Was life really harder in 1990, last time inflation peaked?

Friday, 21 October 2022

In 1990, and high inflation was coupled with high unemployment, especially for Māori.

Inflation is bad in 2022, but we can thank our lucky stars we’re not back in 1990, the last time prices were rising this fast.

Then the country was truly miserable.

Economist Peter Wilson, a working economist for four decades, recalls the dour state of the country in 1990, and the New Zealand 'Misery index' he has calculated indicates his memory does not deceive him.

“New Zealand was still going through the backwash from the [Sir Roger] Douglas years,” he said.

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The country digesting Rogernomics reforms, which were designed to end 1970s and 1980s “stagflation”, and get on top of a massive Budget deficits.

The gritty novel Once Were Warriors was published in 1990, and high inflation was coupled with high unemployment, especially for Māori.

“When we first came to New Zealand in December 1990, it was not a happy place,” said Australian-born Wilson.

Stuff reporter Imogen Neale revisits some of the themes raised in the groundbreaking film Once Were Warriors and asks what, if anything, has changed since its release.

The Misery Index was created originally by Yale University economist Arthur Okun in the 1960s as the Economic Discomfort Index, but was supposedly renamed by United States president Ronald Reagan.

It calculates a country’s economic misery by adding the unemployment rate to the inflation rate.

It’s a simple concept, which was designed to give US presidents an easily-grasped snapshot of how households were faring, and probably feeling.

It also provides a shorthand for comparing 1990 with 2022.

In June 1990, New Zealand’s misery index score was 15.2%, made up of 7.6% unemployment and 7.6% inflation.

Prime Minister Jacinda Ardern has faced a tough time because of high inflation, but she has not had to also explain high unemployment.

In June 2022, it was 10.6%, made up of 3.3% unemployment, and 7.3% inflation.

ASB economist Chris Tennent-Brown said high employment was cushioning households in a way that did not happen in the 1990s.

“It’s amazing to go through the pandemic, or GFC, and not have unemployment go up to the rate it used to,” he said.

In the early days of the pandemic, people worried unemployment might spike, but Government borrowing, and subsidies for employers to pay wages, had kept employment from crashing.

For a skilled worker in good health today, being unemployed was either “frictional”, meaning they were between jobs, but would soon have one, or voluntary, Tennent-Brown said.

Homeowners today were facing rapidly-rising home loan rates, but they were nothing on the variable rate home loans available in the 1990s, statistics show.

Not everything in 1990 was awful. Auckland hosted the Commonwealth Games, and Kiwi athletes won 58 medals, including Tanya Murray’s gold in the high.

In 1987, they peaked at over 20%, but in 1990, they were still high. They started 1990 at 14.5%, falling to 13.7% by the end.

But house prices were much lower in 1990.

The mismatch between the number of homes being built and the number of people wanting homes was ramping up, houses were being built bigger, and land prices were rising as planners tried to contain urban sprawl, data shows.

As unemployment and inflation are always present in modern economies, there is a level of economic misery present at all times.

Writers at the US finance website The Balance said a healthy economy would produce a misery index score of between 6% and 7%.

Finance minister Ruth Richardson delivered ‘The Mother of All Budgets’ in 1991.

In his economic history of New Zealand, Not in Narrow Seas, economist Brian Easton said Rogernomics led to a very sharp increase in inequality because taxes were changed to benefit the better-off, and social security benefits were slashed.

Some benefits for the unemployed were cut by as much as 24.7% in late 1990, he said.

Unemployment was rising in 1990, and would peak in two year’s time. In March 1990, it was officially 7%, steadily rising to 8.8% by the end of that year.

“In the five years from 1988 to 1993, the unemployment rate averaged 8.7%,” Easton said.

Jim Bolger became prime minister in 1990.

Factories were closing, or downsizing their labour forces.

Slashing benefits had an impact on the economy that would be felt in the following two years.

There was a “cyclical downturn associated with the ‘Mother of All Budgets’ and labour shedding following the corporatisation and privatisation of state-owned enterprises, and from business closures, Easton said.

A lot of workers felt the sting of job loss.

“In the period from October 1988 to June 1993, over three-quarters of a million workers enrolled with the New Zealand Employment Service. This excludes double counting, those who enrolled again, and those unemployed who did not use the NZES, Easton said.

“At the time the average size of the labour force was 1.6 million people, so it seems likely that about half the labour force was unemployed at some time in the five years from 1988/89 to 1993/94.”

Many would have experienced traumatic layoffs, and found a new job with poorer pay and working conditions, he said.

A usually politically stable society, 1990 saw three different prime ministers in Sir Geoffrey Palmer, Mike Moore and then Jim Bolger.

New Zealand had only ever seen two years previously in which the office of the prime minister changed hands three times, and one of those was a year in the long depression of the 1880s, the other in 1972 when inflation was high.

The spectre of redundancy in 1990 that was stalking families was distinctly worse for some portions of the population.

Economist Matthew Roskruge, from Massey University, said different people in a society bore different loads of misery at points in time.

Data from Stats NZ indicates that in 1990, Māori unemployment reached 19.8%, going even higher in the following two years. By contrast, people of European ethnicities had an unemployment rate of 6.5% in 1990.

Assuming both faced the same level of inflation, the Misery Index score for Māori may have peaked over 27%, while the peak for people of European ethnicity may have peaked at just over 14%.

Since then, the way ethnicity is measured for unemployment statistics has changed, but the unemployment gap has narrowed between Pākeha and Māori.

In the June quarter, it was 2.9% for Pākeha and 5.5% for Māori, indicating possible Misery Index scores of 10.2% and 12.8% respectively.