They are being punished repeatedly, and in a way that scars them for a lifetime. I spoke about this in my questions to the Reserve Bank Governor in the news conference yesterday, which are included in the video above.
It’s most painful for those who graduated into the workforce in the last decade or so. They graduated from school and university into a jobs market where hundreds are applying for single low-level jobs every day. If they could get a job, their real wages have fallen more since 2021 than any other country in the developed world.
NZ real wages down most in OECD in 2026 & since 2021
From those wages, they’ve had to repay student loans and hope to save for a home. If they were lucky (or unlucky) enough to buy one in 2021 or 2022, their deposits will have been wiped out by real house price falls of more than 30 percent in two of our three biggest cities — caused largely by first money printing and high interest rates.
This generation face being told they’ll probably be forced to put even more of their money aside into a savings fund they won’t be able to access unless they are in complete poverty or reach the retirement age, which will probably have been pushed back by the voters and politicians who will have already retired by then.
Our two pillars of economic policy just don’t work
For the last 40 years, New Zealand has made a collective decision to manage our economy and society with a strict delineation and delegation of the levers of power between directly-elected politicians, who run fiscal policy by taxing, borrowing and spending, and an appointed Governor, who changes interest rates to speed up or slow down the economy, all with a single aim of keeping inflation around 2%.
It has meant the Government believes someone else (the Reserve Bank) is responsible for short-term economic growth and inflation in the long term. Bizarrely, this has actually incentivized governments of both flavors, and both central and local governments, to load more and of the capital costs for infrastructure onto consumers through user pays and fees. The Reserve Bank pointed out yesterday that administered prices had been rising at a rate of 7-9% per year in recent years, making up 0.7 to 0.8 percentage points of the 3.9% inflation rate in the first quarter of this year.
They believe they can achieve their PFA targets and let the RBNZ achieve the inflation target separately. This happens by the Reserve Bank effectively bearing down on the parts of the economy it can influence through interest rates directly, including construction, consumer spending and business investment, and indirectly, through the currency, which can shift export receipts and the costs of imports. It means that these sectors are suppressed, while the Government and monopolies can get on with their own business. This change in relative prices has effectively crunched our export sector well below 30% of GDP over the last 30 years.
That’s your problem. Not mine.
For the Reserve Bank, it has regularly pointed out it can’t change the underlying tax settings and policies that drive productivity and investment in the longer run. Governments of both flavours have chosen to ignore those gentle pleadings towards taxing capital gains and improving productivity, largely because the Reserve Bank was able to deliver very low interest rates for most of the last 20 years, thanks to imported deflation from the factories of China and, for much of the last 20 years, cheaper energy.
Meanwhile, productivity has stagnated here even more than overseas and generations of investors and bankers have come to focus their investments on land, rather than actual businesses and productivity-enhancing technology, skills and businesses.
By separating the levers of power and splitting responsibilities, neither have achieved progress in the long run. And the poor generations in the middle have paid the price, especially the ones that happened to be unlucky enough graduate into recessions.
We’ve known forever that monetary policy is not just blunt, but shifts wealth from the poor to the rich, and from workers to asset owners. When interest rates are raised, those in debt paid more to those with savings in banks. When interest rates fall, those with assets are made wealthier by rises in the value of those assets.
The rules and targets in our economic machinery and the separation of the responsibilities for achieving those targets just haven’t worked.
We should look to repeal both the RBNZ and the PFA Acts of 1989 and replace them with a new operating system for the economy that prioritises investing in the future of our kids, rather than using a higher unemployment rate to try to bludgeon a variable down that is determined by those overseas and by those who don’t have to pay the price.
We need to get rid of the slavish focus on 2%, 30% and 30% rules, and focus instead on getting all our young people into work.
Cheers
Bernard
PS: I have opened this one up to the public immediately and in full. Last week, I asked paying subscribers if I should do this for all these articles until the election on November 7. They agreed I should. I’ve also restarted the 50%-off introductory discount for the first year of subscription, which we had for the first three years of The Kākā, after existing paying subscribers agreed. It will stay on until the end of the year.
This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe
View all episodes
By Bernard HickeyIt’s just not working.
We’ve known this for a long time, but we felt it being seared into the body of our political economy all over again yesterday. The Reserve Bank tightened monetary policy to slow economic activity again. It wasn’t a mistake. It hiked the key interest rate in order to reduce jobs and wages growth, as well as investment. All because it has one blunt tool, the Official Cash Rate, and one target, to keep inflation around 2%.
This way of running our economy isn’t a bug. It’s a feature. The RBNZ acted yesterday as it was directed to do by the latest version of the Reserve Bank Act (1989). It decided that hurting consumers and workers more in the short term was necessary to ensure they weren’t hurt in the long run by higher inflation. It believes it has no choice but to increase unemployment in order to reduce inflation.
It was burning the village again to save the village.
Our primary macroeconomic manager did this at the same time as the Government is also tightening fiscal policy to slow activity. All because it believes it has one aim, to reduce deficits and borrowing to get the size of Government back under 30% of GDP and to get public debt back around 30% of GDP. All because it believes, without evidence, the world’s bond markets might punish New Zealand by not lending to our Government in the event of a crisis. Even though our Government actually has more assets than debts, and a net worth of over 30% of GDP, more than most other countries.
