Matt Nolan

How to sell superannuation changes

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While sitting today I got very confused.  I realised that I could really see future generations currently stealing resources off me in the way I keep hearing.

Now, as was quickly pointed out to me by my work colleagues’ resources are in fact being “stolen off me” in two ways:

  1. Future taxes will need to rise to pay for superannuation
  2. Knowing that superannuation is available, the older generation is saving less now and increasing consumption – thereby pushing up interest rates and the price of consumption.

Very good, we have our fundamental reason why superannuation is unsustainable – because tax rates will need to rise in order to satisfy the governments “balanced budget” constraint.

Now if we believe it is the hubris or straight selfishness of older generations that is behind the refusal to change the superannuation age to make it affordable – then frame it in terms they understand.

Say that, when they are retired it will be the next generation in charge.  The next generation won’t be willing to increase taxes, and so will cut them off – forcing them to leech off their children or live an impoverished existence.  If the younger generations show this degree of bloody-mindedness now then older generations will definitely cut back on consumption, and start saving for their retirement.

They might even be willing to “make a deal” regarding the retirement age.

So if that’s the way you think, stop saying how much Gen X  and Gen Y are going to get hurt by the superannuation issue – point out the potential for the Baby Boomers to have the rug pulled from under them, giving them a miserable impoverished retirement.

Easy.

Note:  I don’t want anyone to suffer here.  I’m just part of Gen Y, and we were raised during the reforms – so I’ve learnt to think about these matters in a more, say, clinic way.

Update:  Bill picks up that the population demographics aren’t in favour of my proposal – while Eric indicates that no-one really is 😉 .  I’d note that my joking proposal was mainly just a way of showing that there is a “cost” turning up, and we are thinking about how to share this burden between people – it isn’t just a case of baby boomers robbing everyone blind!

Matt Nolan

Actually, I disagree: Why we are better off than before

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On Sunday I was sent a copy of an article where I was taken completely out of context.  While I am sure that this wasn’t intentional I would just like to point out that I believe the opposite of what the article suggests – I believe that households are significantly better off than back in the day.

So let me cover off the bit that was directly attributed to me:

Infometrics economist Matt Nolan said all recent government policy had been about getting second earners into the labour market, but that extra income – thanks to easy credit – was simply going into extra debt in the form of larger and flasher houses.

“That income has gone into building bigger and better houses than they had before. The square metreage has doubled.”

The conversation with the author went like this.  He said to me that 2 income households worse off than 1 income households used to be.  I said that was patently false, and that there were a bunch of reasons why we had more 2 income households now (social acceptance, Working For Families) and as a society we just need to look at the policy setting to see if we agree with what we are subsidising.

He then reiterated that the median household was worse off – which I disagreed with.  In fact, median real incomes have risen significantly – and the common comparison with the situation in the US is wrong.

At this point he asked me why debt levels have risen so much.  I stated we needed to ask why some people were borrowing, and why people were willing to lend to them.  Two things we had seen when debt was built up were currency intervention in Asia through significant savings, and households willing to invest a lot in property by increasing building and A&A work.  This is investment and it is fine – if we think there is a policy or market failure somewhere in there we need to find it, not just assume it.

Given that most of what I said did not fit into the central thesis of the article it was put to the side, that’s fine.  However, what I did say about housing wasn’t in quite the same context as it is described in the article 😉

In the article, a mixture of conjecture and moralising over debt is tied together in order to prove a false statement – that the current generation is worse off than the previous one.  While other people may be happy to have their name attached to a false claim, I’m not.

Are there people who are struggling?  Well yes, and there always will be.  But the New Zealand middle class has no idea how lucky they are, or how things have improved for them in the past couple of decades – both with underlying real income gains and increasing transfers from government.  The thesis raised in this article is a steroypical middle class complaint – ignoring the real hardship for those who live on the fringes of society in order to justify more hand-outs for themselves.

jamesz

Measurable goals for the nation

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The advantage of tough, measurable goals with strong incentives attached is that people work hard to achieve them. That’s what managers do when they’re settings targets for staff, so it makes sense that John Key’s gone that route. But what can happen when one organisation is responsible for both meeting the goals and measuring their achievement?

