Why politics and savings don’t mix
Posted November 27, 2008on:
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!