National's baby bonus demonstrates their ideological rot

You work. 

You earn. 

You're taxed. 

You spend from what's left. 

You save, if you can, from the remainder. 

National leader Christopher Luxon now wants to compel you to save in his chosen politically-connected savings vehicle. You're taxed by coercion, and you'll save by Luxon's compulsion.

And it starts with a Baby Bonus. For which you will be taxed to pay for other people's babies. 

Even Muldoon turned up his nose at that one. In fact, bad as National leader Robert Muldoon was, you can trace the ideological degeneration of the National Party by its reaction to variants on this one policy.

WHEN THE THIRD LABOUR Government went to the 1975 election promising cash payments to families to have children -- the payments supposedly compensating mothers for reduced contributions to Labour's compulsory superannuation scheme due to time out of the workforce -- Muldoon correctly called it a "baby bonus" offered up by the Labour Government as an election bribe.

Not many people, he said, would be fooled into allowing a baby bonus to be put into an account in [Labour's] New Zealand Superannuation Scheme. It was the biggest "con game anyone had seen." It was "just an election bribe." Mr Muldoon said.

That was then.

The National Party today should be explaining without fudging or vapourware how they propose to get the government's accounts into surplus. "But instead," to paraphrase what their former leader said then about Labour's election bribe, "all they can offer is 'Have a baby and we'll give you a couple of thousand dollars'."

Pathetic.

And who is the "we" whose cash will be doled out for this election bribe? Yes, of course, it's you and I, Joe and Josephine Taxpayer.

And as anyone still alive from 1975 might remember, the National Party created an election-winning ad pointing out that to the extent the compulsory savings grew, they would drown out voluntary savings, and their politically-driven investment eventually come to strangle the whole country. It became known as the Dancing Cossacks ad. It became infamous. But it was accurate.

IN 2007, NATIONAL LEADER John Key called Cullen's voluntary Kiwisaver scheme "socialism by stealth." 

And so it was, and is. And Key could have killed it off back then in one sentence, simply by announcing it would be cancelled under his watch. Instead, he oversaw its expansion.

He really didn't care. Muldoon didn't care who disliked him. But Key just liked to be liked.

So now, with the stage set, we see this National Party who want leader wants to introduce compulsion. For which his party give him a standing ovation, and he was granted a few brief moments of warm commentary from the left-leaning commentariat.

The intellectual and ideological rot is complete.

=>Oh, but it will "boost" household savings. 

Bullshit.

People's wont to save is already measured, and measurable. Whether voluntary or by compulsion, their preference to save and/or spend is a measure of their time preference, which is relatively constant over the medium term. Any "boost" by compulsion would undoubtedly see a proportionate decline in voluntary savings, a decline in people making their own choices about their financial future, leaving more capital in politically-driven investment vehicles instead.

=>Oh, but it's "good for the economy." say National Party cheerleaders. It will create a "surge" in investment capital, say investment bankers eager to take your compulsory-acquired savings. 

Bullshit.

As Roger Kerr patiently explained way back in 2007, New Zealand already has access to a whole "vast international pool of capital for investment at a price that is set in world markets." 

KiwiSaver cannot stimulate investment by reducing the world cost of capital. If it increased domestic savings, firms would simply use less foreign savings.

Moreover, much of any additional saving would not be invested in New Zealand. In the interests of prudent diversification, fund managers are likely to place more than 50 percent of the inflows offshore, as the New Zealand Superannuation Fund does. Domestically, they will have to put most of their equity funds into listed companies. The diversion of savings from other vehicles into KiwiSaver might reduce local funding for sectors like small business and farming. These are amongst the most innovative and productive in the economy....

Even if the funds going into KiwiSaver translated fully into additional investment and were manna from heaven, the impact on GDP would be small... The contribution of KiwiSaver to GDP is thus looking very small at best, and could easily be negative, having regard to deadweight losses and distortionary effects on savings and investment decisions. Its contribution is clearly negative compared with equivalent tax reductions. 

Again, and not for the first time, it's necessary to make the point that all the government programmes in the world can't boost productivity -- the only thing they can do help is to get the hell out of the way.

We've already seen the NZ Superannuation Fund (aka the Cullen Fund) invest in every variety of politically-driven alleged investment, from "green" energy" to an Iwi/Māori investment fund -- and as the fund grows by coercion, those calls to divert investment into political vehicles will only increase.

And on the issue of encouraging savings, the basic point to make is this: if you truly want NZers to save, then just stop taking so much of their hard-earned money. 

Austerity, what austerity?

 

"You may have heard a lot of stories about austerity. Consider that both the government and the opposition may want to convey the impression that it has happened, despite it very much not having happened.

"Throughout the 2010s (barring #eqnz), per capita real operating expenditure net of interest expenses ranged from $17,143 to $18,653 - with 2019's jump to $18,653 being well out of line with the prior track. Labour substantially increased spending under its wellbeing focus ...

"Per capita real operating expenditure net of finance cost has been above $21,000 since then; the provisional figure for 2025 is $21,648. ...

"The largest-spend category here by far is social protection [sic]: benefits and superannuation. ...

"Any giant shedding of government staff will show up in General Public Services. The austerity really stands out in this picture. Can't you see it too? ..."

 

~ Eric Crampton from his post 'The state of the books'

"High house prices are nature’s most reliable contraceptive"

"[A]dvanced economies are halving their populations every generation ... Naturally, everyone blames 'fertility.' As though biology suddenly went on strike sometime around 1992.

"But neither ovaries nor sperm unionised. The culprit is more prosaic—house prices. ... A new study confirmed what few were willing to admit. Housing costs explain more than half the baby drought. If housing had been more affordable in recent decades, decline in fertility would have been smaller by 51%. ...

"High house prices, it seems, are nature’s most reliable contraceptive."

~ Benno Blaschke from his post 'House prices are the new birth control'

Labour "recognises NZ’s infrastructure crisis. But has no idea how to fix it."

There was never a chance that politicians could look at the growing "Cullen Fund" and not think to themselves "if only we had that to spend!"

So in the same week that Treasury confirms that paying for old-age pensions are about to get unaffordable on our present trajectory, the Labour Party has decided it would be a good time to use the government's superannuation fund as a slush fund for them to "pick winners"—on which all governments everywhere have a dismal track record. 

Labour’s first policy announcement ahead of the 2026 election reveals the party recognises New Zealand’s infrastructure crisis. But it also shows it has no idea how to fix it. ...

The fact New Zealand has an infrastructure crisis (roads, pipes, umpty-tum waters) is a testament to how short-term political thinking has encouraged short-term spending decisions. Labour's "plan" (if a glossy pamphlet without detail can even be called that) simply doubles down on that ongoing disaster. As Roger Partridge notes:

Rather than seek the best global returns, it would invest in New Zealand companies selected for political purposes. The fund’s goal is not profit maximisation but job creation through government-directed investment. This is corporate welfare dressed in the ... garb of sovereign wealth management.

Superannuation: Raise the age!

"New Zealand’s superannuation costs are spiralling out of control and threaten the country’s long-term fiscal health. 
    "As the number of superannuitants continues to grow, so too will the burden on the taxpayer. The longer we delay reform, the harder it becomes for future governments to respond without drastic tax hikes or cuts to essential services [sic] elsewhere.

    "Treasury’s projections show that by 2060, superannuation expenditure could balloon to 7.4 percent of [GDP] This is not just an accounting issue - it’s a generational issue. Young and future New Zealanders will be forced to bear an ever-growing welfare bill for their parents and grandparents. Without reform, or significant productivity growth, future taxpayers face a nightmare scenario: higher taxes, deeper debt, and reductions in public services. ... 
    "Raising the superannuation age to 67 and indexing it to life expectancy would slow the growing burden ... Even with the higher age, retirees would still receive NZ  Super for as long, or longer, than previous generations.... 

~ Taxpayers Union from their report A Pathway to Surplus

PS: From NOT PC (March, 2017):

So what's wrong with "ethical investing"?