Matt Nolan

Some thoughts on housing

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I see that the latest Barfoot figures are out, and they are pointing to fairly strong sales figures in the Auckland region.  That’s nice. There are also suggestions that this is indicative of a bubble or boom coming into the housing market.  However, it is important to look at a broader view of what is going on, not just house sales for one agency in Auckland, in order to get an understanding of the what is really going on.

When looking at the housing market, there are a number of little points we need to keep an eye on.

  • The regional split: We have commonly been told that Auckland and Canterbury have a shortage of property – all else equal this pushes up house prices in these regions.  This is something we have seen happen.
  • Borrowing to invest?: In 2003, households borrowed heavily and developers started building heavily.  Now we have the opposite.  Yes, in the year to April households borrowed 30% more (in gross terms) to buy housing.  Yes, this was $45.4bn.  However, the stock of mortgage debt rose by a more modest $2.4bn more – or by 1.4%, below the rate of inflation.  Even as house sales and prices have climbed, households have taken the funds from sales to pay back mortgages – not to spend or build more houses.  SO, while we could use the rising prices and investment in the mid-2000’s to point towards a bubble, this time we have limited investment and an underlying shortage of property driving up prices – this is not a bubble, this points to a failure somewhere in the building or credit markets.
  • Credit conditions:  Mortgage conditions have eased, and competition between banks (along with low wholesale funding rates) has driven down the cost for households.  This sounds similar to what was going on during the boom time.  But even so – we have pointed out that increases in NET borrowing have been low (or negative in real terms).  On top of this, for various reasons credit conditions are tight when it comes to building houses – increasing the value of existing housing.
  • Quality, income, and constraints:  As the productivity commission noted, there are significant issues currently impeding activity in the building industry – and thereby pushing up prices.

When this combination of factors is taken together, it feels like we have a situation which is “supply” driven, with a shortage or property driving up values.  This compares to any perceived “bubble” which would be “demand” driven, with expectations of capital gains leading to excessive investment and excessively high prices.

This distinction is important when it comes to the actions of the Reserve Bank.  There are three questions they need to ask when looking where housing appears within the context of their goals of inflation targeting and financial stability:

  1. Are current interest rates consistent with the level of general demand in the economy? If the lift in housing market activity is supply driven, this suggests that interest rates should be lower relative to a situation where it is demand driven, with the increasing borrowing that entails.
  2. Is the current stock of debt, and banks attitude to risk in general, taking into account the full social risk associated with these elements?  The RBNZ has introduced a range of policies to help ensure this is the case.
  3. Is the regulatory regime that the RBNZ implemented possibility having a greater impact on domestic demand, or the housing/construction market than was previously expected?
Matt Nolan

Principles for talking to macroeconomists

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This article on stuff seems to throw down a great set of principles to keep in mind when talking about the New Zealand economy with New Zealand macroeconomists – in a way that intelligent people not versed in economic prose can understand.

They are:

  1. Commodities are our comparative advantage, they are what NZ is relatively better at making than other things.
  2. Monetary policy that targets inflation aims to set NZ in a “Goldilocks zone” where the economy isn’t running too hot (high inflation) or too cold (high unemployment).
  3. Don’t put too much faith on one data point, or even one data set.  To tell a story we need to explain why a full set of different figures are moving the way they are.
  4. As a small open economy, what is going on in the rest of the world is important!
  5. Economics isn’t about telling the future.  Economic forecasts are useful only insofar as they tell us about risks and describe what is going on – economists cannot tell the future.

All good points.  I think that number 4 (we are a small fish in a big pond) is the most important one to keep in mind for any of these conversations you may have, while number 2 (the Goldilocks zone) is the best, and easiest to understand, of the stated stories.

Good story, well done Stuff and the economists involved.