Our Government — and this has been a bipartisan approach for decades — did this because it interprets the Public Finance Act (1989) as meaning it should almost always put a sinking lid on spending, not raise taxes, and tirelessly strive to reduce deficits and borrowing.
Gallingly, both tightenings are happening at a time when:
* 20.3% of young women and 14.4% of young people overall are unemployed;
* a million people, 20% of the population, have so little money after paying for their rent, power, fuel and insurance that they need donations of food to stay alive; and,
* there is an ongoing and desperate need for investment in hospitals, schools, roads, railways, water pipes and, especially, the skills and health of our youngest and oldest.
We are saving for a rainy day, even though we’re in the middle of our second 1-in-100-year flood in a year. And we are putting up the cost of building rain shelters at the same time.
A scarred generation being scarred even deeper
Yesterday’s hike was especially galling because it demonstrated that this way we run our economy deliberately puts more young people out of work for longer, in order to solve an inflation problem that was created overseas and/or is administered by Governments and monopolists. Our poor and young people are being punished for the sins and accidents of people overseas and rich people here. They are being punished repeatedly, and in a way that scars them for a lifetime. I spoke about this in my questions to the Reserve Bank Governor in the news conference yesterday, which are included in the video above.
It’s most painful for those who graduated into the workforce in the last decade or so. They graduated from school and university into a jobs market where hundreds are applying for single low-level jobs every day. If they could get a job, their real wages have fallen more since 2021 than any other country in the developed world.
NZ real wages down most in OECD in 2026 & since 2021
From those wages, they’ve had to repay student loans and hope to save for a home. If they were lucky (or unlucky) enough to buy one in 2021 or 2022, their deposits will have been wiped out by real house price falls of more than 30 percent in two of our three biggest cities — caused largely by first money printing and high interest rates.
This generation face being told they’ll probably be forced to put even more of their money aside into a savings fund they won’t be able to access unless they are in complete poverty or reach the retirement age, which will probably have been pushed back by the voters and politicians who will have already retired by then.
Our two pillars of economic policy just don’t work
For the last 40 years, New Zealand has made a collective decision to manage our economy and society with a strict delineation and delegation of the levers of power between directly-elected politicians, who run fiscal policy by taxing, borrowing and spending, and an appointed Governor, who changes interest rates to speed up or slow down the economy, all with a single aim of keeping inflation around 2%.
It has meant the Government believes someone else (the Reserve Bank) is responsible for short-term economic growth and inflation in the long term. Bizarrely, this has actually incentivized governments of both flavors, and both central and local governments, to load more and of the capital costs for infrastructure onto consumers through user pays and fees. The Reserve Bank pointed out yesterday that administered prices had been rising at a rate of 7-9% per year in recent years, making up 0.7 to 0.8 percentage points of the 3.9% inflation rate in the first quarter of this year.
They believe they can achieve their PFA targets and let the RBNZ achieve the inflation target separately. This happens by the Reserve Bank effectively bearing down on the parts of the economy it can influence through interest rates directly, including construction, consumer spending and business investment, and indirectly, through the currency, which can shift export receipts and the costs of imports. It means that these sectors are suppressed, while the Government and monopolies can get on with their own business. This change in relative prices has effectively crunched our export sector well below 30% of GDP over the last 30 years.
That’s your problem. Not mine.
For the Reserve Bank, it has regularly pointed out it can’t change the underlying tax settings and policies that drive productivity and investment in the longer run. Governments of both flavours have chosen to ignore those gentle pleadings towards taxing capital gains and improving productivity, largely because the Reserve Bank was able to deliver very low interest rates for most of the last 20 years, thanks to imported deflation from the factories of China and, for much of the last 20 years, cheaper energy.
Meanwhile, productivity has stagnated here even more than overseas and generations of investors and bankers have come to focus their investments on land, rather than actual businesses and productivity-enhancing technology, skills and businesses.
By separating the levers of power and splitting responsibilities, neither have achieved progress in the long run. And the poor generations in the middle have paid the price, especially the ones that happened to be unlucky enough graduate into recessions.
We’ve known forever that monetary policy is not just blunt, but shifts wealth from the poor to the rich, and from workers to asset owners. When interest rates are raised, those in debt paid more to those with savings in banks. When interest rates fall, those with assets are made wealthier by rises in the value of those assets.
The rules and targets in our economic machinery and the separation of the responsibilities for achieving those targets just haven’t worked.
We should look to repeal both the RBNZ and the PFA Acts of 1989 and replace them with a new operating system for the economy that prioritises investing in the future of our kids, rather than using a higher unemployment rate to try to bludgeon a variable down that is determined by those overseas and by those who don’t have to pay the price.
We need to get rid of the slavish focus on 2%, 30% and 30% rules, and focus instead on getting all our young people into work.
Cheers
Bernard
PS: I have opened this one up to the public immediately and in full. Last week, I asked paying subscribers if I should do this for all these articles until the election on November 7. They agreed I should. I’ve also restarted the 50%-off introductory discount for the first year of subscription, which we had for the first three years of The Kākā, after existing paying subscribers agreed. It will stay on until the end of the year.
This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe