Wilkinson on Smith on Key

At the businessday.co.nz blog Nick Smith has a strange posting on Key dons his Muldoon mask in tweaking KiwiSaver. Smith writes

If compulsory super had proceeded, New Zealand Inc would now have huge sums of cash with which to fund future growth rather than borrowing offshore and paying a premium for the privilege.

Conceivably the country would have posted a series of current account surpluses rather than the dismal succession of deficits.

He goes on to say

KiwiSaver is important because it is beginning to reverse the trend of New Zealanders spending more than they earn.

and

But taking an axe to savings inflows, as Key’s KiwiSaver policy effectively will, is dreadfully disappointing and will harm the economy. And for what?

Later Smith refers to comments by David Skilling

“Skilling dismisses this argument. The nation’s well-documented rate of dis-saving - spending more than it earns - means we’re not saving enough. The sheer popularity of the scheme (800,000-plus members) makes claims of an existing savings shift “wildly implausible”, he says.

I have to ask a very basic economic question, does Smith know what a current account deficit is? Even if we had a current account surplus, so what? This just means we are saving more than we are investing. Why do we care? Matt Nolan give a quick summary of why we may not care here.

A current account deficit doesn't mean we are dis-saving it means we are investing more than we are saving. Our savings are still positive. And that could be optimal. We may be better off by saving what we are and "importing" any additional funds need for the investment we want to do rather than trying to fund all investment out of our own saving and thereby reducing our consumption. As Noland notes

The current account deficit is merely the result of the borrowing, consumption, and investment decisions of every household and firm in the economy. As long as these households and firms are fully informed of the risk and return associated with their borrowing decisions, is there really any reason to fear the spectre of a current account deficit? To answer my own rhetorical question – it appears not.

In a comment on the Smith article economist Bryce Wilkinson responds, sensibly, to Smith's posting. Wilkinson writes

“If compulsory super had proceeded, New Zealand Inc would now have huge sums of cash with which to fund future growth rather than borrowing offshore and paying a premium for the privilege.”

Does anyone know of any substantive support in the mainstream economic literature on the sources of economic growth for the proposition that economic growth is generated from spending huge ‘cookie jar’ funds controlled by politicians? I don’t. Regardless, the Crown’s ‘cookie jar’ is already $200 billion (total Crown assets at 30 June 2008) and government in all its forms is spending annually more than 40 percent of national income, without bothering to rigorously assess whether that spending is doing more good than harm. Does this proposition have anything more to back it up but the belief that politicians can spend New Zealanders’ money better than they can spend it themselves?

“KiwiSaver is important because it is beginning to reverse the trend of New Zealanders spending more than they earn. ”

Where is the evidence that it is reversing any trend? Which of the major macro-economic forecasters are projecting the reversing of a savings trend due to KiwiSaver? More importantly, New Zealanders are not spending more than they earn. (See below) National savings have long been positive and measured household net worth (which excludes the net assets the Crown owns on behalf of households) has been rising.

“But taking an axe to savings inflows, as Key’s KiwiSaver policy effectively will, is dreadfully disappointing and will harm the economy. And for what?”

What is the evidence that KiwiSaver is helping the economy? Stuffing a fund full of tax incentives raises tax rates at the margin, distorts the alloaction of funds, and adds to transaction costs. Many individuals would be better off reducing their debts. Governments should not be inducing people to borrow in order to invest in risky things like shares. Does the bald unqualified assertion that cutting it will harm the economy have any factual basis?

“Skilling dismisses this argument. The nation’s well-documented rate of dis-saving - spending more than it earns - means we’re not saving enough. The sheer popularity of the scheme (800,000-plus members) makes claims of an existing savings shift “wildly implausible”, he says.”

If Skilling actually said this it would be disgraceful. New Zealand is not dis-saving. (A balance of payments deficit does not mean that savings are negative; it typically means that investment is greater than savings. This, in itself, is not a bad thing.) In fact, measured national savings have been positive, not negative, for 35 of the last 36 years for which Statistics NZ has data (see SNCA.S2NB08Z). Are statisical facts simply irrelevant? ‘His’ other arm-waving comment is also a red herring. The issue is not whether there is no effect on total saving, it is whether there is any basis for claiming material effects.

Perhaps the worst thing about all this is that it is so one-eyed. There are a host of respected economists, academics and commentators who have drawn attention to research questioning this sort of one-sided propoganda. Why not use their contributions to promote better-informed public debate. Even just a bit of attention to relevant facts would be better than this.