Liam Dann: Are low interest rates good or bad for poor people?

Do low interest rates help or hurt poor people?

It’s a contentious question right now.

Traditionally it was a bit of a no-brainer.

Making money cheaper is supposed should help those at the lower end of the social spectrum – as long as it doesn’t cause undue inflation.

But the extent to which low rates boost house prices has dominated discussion in the past few years.

This year, in the shadow of the Covid-19 pandemic, the unexpected surge in house prices has created an almost singular focus on low interest rates as the cause of inequality.

There is some truth to this, of course. But I think it is overplayed and mistimed.

Here’s an entirely overly simplistic parable …

It’s a stormy night in 50,000 BC and the Ice Age is raging outside the communal cave.

There is a fire, but this is a very sensitive piece of technology – not easy to start and not easy to maintain.

There’s a fire-keeper whose job is to keep that flame burning so the tribe doesn’t freeze to death.

As a storm outside picks up and the wind howls through the cave, the risk of the fire going out rises sharply.

Panic starts to set in amongst the tribe.

“Don’t worry, I will use all the fuel at my disposal and I will not let us freeze,” declares the fire-keeper.

He stokes the fire and a throws on enough fuel to get the flames soaring.

He steps back to watch the flames, sure in the knowledge it will keep burning through the night.

Then a voice pipes up: “I’m a bit hot, actually.”

The problem is that nobody wants the fire to go out but once that primary condition is satisfied we all want it maintained at a temperature that suits our needs.

That’s not always easy or reasonable to expect – especially in a crisis.

The Reserve Bank has been very explicit this year.

It said it would follow the path of least regrets.

In other words, it would err on the side of keeping the fire burning.

And it succeeded.

I understand that an overheated housing market is more serious than a bit of temporary discomfort.

But equally, I’m not convinced that concern about real poverty is driving the intense focus on monetary policy and making it such a hot issue right now.

I think it is middle-class panic that has spooked the Government.

It’s not unjustified but it is revealing of where real political concern lies.

According to Barfoot and Thompson figures, half of house sales in Auckland sold for above $1 million in November.

That’s some sort of record and it’s frightening to young professional people contemplating getting into the housing market.

I’m not sure it will resonate as much for those families struggling just to put food on the table.

Yes, there is a flow-on through from the property market to rental prices and so on.

But I think the kind of housing issues faced by the poorest people in this country have less to do with median house prices and a lot more with social policy and structural inequalities.

It is there where solutions lie.

Meanwhile, using monetary policy to stoke the economy so the poorest and most vulnerable have jobs seems to more pressing.

That’s just my opinion, though. We really need to see more research in this area.

Thankfully it also seems to be something the Reserve Bank is prepared to take a closer look at in the wake of the letter it was sent by Finance Minister Grant Robertson.

If the RBNZ is going to be asked to consider house prices more closely then it will need to assess what costs that might have elsewhere.

This week, in a speech to the Australia National University, Governor Adrian Orr noted that the Reserve Bank had undertaken an assessment “of the literature on the distributional impacts of monetary policy on wealth and income equality”.

Orr made the point that while the four main ways that monetary policy impacts wealth and income distribution are quite well recognised, the net effects are less clear cut.

I’ll paraphrase some of the technical language but those for channels of influence are:

1) Lower rates are bad news for those who have money in the bank and good news for those with debt. Usually, it’s poor people struggling with debt and rich people with money in the bank.

2) But, lower interest rates boost asset prices including house prices. That means people with or access to capital to buy more assets will benefit.

3) Lower rates pump the economy and keep unemployment lower. As the biggest variable for lower-income households is whether they are employed (or the number of hours worked) lower rates help the poorest.

4) Lowering unemployment also ought to boost wage inflation and that too should help those who rely on wages more than it helps those who rely on business profit or capital income.

The Reserve Bank plans to push forward on work to analyse where the net benefit or costs sit in terms of wealth and income inequality.

And that is a good idea.

The world is dynamic and ever-changing, as this year highlighted so brutally.

Monetary policy needs to stay dynamic too.

Let’s step back from the fire and take a look.

But we should be thankful we can do so secure in its ongoing warmth.

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