Matt Nolan

Kiwisaver and savings types

/in , , , /by

So far we have described that there is some belief that we have some problems in our capital market, this has lead to the statement that we have a “savings problem” and to solve it the government introduced Kiwisaver – which may not even increase national savings (infact it might reduce it). These articles have put us at a point now where we can ask – even if Kiwisaver does not increase national savings, could it do any good.

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?

Read more

Matt Nolan

Apologises for the lack of updating

/7 Comments/in /by

My apologises for the lack of updating over the past few days. I am still in shock from the recent dovish MPS and the following call by Ganesh Nana (and previously by Joe Stiglitz) that inflation targeting was a failure.

In a sense I am struggling because I feel betrayed by the economics profession in New Zealand, with ANZ and BNZ both seemingly applauding the RBNZ’s dovishness. Thank goodness for Westpac, Infometrics (subscription needed) and interest.co.nz – if they hadn’t criticised the Bank’s actions I would have felt decidedly alone.

In time my shock will make way for anger, and I will effectively be going to war with our current set of economic institutions. Growing up I was proud of the way NZ was handling fiscal and monetary policy – now I have realised that we have thrown all this hard work away over the last decade.

Matt Nolan

June 08 OCR review and MPS

/11 Comments/in , /by

The Reserve Bank left the official cash rate unchanged today at 8.25% – inline with the expectations of most if not all market analysts. However, as always, the devil was in the detail.

Starting with the statement, the language surrounding potential cuts changed completely. In March (*) we had “the OCR will need to remain at current levels for a significant time yet” then in April (*) “the OCR will need to remain at current levels for a time yet”. However in June we got:

Provided the economy evolves in line with our projection, we are now likely to be in a position to lower the OCR later this year (*)

With the RBNZ picking an annual inflation rate of 4.7% by September they are effectively stating that if the June CPI number is weak (or even moderate), rates will be cut by July.

Further detail was in their Monetary policy statement for June (effectively their forecasts).

Read more

Matt Nolan

Employer contribution and Kiwisaver

/6 Comments/in /by

Tracy Watkins indicated that the National is in a pickle surrounding compulsory employer contributions in Kiwisaver. One way of keeping these contributions and regaining the support of business would be for National to allow wage cuts on the basis of entry into Kiwisaver (with its compulsory employer contribution). The Standard laments such a move, however there are two reasons why I don’t think it’s a big deal:

  1. In most cases such a policy won’t change anything,
  2. In this cases where the policy leads to lower wages it may actually be “fairer”

Let me explain myself:

Read more

Matt Nolan

OCR review preview – June 2008

/5 Comments/in /by

Well we have had an action packed quarter haven’t we – bad employment numbers, bad retail numbers, bad inflation numbers, and tax cuts.

Of course I’ve stated that all these things imply more inflation, but its not what I think thats important – its what the Reserve Bank thinks that matters. On June 5th we get to here what there outlook for economic activity really is – and as a result we will get an idea about how their view of future monetary policy easing has changed (from September 2009 as a starting point in March).

So what is going to happen? The Reserve Bank will heavily reduce their growth forecasts (I’m guessing 0.9% growth over the March 2009 year – with a technical recession over the first half of 2008). A weaker labour market outlook and a downturn in global growth forecasts will be major factors behind this shift – along with a sharper housing market correction. The delay of the ETS will lighten up inflation forecasts while additional fiscal stimulus will lift it again – fundamentally inflation will cross 4% in September, but head under 3% by June.

It is possible they may state that fiscal policy changes (ETS and tax cuts) cancel out – especially given that most of the tax cuts appear out in 2010 – and approximately 50% of consumers are supposed to act in a manner that is “liquidity constrained” (so will not borrow on the tax cuts which are coming).

With inflation expectations elevated and the dollar threatening to bolt with three months of potential rate cuts the Reserve Bank will probably implicitly time rate cuts from March 2009 in the MPS – however with some (real) risk of cuts occurring earlier.

Personally, I think inflation pressures are far more endemic – but I believe that the Bank believes that the risks to growth are too strong to ignore. If this is the way things go down I would expect a short rally in the dollar – before the realisation that the RBNZ was just treading water sets in, dragging the dollar back to where it started.

Matt Nolan

What is this savings problem?

/4 Comments/in , , , , /by

So far we have discussed Kiwisaver and national savings in fairly loose terms. We know that (part of) the purpose of Kiwisaver was to increase national savings and that our interest in national savings stems from the fact that we want New Zealand to have more productive capital.

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?

Read more