Money Illusion in Prince Parker’s Court

By Eric Crampton 15/02/2013


Alas, money illusion wasn’t confined to King Arthur’s Court. Witness debates in New Zealand about manufacturing and the dollar.

Here’s Finance Minister Bill English, who understands that devaluation only affects exports by effectively cutting real wages:

Finance Minister Bill English says manufacturers calling for a lower exchange rate are calling for their workers’ wages to be cut.
Appearing before the Finance and Expenditure Select Committee, English faced a grilling about the Government’s unwillingness to intervene in the currency markets to attempt to lower the New Zealand dollar.
Opposition MPs, who have been taking part in an inquiry into manufacturing in recent weeks, said the manufacturing industry had been warning that the high exchange rates was eroding profits and putting off any investment. English responded that the industry was effectively calling for lower wages for workers.
“What they’re actually telling you is they want to cut the real wages of their workers, because that is the other side of the equation. They want to cut the real wages of their workers,” English said.

Now you could argue against English by saying that nominal wage rigidity makes a bit more inflation desirable. There’s no great evidence that wage settlements are clustering on the zero bound, and you’d want to sort out whatever structural stuff is causing our high exchange rates, and it’s pretty unclear that the exchange rate is to blame for any relative decline in manufacturing anyway: manufacturing is in decline all over the place and our drop in manufacturing seems to match what you’d expect given that we decided to set regulations to make it really hard to build houses. But you could make that kind of case and it wouldn’t be dismissed out of hand.

Here’s what Labour Finance spokesman David Parker said instead:

Labour finance spokesman David Parker dismissed the comments as “nonsense”.
“What they [manufacturers] want is an exchange rate which enables them to compete internationally so they can afford to pay wages,” he said.
“The idea that an artificially high exchange rate is good for New Zealand workers because it holds down the price of flat screen TVs is a nonsense if they can’t earn a decent wage.”

In other words, they want to cut real wages so they can afford to pay higher nominal wages. And wages are only really measured in terms of what they can buy, like flat-screen TVs. If he’d couched the argument in terms of higher employment, it would have been defensible. But as stated, I wonder whether Parker is one of Twain’s ignorant country blacksmiths, or whether he is just pandering to them.

HT: Anonymous Wellington wonks.

Update: this comment from Sam D is worth hoisting into the post.

Probably a little petty but is it worth mentioning to David Parker that the audio-visual equipment index, as measured in the CPI, hasn’t increased on a quarterly basis since December 2001, with annual deflation of 13.2% since the series began?

The only problem with flat screen TV as numeraire is that the darned things keep getting better and better – it’s hard to quality adjust them. I’m not sure how StatsNZ handles this, but I’d take that 13.2% reduction as possibly understating the true quality-adjusted cost adjustment.