 

What's the ESG movement, and how is it making you poorer? How are things like "triple bottom lines" destroying human flourishing? And how has government coercion increased the power of this "socially conscious" movement?

If you've noticed the move to so-called "ethical investing" and "divestment," and wondered where it came from -- and where it might be going -- then this is the interview for you. And if you're an investor (or you have a pension plan) , and you haven't yet noticed it, then this is definitely the interview to get you up to speed.

In this segment from Alex Epstein's Power Hour, he and Yaron Brook discuss this influential and destructive movement, how the culture of altruism and so-called "stakeholder theory" give it wings, how helps destroy economic value, and what you might do to challenge it. 

A great demonstration of how philosophy (even bad philosophy) has the power to move the world.

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Truths no politician is telling you this election

An ex-politician can say things a current politician can't:

The country’s economy is in a mess. It was in a mess before Covid. All that Covid has done is hasten the day of reckoning and helped highlight the burgeoning debt. But the rot was in long before that. Bill English made a half hearted attempt to pull things together after the growing shambles left by Clark and Cullen. But there was shambles even before Labour...
    We are trying to live a five star lifestyle on a two star income. We spend like a fat cat and earn like an alley cat. We want the cake with all the trimmings but we can barely afford the flour and sugar.

Why is no politician even talking about this problem, let alone promising reform of the magnitude and type required? Why is no-one demanding it?

Any party or politician who promised reform of the magnitude and type required would 'be gone by lunchtime.' The MSM would crucify and then ignore. We are so conditioned to being promised the moon we think we own it. There is almost zero understanding of the perilous position we are in. When you are sucking the tit you don’t want to hear the udder is dry.

So what would a politician with balls offer?

They would face the debt mountain and the agony that health care and superannuation are rapidly becoming unaffordable...
    Growth in GDP won’t fix it. Our real GDP/capita is stuffed. We don’t know how to work smart, how to achieve higher productivity, how to attract high performers as immigrants, how to figure out shifting investment from low-return housing to high tech, how to create an attractive new business investment climate, how to improve the quality of our exports rather than the quantity...
    How many politicians are focusing on any of the above? Instead they are clambering over one another to build a bikeway over a vulnerable harbour bridge. We want to give ourselves more holidays, more sick days, more guaranteed paypackets...
    We are becoming a nation of low performing advisors... Can a population of 5 million people (a medium-sized city in many places) really justify 150 government departments, 26 Cabinet Ministers and Under Secretaries, 80 local authorities, endless numbers of states agencies, 8 universities, all expensive fiefdoms with grossly overpaid staff. There are populations of 5 million with one governing authority, one hospital, one bureaucracy.
    With all of that low-productivity army we cannot fix a housing problem; we are lost in a jungle of low-quality inadequate roading, uneconomic rail, battles over ports, broken sewage and water infrastructure. Our kids are leaving school poorly educated, often unable to read or write and feeling the world owes them everything. Our health system is managed by waiting lists and trying to supply ambulances at the bottom of the cliff. Welfare is about entitlement not need....
    The longer we leave the day of reckoning the harder it will be. I fear for my grandchildren having to live through the reforms because it won’t be pretty. It will be as tumultuous as it will be inevitable.
    Is there a politician who cares? Do any understand? Is there a steely spine among them? I doubt it. But happen, it will. Call it necessity.

Superannuation: It’s politics, stupid

 

So why did Bill English touch what Americans call the “third rail” yesterday, talking about changing superannuation and in election year too, only to make what looks like a savage and irresponsible punt – putting off any of the necessary changes out to a time so far in the future there is dust and heat haze between us and the horizon?

The answer is simple.

While his predecessor was happy to break every other election promise he ever made, he stood firm on the one pledge he knew would kill him: he pledged to quit as Prime Minister before ever raising the retirement age of 65. That took the issue of the table politically, without ever addressing how the over-generous welfare package would continue to be funded.

But the very minute his successor refused to renew that pledge, that issue came back on the table with a rush. Which meant unless he addressed it properly – or was seen to address it properly – that question would hound him all through the election year: “Are you going to raise the retirement age?”

So he had to address it. Or be seen to.

By kicking the can out to the year Anno Domini 2037 he chose the latter course. He has taken it off the table for his election year, he has allowed himself room to bag Labour for reversing their sensible policy from 2012, but – crucially – he has made superannuation no more sustainable as on ongoing proposition.

It suggests that as Prime Minister he will be a punter, not a problem solver.

And that this issue will be an issue again some year very soon. As it deserves to be.

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Retirement: What would a libertarian do? [updated]

 

Paying people to retire is neither moral nor just – nor sustainable.

Like most things in politics, superannuation started and has been sustained with lies. The great lie when the experiment was started in 1938 was that the new universal pension  would be “self-funding.” It never was: it was simply paid for out of other people’s taxes. The greater lie said that it wasn’t welfare because those who contributed were those getting the benefits. Not true: they were paid by those who were still working. What it meant was that, in the name of economic security, the money that people could have saved (and as savings would have gone into financing the construction of new housing, new factories and better machinery that we would have now been enjoying) went instead into the hands of government to be distributed and consumed, undermining to this extent the wealth and productive ability of the entire economic system.

The lies and the waste racked up as time went on. Muldoon’s election bribes guaranteed that the scheme would be both immoral and unsustainable. He lowered the age at which folk could become eager beneficiaries to 60, raised rates unaffordably, and made it payable to anyone who voted after being here for just ten years.

Not unsurprisingly, a generation took the bribe – and we have been trying to pay the bill ever since. The age at which the welfare check could be cased was raised progressively from 1992 to 2001, and a “surcharge” that became a political football was unpopularly applied, and a decade later was popularly abolished.

And there this most populist of welfare payments has sat since, discouraging folk from the necessity of saving (why save for later if other taxpayers will foot your bills?) and sucking up fully one quarter of the state's core operating expenditure. One quarter, and rising – with forecasts suggesting the number of people aged 65 and over would double in the next 30 years – delivering a “fiscal gap” second in the world only to the demographic basket-case that is Japan and with, until recently, a Prime Minister in denial that any of this is a problem.

Yet this morning, at the start of an election year, we heard the new Prime Minister chirping happily that he has the solution to solve all this is we can all of us only be patient. Ruling out “drastic changes” – no means-testing for superannuation and “no change to the way it is paid out” – he offered few clues but one to what that might be.

People would have to wait and see whether the age of eligibility would change.
    But there would be no change to the entitlement to superannuation. "We are not contemplating any change to the way the national super is paid," he said.

At least he’s acknowledging the problem, the first step in breaking any addiction. Yet it’s as clear as all politicians are liars that any “solution” will only be a temporary one – and in election year it will be one that will frighten few horses.

The retirement commissioner reckons the age for this form of welfare should be raised to 67. ACT’s David Seymour agrees. So too at the last election did the Labour Party – who were hammered for their own show of fiscal responsibility (and timorous leader Little has firmly backtracked on that since).

So what would a sensible libertarian do?

Clearly, rightly or wrongly people have made plans based on the lies and election bribes of politicians past, and few are in any position to change those plans immediately. Yet it remains iniquitous that generations priced out of housing by the borrowing power of these older generations should be forced to help supplement their retired ease. And it remains a serious handbrake to the saving and capital formation that would have made this whole country wealthier.

Raising the age from 65 to 67 should be just a first step towards abolition.

Economist George Reisman argues that the first step to painless abolition (arguing in the US context, take note) would be (with a grace period of to to three years to allow folk time to adjust) raising the retirement age from 65 to 70, and at the same time making anyone in that age bracket exempt from income tax. This would, upon implementation, slash the costs of this benefit by a third and allow those burdened by paying for it to increase their own savings by this amount, and increase also the community’s concomitant capital accumulation.

For some politicians, that might be enough. But if one could be found serious enough about abolishing this drain on saving, it would be easy enough after say fifteen years of having the age at 70 to then continue progressively raising the age at which folk become a beneficiary “by an additional calendar quarter every year” – which would see the progressive abolition of this failed experiment while giving all involved plenty of time to plan for alternatives.

