Annual inflation above five percent disappeared, initially through disastrous recessions, from to in particular, and then as a result of the resulting entrenched inequality in western 'liberal democracies'.
We might note that the ripples of New Zealand's mass unemployment in the early s remain with us in a number of ways. I will note three. New Zealand's 'infrastructure deficit' today is largely a result of a policy preference then to have huge numbers of young men idle and unemployed instead of building and maintaining public works. The inevitable result is that many of those men turned to crime in Australia; we are now seeing some of these back in New Zealand as ' deportees'.
The third impact to note is the ongoing obsession of New Zealand's political class with 'prudent management of the public finances'. The view is that, under all conditions except the immediate aftermath of a financial crisis, government deficits are inflationary either through setting off inflationary expectations, or through crowding out private businesses, raising their interest costs.
While empirical evidence suggests that this is nonsense, and that the circumstances in which government deficits are inflationary are exceptional, we still retain the dogma that the public purse must be protected at all peacetime cost.
The drums are beating once again for policies to raise interest rates; refer Monetary Stimulus Reduced RBNZ and Interest rates and inflation - shifting sands, what next? Radio NZ. Rising interest rates will only aggravate inflation pressures in the short term, and they will create new rounds of financial and social distress in the medium and long terms.
They will not do anything to resolve current labour-shortages and supply-chain problems. And they will probably only add to house-price inflation, as finance moves out of productive businesses and further into lending to people holding secured assets. People expecting annual capital gains of over ten percent will not be deterred by mortgage interest rates of five percent or higher. We only have to look at the period from to Rising interest rates then did huge damage to New Zealand's core tradable sector think manufacturing, including high tech, and primary production and really inflated residential property values.
Money went into housing and land-banking, as it went out of core production. We need to be more observant of history, including unfashionable history, and less entranced by institutionalised dogma. I note that annual inflation in New Zealand has just jumped to 3.
Yes, the inflation we are concerned about has started. We need to treat this by addressing its cause: labour shortages and supply-chain mayhem. Higher interest rates — and higher interest rate expectations — are not the solution. Keith Rankin, trained as an economic historian, is a retired lecturer in Economics and Statistics.
He lives in Auckland, New Zealand. Keith Rankin taught economics at Unitec in Mt Albert since An economic historian by training, his research has included an analysis of labour supply in the Great Depression of the s, and has included estimates of New Zealand's GNP going back to the s. Keith believes that many of the economic issues that beguile us cannot be understood by relying on the orthodox interpretations of our social science disciplines.
Keith favours a critical approach that emphasises new perspectives rather than simply opposing those practices and policies that we don't like. Keith retired in and lives with his family in Glen Eden, Auckland.
Top Scoops Headlines. A Very Scary Graph: Comparing Delta Variant In New Zealand And New South Wales According to Wikipedia data science is an inter-disciplinary field that uses scientific methods, processes, algorithms and systems to extract knowledge and insights from noisy, structured and unstructured data, and apply knowledge and actionable insights from data across a broad range of application domains This is a problem that I have rarely seen mentioned, perhaps because it is of a slightly more philosophical nature.
Essentially, what I have noticed in economic models is that they can be quite unclear as to what a concept or variable is referring to. Or even just r, which represents the going interest rate in a national economy.
My question is: which interest rate does it represent, exactly? Investments have many rates of return. We all know that some investors make a fortune on the stock market; others make a loss. Bonds have different returns based on their maturity period. If we just take a weighted mean of all these different interest rates, we risk missing some important constituent details.
If we look at the globe, we How do you quantify a risk premium? No one knows. Investors make investment decisions based on their perception of that risk, but the risk itself is uncertain; the interest rate we observe is just the expression of a social belief, not some neat numerical correction. To put it in philosophical language, the ontological status of the risk premium and numerous other macroeconomic concepts is misunderstood.
And the consequences are not just philosophical; they can lead to a number of conceptual errors with serious policymaking implications. One prominent example is in neoliberal economics, and its belief in the divine importance of the market price.
Why should the state interfere and distort the housing market price? In reality, of course, the housing prices of London are really just a reflection of the deluded expectations of property owners on future prices, among other things. Problem No5: the role of risk, uncertainty, and expectations. This is another area of economics that is under active research, and in which we are starting to see improvements.
Perhaps I will cover it in a future post. Until then, I will again recommend reading the venerable Steve Keen, along with various other economists such as Frank Knight and Gunnar Myrdal. What I have written ultimately only scratches the surface; there are much more fundamental questions to be asked about macroeconomics and its ability to accurately model and predict real world economies.
Nevertheless, I think the five key problems I have highlighted constitute a good set of methodological problems with macroeconomics—and they are problems that can be feasibly solved.
My conclusion for students, policymakers, and other economists is this: presently, economic models are pretty rubbish. They are in urgent need of improvement—or else economists will find themselves stuck in the credibility crisis they are now in.
But better models will demand the work of newer, wiser, and better educated thinkers. In other words, we need a twin revolution; a revolution in the way we teach economics, to attract stronger students from a wider variety of fields, and a revolution in the way we do economics.
Will the field rise up to this challenge? People like Steve Keen give me hope. On the other hand: there are a lot of economists who prefer to keep their head in the sand. What can I say? I hope they die quickly. I identify with your frustration about bachelor level economic courses. Every once and awhile someone's model will 'get it right' at that point they go on book tours and predict the next disaster which may or may not happen.
If you're saying "it's hard," then I agree. And every academic macroeconomist would say the same thing. This also sounds like "it's hard," OR "you can't model everything. We can either do our best to try to inform them on the basis of data, or we can throw up our hands, in which case they might well make worse choices.
I do not see this happening personally. Nor do I think a lot of academic economists are in the business of going on book tours making confident predictions.
The models do not show it to them because many cant, or they do not want to see it. There are also enough different theories that they can pick whatever sounds nice and fits what they want to say and then can lean back and say 'see the model said'.
My point is they are not going to follow the 'science' they are going to have smorgasbord of whatever pet theory they want to promote. Then back the 'science' into it. They 'sorta' work right up until you get an irrational actor see recent stonks issue as an interesting case study.
People are irrational but rational in a different dimension. But we have no real good way to model that. It is why almost all of these theories 'work' until you get something irrational that the model does not account for. I am also not saying 'give up'. I am saying you need a lot more dimensions in your calculus. I am also saying many of those dimensions you will have a very hard time measuring. That is due to other external dimensions affecting those hyper dimensional curves, and even the model bending back on itself affecting things.
It will also not be something you can keep in your head.
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