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Comments on: What is this savings problem? http://www.tvhe.co.nz/2008/05/28/what-is-this-savings-problem/ The Visible Hand in Economics Thu, 27 Nov 2008 06:27:33 +0000 hourly 1 https://wordpress.org/?v=6.9.4 By: Why politics and savings don’t mix « The visible hand in economics http://www.tvhe.co.nz/2008/05/28/what-is-this-savings-problem/#comment-1492 Thu, 27 Nov 2008 06:27:33 +0000 http://tvhe.wordpress.com/?p=398#comment-1492 […] 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. […]

]]> By: fred http://www.tvhe.co.nz/2008/05/28/what-is-this-savings-problem/#comment-1491 Sat, 31 May 2008 10:00:27 +0000 http://tvhe.wordpress.com/?p=398#comment-1491 Well it would be good if the government (and oppositions) articulated their vision when it comes to of the accumulation of capital by individuals (yes it is more than just about “saving”). Cullen’s kiwisaver is clearly a transfer of wealth from the less fortunate to the more fortunate and, as you say, may not actually increase savings at all. What would an optimal level of “saved wealth” look like? Would it be held by individuals, families or in trusts and would it be in real estate, shares, businesses, and how much would be local versus foreign. We simply don’t know what the government wants and that’s more than likely because they haven’t really thought about it. Cullen hasn’t really explained the thinking behind Kiwisaver, and if I was being cynical I would simply explain it as “fund manager capture”.

This question is along the same lines that Bruce Sheppard running on his blog.

If it is left to the market is it inevitably necessary at some stage for the state to bust up monopolies and family dynasties, we see small dairy farms being swallowed up by the large ones – where does that end? And the minute you try to bust them the wealth evaporates overseas.

Here’s what I think it should look like and some of the pre-requisites. Treaty of Waitangi settlements provide examples (good and bad) of how to structure the ownership (of capital). I think that that the asset(s) should be alienable, you should be able to bet the farm (or eat it) and no matter how it is structured it should be about individual property rights (and responsibility). So a bit of a shift away from the current thinking.

The aim should be that the average person owns property/assets, a significant amount. What’s the total capital of the country per capita, the average held by the individual should be close to the median (socialists all agree). Combine this with a Zero income tax and a significant consumption tax (GST). The implications: no unions, no WINZ, virtually no welfare, IRD a fraction of it’s current size, no MSD, no housing corp. A huge release of current deadweight in the economy. Is there enough to go around? If it’s not around $300,000 (because we carry so much debt) then my idea falters but just a little, it’s not fatal, because the objective is that “NZ inc” owns something like microsoft and we are talking about a 20+ year timeframe.

The optimal amount of property owned by the individual should be about the size that allows the shareholders to take a keen interest in it whatever it is and not too large that it stops them taking an interest and influencing outcomes.

It becomes mandatory that everyone has a lawyer, an accountant, and a trustee, if you can’t choose them, then the role of the state is to provide you one. There is minimal interaction with the state apart from this. The model for this already exists, it’s analagous to the way some people interface to the IRD via an accountant, the other two roles replace all other services provided by the state (well apart from health and education, and that’s delivered by a competitive services model). Trustees are JP’s or the like with extra responsibilities for between 20 to 50 people.

How to get there? The government announces that in, say, 5 years time every person reaching the age of 28 will no longer be eligible for any benefit or welfare, on reaching this age the trustee is given something like $200,000 to $300,000 for that person (not in cash but in shares or property). The trustee would have a suite of rules to apply, depending on the skills and circumstances & training of the person, ranging from sorry you have to survive on the interest to yes it’s enough for a deposit on the farm/business, after you have paid off the student loan.

Each year following this, everyone turning 28 is added to the scheme, the syetem can be means tested, if you happen to be a Todd or a Fletcher or a member of Ngai Tahu, then the arrangement in these cases is family provides most state tops it up. Anyway, thats the general idea, I’m sure others can flesh it out.

]]> By: Matt Nolan http://www.tvhe.co.nz/2008/05/28/what-is-this-savings-problem/#comment-1490 Wed, 28 May 2008 06:36:01 +0000 http://tvhe.wordpress.com/?p=398#comment-1490 Hone,

Very good comment, I agree with everything you said!

]]> By: Hone http://www.tvhe.co.nz/2008/05/28/what-is-this-savings-problem/#comment-1489 Wed, 28 May 2008 06:32:06 +0000 http://tvhe.wordpress.com/?p=398#comment-1489 You missed one possible justification for Govt determining the optimal level of savings.
You say “savings will be determined such that individuals are maximising their lifelong expected utility”. There are swags of experiments/evidence in the behavioural economics field that suggest that most individuals make choices that are (amongst other things) time inconsistent and not consistent with maximising lifelong utility. As far as I can tell there aren’t any studies that support the discounted or expected utility theories as descriptions of how people actually act. That means it is not necessarily a good idea to appeal to those theories as supporting the idea that people should choose for themselves. It also means it is possible (in theory) for Government intervention to raise overall utility in society. That said, Governments make time inconsistent decisions too, so time inconsistency or failure of discounted utility theory is not a justification for Government intervention. In general it is hard to see how Government can accurately uncover the optimal level of savings in practice even if there is some theoretical justification for an intervention. I reckon if Government can’t uncover the optimal policy it should seek to maximise experienced utility and forget about taking a stab in the dark on our behalf.
Even if Government can’t determine the optimal level of savings, it can help households that have “self control” problems (i.e. know that for themselves it is a good idea to save but they don’t do it anyway, rather like going to the gym) by providing access to commitment mechanisms and/or “educating” unsophisticated consumers about the usefulness and existence of commitment mechanisms (illiquid assets being a typical way of providing a commitment mechanism as many will recognise from the “forced saving” rationale used by some people when they buy a house). Does kiwisaver fulfill such a role? Maybe in part, but the subsidies chucked into the scheme have absolutely no justification as far as I can see and if the “problem” being addressed was commitment problems, then a policy where you couldn’t get your money out for a while after having requested its release, let’s say a year, would suffice. The whole “not until you are 65” (it is 65 isn’t it?) is just dumb – from an individual saving decisions point of view .

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