Even without this long-term goal, writes Reisman¹,

an immediate way to begin reducing the cost of these programmes would be for the government simply to make the kind of tax-exemption offer described above, to everyone eligible to receive [or soon to receive] these programmes’ benefits… If enacted, this proposal would achieve some significant immediate good, and, in addition, help to prepare the ground for further reductions in the cost of [the retirement welfare programme].
    It should also be noted here that the phase-out …, or the undertaking of any other measure that would be accompanied by an increase in the number of people seeking employment, calls for an intensification of efforts to abolish or restrict as far as possible pro-union and minimum-wage legislation … in order to make it possible for the larger number of job seekers to find employment.

At the same time, to help those with many years to go, there should be a very significant carrot …

The government's very considerable savings from reduced pension obligations over an initial phase-out period totalling almost forty years from start to finish, should be earmarked for tax reductions for workers who will never be able to enter the system, i.e., in the above scenario, workers aged 34 and less at the time of the reform's enactment. As these workers advance in age, new workers will be entering the labour market. There will thus be an increasing number of workers to bear the burden of the [pension] system's final phase. This will permit … tax rates to be steadily reduced on this group, until they disappear altogether.

This, or something like it, needs to happen if the carcass of the politicians’ decades-long bribe to voters isn’t to become our albatross.  It would be both moral and practical.

The end of [state pensions] would be the end of something that should never have been started in the first place. The root of the system is the philosophy of collectivism, in that it forces everyone into a giant stewpot as it were, in which individuals are compelled to support the parents and grandparents of total strangers, whether they want to or not, in exchange for themselves later on being compulsorily supported by the children and grandchildren of total strangers.
    And, of course, standing between the generations has been a mass of politicians and government officials who have used whatever excess has existed of these forced exactions over current pension payments, to fund ordinary, current government spending.
    If a private insurance or annuity company had done such a thing and used its excess of premium income over current payments, to finance the consumption of its owners and employees, for whatever purpose, including the funding of charities and public works, the company officials would now be spending long terms in prison. For it would be very clear that they had embezzled the funds of their clients. Yet exactly that in essence is what politicians and government officials have done, on a scale far surpassing all private financial frauds combined over the whole of human history.

I have no expectation however that the new Prime Minister will do anything remotely along these lines however – or espouse anything like these arguments -- especially not in an election year.

But I am prepared to be surprised.

UPDATE:

Billy Bob has now made his announcement, and there re no surprises at all. Like his colleague Nick Smith, Bill English makes no promises for this decade or even the next decade, but only a promise for 2040 …

---

NOTES:

1. Reisman’s proposal appears in section 4 of the last chapter of his book Capitalism, which can be found online here.

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John Key: “His political career ends in a failure much more indelible than that of a mere electoral defeat or internal coup.”

 

John Key said he would do many things prior to election in 2008. Michael Reddell examines whether any got done.

Short answer: No.

At one level, John Key’s political career won’t have ended in failure.  He remained popular and had had a pretty good chance of leading his party to a fourth term in government next year.  But at another level, so what? … [Politicians like Bob Hawke, Paul Keating, and John Howard, and even Margaret Thatcher, Winston Churchill or Charles de Gaulle] left having made a difference. I’m not sure that same can be said of John Key.

Reddell suggests you should judge Key’s performance by how he proposed to judge himself.

In his 1975 election campaign, the then Opposition leader Robert Muldoon stated that if his party was elected his goal was to leave the country no worse than he found it.   That wasn’t how John Key articulated his vision.  In his campaign opening address in 2008 he talked about serious change … “a Government that will focus on the issues that matter to you” … “with a plan for economic recovery” … “National’s plan faces the fact that we must lift productivity in this country.”

How did he propose to do that?

“National’s plan [said Key] recognises that lifting productivity … means removing the bottlenecks in the economy – the roading problems and the creaky communications networks that are holding business back. That’s why National will fix the Resource Management Act and that’s why we’ll invest more in the infrastructure the economy needs to grow… [L]ifting productivity also means encouraging businesses to invest… The number 1 reason that private companies invest is because they are profitable and feeling positive about the future. All the R&D credits in the world won’t cut it if companies aren’t making any money. We have to get the fundamentals right first.

In 2008, a young Reddell had found this so inspiring he pinned the passage up on his wall at Treasury:

“I came into politics [said Key] because I believed New Zealand was underperforming economically as a country. I don’t think it’s good enough that so many New Zealanders feel forced to leave our country each year to seek higher wages in Australia. I don’t think it’s good enough that our average incomes lag so far behind the rest of the world. And I think it’s unforgivable that the Labour Party has done so little to address these fundamental challenges.
    “I believe that a very big step change is needed in our economic performance to ensure New Zealand can make the most of its considerable potential. Growing the economy of this country continues to be my driving ambition. I stand before you today ready to deliver on that ambition for New Zealand.
    “You have my personal commitment that if I am elected Prime Minister in eight days’ time I will work tirelessly over the next three years to deliver the stronger economic future our country deserves.”

So how did he do?

Well, as of this morning “the National Party has now taken down the link to [this] economic speech.” That might suggest their own assessment.

Another measure is the Prime Minister’s own. In 2008 he proposed to measure his premiership not by simply leaving the country no worse than found it, but by “lifting productivity” and increasing economic performance. In 2016, in his leaving speech, he now says “the test of a good Prime Minister is that he or she leaves the country in better shape than they found it.” And “over time, others will judge whether I have done that.”

Even by his own standards, says Reddell, he clearly hasn’t – and he very clearly knows that.

I don’t doubt that he has worked tirelessly over the last eight years, but to what end?
    There has been no “very big step change” in our economic performance.  What is worse perhaps, there has been no serious attempt to bring about such a change.   The 2025 Taskforce’s prescription was dismissed –  from some Caribbean island where the Prime Minister was –  the night before its report was released.  And if he didn’t like that prescription there was no sign of any energy being put into finding a package of measures he really believed would make a difference.  Worse still has been the sheer dishonesty of the last few years in which the Prime Minister repeatedly asserts that New Zealand is doing very well by international standards, and is somehow the envy of the advanced world.  Only a few months ago we had the nonsensical claims that he was remaking New Zealand as the Switzerland of the South Pacific, or the frankly rather offensive proposition (to all those struggling in that market) that Auckland house prices were just what one expects in a successful global city –  when all the time, Auckland’s GDP per capita has been falling relative to that in the rest of the country (and when the government knows it has been making little or no progress in freeing up land use restrictions).  And for all the talk of international connections etc, there has been no nationwide productivity growth in the last few years, and exports as a share of GDP are, if anything, a bit lower now than they were in 2008.

There is much more, and it is damning. He concludes:

I could go on.  About, for example, the suspension of property rights following the earthquakes, about the weak regard for the institutions of our democracy, or –  mundanely –  about the fiscal and moral failure that the big increase in (already high) prisoner numbers over the term of this government represents.  But I’m sure you get the drift.  It has been eight largely wasted years –  building on at least the previous nine largely wasted years –  in which none of the big structural economic challenges New Zealand  faced has been even seriously addressed.  On not one of them can the government show serious progress and on some –  house prices most noticeably –  things are now even worse than they were in November 2008 when John Key spoke of his goal of securing a very big step change in economic performance.  He has held office, and left at a time of his own choosing.  But to what end?  In that sense, surely, his political career ends in a failure much more indelible than that  of a mere electoral defeat or internal coup.

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The Keynesian Blessing: People Are Broke

 

Guest post by William Anderson

Writer Neal Gabler recently “confessed” his “secret shame” in an Atlantic Monthly article on how a huge percentage of the middle-class are living beyond their means, existing paypacket-to-paypacket, and are mired in personal debt. He writes:

I never spoke about my financial travails, not even with my closest friends—that is, until I came to the realisation that what was happening to me was also happening to millions of others, and not just the poorest among us, who, by definition, struggle to make ends meet. It was, according to that Fed survey and other surveys, happening to middle-class professionals and even to those in the upper class. It was happening to the soon-to-retire as well as the soon-to-begin. It was happening to uni graduates as well as high-school dropouts. It was happening all across the country, including places where you might least expect to see such problems. I knew that I wouldn’t have $400 in an emergency. What I hadn’t known, couldn’t have conceived, was that so many others wouldn’t have the money available to them, either.

