Evening Post. TUESDAY, OCTOBER 12, 1937. COSTS AND INFLATION

Evening Post, Volume CXXIV, Issue 89, 12 October 1937, Page 8

Evening Post. TUESDAY, OCTOBER 12, 1937. COSTS AND INFLATION

Costs in New Zealand are rising. That fact cannot be denied. The official statistics as yet show a fair margin in favour of wages; that is to say the worker who has received the average wage increase ia able to cover the higher cost of necessaries with a little to spare. Many workers, however, are not convinced that this applies to their cases, and they may be right, for the statistics relate only to a standard lot of necessary commodities and the worker may v buy many other things. Also, as the statistics are necessarily collected at fixed intervals they do not reflect all the latest increases. But the effect of rising costs on living standards, while of great and wide importance, is not the only aspect to be considered. Rising costs must be regarded also for their effect on production, and therefore on ment. This effect may not be seen at once. The manager of a manufacturing business is reported as stating: "It does not seem to be realised by the Government that businesses do not stop suddenly when things go against them. The stopping process is gradual because of the resiliency of a well-managed business. Business in New Zealand is running down like an unwound clock."

.There are reports every day of higher costs. Today it is boots and shoes and road-sealing. With roadsealing the'work goes on, in spite of the cost. Boots and shoes also must be provided, but New Zealand manufacturers say the work is going overseas. This, after all, is not in keeping with the Labour recipe. Labour said: Increase wages and spending power and there will lie more work to be done; factories will be busy, shops will be busy, output and turnover will rise and will absorb any higher costs resulting from higher wages or shorter hours. This process is upset if, owing to higher costs, a greater part of the spending power is diverted to imports. So far the effect of diversion is not so marked as to cause an increase in unemployment, though it may have checked the absorption of the workless and the expansion of industry. But, like cost-of-living statistics, business does not register results immediately. Good business iand good statesmanship take account of the first evidences of a check and modify the policy before the full effects are felt. This is what the Government, .as urged by the business community, should do now. It should examine the evidence with candour;-, not merely with the idea of proving that it is all wrong, and the policy still all right, but to see whether the policy does not require modification. We quoted recently the comment of the "Round Table" upon Mr. J. M. Keynes's submission that, if a rise in interest rates could he avoided, industrial recovery could be prevented from degenerating into a boom with the risk of subsequent collapse. The "Round Table" suggested that the theories of Mr. Keynes and those of the more orthodox economists could be amalgamated! into the statement that the best way , to avoid this consequence was to prevent any substantial rise in commodity prices or in interest rates. The New Zealand Government is giving attention to one part of this prescription. It is concentrating attention on keeping down, and even lowering, the-rate of interest • But, if it is giving equal attention "to prices, the Jesuits are not being seen. ' Certainly it "has passed a Prevention of Profiteering Act, and investigated cases coming under that Act, but it dealt with the root causes of price-increases? Has it even considered whether the attempt to pile costs on costs, higher wages on shorter hours, and tremendous expansion of expenditure on higher taxation, is not producing the very result that Should be avoided? This very problem was considered by Mr. Keynes in a contribution to "The Times" six months ago wherein he examined whether Britain could make a loan addition of £80,000,000 a year to armament.expenditure and yet avoid inflation. He stated that an improvement in demand, proceeding from greater expenditure, would carry with it an increase in output and employment and, at the same time, a rise in prices and wages. It was when increased demand was no longer capable of materially raising output and employment, and mainly spent itself in raising prices, that it was properly called inflation. When this point was reached, the new demand merely competed with the existing demand for the use of resources which were already employed to the utmost, A primary increase in expenditure of £80,000,000 by loan, Mir. Keynes calculated, would have a double or treble effect on demand (through spending by the recipients of the £80,000,000). The total increase in the national income would therefore be in the neighbourhood of £240,000,000, or about 5$ per cent. Mr, Keynes believed that Britain could stand this, but only by very careful planning—by arranging that a great part of the money should be spent in depressed areas, by allowing for a reduction ill ordinary expenditure such as building, and for a diversion of some spending power to imports to be covered by an increase of visible and invisible exports. Stated briefly his conclusion was that the money could be spent, but there must be no thoughtless splashing | round of spending power. It must i bo carcfully directed.

This has a direct bearing on our own affairs. We have undertaken a vast new expenditure by loan and crcdit issue. How great we cannot

say; but if we reckon the addition of so much of the £17,000,000 Public Works programme as comes from loan or credit, the credit housing expenditure, and the indirect addition to, capital through the Dairy Industry Account, it is evident that we are making a primary addition in the neighbourhood of £15,000,000 or £20,000,000. If this is trebled we have a final addition to demand which is ever so much greater than the 5% per cent, by which the rearmament loan would increase British national income. And this is being added without any very special planning. The Government plan, is just to increase spending power and the rest will take care of itself. Already there is evidence that the results against which Mr. Keynes gives warning are coming. The new demand is competing with the existing demand for resources which are fully employed; farmers are complaining that their labour is diverted to public works, and builders say they cannot secure labour. Costs and prices are rising. Without doubt the time has come when the basic policy and its effects should be reconsidered if worse results are not to follow.