Gareth Morgan, director of Gareth Morgan Investments
I’m a wage earner with a mortgage and interest rates rise. That rise drops the spending power of my income since interest is one of the costs I face. My sister’s a wage earner without a mortgage but with savings in the bank. When interest rates rise she’s better off.
Statistics New Zealand (SNZ) published a real wage index and argue that when interest rates rise the purchasing power of wages falls. The reason, they claim is that interest is a cost. To reach that conclusion is correct in my case, but clearly wrong in my sister’s. We don’t know whether in aggregate wage earners are net borrowers or savers, or whether a rise in interest rates is a benefit or cost to them. We do know that for all households it’s a net benefit.
So how relevant is the SNZ finding rising interest rates reduce the purchasing power of wages? The Government Statistician, Len Cook has replied that his wage real index only measures costs and so the conclusion that higher rates being a higher cost, reduce real income s valid. I argue his analysis is trivial.
We know interest payments are a certain percentage of consumers’ outgoings. SNZ then say interest is that same percentage of the costs consumers face and the CPI only measures consumers’ costs. That’s fine, but don’t use it then to deflate income measures which exclude interest income thereby omitting the true net effect of interest. This is SNZ’s malfeasance.
It’s reminds me of a former Associate Minister of Finance who argued that by selling assets government could reduce debt. He was correct insofar as reducing gross debt was concerned, but net indebtedness wasn’t changed at all when assets were sold at book value. Yet net debt determines government’s credit worthiness so his analysis of the gross position was irrelevant. Similarly, to ignore the benefit which sonic wage earners accrue as a result of interest rate rises and concentrate only on one side of the ledger, is an incomplete (not necessarily wrong, but definitely severely limiting) appraisal. Yet SNZ promote their measure as the definitive word on the impact of inflation on wage income and are just wrong to do so.
Mr Cook should tell us what possible use his real wage index has. It’s not an index of wage costs since it’s deflated by the CPI rather than an index purporting to measure employers’ costs; it’s not an index of wage earners’ purchasing power because the CI-’J deflator fails to include the net impact of interest, choosing only to include its gross cost impact; we know it’s not an index of disposable income (please don’t suggest I misunderstood it as such Len, that’s just crap). And finally, it’s doesn’t substantiate what SNZ declare – that higher interest rates reduce your real wages. Your wages still buy the same quantity of all goods but won’t go as far in paying your interest bills. But then if in net terms most wage earners are savers (which they could hey, tile net interest bill will have fallen (net receipts risen) – so what’s the point? Overcooked stats I’d say.