The article is worth reading if only to track the spending habits and lifestyle of someone who has done well income-wise, but now is caught in a huge financial trap, and things will only deteriorate from there. Gabler tries to find and fix the blame, and it ranges from the banks to individuals to “keeping up with the Joneses.” That is all well and good, but he fails to point out the role of central banks and the American Federal Reserve System and the poisonous ideology that undergirds all their actions: Keynesianism.

No Emergency Funds: A Triumph for Keynesians

There is a sad irony in Gabler’s article, and that is that what he understands as a real financial crisis in middle-class households actually is the ideal state of things via the Keynesian lens of economic thinking. In the upside-down world of Keynesianism, the fact that most of the middle class now live hand-to-mouth without any appreciable savings is a triumph and is the key to prosperity, at least in the Land of Keynes. Let me explain.

In the 1950s, the so-called Keynesian Revolution began to steamroll its way through university faculties as “The New Economics” became the rage. John Maynard Keynes, in his alleged “path-breaking” book,The General Theory, had demonstrated that far from blessing an economy with the means of capital formation, household savings instead were actually a curse and when “too many” households saved too much money, the so-called Paradox of Thrift would take hold and actually drive down the economy into the dreaded Liquidity Trap.

The middle class at the time were not aware of this new Holy Doctrine and continued to save. For example, I knew a single mother who for most of her working career made little more than minimum wage, yet upon retirement was able to purchase a home with cash for $100K and she has continued to live well into her 90s. Her mother and father were poor farmers, yet they managed to save an astonishing amount of money despite their very low incomes.

This was not unusual back then. Americans especially were known for their savings habits and continued to save even as Keynesian economists began to admonish them for denying that the economy needed “spending” to keep us at “full employment.” Like all Progressives, Keynesians believed that if people were not willing to do what they considered necessary, in this case, to allegedly sustain full employment levels, then the federal government would need to “nudge” them in compliance. Politicians were all-too-happy to earn the praise of the professoriate while also getting their chance to use their nudging gun.

And so little by little governments changed the economic landscape in order to conform to the Keynesian “ideals.” The most important official change in policy was the promotion of inflation. True, officials claimed that inflation was a bad thing, and could be “fixed” by application of wage and price controls, but at the Keynesian-dominated central banks and American Federal Reserve System, officials already were setting “inflation goals” in order to keep the economy from slipping into deflation.

While Keynesian “theory” sprouts many myths, one of the main ones is that inflation (read, monetary debasement) helps to create full-employment and that it is necessary because, if left to its own devices, a free-market economy quickly will deteriorate into a downward deflationary spiral and end up in a perverse “equilibrium” in which unemployment is high and economic activity is low. Only inflation can stop the spiral, and if it isn’t “high enough,” according to Keynesians, then the system will implode into the depths of deflationary depression.

To Austrian economists, none of this makes sense, at least if one is speaking about real economics, not politics. If Keynes were correct, then the government’s inaction during the recession of 1921 would have resulted in a major depression during the 1920s.

For that matter, since the government had not intervened in previous depressions and recessions, the Keynesian logic would have meant that the US economy would have been in permanent depression – and that upon exiting WWII and drastically dropping government spending governments would have started depressions and not recovery.

The Benefits of Saving and Investment

The historical results parallel economic theory. Economies do not grow because governments inject doses of  “aggregate demand;” they grow because entrepreneurs develop better uses of factors of production that permit more goods to be produced and also allow for more resources to be applied in areas where they have not been used, or at least used in lesser amounts.

Take the development of the washing machine, for example. Before washing machines were developed and made available to households, washing clothes was a huge chore that might take at least one day and maybe even longer than that. For the most part, household laundry chores were performed by women who worked for hours to clean clothes and other materials.

Washing machines, however, enabled housewives to do more laundry in less time, thus allowing them to apply some of their other skills elsewhere. Multiply this sort of thing across an economy, by putting capital together to make these new inventions, and one can have an idea how the development of such goods enables economic growth, which enables to the development of even more goods, and on and on.

Contra Paul Krugman and other modern-day Keynesians however, capital formation does not exist as a “given.” Instead, capital formation not only is a function (to use a mathematical term loosely) of savings, it must be so because modern economies involve a mix of capital and consumer goods, and their ratios are related to individual time preferences. One cannot consume all of its present production and simultaneously abstain from consumption in order to create capital goods that will produce more consumption goods in the future.

For example, if people (like our ancestors) are willing to save large portions of their incomes, it is not because they are irrational or are “hoarding” money (as Krugman would tell us), but rather because they wish to postpone some current consumption in order to be able to consume more in the future. Investors take that savings pool and then invest in the kinds of capital goods that would allow for the creation of even more goods to be consumed at a future time.

The key indicator in whether or not investors are going to invest in long-term capital (that results in fewer consumption goods made in the short run, but brings about much more consumption in the long run) is the interest rate. In a free-market economy, low interest rates mean that individuals are saving large amounts of their income, making a larger pool of “liquid capital” available, while high interest rates indicate that consumers prefer to consume now and save less — precisely the state of things right now.

Keynesians, on the other hand, claim that since the true economic “multiplier” is equal to 1 over the rate of savings, then the less a society saves, the more economic growth that economy will experience. (For example, if all individuals in a society save 10 percent of income, then that economy has a multiplier of 10. If the individuals save 5 percent, then the multiplier is 20. It reminds me of the ditty we used when I was in school in which we “proved” that the less we studied, the more we knew.)

Low Interest Rates vs. Reality

Of course, interest rates are not high, and certainly do not reflect current societal time-preferences. A society featuring a dearth of savings should have high rates, not low ones. Neal Gabler’s article, that I began with above, chronicles a life of spending and not saving -- whether it is paying for a daughter’s wedding or coming up with large amounts of money to pay for a pricey elite college education for the children. With central banks suppressing interest rates to less than 1 percent, there almost is no incentive for people to put money into savings accounts, given there is almost no appreciable return, and few of us are equipped to enter the equities markets without making serious investment errors. Multiply that across the economy and one finds a dearth of savings and a preference for present consumption — exactly what Keynes and his modern-day followers claim is the formula for prosperity: we spend ourselves into wealth.

So, we are left with a huge irony. We have low interest rates, but clearly the kind of real long-term capital investment is not common in most economies at the present time. (Of course, given the hostility of the American Political Class to private investment and given the fact that Sanders is running a campaign based on attacking and ultimately destroying private enterprise in the USA (with Clinton not far behind), American investors are reading the tea leaves and taking their money elsewhere, something that infuriates the Political Class. Not surprisingly, the Political Class is demanding laws that effectively would build a Berlin Wall around American investment, making it illegal for Americans to invest outside America. One does not need to be very astute to know immediately what a disaster that would bring, but given that the Political Class exists by looting others, its members would be somewhat shielded from the economic carnage.)

Lest anyone doubt that current American savings rates are low, the chart below presents an ominous picture. It also demonstrates beyond a doubt that the biggest offender in conducting policies that discouraged savings was not the Obama administration — as bad as it is  but the Bush administration with its housing bubble that exposed what Peter Schiff often has called the “phony economy.”  If you want to see the reason for America’s “rust belt” and the demise of many of its once-great manufacturing cities, then this is among the greatest of them:

The chart itself exposes much about the past 35 years that is harmful to the economy. Yes, there has been the rise of the high-technology sector and the improvements in transportation and telecommunications, thanks to the deregulation efforts of the Carter administration (something for which Carter never takes credit because his Democratic Party ideology tells him that private enterprise and profit are bad things).

