Peter Lyons: Reserve Bank lacks weapons for housing fight

Those with assets are now getting wealthier at a rapid pace. Photo / File

I attended a Spandau Ballet concert the other night. They were an early 1980s new romantic band. The audience was largely 50-plus and well heeled. During the intermission, many in the audience played on their smartphones. The lady in front was shopping for quality boots.

My generation is the last of the post-war lucky ones. We had no student debt. We entered the workforce in the 1970s and early '80s. Unemployment in the late 1970s was around 5000. But most importantly many of my generation were able to acquire capital including being able to buy a house on a low multiple of our incomes. Yes, interest rates rocketed in the late 1980s and early 1990s, but the average house in suburban Auckland was still a low multiple of median income.

Those with assets are now getting wealthier at a rapid pace. The wealth gap is likely widening at a far faster rate than income inequalities, but it is seldom discussed in the media because collecting statistics on the distribution of wealth is difficult - income data is easier to collect because they are generally taxed.

The wealth gap trend largely depends on the accident of birth. Those of us born before the 1970s had a better chance to accumulate wealth. The other accident of birth playing out these days is that those from families with wealth have greater access to the booming housing or share market. So wealth inequality will continue to magnify.

A factor that is often overlooked is the role of deliberate economic policy in magnifying wealth inequality. Our Reserve Bank is charged with keeping inflation between 1 to 3 per cent. During boom times, when inflationary pressures increase, it raises interest rates. During slumps it lowers interest rates. This deliberate policy has lead to major distortions in asset markets such as property and shares, here and abroad.

In recent years, central banks around the world have kept interest rates at record lows to try to stimulate their economies. Because the inflation rate on goods and services has been so low, central banks have been able to keep interest rates low, helping fuel inflation in asset prices - particularly shares but also residential property in cities such as Auckland.

What has become evident is that obsessive inflation targeting by a central bank using short-term interest rates can be as distortionary as inflation itself.

Our Reserve Bank now resembles a paper tiger. It laments housing inflation in Auckland but has signalled it is likely to drop interest rates which will further fuel housing inflation. It desperately needs the support of the Government to address the distortion that monetary policy is helping create. This support necessitates tax changes. It is unlikely to materialise. Politicians prefer the illusion of prosperity.

In the late 1980s New Zealand was a pioneer in economic management. We made our Reserve Bank politically independent. We established an inflation target that it had to meet. Nowadays this approach to economic management resembles fighting a new enemy in different terrain using obsolete weaponry that has a habit of misfiring.

• Peter Lyons teaches economics at Saint Peters College in Epsom and has written several economics texts.