Indeed – however, if they have a preference for some random reason we should allow them to satisfy it. The best society can do is tell people about the risks associated with housing etc. If they have an explicit preference for housing as a result and are willing to invest further in it then that is a “consumption” choice by the household.

“I’m still interested to know how many people will not use their additional funds to reduce their mortgage.”

That will be a key point. I hope that people do decide that they want to use funds to pay down debt from a personal point of view – however, if they don’t they don’t.

Ultimately, New Zealand must have a view that our incomes will eventually rise to a level comparable to first world countries. If that is a fair assumption then what is going on is fine – otherwise it might not be so much.

However, I don’t think government is in a better position to judge future income levels and individual preferences as well as individuals – hence why I think the concept of savings being “too low” is a bit of a misnomer.

I have no problem with the government setting bounds where they think there may be a problem – but I’m not sure if New Zealand has broken outside these bounds given the balance or risks and fair expectations about the future.

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.

Shouldn’t household’s internalise the risks associated with their lifetime income stream?

“It seems to me that the great Australasian home ownership obsession is about having retirement income mostly”

Very true – hence why the fall in house prices is having such a large impact on savings rates!

“This, plus the silly pre-election politicing by English, is why I completely understand where Steve’s coming from.”

I’m still not sure – criticising someone for merely stating that lower house prices will lead to higher savings rates doesn’t make sense. Next someone could write a post criticising me for saying that, when there are no clouds in the sky and it is daytime it generally looks blue.

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

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?

Indeed.

“I think NZ business has a fundamental problem in acquiring equity finance”

Outside of compositional issues regarding domestic savings I’m not sure that this is the case. The question we have to ask is “does the difficulty with firms sourcing credit represent the risk associated with their business”?

If firms have not been able to source credit in the recent loose environment, then I think that says more about the position of their balance sheet than about domestic equity markets – I feel that the criticisms of equity markets in NZ is a bit overplayed.

“There are plenty of great business opportunities out there but little infrastructure to navigate these opportunities”

What type of infrastructure? Are you talking about the structure of equity markets in NZ?

Equity markets in NZ are notoriously thin – which is problematic for the dissemination of new information.

However, if we aren’t big enough to support our own stock exchange why don’t we integrate with Australia – the NZX can’t have it both ways, it can’t be struggling to function as a market and selling its ability to preform functions outside of the ASX.

Ultimately, I agree that we don’t want to distort peoples incentives when it comes to saving – but complaining that people aren’t choosing “productive” assets is silly, because all assets are productive in some sense.

If we give savers good information, and we patch up our tax system to remove distortions, then the flow of savings will be what is in SOCIETIES interest – which is the ultimate goal.

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.

🙂

Good luck with that.

In this case, the government acts as an exogenous agent which can change the incentives and institutional structure that agents in the market face.

“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””

When did I say that the “market determines optimal savings” – I said that we need to describe how the market is different from a counter-factual situation where savings are determined “optimally”.

Now I agree that the term “optimal” is subjective, but you can never discuss policy without subjectivity. You can argue with my notion of optimality – but you seem to be stating that we can’t even try to look at what optimality is, which implies to me that we can NEVER MAKE A POLICY RECOMMENDATION.

Also lets be clear, I am not stating that the market is optimal and it is failing, I am merely comparing an actual market to my counter-factual market. If we didn’t create a counter-factual I do not know what we could state something was “too low” or “too high”.

In my counter-factual market savings is determined such that fully informed individual are making choices on how much to borrow and save based on a market rate of interest which represents the behaviour of the capital market. There is a consensus among economists and many politicians that this would be the level of savings we should target – given that we can compare elements of this market to elements of our real world market in order to figure out why, and how, savings differs.

“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.”

You seem to be determined to make analysis either completely objective or completely subjective. The value we place things MUST be subjective, however the description of the situation we are in should have some semblance of objectivity (given the difficulty accessing truth and facts, objectivity is a hard puppy to get).

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. Doing this will allow us to discuss our points and gain a fuller understanding of how we feel.

Tell me, in the examples you gave above you took something that we know, from introspection, is wrong and tried to talk about it in the same light as savings. Do you really believe that savings are “too low”, do you have an internal moral compass that tells you we as a society should “save more” – as you would have a moral compass telling you those other things. If you don’t, then you were not using a metonymy as the substitution does not fit. If you do, then I would like to hear why.

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.