The steepest drop in the rate of savings came with the Clinton and George W. Bush administrations, and I don’t think that we should be surprised that during those years, the Fed actively pushed down interest rates and helped create two massive financial bubbles, each of which burst and created destruction in their wake. From the Fed’s own statistics, savings has somewhat recovered during the Barack Obama years, even though Obama’s administration is extremely hostile toward savers.

But here we are. After decades of what essentially could be called a new “Industrial Revolution” with the advent of computers and the internet, the US government has managed through its monetary authorities and through its other policies to decimate savings and leave millions of Americans financially vulnerable.

It has been no accident. People are able to resist force only for so long before giving in, and given that the Keynesian war on savings has continued unfettered for decades, and has been blessed at the highest levels of government and academe, not to mention touted in the news media, we should not be surprised that people save less. We also should not be surprised to know that all of us will pay a steep price for this spendthrift way of life, even as the political classes scramble to protect themselves from the consequences of their actions.

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Bill Anderson is a professor of economics at Frostburg State University in Frostburg, Maryland. His Ph.D. in economics is from Auburn University, and he serves as an associate scholar with the Mises Institute.

He has published numerous articles and papers on economics and political economy, including articles in The Independent Review, Reason Magazine, The Free Market, The Freeman, Public Choice, The American Journal of Economics and Sociology, Quarterly Journal of Austrian Economics, and others.

This post first appeared at the Mises Daily.

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Youngsters v oldsters

Excitement erupted on the local Twitterverse Saturday morning about a “battle of the generations” hosted by the very TV network most of that section of the Twitterverse had vowed never to watch again after John Campbell's departure.

But most of this Twitterverse are immune to irony.

The debate, on TV3's The Nation, pitted “baby boomers” Michelle Boag, Tau Henare & Simon Chapple against “Team Gen X and Y,” Geoff Simmons, Julie Anne Genter and Asher Emanuel over who is really doing it tough.” 

“Have the Boomers really reaped the benefit of a free education and cheaper houses and then pulled up the ladder behind them?” gushed the promo.  “Or are Generations X and Y just unwilling to make the sacrifices needed get their feet on the rungs?”

Talk about falsely framing an issue.

Anyway, to a man and woman the Twitterverse reckoned the debate was a cracker, and “Team Gen X and Y” nailed it.  I have a small interest in this area, so I roused myself and tracked down the “debate” online. [Part 1, Part 2.]

At times, from the oldsters especially, it sounded more like Monty Python than mighty conflict.  “Eee, lad, when I were young used to have to live in’t shoebox in’t middle of road, and dad used to thrash us to sleep wit’ belt.” “Shoebox! Luxury!! When we were were young we had to live in plastic bag in septic tank. And father used to beat us around the head wit’ broken bottle. If we were lucky!”

But from the youngsters, it sounded like whining. Like Oliver Twist not only asking for a second bowl, but putting the hand out for the whole pot.

None of either group, not one, even touched on the monetary transfers between generations made possible by the welfare state. That’s because one group are big-time generational beneficiaries of the welfare state; and to the other group, it’s a sacred cow that can’t be questioned.

Author David Thomson questioned it around half-a-generation ago¹ in his book, Selfish Generations; The Ageing of New Zealand’s Welfare State (Later updated and entitled Selfish Generations? How Welfare States Grow Old). In it, he argues that

that the history of the welfare state since the 1930s has been a direct response to the needs of the baby boom generation and its parents.

From birth, education, household formation, housing, health care and retirement income provision for their parents, Thomson argued the baby boomers enjoyed and then gave themselves benefits that were and will be ultimately paid for by others at just the very time they needed them themselves – from their cradles and, ultimately right up to their graves. From baby bonuses at birth, to family benefits and free education through adolescence and early adulthood, to state advances to house and feed  their own young families, to subsidies and welfare ever since … they are, he said, the “selfish generation.”

The idea is that modern welfare states were born when boomers were born, and “have turned out to be like a poorly managed ‘commons,’ in which those who had first access to the asset were able to take out far more than they were required to put into the common pool…”

Arguably then, free life-time health care, free trips to Waiheke and locking in superannuation now  “could be seen by future taxpayers as the last roll of the dice by the baby boomers.”

A group of self-interested politicians (almost all of whom are members of the “selfish generation”) attempted to lock in benefits that the country may subsequently discover it can't really afford, or simply doesn’t want to pay. The growing NZSF will be the most visible manifestation of that last gasp. As it becomes by far the largest pool of investment capital in the country, it will be an ever-present symbol of what is already the largest single claim on taxpayers' resources. The NZSF will, in fact, become an impediment to any needed change and that is probably what the government intended.

So the argument is, I think, fairly sound, and should at least have been taken out for a canter. But, naturally, none of the young debaters – a Green MP, a Salient editor, Gareth Morgan’s economist – would want to knock the welfare state. So instead they just got very shrill.

Mind you, the oldsters could just as easily have argued in response that “ultimately, the idea of intergenerational transfers has been overplayed”; that “new generations are benefiting from the established capital stock and technology” built up by preceding generations. But I reckon none of the three would have even understood what that meant.

So instead, they just sounded like Four Yorkshiremen.

 

NOTE:

1.  Just so we’re clear to which generation Thomson is referring, and to which his argument could be extended …

published in the wake of pivotal changes to New Zealand’s welfare state. Thomson’s thesis is that the welfare state has operated in the interests of one generation, that born between 1920 and 1945, and he examines the various ways this ‘selfish generation’ has maximised its benefits, breaching the unwritten welfare contract between them in the process. Later ones in particular have paid, and will continue to inject, greater financial resources into the maintenance of the welfare state than earlier ones, and will reap fewer of its benefits. Thomson is careful to point out that this process is integral to welfare states ‑ and in this respect New Zealand is not alone – and is not a deliberate plot to disadvantage one generation in favour of another.
    Thomson’s argument is persuasive, as he sets up and then rejects alternative interpretations for the actions of the welfare state. The suggestion that ‘the first welfare generation has remained the only welfare generation’ is not always obvious from the examples given, for it appears that such a definition could be extended to include those born up until the mid-1950s as well. The ‘crude and yet deliberate’ focus on generation to the exclusion of other social processes does leave crucial avenues unexplored, and Thomson’s brief forays into the differing effects of the political ageing of the welfare state on women and Maori give an indication of the directions in which further analysis could lead. As a frank and detailed study of changing social policy and priorities, this work is a major contribution to New Zealand historiography. (From a review by Bronwyn Dalley, then in the History Department at the University of Otago.)

How Central Banks Are Waging War on Your Savings

Guest post by Mark Thornton

Martin Wolf is the chief economics commentator at the influential Financial Times. Mr. Wolf has only deteriorated in my estimation over time. He has reached an all time low with his recent editorial (“Wipe out Rentiers with Cheap Money,” 5/6/14), where he argues that the cheap money policy used by central banks is here to stay, so get used to it.

What makes his conclusion so tainted is that he understands the consequences of this policy. He even invokes the famous remark of Keynes regarding the “euthanasia of the rentier” where he supported the ruination of people who earn interest on their savings.

He sees the problem as insufficient aggregate demand. Wolf considers the pre-2007 unsustainable credit boom a temporary fix, rather than the cause of the crisis brought about by central banks. His argument is that low interest rates and quantitative easing policy have been an insufficient policy response to the crisis. His preferred solution remains some type of massive public works program financed by government deficits. However, he believes that governments will refuse to borrow in order to build “productive assets.”

This is classic Keynesian logic: solve the problems of debt and monetary expansion by engaging in more debt and monetary expansion. With governments reluctant to expand spending further he concludes that we are stuck with the second-best solution of a cheap money policy consisting of ultra low interest rates and quantitative easing. Besides, he notes, the “cautious rentier no longer serves a useful purpose.”

Wolf is the unabashed mouthpiece for the ruling power elite. He clearly and correctly describes what this policy actually accomplishes — cheap monetary policy hurts most people in the economy, particularly workers and savers and redistributes wealth to the ruling elites. The losers from easy credit policy include the broad categories of insurance, pensions, and households (a long-known result recently confirmed in a study by the McKinsey Global Institute, referenced by Wolf himself).

