Of course I’m linking to it because I got to write one of the essays (with the editing help of some other blog authors – thanks Agnitio, Goonix, Rauparaha and CPW).

I wrote on how we shouldn’t forget productivity when looking at social welfare policies – as at the time we had a Labour government in that was determined there was no trade-off between efficiency and equity and therefore determined that we should focus on equity.

However, by the time it was release we had a National government who believe there is no trade-off between equity and efficiency and so we should focus on efficiency.  They do this under the catch-cry of productivity, which lead me to write things like this.

There is no contridiction.  Ultimately, I just want politicians to face the trade-offs associated with policies and wrote articles that, at the time, illustrated the costs they were missing.

Clearly the productivity gain to surfing at work is concave, so the question is really, “at what point do the marginal gains become negative?” According to this study it’s only when you surf more than 20% of the working day that your productivity starts to decline! That means that the productivity losses from boredom (or whatever it is) are absolutely enormous; far bigger than I would have guessed! And, on average, those people are almost 10% more productive. I’d really like to know more about the shape of the productivity/surfing curve, but no more data is reported in the article.

Unfortunately, that’s not a sufficient reason to demand more surfing time from your boss. The article also reports that 14% of those surveyed had ‘internet addiction’ and spent far too much time on the net, so employers have to balance that against any productivity gains.

As mentioned in this post, our “savings problem” may not stem from insufficient savings per see, but from distributional issues surrounding our savings. As Dismal Soyanz suggests, other government policies (or insitutionalised rules of thumb) may have created a situation where savers have a bias towards relatively “unproductive” forms of investment, such as housing – furthermore, households underestimate the risk of certain assets and overestimate the risk of others. These are all behavioural biases that may exist in reality – as a result of the bounded rationality of individuals.

As a result, the purpose of Kiwisaver may be to shift the composition of New Zealand’s savings – not increase the level. Now if this is what Kiwisaver is meant to achieve we have to ask about two things – firstly, is there a better alternative. I can’t think of too many alternatives off the top of my head, so I’m going to cover this by asking, how does Kiwisaver compare to a straight income tax, where some % of the money is put aside?

From what I can see, the advantages of Kiwisaver above the government taxing the money and giving it to providers are:

1. The scheme is voluntary – allowing people to make their savings decisions rather than forcing them down a sub-optimal path,
2. Transparency – people can tell where their money is going, and can keep track of it.
3. Lower risk – there is a much smaller chance that the government will just change the policy and claim the money, as it is under your name (forces the government to be time consistent!).
4. The behavioural element – opting out has a transaction cost, which although it is small, may help time inconsistent savings commit to a greater level of savings.

So given that we want to change the distribution of individuals savings, Kiwisaver seems like a better mechanism than achieving it by tax.

However?

There are some issues with Kiwisaver in its current form.

Firstly, all these subsidises come with the cost of deadweight loss in taxation.  As long as the price effect of receiving a higher interest rate (as that is what the subsidy does) is greater than the income effect (you need to save less to have the same level of savings in the future) we know that this will increase savings – however the cost to society is substantial.

Takings someones money and then offering to give it back to them in a way that won’t let them spend it is really equivalent to the government taxing and saving for us – as a result, it suffers from the costs described above.

Secondly, you can take the money out to buy a house.  If we are interested in shifting peoples savings away from housing and towards the broader capital market this clause is insanely counter-productive!

Ultimately, I think that if you remove the subsidies and change the conditions surrounding the removal of funds (to take into account inherent income risks and the fact that we are trying to promote a savings shift) Kiwisaver could be a novel way to change the distribution of savings.  As it is, it is likely to become a large scale burden to the tax payer, and lead to the ultimate removal of superannuation payments.

So before we can discuss the myriad of burning questions surrounding these issues – and more broadly surrounding New Zealand’s productivity (such as if Kiwisaver achieves the greater capital goal even if it theoretically doesn’t increase savings) we need to ask, what is the savings problem?

