Economists Panel

The Financial Services Council ran a panel session last week with a few Chief Economists from different sectors: property, investment, banking, and policy. 

I was the policy guy.

The session's now online for those keen.

Rob Stock wrote up one part of the discussion. Jack Tame asked the panel how much unemployment would have to rise to get inflation back under control. 

I didn't like the question's framing. Unemployment will rise regardless of what RBNZ does, short of increasing inflation at an accelerating rate. But I'd gone on at too much length on prior questions and didn't want to spend a ton of time on it. I probably should have, because Stock reported it as though economists want unemployment to rise. That ain't it, or at least it shouldn't be. 

I just said that hardship would be hard to avoid from where we are. That's obviously not an endorsement of hardship. Where we are sucks. 

But I went through the problem in more depth over at Newsroom.

And here we start seeing what maximum sustainable employment means. Employment levels, during this early phase, are not sustainable unless inflation continues to increase. In the same way that you or I might buy more of anything we like when it’s on sale, and more than we would normally purchase, firms want to hire more workers than they otherwise would when inflation pushes real wages down.

It isn’t sustainable in a very obvious sense: labour demand is only as high as it is because prices for firms’ outputs rose more quickly than wages. But firms are competing for workers and want more of them when wages are low relative to the prices they can receive for their products. That competition pushes workers’ wages up.

Once wages catch up, then labour is no longer on sale. Companies that had wanted to do lots of hiring when workers were effectively on special stop wanting to staff up and some even contract. Employment rates go down again – even if the Reserve Bank has done nothing to tighten monetary policy.

And that’s the spot the Reserve Bank has gotten us into. Monetary policy errors driven by incorrect forecasts back in 2020, followed by failures in correcting the errors quickly enough, mean we now have an awful mess to get out of. All paths out are painful.

I absolutely do not envy RBNZ right now. Forecasting a year out, given the mess in Europe, will be far from simple.  

On a better note: it's always fun to talk with the vendors at these kinds of conferences. There were maybe four different companies offering their different AML-KYC solutions. They can now onboard customers through those processes at less than five dollars a pop. KYC compliance wouldn't have to murder iPredict today.