The losers from cheap money policy are:

• Insurance is far more important than most people think. Insurance protects us against the loss of life (life insurance), our health (medical insurance), our homes (home, flood, and fire insurance), and our vehicles (car insurance). There is also general liability insurance and various types of business insurance. Insurance companies even offer incentives to be better drivers, to maintain safer homes, and to live healthier lifestyles, and they strive to eliminate moral hazard. Insurance companies are hurt by cheap money policies because their interest return on investments are now lower than required to meet their payout obligations. This hurts the companies and their policyholders because it requires higher premiums and raises the possibility of bankrupting insurance companies.
• Pensions and retirement savings accounts are also hurt by easy credit policies. These institutions arose to address the problems associated with increased longevity brought about by increased prosperity. By saving during your working career you provide income for your retirement. Cheap money policy and low interest rates discourage saving and also makes it more difficult for pensions to earn returns on their investments necessary to make future payouts to retirees. The same is true for individuals who have retirement savings accounts.
      In order to achieve higher returns, pension funds and people saving for retirement have been forced into more risky investments. Savings accounts, money market mutual funds, certificates of deposit, and short-term government bonds earn less than 1 percent, and after taxes and inflation they are losing purchasing power. Hence, central banks have been forcing these people to invest in the stock markets and junk bonds and the possibility of large loses in the future.
• The class labeled “households” is basically everyone except the small number of people who benefit from cheap money policy. Households are harmed in a variety of ways, including the weak job market, declining real wages, and the negative impact on savings. It has also harmed them by encouraging households to take on extremely high amounts of debt, much of which comes with much higher interest rates.

The winners from cheap money policy are:

• the government,
• large corporations, and
• large banks.

Low interest rates clearly benefit borrowers with lower interest rates and governments, banks, and corporations are the biggest borrowers. In general, artificially low interest rates benefit capital and hurt labour. Cheap money policy by central banks helps banks, like subsidized flour policies would help bakeries. Banks are also helped by most forms of government bailouts.

The easy money policy makes it easy for large corporations to borrow large amounts of credit at very low interest rates. It also forces stock prices up as alternative forms of savings, such as certificates of deposits, yield a real negative return. It has also made it very cheap for corporations to buy back their stock and to leverage their balance sheets.

The stock market bubble is the direct effect of the cheap money policy of the central bank.

Mr. Wolf and central bankers around the world have the idea that cheap money policies can increase stock prices and that this will lead to sustainable increases in investment, consumer spending, and increased aggregate demand. In reality, cheap money policies cause economic bubbles that are inherently unstable and subject to crash. It should be obvious that harming the workers and savers of society to benefit the wealthy ruling class is no way to get the economy back on track. Therefore, cheap money policy is a scam of gigantic global proportions.

Achieving economic recovery and growth requires first knowing what caused the problem in the first place. A lack of aggregate demand is the effect, not the cause. A lack of aggregate demand is the crisis, not the cause of it. The cause of the crisis is easy money policy and runaway government spending and debt. Continued easy money policy and government spending will only make the negative consequences of the crisis even worse.

The solution consists of:

1. Central banks should have no monetary policy and they should not interfere with interest rates.
2. Government budgets should be balanced and reduced over time.
3. Government regulations, subsidies, and taxes should be eliminated.
4. Land, labour, and capital should be transferred from the public sector to the private sector. And,
5. Programs that burden future generations should be ended.

The horrible irony here is that when Keynes wrote approvingly of the euthanasia of the rentier class, he was speaking of a powerful class of monopoly capitalists and aristocrats. When Mr. Wolf speaks of the euthanasia of the rentier he is actually targeting “insurance, pensions, and households,” with a policy that has enormous financial benefits to the class of people that Keynes was targeting for extinction!

In 1789 Marie Antoinette said “let them eat cake.” In 2014, Mr. Martin Wolf tells us to eat “cheap money.”

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Mark Thornton is a senior resident fellow at the Ludwig von Mises Institute in Auburn, Alabama, and is the book review editor for the Quarterly Journal of Austrian Economics. He is the author of The Economics of Prohibition, coauthor of Tariffs, Blockades, and Inflation: The Economics of the Civil War, and the editor of The Quotable Mises, The Bastiat Collection, and An Essay on Economic Theory.
This post first appeared at the Mises Daily

Raiding Super to buy votes?

The present Superannuation scheme is clearly unsustainable. Paying universal Superannuation to everyone over 65 for the indefinite future is guaranteed to send us the way of the Greeks. But folk nearing retirement do need to be able to plan their future.

It therefore makes prudent sense to announce that govt will at some specified time in the future begin raising the eligibility age for Super, perhaps by six months at a time ever two years.

To the credit of the Labour Party, they have this as a policy—though in their case they stop raising the age before I would.

Raising the Super age to 67 will save around $1.5 - 2 billion.

Unfortunately, no politician or lobbyist can see a sum like $1.5 - 2 billion without wanting to raid it for their favourite programme.

Enter the Children’s Commissioner, who wants the money saved spent on “developing a mix of services for children”  and increased benefits for beneficiaries with children.

Did you spot the nice sleight of hand? In other words, he wants to “redistribute” the un-wealth from retirees to beneficiaries.

This is just a trial balloon. If it arouses no great hue and cry, expect vote buyers in all parties to follow it up swiftly.

GUEST POST: Houses are homes, not investments

Guest post by Vedran Vuk of Casey Research 

Recently, my parents were considering purchasing some real estate. As the financial professional in the family, they asked me, "What do you think? Will it go up in value? You know... not now, but eventually?" I've heard the same thing over and over again. In response, I shared my opinion: "Would you pay the current market price to live there even if its value never increased?" If the answer is yes, buy the property." Essentially, is the house worth it as a home, not as an investment?

In the past few decades, the concept of home ownership has been completely turned on its head. Previously, homes were considered a very long-term consumption good. Do you think anyone in the 18^th, 19^th, and prior centuries ever considered tripling the value of their homes by retirement time and selling them to move beachside? In the vast majority of cases, such ideas never crossed their minds.

Yet, somehow along the way, this became a reasonable investment expectation. Even today, home buyers still make their purchases with the hopes of escalating prices. But are homes really wise investments?

Consider the difference between your house and an investment such as Apple (NASDAQ: AAPL) stock. At a major company, the opportunities can be truly limitless. Apple can produce cashflows from computers, iPods, iPads, and future innovations that are just dreams and concepts today. If the local market is oversaturated, Apple has the option of spreading out all across the world. As a result, Apple's stock price has gone from $17 in 2005 to $540 today. Can your house do the same? Unless there's a hyperinflation ahead or your house is located in the New York City or London of the 21^st century, the answer is no. Why? Because your house is ultimately a product--and products have an upper bound to their prices.

To understand this difference, there's no need to drag out the Case-Shiller Index or analyze complex statistics. Suppose one bought a single-family house over a decade ago for $200K. At the peak of the housing bubble, the price reached $500K; to his joy, the owner sold it and moved thereafter to retire in the Bay of Plenty. Can the house's price go higher from here? With Apple, the stock price can just keep climbing with greater profits and innovations. But is that true with real estate?

For the sake of argument, let's say that prices do keep rising. Eventually, the second owner sells to another buyer for $1 million a decade later. Guy number two also peacefully retires in bounty. Well, where does that leave the third guy? Unless real salaries make an incredible jump in the same time period, no one will be able to afford the home next. The median worker earning $51K won't be selling such a house for retirement; instead, it will take him until retirement to afford it. In many ways, this "investment" more closely resembles a Ponzi scheme. (Yes, Ponzi schemes work: for those who get in early and get out - as the recent real-estate bubble demonstrated.) Ultimately, there's an upper bound to housing prices - they can't continue rising perpetually with no end.