David Skilling from the New Zealand Institute has written widely about the “savings problem” New Zealand faces. In his view we can tell that New Zealand national savings levels are low as our current account deficit is so high, our business investment is so low, our foreign direct investment is stagnant, and domestic investment in the local stock market is limited. This sets the stage for the savings problem to be defined as follows:

National savings levels in New Zealand are too low

However, the existence of a current account deficit is not evidence that savings are “too low” – it is only evidence that domestic expenditure on consumption and investment is greater than domestic income! This view is in evidence in both wikipedia and recent work by NZIER and Capital Economics Ltd. As a result, as long as consumption and investment are determined by individuals with sufficient freedom to make choices and there are no externalities and sufficiently good information and institutions in the country it seems a bit silly to say that savings is “too low” – savings will be determined such that individuals are maximising their lifelong expected utiltiy!

Furthermore, as Trihn Le from NZIER says:

the saving-investment-growth issue relates to national saving rather than household saving. New Zealand’s national saving rate has been largely positive and shows no sign of deteriorating

Remember, the purpose of saving is deferred consumption – if we invest in something it is so we can consume from it later! When describing the savings level we want it is important to look at national savings – not private savings, as that defines the level of true savings in the economy.

As a result, when discussing savings and investment we are talking about the trade-off between consumption now and consumption in the future. If we want more stuff in the future, we will have to sacrifice some consumption now. Rather than having government legislate the timing of our consumption, wouldn’t it be fairer to let people decide for themselves.

But …

It is still possible that we can have problems with savings. Fundamentally they fall into two categories:

1. Market failure causing a sub-optimal level of savings,
2. Market failure causing a sub-optimal distribution of savings.

Starting with the level argument it is important to look at the possibility of poor institutions and externalities. If the institutions aren’t up to scratch, the wedge between the return on investment and the return on savings will be greater – leading to lower levels of investment.

The externalities argument is more difficult. If we know that there are positive spillovers from investment, then extra savings may increase the return from further investment, leading to a significant increase in investment intentions and demand for capital. If this is the case we will have multiple equilibrium and government policy may be able to move us to a pareto superior outcome.

Furthermore, if we think there is a negative externality from consumption (by consuming you make other people feel bad about their lives) a higher savings equilibrium would be preferable – although I am not a big fan of this argument! (Update: CPW mentions that his doesn’t make sense – as since savings is deferred consumption we have to face the externality anyway.  He is right.  However, we can still justify looking at this externality if the marginal social cost rises in consumption and we have consumption tilting, which requires that the rate of time preference is greater than the interest rate)

The suboptimal distribution of savings is a FAR more important issue. This stems from asymmetric information. Fundamentally, New Zealander’s seem to hold an underlying belief that investment in housing is the best type of investment. Now, buying a house is definitely an investment with a return (rent or imputed rent as well as capital gain through the opportunity cost of land and other scarcity issues) that appears relatively low risk and has fringe benefits (its hard to get kicked out of a house once you own it).

However, our focus on housing seems to be a bit extreme as noted by the RBNZ.

As a result, a savings problem in terms of the distribution of savings that households have undertaken may well exist in New Zealand – this raises the question, will Kiwisaver help solve this problem?

(Update:  Hone rightly mentions that time inconsistency is a problem that the government may want to solve when it comes to the savings decision – this is another reason why savings may differ from what is socially optimal).

As Fred states in this comment, savings are effectively deferred consumption. The incentive to defer consumption is based on individuals wish to “smooth consumption” over time (which relies on their time discount rate and expectations of future income) and the return available on these savings. Now the reason that it is possible to make money off your savings is because these savings are used by other agents in the economy who have the ability to pay you back later on – fundamentally these savings are used to invest.

Going back to our good friend supply and demand we know that the supply of funds for capital investment is a function of the interest rate and peoples willingness to smooth consumption while the demand for capital investment is a function of the interest rate and the expected return from the investment. As savings increase in the interest rate (for those who care, assume that the substitution effect dominates the income effect of a higher interest rate) and investment decreases with the interest rate (or at least the expectation of the equilibrium interest rate) we know that there will be an interest rate that makes supply and demand equal.

Fundamentally, the government may want to increase national savings if they believe that current national capital accumulation is sub-optimal for some reason – as in some sense savings=investment. Again I’m going to ask a question which I would love for everyone to have a go at answering – why may the government believe that the current rate of capital accumulation is sub-optimal?

The idea that Kiwisaver can actually reduce national savings is an important one – and something that one of us will post on soon, either before or during our upcoming discussion on productivity.

For now it would be useful for you guys to have a look at this article and tell us what you think. Do you think Kiwisaver will actually increase national savings – if so (or not) why?