Throughout the Covid-19 pandemic, we were told to just “trust the science” implying: listen to the advice of epidemiological researchers. But this was a narrow view of what the relevant “science” was. Epidemiologists can tell us about case and infection fatality rates of pathogens or their prospective path of transmission. But what we do with that data, what level of risk we are willing to tolerate, what costs we are willing to bear and what freedoms we are willing to sacrifice is no longer a question for epidemiologists. In fact, this question should not be left to them. It requires expertise from other social sciences and humanities. In reality, this “trust the science” mantra was an abdication of responsibility by our leadership for decisions that require statesmanship and are fundamentally political in nature; a pretense that a narrowly defined view of science can substitute for ethical judgments that ultimately need to be made by elected leaders.
Which brings us to the news that there is much consternation around the fact that the consumer price index is up by more than 3% on an annual basis. Why the surprise? This is one of many inevitable outcomes of the zero-Covid mindset. The government has refused to acknowledge that Covid-19 was not merely a health crisis; it was also a social and economic crisis requiring a multi-pronged response rather than single-minded devotion to elimination. The “scientists” advising the government failed to understand that while too little social distancing leads to loss of lives and livelihoods from Covid-19, too much social distancing implies a loss of lives and livelihoods from other diseases and factors. Little thought was given to issues like our geographical isolation, the impact on global supply chains; that vaccination roll-outs may take a long time; that this will make it increasingly difficult to hunker down in Fortress New Zealand.
The Covid-19 recession is also different. In the past, governments were fighting recessions caused by shocks that had already happened. But for the Covid-19 induced recession, faced with declining output and the prospect of large-scale unemployment, our government started borrowing heavily, thereby dramatically increasing the government’s debt. But simultaneously, the government (in the guise of the Reserve Bank) bought back that same debt in a massive program of quantitative easing; printing money to stimulate economic activity. This would be funny if the consequences were not so dramatic. Not surprisingly, it became clear soon enough that the ability of quantitative easing to stimulate business spending was going to be limited. This is because what was holding back such spending was not a lack of credit but an acute uncertainty about what the future held.
In most recessions house prices take a nose-dive. But not this time around; partly because this recession hit the non-asset owning blue-collar workers far more than the while-collar ones. The latter had the option of working comfortably from home and therefore, did not experience much economic hardship. The historically low interest rates set off a quest for higher returns, resulting in investors gravitating toward houses and equities, furiously bidding up prices and fueling speculative bubbles. Among other things, this will create long-term wealth (and inter-generational) inequality. A government that touts its progressive credentials was essentially giving away free-money to the asset holding class.
On top of this, the government decided to adopt another common populist tactic: the minimum wage was put up to nearly three-quarters of the adult median wage. I firmly believe that the negative employment consequences of minimum wages are often blown out of proportion by opponents. But not in a recession and certainly not in a situation when the country’s borders are shut tightly thereby depriving businesses of making compensatory adjustments. In any event, the inflationary pressures we are experiencing are more due to the quantitative easing rather than the minimum wage increase. These policies hew closely to ones followed by other populist regimes such as in Argentina or Venezuela. First, money creation to deal with large fiscal deficits; followed by wage increases (helped by substantial minimum-wage hikes) and declining unemployment. Soon, however, bottlenecks appear and prices skyrocket.
The government is supposedly keen on having more skilled labour. This would require building up capacity in the tertiary education sector. Yet, by restricting funding and forcing redundancies, the government is in the process of bringing our universities to their knees. The government deficits are creating a temporary boom in consumer spending and giving people the impression that everything is fine; but this will be short-lived. In the meantime, long lasting damage is being created to the country’s productive capacity. Unfortunately (or maybe fortunately) another group of people will be tasked with repairing that damage, which will become ever more apparent with the passage of time. As the saying goes, those who would give up essential liberties for temporary security will have neither security nor liberty.