Why politics and savings don’t mix
Posted November 27, 2008
on:Over at the Standard they discuss Bill English’s statement that we will become a “nation of savers”. Now their attack line is relatively weird, especially given that he is just saying that if we need a bigger deposit to buy a house we will have to save it – he doesn’t say we should take on policy that imply “save more”.
However, he illustrates a strange view that National have of savings when he suggests that tax cuts will lead to an increase in savings – it will increase private savings but it is also dis-savings for the government, hence it will lower national savings (unless you believe it will magically cause a massive increase in economic activity).
Obviously the term “savings” is being used in a loose way – which is also “loaded” in the sense that these people assume that an “increase” in savings is a good thing.
I think it would be good if we review a series of posts which was (and eventually will be extended into) our “productivity series“. In the four posts here we discuss Kiwisaver, national savings, and what savings is.
Ultimately, if savings are “too low”, as both the Standard and National might feel, it must be because of a market failure. The ways this failure could exist are discussed in this post.
The Standard appears to believe that Kiwisaver is a solution to our “savings problem” – however, I don’t think this is exactly an obvious point. For one, the way Labour set up Kiwisaver it is unlikely it would increase national savings. If we care about national savings because we want more capital we have to ask, why? A current account deficit shows that we are managing to borrow internationally to get our capital and consumption – if the interest rate is low why not use it!
We cannot complain that consumption is too low, savings are too low, and that the current account deficit is too high unless we want a MASSIVE decrease in capital accumulation – is that what all these guys support?
Of course, I think a better argument in favour of Kiwisaver (even beyond time inconsistency) is that it helps to change the “allocation” of savings into capital. Of course this presumes that the current allocation (namely into housing) is inefficient in some way – if we can make that argument, and we can show that we can’t directly fix imperfections in the market to get us to the first best solution – then Kiwisaver may be useful.
This argument does not support the subsidy loaded, bloated, Kiwisaver that was given to us – it supports a version of Kiwisaver that offers a voluntary opt out and a market rate of return on savings, but with funds going to firms more closely integrated with the general equity and bond markets.
Ultimately, I think both sides of the political spectrum need to straighten out their ideas surrounding “savings”. Determine what you think the market failure is – then we can discuss how to fix it.
If you can’t figure out a reasonable market failure, savings aren’t too low!
24 Responses to "Why politics and savings don’t mix"
I wasn’t arguing that Kiwisaver is a silver bullet for savings. I was saying it is hypocritical and weird to cal for savings while cutting a large savings program in half.
There’ s a logical flaw, albeit a common one, in assuming that someone who opposes a change thinks the status quo is perfect.
Matt matt matt. Here and I thought you were a good economist with a grasp of the real world. 🙂
In your words there is “Market failure causing a sub-optimal distribution of savings.”
There is a market failure caused by inadequate regulation leading to NZ investor lack of confidence in equities and overinvestment in housing. I make that bald statement in the knowledge that you can do the comparisons of housing vs equity investment in New Zealand vs other markets.
The reason why it matters can be illustrated by the following example.
We both own large partly developed farms with small adequate houses. We both work equally hard and equally long hours. At the end of the year we have both made the same profit. You invest it in starting to build a small extension to your house and new soft furnishings for the wife.
I reinvest my profit in a tractor and fertiliser to make my farm more efficient. At the end of the second year I make a higher profit. Over the next 5 years you continue to make small improvements to your house from your smaller profits.
Over time I will accumulate far higher wealth than you because my farm is more productive. To the point where I can employ farm workers and have more leisure. You are still working hand to mouth.
That is the real world situation in New Zealand. Spending on houses is not productive investment. It is long term consumption not investment. But you have been taught that any spending over a year is capital investment. That is simply not the reality. There is an enormous qualitative difference between productive investment and long term consumption
reading that again I might sound a bit harsh and imply some straw man arguments you did not make. sorry if it does.
Perhaps my point is accepting and being clear there is a market failure would be a good first step.
Matt
The focus on net national savings is very important.
The Australian experience is telling. They have had compulsory savings for almost 20 years now, and while the amount of household assets has gone up markedly, so too has the amount of household debt.
My take on this is that households are being completely rational. Their life-time income has not changed as a result of the forced savings regime, nor has their discount rate or their preference set. Thus, they will largely continue with the same consumption pattern. “Largely” because there are transaction costs and there is some uncertainty about whether the future income stream from the forced savings will materialise.
The net effect, via a long process of financial intermediation, is probably that households are borrowing from themselves to finance the consumption stream they would largely have had without the scheme.
And the tax concessions given to savings mean that Government savings is less.
And Australia is still running a large current account deficit, meaning that they are still borrowing from the rest of the world (and like you, I have always thought that they fact that a country has more productive investments than it can finance via domestic savings is a cause for celebration, not concern).
I wish iPredict would set a line on how many posts before all the authors at TVHIE stopped being surprised by the silly attack lines taken by The Standard.
Just look at robinsods response to this post. He ignored everything you said and tried to associate your argument with child slavery.
