Example of vested interest groups undermining the economic interest of others

February 3rd, 2008

Share |

Sometimes, reading the news media will lead to the net subtraction of economic knowledge. The problem is, there are too many vested interests that want to propagate their biased (and perhaps even fallacious) opinions for their own benefits. If they manage to get the attention of the media and have their ‘expert’ opinions quoted repeatedly, it will come to a point that the masses will start to believe them. Today, we will present you the opinion of an ‘expert,’ who represent the interests of his clients.

Take a read of this article, Rents ‘to rise 10%’ if rates go up:

But Mr Young said another interest rate rise would be counter productive.

“By increasing interest rates again, the Reserve Bank will continue to open the `Pandora’s box’ of inflation because landlords will continue to raise rents which in turn will feed into higher inflation,” Mr Young said in a statement.

He said rises in weekly rents had been identified as a major factor in the upward pressure on inflation, as landlords passed the higher costs on to tenants.

What is wrong with his reasoning (which is expected to be biased towards the interests of his group)?

Firstly, are interest rates that strongly correlated to rents? Maybe yes in pockets of areas where landlords have strong pricing power (i.e. monopolistic power). But we have showed you with the graphs in Myths on the Australian housing/rental crisis & its implications, this is not true for Australia overall. It is very important to understand these two points:

  1. The setting of interest rates is a very broad and blunt macroeconomic tool that affects vast swathes of the nation, across a wide spectrum of the economy, influencing multitudes of aspects of people’s life.
  2. The nation’s rental problems are only one aspect of the economy that affects specific geographical areas.

Therefore, it is an error to expect and demand that the issues faced by the entire economy to be held hostage by the nation’s rental problems. That is, these problems lies outside the jurisdiction of monetary policy and should belong to the realm of other government agencies (e.g. city planners). Our suspicion is that for the rental problems to reach such critical stage today, someone out there with authority must have been asleep for several years. For example, you will notice that there are over-supply of unwanted new houses and apartments in parts of Sydney and over-demand of housing in other parts. Therefore, is monetary policy appropriate for putting the blame on Australia’s rental problems?

Now, if you notice from the above-mentioned news article, Mr Young is trying to use the nation’s rental problems as a lame excuse to connect the cause of inflation with the effect of rising interest rates. Since he is the president of the Investors Club, which “manages more than 10,000 investment properties throughout Australia on behalf of its members,” it is clear whose interests he is trying to protect and why he is trying to push such a fallacious idea.

There are two fallacies we would like to debunk here:

  1. What is inflation? Is it merely just the general rising of prices as defined by mainstream economics? We recommend that you read Cause of inflation: Shanghai bubble case study. Without a sound and proper definition of inflation, there can never be sound and clear thinking to tackle this malady.
  2. Using the CPI to ‘measure’ price level, rents have been ‘identified’ as a major component of inflation (which is fallaciously defined in the first place). We recommend that you read How much can we trust the price indices (e.g. CPI)?. The whole idea of price indices is logically indefensible and invalid.

Dear readers, if you can and if you feel outraged enough, please write to the media so that clear and sound thinking will prevail and that the agendas of vested interest groups are hindered.