The same is true of any product. At $300 for the newest iPod Touch, Apple might be doing well, but at $10,000 per unit, there likely would be very few buyers. As a homeowner, you're not holding a company that can innovate, cut costs, and enter new markets. You're ultimately holding a product which must be either sold to the next user or leased to the next renter. Houses are a good created for a specific use - to put a roof over one's head. They are not magical money machines. Previous generations understood this very simple concept. One built a home as a place to live and escape the elements - and worse yet, the squalor of tenement housing. Homes were not retirement tools, but rather long-term goods.

Unfortunately, policy makers still view homes as investments and are always worried about low prices. But is it really healthy to play another round of the same Ponzi scheme? Suppose the Reserve Bank manages to inflate housing prices again. There will be another boom in which some folks will make a tremendous amount of money. Eventually, housing prices will hit an unrealistic upper bound. Again, home prices will violently drop, resulting in homeowners deeper underwater than now. Of course, the banks will again take a hit as the mortgage holders. As long as real incomes trail the rise in housing prices, there will ultimately be a correction of some sort.

So, do I think the current real estate market is just fine? No, of course not; but I don't think shocking houses prices back into a bubbly stratosphere is the solution. Ideally, I'd like to see increasing housing prices, but only at the pace of real growth in society's wealth. Over the last few decades, houses grew in value for good reasons and bad. On the good side, the economy had been expanding. On the bad side, central banks’ low-interest-rate bubble artificially inflated housing prices beyond what made sense for economies to sustain.

If US companies such as Apple are creating greater abundance in society, it makes sense for US housing prices to grow with greater wealth. But, bringing house prices higher on a wave of printed cash does not make anyone wise investors, but rather willing participants in a Ponzi scheme where someone else will be left holding the bag. Though that might be an attractive solution for those underwater on their mortgages, it's no solution for the economy as a whole--nor for the next buyer, or the next but one.

Vedran Vuk is a senior research analyst with Casey Research

A retiring Roger Douglas

Roger Douglas is retiring from politics. Again.

At the age of 74, this time it’s probably for good.

His record isn’t anywhere near as good as his supporters would seem to believe—and because the reforms for which he was responsible were done in part by stealth, and the architects of the Rogernomics revolution never bothered to foster a parallel revolution inside people’s heads, it was a record which led many to believe that the free market itself operated on stealth—and it poisoned a generation on the very idea of free-market reforms.

In that respect, he and his colleagues helped bring the ACT Party’s ever-worsening fortunes on themselves.

But on the other hand, his record is nothing like as bad as his critics would have you believe.  The structure of political economy in which we live today is still the house that Douglas built, and even his harshest critics did nothing to alter his floor plan. And without his reconstruction, there would be many more grandparents than there are now around New Zealand mourning the loss of their children and grandchildren to richer pastures overseas.

New Zealand is a richer place today than it would have been without him. For that he deserves thanks.

As a politician he really only had four years in the sun, four years when he found the courage to admit to himself all he had previously thought was wrong—four years when, for all the blundering, he and his reforms (let’s admit it ourselves) rescued New Zealand from becoming the Polish shipyard it had almost become. Whatever else he did before or since, it will be those four years of crisis on which history will judge him. (And the best judge of that history in my estimation was not written by a bitter David Lange, but by the man who as the country’s “go-to” interviewer at the time saw it all up close: Lindsay Perigo.)

There are two great tragedies in Douglas’s late career.

The first is that a National Government facing another economic crisis and with no answers to meet it could not find it in their embittered souls to make use of his ability. There he sat for the last two years doing almost nothing while his coalition partner fiddled. What a waste.

The second tragedy is that he didn’t just sit quietly and do nothing for those last two years.  Instead he was jetting off round the world to see his grandchildren, and charging to to the taxpayer’s tab—and when he was sprung for it he compounded his error by telling us to our face that he is “entitled” to dip into our pockets.

A sad final act for a man whose performance in his short time in the sun makes him a once-legendary player.

The irony now is that he plans in his final retirement to spend more time with his grandchildren.

My worry is that it will be us picking up the tab for all the frequent trips to see them.

Retirement villages

Here’s a few wee pieces of advice about rest homes and retirement villages it might be useful to know about, stuff I wish I’d known before helping out both my mother and my in-laws move in recent years—my mother into a rest home on medical advice; the latter into a retirement village by choice, then into a rest home because their quack said so. Advice they’ve offered that might just be helpful to you or your folks too.

First, everyone likes to be independent, but when being independent is becoming a struggle why not pay for someone else to sweat the small stuff for you, so you can spend what time and mobility you do have doing what’s really important to you (playing golf; compiling Satanic incantations; plotting world revolution) in what in every respect will still be “your own place.”  Of those I’ve met, few who do make the move seem to regret being able to walk, or be wheeled, home from happy hour.

Also, it seems that the earlier you do move in, the more likely you’re going to be able to make friends there.  If you move in when you’re still healthy and able to sink a couple every night, you’re more likely to make new friends who’ll stay with you as you age than you will if you wait until you’re deaf as a post and completely incontinent.  There’s nothing that turns off a potential new scrabble companion so much as a pool of urine on the floor, and a partner who can’t hear the table talk.
So if you’re going to move, do it early.

Third, there’s a difference between a retirement unit, a rest home and a nursing home (see below). Some villages have all three; some don’t. This is more important than you might think.
There are spry 102 year-olds still living in their own apartments with no more need for medical care than our pedigree cat, but they’re the exception. over the course of most people’s retirement they’re probably going to need all three, choosing a village that does have all three makes the transition from one to the other far less painful for everyone concerned (including your children) and when you do make the move “upstairs” it means the friends you made “downstairs” are still around to remind you of that time you lost your teeth down the waste master.

Fourth, everyone likes to choose their new home themselves. But you never know when bits are going to start falling off, or a fall might leave you immobile, or when your quack might tell you it’s time for a move—and when or if that happens, you’ll be in no condition to look around yourself, leaving your kids to decide for you.
So if you want to plan ahead and make things easy for yourself, you can either be nice to your kids now (and who needs that kind of pressure), or you can make your decision on where you favour now so you’ll know in good time where you want to go.  Just in case.

As for me however this is all academic, since both sets of parents are now well set-up and happy, and I plan on working right up until I’m 92 when I keel over and have a heart attack over my drawing board. I just though you might find it useful.

Q: What’s the difference between a retirement unit, a rest home and a nursing home ?

A: For some reason doctors, nurses, physios, social workers and operators of retirement villages always assume everyone knows the difference. I didn’t. Most people don’t. Why would you?
A retirement unit (either an apartment or a stand-alone unit) is just like a unit in a small village, and in the best retirement villages there is a continuum residing in these, from folk who are still independent, active and vigorous (those who’ve moved in early) to those whose physical horizons are becoming more limited. You usually buy this unit yourself.
A rest home unit provides for less active folk, who need help or care of some description.  Depending on the village, you can either buy or rent, and in either case you pay a substantial monthly service fee on top depending on what services are needed. (Some villages also offer a “serviced apartment,” which is somewhere in between the retirement unit and the rest home unit.)
And a nursing home unit (or “hospital,” even though they can’t even draw blood) is for when you’re unable to do much at all for yourself.

Brash wants to wean NZers from the unsustainable super pyramid

Don Brash is in the news again for another good transitional proposal—not yet to help wean NZers from the great unsustainable pyramid scheme that is govt superannuation, but at least to help get that process started.

From the time Michael Joseph Savage’s Labour Government set up New Zealand’s retirement and pension scheme (you know, back when average life expectancy in New Zealand was about three weeks after you got the gold watch), this was never a pay-as-you-go scheme.  It always relied on those still working paying for those who no longer were.

But now there’s too many of the latter and not enough of the former, and while the rapidly increasing number of oldsters is spending more and more, the youngsters whose savings should be paying for them are saving less and less, and being taxed through the nose to fund what will soon be un-fundable. 

Actually, when the government is borrowing a quarter of a billion a week just to pay its welfare bill, it’s clear the whole welfare thing is already un-fundable. But while that’s just un-fundable, ‘super’ is becoming super-un-fundable, and it’s only going to get worse. This is a pyramid scheme that is near collapse. It is unsustainable.

