Stuff: Sacrificing 50,000 workers on the altar of inflation is madness

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It sounds like a Pacific island, but is actually a crime scene. Welcome to Nairu, the Non-accelerating inflation rate of unemployment, a seemingly innocuous term that symbolises all kinds of damage to well-being and to working lives.

On Wednesday, in the latest salvo of the cost-of-living war, the Reserve Bank lifted the official interest rate at which banks borrow from 3 to 3.5%. If, the theory runs, banks in turn charge customers more to borrow, companies will cut back on spending and inflation will be curbed.

Which is all very well – except that one of the ways in which companies retrench is they sack thousands of staff.

Last month economists were candidly discussing the “need” to cull 50,000 workers. Contemplating the Reserve Bank’s options, ANZ chief economist Sharon Zollner argued: “To beat inflation, they require some people to lose their jobs. That’s a comms challenge right there.”

A comms challenge is one way to put it: unnecessary suffering might be another.

Part of the problem is symbolised by the Nairu, a concept used to identify, in the words of Australia’s Reserve Bank, “the lowest unemployment rate that can be sustained without causing wages growth and inflation to rise”.

Leaving aside the special genius it takes to frame wage growth as a bad thing, the salient point is that estimates of the Nairu are often quite high. In 2018 our Reserve Bank put it at 4.8%. If unemployment falls below that level, on this theory, inflation will accelerate away. Even commentators who’ve never heard of the Nairu are channelling a similar logic – one that leads inexorably to mass layoffs.

So much here is upside down. While high inflation is undoubtedly bad, high unemployment is far worse. Research by New Zealand economist Robert MacCulloch suggests the latter is 12 times more damaging to our self-reported well-being than the former. If, as ministers claim, we live in the age of well-being economics, surely we should be making different decisions.

There’s little evidence, moreover, that the main villain in the cost-of-living story is the spending of the 50,000 people who’ll be laid off. Much of current inflation is driven by Covid-induced supply-chain shocks and war in Ukraine, by firms facing so little competition that they find it easy to raise prices, and (at the margins) by government spending. None of that is working people’s fault.

It’s still true that too much money sloshing around lifts inflation. But think about the 50,000 workers most likely to be laid off, who will be disproportionately low-waged, young and Māori. Are they spending their spare cash on fripperies, or just trying to buy groceries, heat their houses and pay rent?

If there genuinely is excess cash, it sits in the hands of the well-off. But current policies don’t target them. In other words, low-wage workers will be thrust into poverty so that the rich can keep buying new kitchens. Hence the above reference to a crime scene, for these are economic crimes being visited upon ordinary people.

Questions should be asked of the Reserve Bank, though its options are limited by the blunt interest-rate-hike tools at its disposal. We must also dig deeper into our intellectual substructure, unearthing semi-hidden concepts like the Nairu and questioning what they represent.

The Nairu assumes, for instance, that wage rises automatically spur inflation. But if employers take the hit by accepting lower profits, rather than passing costs onto consumers, inflation needn’t soar. How, in these equations, have company profits slipped out of sight, gaining the protection of an invisibility cloak?

Nairu-based analysis also sees greater staff bargaining strength as a bad thing, because it lifts wages. A wider pool of workers is good only because competition between them keeps wages low. Again we glimpse an upside down economic universe.

In a more orderly world, decision-makers would put employment and wage growth first, then work out how everything else fits. Since New Zealand used to have full employment, we might aim for something similar again.

Accepting that 1% of the workforce constantly churns in and out of jobs, we could seek to eliminate long-term joblessness – especially if we invested far more in retraining schemes for beneficiaries, as other countries do. Paid work isn’t the be-all-and-end-all. But for those who want it, a job should be available. Isn’t that one of the core promises of social democracy?

In this scenario, of course, inflation risks would be heightened– and we’d need to manage them carefully, without harming poor households. Which tools we’d use isn’t yet clear. Forcing more competition into sectors where it is currently deficient? Higher top income tax rates? Higher but temporary GST levies on luxury products, when inflation threatens?

Whatever the answers, they have to be more sophisticated than the current set. Sacrificing 50,000 workers on the altar of inflation is madness.