This is the audience of The Standard. This is who those authors are pandering to. They are not rational people. Any of them.
[…] Why politics and savings don’t mix Of course this presumes that the current allocation (namely into housing) is inefficient in some way – if we can make that argument, and we can show that we can’t directly fix imperfections in the market to get us to the first best … […]
Note to self: economists have no capacity to understand a point made through metonymy.
Now – What I was trying to point out was the determination of “market failure” is an entirely subjective point. I’ve also noticed that your working definition of “market” seems to vary quite considerably.
For instance, in this piece, you seem to be simultaneously claiming that optimal savings are decided by the market but then claiming that the market needs directing by people who have made a decision on what exactly “optimal savings are” – in this sense you are at once describing the market as the totality of the environment we operate in (in which case there should be no need for an “optimal savings” decision to be made as it is already being approached by the the market) and as the tool we use within this environment to produce the outcomes we desire.
If you stick with the former definition then the claim that people need to “look for the market failure” is absurd as economic agents within the market are by definition unable to identify “market failure” as they cannot act anterior to the market.
If it is the latter then the notion of “optimal savings” is strictly subjective and as such all opinions (including yours) on whether we have “optimal savings” or not stem from a non-market set of cultural and ideological principles (such as free-market principles) that have little or no basis in an objective reality.
Also, if you stick withing the first definition then the selling of children (as has and does occur) becomes a non-morally loaded outcome of a functioning market at a particular point in time. So too slavery. And if this is the case then there is no market failure and thus no problem.
“Merely stating that I’m being subjective does nothing to counter-act my argument – you need to actually state what subjective assumptions you believe are WRONG.”
Good luck with that.
[…] Why politics and savings don’t mix … Of course this presumes that the current allocation (namely into housing) is inefficient in some way – if we can make that argument, and we can show that we can’t directly fix imperfections in the market to get us to the first best solution – then Kiwisaver may be useful. This argument does not support … […]
Can I suggest that those of you wanting to understand more about the negative effects of over-investment in the housing sector and the status of our tax system (pre 2008) please read the “McLeod Tax Review 2001”.
Really good stuff in there…
It states that the problem is not necessarily the level of savings, but the composition of savings – hence over-investment in housing is a major problem – brought on partly by the lack of capital gains tax (among other things).
I also like a few things Phil Sage mentioned. I think NZ business has a fundamental problem in acquiring equity finance. There are plenty of great business opportunities out there but little infrastructure to navigate these opportunities.
🙂
A great discussion.
I prefer to see the savings issue in slightly broader terms. I agree that the level and allocation of savings and the method for its accumulation is important in terms of productivity growth but we shouldn’t ignore personal financial security.
It seems to me that the great Australasian home ownership obsession is about having retirement income mostly. The fact that this might constrain national productivity is of secondary importance to most individuals. Australian demographic forecasts suggest despite the arrangements here, deteriorating work/beneficiary rates are a real challenge.
I agree Matt’s premise that depending on the cost of international finance, comparatively low national savings mightn’t be the problem it appears however I suspect the current “crisis” will serve only to reinforce traditional values. This, plus the silly pre-election politicing by English, is why I completely understand where Steve’s coming from.
Low growth, low trade-intensity and small population are the root-cause of NZ precarious economic future but financial security is probably an overwhelming personal driver. Hands-up if you’re using the rate cuts to buy more or reduce your mortgate?
Shouldn’t household’s internalise the risks associated with their lifetime income stream?
I’m not sure I follow? My point was that the tendency for investors to preference housing over other more liquid assets was a function of cultural values relating to anticipated retirement – it’s a decidedly middleclass ambition to be mortgage free and have a nest egg sufficient to be unreliant on the pension.
I still don’t think it is transparent to attack the fact that we have had a “lowish” savings rate – not that consumers and businesses have brought/invested up large when prices (and the cost of borrowing) were low, sounds pretty sensible to me
It seems to me that there’s a conflation of a whole lot of factors; balance of payments deficit, low trade intensity, foreign-owned banks etc etc etc and deteriorating wage/beneficiary rates leading to a concern about savings. There may also be a switch between the personal and the global: shite loads of private and unsecured debt have got us into this trouble, my personal savings will get us out…?
I guess I come at this not as a professional economist; I value the view of economists – not least of all for explaining the backstory which can be impenetrable – but the rationality that pervades me and my mob is less predictable and possibly a whole lot more selfish (for now at least). I’m still interested to know how many people will not use their additional funds to reduce their mortgage.
1 | Robinsod
November 27, 2008 at 9:10 pm
If you can’t figure out a reasonable market failure, then people aren’t unnecessarily starving to death!
If you can’t figure out a reasonable market failure, those hip operations didn’t need to be done!
If you can’t figure out a reasonable market failure, all those people didn’t need jobs!
If you can’t figure out a reasonable market failure, slavery can’t be a bad thing!
If you can’t figure out a reasonable market failure, those children reached market value!