Sunday, October 28, 2007

A question for those Libertarian economists...

...who believe that inflation is the consequence of government interference in economic systems.

If the cost of my weekly food bill rises (as is predicted) by up to 20% over the next 12 months, what is it called if not "inflation"?

If it is "inflation", how is it being caused by government interference in the economy, or the supply of money, or whatever?

First of the big movers are dairy products, slated to increase by up to 45% by March next year. Why? Well it has to do with the fact that NZ is an open economy, where there are no subsidies on internal production, and others are prepared to pay that much more for our products. Simple economics, demand and supply affecting pricing.

Second big mover will be wheat and flour. Why? Because NZ's main supplier - Australia - is suffering its worst drought in many years. Farming production in Australia in general could be reduced by as much as 50% if the worst prognostications are realised.

Meats will increase in price as Americans divert land from agriculture for food to cropping for fuel. Good for our economy, and for the farmers, bad for me because I pay the same price for a leg of lamb or a slice of sirloin as does the supermarket that Al buys his from...

Oil will continue to impact upon my pay packet as well.

But the point is - none of these involve government action.

So, all of you economist experts - is it inflation, or do you have another name for it?


T. F. Stern said...

I’m not a big brain on Economics; however, there are several factors which the government controls which have a direct bearing on the value of your money, call it inflation or some other name. Fiat currency is the primary means by which so called inflation is brought about, the printing of more money which is dumped into the existing pot causes the value of previously issued currency to be devalued. Government strings which are attached to industry such as taxes, fee based impositions and other regulatory measures also alter the value of marketable items. Land use is a good example of how the value is either improved or destroyed by government intervention. Ecological measures imposed can destroy property owner’s ability to use their own land, zoning and proximity to planned community improvements might increase the value. The list is nearly endless; but what do I know…

The probligo said...

TF, noted.

This is going to stick around for a bit - at the very least to see if there is some kind of consensus.

Dave Justus said...

I am not sure which brand of Libertarian you are refering to, there are many libertarian and quasi-libertarian brands of economic thinking.

However, to the best of my knowledge no Libertarian economic thought says that all cases of micro-inflation (which is what you are talking about here) are the result of government intervention.

If the situation is as you describe, then you have identified many of the causes, which looks to be a whole bunch of unrelated coincidences. (although I would be surprised if America's relatively small focus on bio-fuels is actually effecting the price of meat in New Zealand.)

Typically this sort of thing isn't included in 'core inflation' because it is variable and reverses. This years drought in Australia could be next years bumber crop.

I would also imagine that the effects of this sort of thing are larger in New Zealand then elsewhere because of its small size and isolation, which makes substitution difficult. In larger markets, if one source of supply fails typically another can replace it. Aternatively, one type of thing can substitute for another (if beef is expensive, eat more chicken and pork.) Smaller and more isolated economies have more difficulty reacting quickly to this sort of thing then larger ones do.

The probligo said...

Dave, thanks for the comment.

Can I just point out that NZ is a nett food producer. Therefore, when looking at food groups the price of substitutes is not a valid comparison. Yes, it is conceivable that world dairy and beef prices might collapse in two years time. But in the meantime, it is as I said - that the price I pay is the same as the price you pay. If it were impossible to get our produce to market overseas, NZ would not starve but could well survive on a subsistence economy not unlike that of many African and Pacific nations.

As for this being "micro-inflation effects", there I disagree strongly. To illustrate why -

Let's assume that my total nett worth is in the vicinity (as of today) of NZD700k. If converted to an annuity with interest at 5% that might earn NZD25k after tax (and remember that an annuity consumes both income and principal) over 20 years.

At present that income represents a comfortable retirement income.

However, if inflation averages more than 3% per annum then the purchasing value of that annuity reduces steadily to the point where in 10 years time, the NZD25k income is likely to be worth little more than $19,000 in 2007 dollars. If the rate of inflation averages no more than 5% over the same period, in 10 years time I will be living on the equivalent of under $16,000 today. When you compare that with the present old age pension for a married couple - somewhere about $21000 - it is a worry.

That is NOT "micro-inflation" in my book.....

The probligo said...

Found this after writing that comment Dave, puts my point nicely and from a totally different source too...

Dave Justus said...

by 'micro inflation' I mean inflation that that effects only a small portion of the economy, not that the inflation amount effecting that economy is small. For example, a drought that raises the cost of wheat by 20% is a large increase in the cost of wheat, but an example of micro-inflation. When the fundamentals of an economy change so that everything (or nearly everything) cost more, that is macro inflation, even if the change is very small.

Of course the two things are related, but typically if macro inflation is under control, governments don't worry so much about isolated cases of micro inflation.

New Zealand being a net food exporter doesn't entirely mitigate the effects of being small and isolated that I was talking about. For example, as you mention wheat is imported from Australlia. When the Aussie wheat crop has trouble, of course world commodity prices rise, but beyond that their are additional costs as New Zealand importers have to find new sources and arrange for the purchase and transportation of those sources.

If for example, I buy all my apples from Farmer Bob down the street, if Farmer Bob's crop fails I have to spend the time and money to find an alternate source as well as pay any increased prices in the overall cost of apples that result from decreased supply. If instead I got apples from Bob, Joe and Frank, if Bobs crop fails I can simply increase my order from Joe and Frank without the expense of establishing a new relationship. I don't know enough about the specific markets in question to know if this is a large factor or a small one in the case you describe, but I imagine it has an effect.