A reader provides his thoughts on Labour’s”big tool”.
As a student who is about to graduate after 5 years of study I will start my working life under this scheme, if Labour gains power. So over the past 3 days I have been researching and thinking about what effect this policy would have on New Zealanders, and this the conclusion that I have come too.
“The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups.” -¬†Henry Hazlitt, 1946, Economics in one Lesson
“Compulsory”¬†is not a pleasant word, it’s not a democratic word, It is authoritarian. Compulsory means ‘do what I say, or else!’, by definition it requires there to be a threat of punishment if orders are not followed. What is Labour going to do to punish those of us who refuse to partake in Kiwisaver? fines? prison time? Personal Liberty and Economic liberty are not separate, they are the same. To limit the amount of money that someone can spend is to limit not just economic but personal and social choices available to them.
The policy is filled with numerous economic fallacies and judging from the policy fact sheet on the Labour Party website it is based on a misunderstanding of the current global economic situation.
Let’s start with interest rates. Interest rates are at historic all time lows in New Zealand, which makes borrowing money easy and saving money an unattractive way to invest. to say interest rates in New Zealand are too high is ridiculous.¬†David Parker is correct when he says that compared to “international norms” and the USA we have high interest rates, but since 2002 and for the last 6 years of the previous Labour government our interest rates have been significantly higher than those of the USA. The reason that US interest rates are so low is because the Federal Reserve is spending $45 billion a month purchasing bonds to keep interest rates below 1% in a failed attempt to stimulate the economy, the UK and Japan have been doing the same.
Parker argues that our high interest rates are causing a high NZ dollar and that this is hurting our exporters. I say rubbish. The high New Zealand dollar is the result of foolish monetary policy on the part of the United States and others like Japan. By pushing¬†their interest rates below 1% whilst inflation sits at 1.50%, the savings of Americans are been destroyed by inflation at a rate of about 1% a year. Individuals and businesses that can afford to have shifted their money around the word to countries that offer higher interest rates, and that is one of the major reasons the New Zealand dollar has risen. It is not the result of New Zealand actions but the actions of other governments.
This highlights another major flaw in the policy. Despite Parker’s claims this will increase the amount that people save It probably won‚Äôt. Parker wants to lower interest rates to ‚Äúinternational norms‚ÄĚ (USA levels) and as stated above that has had disastrous effects on the value of American savings as interest rates have dropped below the rate of inflation. Parker hopes to counter this effect in New Zealand with his compulsory and variable Kiwisaver but it won‚Äôt work. The policy¬†artificially reduces the amount of disposable income people have¬†and this combined with low interest rates will lead to people simply borrowing more money. What do people do when they don‚Äôt have enough money and money is cheaply available? Borrow. The Labour government will remove money from the economy using kiwisaver and a lot of that money will simply be replaced with borrowed money, meaning that very little if not nothing has been done to address demand push inflation.
People don‚Äôt just save for retirement, they save for cars, children‚Äôs education, homes, business start-ups and an infinite list of other things. Lower interest rates will discourage ordinary bank account savings because the interest return on saving will be too low (particularly if inflation higher than the interest rate), instead people will seek to put their money in other higher risk investments such as the stock market to try and get a higher return.
Low interest rates that are in line with ‚Äúinternational norms‚ÄĚ will lower the New Zealand Dollar. Parker is right that this is good for exporters, but he is slow to admit that it will be¬†at the expense of everyone else. Lowering the NZ dollar will cause cost-push inflation by increasing the cost of imports, a type of inflation that cannot be controlled by confiscating our money because the rises in price are unrelated to consumer demand. The only way to address the inflation caused by a low exchange rate is to increase interest rates, but doesn‚Äôt that defeat the purpose of this policy which Is meant to deliver a low New Zealand Dollar and low interest rates?
A low NZ dollar will also mean that the price of New Zealand produced goods will increase because the imported goods required for production, especially petrol and petroleum based products will become more expensive. Again these price rises are independent from consumer demand, so cannot be lowered by decreasing demand through variable Kiwisaver.
Parker is wrong when he says that this is going to create¬† jobs. Yes, new jobs will appear in the export sector, but at the same time jobs will disappear from the import sector as kiwis will be buying fewer imports because import prices are high and people have less disposable income.
Parker made the claim this policy is going to result in ‚Äúless foreign ownership of our land and companies‚Äô‚ÄĚ ‚Äď this is nonsense.¬†A lower New Zealand dollar will make buying New Zealand companies cheaper for overseas investors.
Another nonsense claim is that this will somehow help us save for our retirement and stop us from giving our money away to overseas banks in the form of mortgage interest rates. In reality, people who have money saved in the bank will receive a lower interest rate, thus saving less, and people who lose jobs in the import sector will also save less. Lower interest rates are good for those with mortgages, but at the same time mortgage holders will also have less disposable income because of mandatory variable kiwisaver and higher import prices, so they will likely be paying down their mortgages at a slower rate. It is also important to remember that lower interest rates will encourage people to borrow more money than they normally would, so it is unlikely that the banks will¬† experience any loss in income as Kiwis pay off larger mortgages at lower interest rates but over a longer period of time.
Finally – It appears that Parker has forgotten who runs our kiwisaver accounts, the banks and insurance companies do. These foreign banks and insurance companies will be making massive profits from Kiwisaver if it becomes compulsory, which raises the question of who helped Parker formulate this policy? Was it those who stand to profit from compulsory Kiwisaver?
Another implication of this policy that I have not seen discussed is the effect that the exclusion of employees and self-employed people will have. Will we see large numbers of wage earners now becoming contractors to avoid having to contribute to kiwisaver, particularly if the compulsory contribution is pushed above 10%?