Wednesday 13 February 2013

Money Illusion in Prince Parker's Court

Alas, money illusion wasn't confined to King Arthur's Court. Witness debates in New Zealand about manufacturing and the dollar.

Here's Finance Minister Bill English, who understands that devaluation only affects exports by effectively cutting real wages:
Finance Minister Bill English says manufacturers calling for a lower exchange rate are calling for their workers' wages to be cut.
Appearing before the Finance and Expenditure Select Committee, English faced a grilling about the Government's unwillingness to intervene in the currency markets to attempt to lower the New Zealand dollar.
Opposition MPs, who have been taking part in an inquiry into manufacturing in recent weeks, said the manufacturing industry had been warning that the high exchange rates was eroding profits and putting off any investment. English responded that the industry was effectively calling for lower wages for workers.
"What they're actually telling you is they want to cut the real wages of their workers, because that is the other side of the equation. They want to cut the real wages of their workers," English said.
Now you could argue against English by saying that nominal wage rigidity makes a bit more inflation desirable. There's no great evidence that wage settlements are clustering on the zero bound, and you'd want to sort out whatever structural stuff is causing our high exchange rates, and it's pretty unclear that the exchange rate is to blame for any relative decline in manufacturing anyway: manufacturing is in decline all over the place and our drop in manufacturing seems to match what you'd expect given that we decided to set regulations to make it really hard to build houses. But you could make that kind of case and it wouldn't be dismissed out of hand.

Here's what Labour Finance spokesman David Parker said instead:
Labour finance spokesman David Parker dismissed the comments as "nonsense".
"What they [manufacturers] want is an exchange rate which enables them to compete internationally so they can afford to pay wages," he said.
"The idea that an artificially high exchange rate is good for New Zealand workers because it holds down the price of flat screen TVs is a nonsense if they can't earn a decent wage."
In other words, they want to cut real wages so they can afford to pay higher nominal wages. And wages are only really measured in terms of what they can buy, like flat-screen TVs. If he'd couched the argument in terms of higher employment, it would have been defensible. But as stated, I wonder whether Parker is one of Twain's ignorant country blacksmiths, or whether he is just pandering to them.

HT: Anonymous Wellington wonks.

Update: this comment from Sam D is worth hoisting into the post.
Probably a little petty but is it worth mentioning to David Parker that the audio-visual equipment index, as measured in the CPI, hasn't increased on a quarterly basis since December 2001, with annual deflation of 13.2% since the series began?
The only problem with flat screen TV as numeraire is that the darned things keep getting better and better - it's hard to quality adjust them. I'm not sure how StatsNZ handles this, but I'd take that 13.2% reduction as possibly understating the true quality-adjusted cost adjustment.


  1. Probably a little petty but is it worth mentioning to David Parker that the audio-visual equipment index, as measured in the CPI, hasn't increased on a quarterly basis since December 2001, with annual deflation of 13.2% since the series began?

  2. I'm not entirely comfortable with flat screen TV's being used as a purchasing power indicator, not because it is difficult to quality adjust their value over time, but because they are really a semi-luxury item. If we're really concerned about the relative purchasing power of our wages I'd prefer we focus on the basic necessities of life and how affordable they are. Call me uncaring, but the ability for someone to be able to afford a flash new TV isn't as important to me as their ability to feed, clothe and house themselves and their family.
    Don't get me wrong, I like my TV and I know almost all houses in NZ will have at least one, but if I had the choice of not having a TV or going hungry I know which one I'd choose.

  3. But Parker's comment, if heeded, says "Buy your flat screen now before we increase inflation after the next election".

    Then, in the run up to the election he can say "The recession is over, look at the sales of flat screen TVs.. time to kick out the penny pinchers and elect a progressive Govt!"

    Older New Zealanders know that coded signal well and if they think the Govt will likely change they will buy.. and the younger ones will follow suit to avoid the price increases and shortages.

    In a funny old way its the public who decide when the good times are back.. and sometimes its right, even for the wrong reasons.


  4. The mythical flat screen TV argument has been used before... to make the claim that NZ households were not saving enough... because we were all using consumer credit to buy flat screen TVs... it was a junk argument then and it is now...

    There is no evidence in the savings data to suggest that buying flat screen TV's changed savings habits, but its an easy political message to get across...

    And I don't get why its a 'semi' luxury item... you can pick one up from around $500 from Harvey Norman or JB HiFi... hardly break the bank stuff...

  5. For some people on minimum wage $500 IS break the bank stuff.

  6. Lats, the flat screen is just an example. The important point is that policies that push up nominal wages while pushing up nominal prices proportionately more do harm to real wages.

  7. Yeah I totally get that. I just think consumer electronics are probably a poor measure for a couple of reasons.

    Firstly, as you said the technology changes so quickly and what you can get for your money changes so much over time, so it is difficult to make sensible quantifiable judgements on affordability over any reasonable time period.

    Secondly, if the justification for keeping the exchange rate high is that it makes life more affordable for the average worker (because they can afford more imported goods) then I say bollocks. Now I'm only guessing, but I suspect low wage folk on the breadline are less concerned with being able to buy the latest TV than they are about being able to pay for their rent, utilities, groceries, etc. Claims that keeping the exchange rate high is helping these people are, quite frankly, a load of old cobblers, and are really just an excuse made by Key, English & co so that they can continue to do exactly nothing.

    Yes, a high exchange rate is great for those businesses which rely on importing widgets in their supply chain and will have a flow on effect for the final cost of their product or service, but it also hurts exporters. And the relative influence of exchange rates on the cost of the staples produced or manufactured here (food especially) is much lower than that of wholly imported consumer goods.
    I don't claim to have the answers, but I do recognise bullshit when I see it.

  8. Lats, I urge URGE you to go and look at the RBNZ CPI series split out by tradeable and non-traded sectors. Cost increases in the non-traded sectors are massive compared to the import-competing sectors: a relatively high dollar is what's kept interest rates from having to rise to beat down total CPI.

  9. I will. I'm the first to admit my knowledge of economics isn't all it could be, that's why I hang out here, to learn the odd thing. The problem I have with many of the economic documents/statements is they are often couched in econo-speak, which to the uninitiated is about as useful as Orwell's double-plus-good language.

    And I admit my opinions are tarnished by my leftish leanings, I have little time for smug liars like Key & co. But then all politicians are untrustworthy, and rank just above child-molesters, and just below insurance companies on my scale of trustworthiness :)

  10. Upshot: for substantial periods, the only thing keeping NZ CPI below the 3% cap was low price growth in the tradeable sector (high exchange rate). Devalue and we're over the CPI target, and you're back to needing to stomp on the whole economy with interest rate hikes.

  11. Just for the record I went and had a look at the CPI data. You're quite correct, the cost increase for non-imports are significantly higher compared to imported goods, with the obvious exception of petrol which seems to be all over the place. Curious also that the CPI impact of housing stays relatively minor until about the last 18-24 months, unless I'm reading the data incorrectly. Thanks for pointing me in the direction of these stats.

  12. Yeah, folks will often look at core CPI that strips out volatile bits like petrol. I think the CPI effects of housing are mostly out of series on rent and imputed rent; rent has gone up less quickly than overall housing.