Election Economic Misconceptions (1) Cost of Living

I don’t believe in political power, so I am not invested in the general election that is coming up in New Zealand at the beginning of next month. However, I am interested in economics, so I get frustrated with statements by politicians that don’t make economic sense. These are getting more and more common.

Cost of Living

The biggest issue in the upcoming general elections seems to be the “cost of living”. All political parties are announcing policies to reduce the cost of living for New Zealanders.

Unfortunately, this concern is misguided and producing political suggestions that will not be effective. The real problem faced by New Zealanders is not the so-called “cost of living”; it is “stagnant incomes”.

Increases in the cost of things that people need to buy are not unusual. The attack on Iran by the United States and Israel has pushed up the price of fuel, especially diesel, which has pushed up the prices of many goods that we buy.

In a normal economy, people’s income will usually be rising. As people become skilled in their work, they should be paid more. Many people will be promoted to more responsible roles that are better paid. People will be free to move to better jobs for which they can get better pay. If incomes are rising gradually, most people will be able to handle increases in the cost of living.

The real problem in New Zealand is that governments have been screwing down incomes, creating suffering for people when the cost of living increases. Here are just a few of the things that the government have done to hold down incomes.

• Changing employment laws to make it difficult for unions to operate effectively and push for higher wages.

• Undermining the process for female employees to obtain pay equity with males.

• Keeping increases in the minimum wage as minimal as possible.

• Reducing the size of the public service by disestablishing roles

• Preventing cost-of-living adjustments to wages and salaries.

• Fostering immigration to keep wages for unskilled work low.

• Minimising increases in benefits.

• Pausing infrastructure spending after the last election to review the benefits created unemployment in the construction sector, which put downward pressure on wages.

• Via Central Bank policies, governments have used unemployment to control inflation.

• Keeping unemployment at 4 to 5 percent of the workforce, ostensively to control inflation, puts massive downward pressure on wages and salaries.

• Maintaining unemployment and uncertainty makes it risky for people to move to better-paid jobs, because they are scared of being made redundant as the last person in.

• Fear of unemployment or redundancy makes it difficult for employees to ask for an increase in their wages and salaries.

If incomes had been rising over the past decade, as should happen in a healthy economy, people would be able to cope with the rising cost of living.

Rising prices are not a problem that governments can solve, but if they had allowed benefits, wages and salaries to increase as they normally would, we would not be facing a cost of living crisis. People would be able to cope with the change.

The political parties like this mischaracterisation of the “stagnant income” problem as a “cost of living” problem, as it turns it into a problem that they cannot solve and allows them to push responsibility for the difficulties faced by New Zealanders onto someone else. They prefer to rant against the “evil supermarket duopoly”, the “greedy banks” and the “colluding fuel companies. The politicians direct the anger of the people who are suffering against these companies, so they don’t get the blame for the real economic problem that they have caused.

Governments are responsible for the stagnant income problem. Unfortunately, the election process is enabling them to shrug off their responsibility and pass it off to various companies by calling it a “cost of living problem”.

New Zealand does not have a cost of living problem. We have a stagnant income problem. Solving the latter problem requires a completely different set of policies, but none of the political parties is interested in them.