Governments like scapegoats. A good scapegoat can take the blame for something that is a government’s fault. It can also help justify measures the government was itching to take for other reasons.
When all goes well, a very good scapegoat can do both.
Clark pointed to the most recent food price inflation figures being “above the general inflation figures”. He claimed that “the super profits of the supermarket duopoly” are responsible for rising food prices, and that rising food prices bolster the case for action against the supermarkets.
It is, bluntly, absolute economic nonsense.
This type of nonsense is hardly limited to New Zealand. Incumbent governments in many countries facing high inflation rates make populist appeals while looking for scapegoats.
In January, White House Press Secretary Jen Psaki blamed “corporate greed” for rising meat prices. Congresswoman Alexandria Ocasio-Cortez claimed corporate “price gouging” fuels inflation. Both ignored that inflation really comes down to monetary policy.
Greed is a poor explanation for inflation not because companies are altruists, but because greed is always with us. It isn’t cyclical.
Should we credit corporate public-spiritedness for the five years from December 2011 through December 2016 when inflation ran well below the midpoint of the RBNZ inflation band?
Of course not. Monetary policy drives inflation, not changes in greed.
But it gets dumber.
Minister Clark suggested that food prices rising ahead of the overall Consumer Price Index justifies antitrust action in groceries.
Over the past decade, annualised food price inflation has been below overall consumer price inflation in 28 out of 40 quarters – 70% of the past decade. Should we then ignore the Commerce Commission’s recommendation to liberalise zoning and land use planning so that more supermarkets can enter the market?
I hope not.
Even worse, Minister Clark implicitly compared March quarter food price figures with December quarter CPI figures. March quarter inflation figures will not be released until later this week. It is currently impossible to say whether food price inflation is above or below the overall CPI.
The most recent inflation figures are from the December quarter. In that quarter, year-on-year food price inflation was 1.8 percentage points below the overall CPI.
So the Minister was wrong about the most recent possible comparison between food price inflation and overall inflation, and did not know or ignored the trend over the past decade.
It gets dumber still.
Suppose that New Zealand had a single monopoly grocer covering the entire market with no competition at all, instead of two chains with many fringe competitors.
That monopolist would be very profitable.
But would it use inflationary conditions as opportunity to hike prices even more? In other words, does inflation enable a monopolist to become even more greedy?
Not really. The standard case suggests the opposite.
Monopolists are generally bad for consumers. But a monopolist is generally less responsive to changes in costs.
The standard simple example taught in intermediate microeconomics texts has a monopolist passing through half of a cost increase to consumers rather than the full amount.
Monopolists charge too high a price to begin with, relative to a competitive market benchmark. Fully passing cost increases through to consumers would mean lower profits because of reductions in turnover.
That is why only seven percent of US economists surveyed in January, in response to similar populist nonsense there, agreed that market power is a significant factor in explaining inflation. Only five percent agreed that antitrust interventions could successfully reduce inflation over the next year.
Harvard’s Eric Maskin provided the standard answer: “Theory suggests that monopolists respond less to changes in costs than pure competitors do, so market power doesn’t seem a likely culprit.”
So Minister Clark was wrong in stating that food price increases have outstripped inflation. Inflation data for the most recent quarter has not even been released yet, and overall inflation in the December quarter ran hotter than food price inflation.
Even if he had been right about food price inflation exceeding CPI in the most recent quarter, he would have been wrong about the overall trend over the past decade.
And if food prices had outpaced inflation over the past decade, that would be weak evidence against the need for increased competition in grocery retail, not justification for greater intervention.
In short, the Minister was wrong from beginning to end. Absolute economic ignorance would be the most charitable explanation, but an ignoramus might have considered asking Treasury’s advice.
More plausibly, Minister Clark was scapegoating the supermarkets to justify populist measures against them, or to deflect attention from his government’s failure to keep the Reserve Bank on target, or both.
Voters should be wary of policies justified by scapegoating.