The visible hand in economics

Everyone needs to play their part?

Posted on: December 10, 2008

In an interesting speech by the RBNZ governor Alan Bollard we are told that everyone needs to play their part during the economic crisis. Specifically he stated:

We would hope that the electricity industry does not take advantage of its market position and keep increasing rates, that local authorities realise they need to set rates increases below inflation for a change, that the construction materials industry respond to much weaker demand, that the food industry react to lower international commodity prices with price cuts, that petrol companies keep cutting forecourt prices, that the transport industry pass on fuel price cuts, and that the banks pass on interest rate cuts. Only then will all these firms be playing their proper role in New Zealand’s recovery.

Now, putting the hard word on industries that do not face market pricing (like local councils) is fine – but attacking businesses for setting prices in their own interest – what the hell!

Firms aren’t passing on costs because they aren’t. If they had increased prices as strongly as cost pressures demanded on the way up then the inflation figure would be a lot worse than 5.1!

Think of it this way – if businesses are pricing “too high” they will face a situation where prices are “relative elastic”. Then it is “in their own interest” to cut prices. If they aren’t doing so, then prices aren’t too high, and if the RBNZ is really worried about inflationary pressure they should batter away with their own instrument instead of making arbitrary calls about “sharing the pain”. If there is a competition problem, complain to the commerce commission, otherwise stop trying to create scapegoats because of the fear surrounding a potential policy failure!

Other comments: Inquiring Mind, Rates Blog.

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6 Responses to "Everyone needs to play their part?"

In other news, Dr. Bollard has taken to leaving his wallet sitting open outside RBNZ House, but implores passers to do the right thing.

We’re awfully lucky that commodity prices have dropped faster than the dollar.

wtf??? These are oligopolies, mostly govt owned.

Of course they do not face genuine market pricing

“We’re awfully lucky that commodity prices have dropped faster than the dollar.”

They are awfully lucky because it will prevent people saying that they had a policy failure – I don’t think the domestic economy will be too happy with a decline in our terms of trade

“wtf??? These are oligopolies, mostly govt owned.

Of course they do not face genuine market pricing”

Even oligopolies will reduce prices in the face of a reduction in demand, that is still a price signal, even if it isn’t “efficient” – if prices aren’t falling there must be a reason.

Furthermore, if there is a genuine competition issue, why doesn’t the RBNZ bring it up with the commerce commision.

I’m serious when I say that this sort of jawboning from the Bank is embarrasing – they are a lot better than that

A lot of lower paid are spending too much money on communications Telecom/ Vodaphone, Broadband, Sky. Legalise handguns and we can dispense our cell phones.

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