So you would think that a simple proposal to begin gradually raising the retirement age would be welcomed, or at least discussed; something that would be announced long in advance, and would come with incentives—i.e., “those who chose to draw the pension down early being paid a lower rate over the rest of their lifetime compared with those who chose to draw the pension down late.”

Dr Don timidly suggests offering this only up to age 67. Actuary Jonathan Eriksen sensibly suggests making such as scheme accessible between 60 and 75.*

A good idea, you would think. Something worth discussing, you would imagine. Except, huh, what’s that … oh, we’ve just been told by those who must be obeyed, that no discussion will be entered into. Hard questions like this will obviously be left to the next generation to sort out.

* (My own suggestion would be to simply announce a gradual raise of the qualifying age one year at a time every couple of years until the whole unsustainable pyramid scheme is gone altogether—giving a grace period of two to three years, while compensating everyone over 65 now by making them entirely exempt from income tax. But that’s just me.  And George Reisman.)

Superannuation

Like many of you I was fascinated both by the common sense suggestion of raising the superannuation age to 67 while removing disincentives to taking up annuity products – a suggestion said to save taxpayers around $100 billion by 2061 – and by the knee-jerk reactions to the common sense proposal to address what is a growing albatross round the neck of every taxpayer.

The idea that 65-year-olds must leave work and get paid for the rest of their lives by other taxpayers is immoral, demeaning, and ultimately unaffordable; and something has to be done. It is a failed experiment – a collapsing pyramid scheme that is costing taxpayers around one-sixth of what Inland Revenue extracts from them each year. The report by investment services company Mercer doesn’t go anywhere near far enough, but it does at least state the obvious:

      Consulting services company Mercer says the double whammy of an ageing population [see Bernard Hickey’s chart at right] and the global economic crisis highlights the urgent need to address the issue of retirement saving, and reduce reliance on New Zealand superannuation . . . [*}

True, all too true. Add to that double whammy another two-base hit: the diminishing number of under-65s in the future who will be expected to pay for it all [see below right].

      "The solution to our retirement savings conundrum [says Martin Lewington, head of Mercer in New Zealand] rests in both growing the economy - ultimately increasing the size of the funding pie - and addressing the social and welfare issues associated with an ageing population and ensuring all New Zealanders can live comfortably in retirement." 
    "It's time for the government to take decisive action and balance the politics in the current debate with what's ultimately best for New Zealand, particularly in regards to the 'hot potato' issues such as raising the eligibility age for NZ Super."

All very sensible, yet barely even radical enough to make the difference that’s needed -- which is no doubt why the government dismissed the idea without consideration. “In my view New Zealand super in its current form is affordable,” sniffed John Key, giving his best impersonation of King Canute holding back the retirement tides by his ability to fake reality. “I've made it quite clear,” he confirmed, “that it would be my intention to resign from Parliament if I broke that promise I made to New Zealanders."

All the better – that’s a two-for-one deal I could sign up for!

But in the meantime, while the government’s policy is to fake reality and shut down debate, even the Mercer proposal barely even makes a start on this problem which isn’t going away, and isn’t getting any smaller.  Within the next forty years New Zealand will move from a position of having 1 in 10 people over age 65 to 1 in 4 people over 65. 

That’s a pyramid scheme with too many blocks missing.  Holding your nose and stamping your feet isn’t going to make that problem disappear with the next tide.

And given that the “decade of deficits” promised by Treasurer Bill English is mostly needed to keep the welfare gravy train going, of which the lion’s share is the bill for the retired, we should see every new tranche of borrowing needed to fund the shortfalls as a new and additional government programme.  One we can’t afford.

We already face the prospect with the Government Superannuation Fund of the government taking a larger and larger share of local companies.  And we now face the prospect of watching it throw away its your money away on local ‘PPPs’ instead of genuine investments.  How much more difficult do we have to make it before we finally face reality and realise that the concept of a twenty-to-thirty year taxpayer-funded retirement is unsustainable?

It’s not like it’s too difficult to sustainably and painlesssly wean the country off this albatross.  Take George Reisman’s simple suggestion for reforming American Social Security for example**, which I’ve paraphrased slightly to give it a local flavour:

    First, following a period of two to three years to allow time for necessary adjustments to be made, immediately raise the retirement age from 65 to 70.
    This, of course, would be a major disappointment to everyone who had counted on starting to receive a pension sooner. Fortunately, there is a way to give these people a substantial form of relief, which would go a long way toward alleviating their hardship. That is, at the same time that sixty-five year olds are refused a pension, enact for their benefit a “senior citizens' employment-income tax exemption” in the amount of, say, $90,000 per year. . .
    The far greater part of the taxes thereby waived for these seniors on their income derived from employment would be taxes the government would never have collected in the first place, since most of the seniors would not have been working otherwise. The elimination of the government's payment of pensions to this group would far outweigh any loss of revenue from those sixty-five year olds who would have worked and paid taxes on their incomes even in the absence of the rise in the Social Security retirement age.

Which might even be enough to allow a similar exemption for all over-60s, which would give them a chance to prepare.

    This income-tax exemption should be extended and enlarged year by year until it embraces everyone in the 65 to 69 year-old age group. And, of course, it should be progressively increased from year to year to keep pace with rising prices and rising wage rates. Indeed, it should eventually be extended to apply to everyone 65 years old or older. In this way, the years remaining in life past today's customary retirement age might become truly “golden years” for millions of people, who at last would be freed of the burden of income taxes on their earnings derived from employment.

Who would be prepared to speak against freeing up that particular burden?  But let’s keep going:

    The retirement age of 70 should be retained perhaps for as long as fifteen years, to make it possible for all workers aged 55 and over at the time of its enactment to take advantage of it. Thereafter, however, the retirement age should be gradually increased further, to 75, over, say, a twenty-year period, rising at the rate of one calendar quarter for each passing year. Thus, workers aged 54 at the time of the reform's enactment would be eligible for social security at the age of 70 ¼, while those aged 35 at the time of its enactment would not be eligible until the age of 75.
    The system should accept no new pension recipients after the end of this twenty year period. In other words, it would be closed to workers 34 years of age and younger at the time of the reform's enactment. These workers, who would remain permanently ineligible, would all have ample time to make their own provision for the future. The superannuation system itself would progressively decline and ultimately disappear as its pensioners passed away.

A relatively painless way to accomplish the necessary reform.  But there’s one more thing to be done to ensure that no new impositions are imposed on anyone:

    The government's very considerable savings from reduced pension obligations over an initial phase-out period totaling almost forty years from start to finish, should be earmarked for tax reductions for workers who will never be able to enter the system, i.e., in the above scenario, workers aged 34 and less at the time of the reform's enactment. As these workers advance in age, new workers will be entering the labor market. There will thus be an increasing number of workers to bear the burden of the Social Security system's final phase. This will permit Social Security tax rates to be steadily reduced on this group, until they disappear altogether.

Reisman makes both the economic and the moral case to end government superannuation.

    The end of Social Security would be the end of something that should never have been started in the first place. The root of the system is the philosophy of collectivism, in that it forces everyone into a giant stewpot as it were, in which individuals are compelled to support the parents and grandparents of total strangers, whether they want to or not, in exchange for themselves later on being compulsorily supported by the children and grandchildren of total strangers.
    And, of course, standing between the generations has been a mass of politicians and government officials who have used whatever excess has existed of these forced exactions over current pension payments, to fund ordinary, current government spending.
    If a private insurance or annuity company had done such a thing and used its excess of premium income over current payments, to finance the consumption of its owners and employees, for whatever purpose, including the funding of charities and public works, the company officials would now be spending long terms in prison. For it would be very clear that they had embezzled the funds of their clients. Yet exactly that in essence is what politicians and government officials have done, on a scale far surpassing all private financial frauds combined over the whole of human history.

The creators of the world’s super scheme were bigger Ponzi operators than Bernie Madoff.  As US Circuit Judge Anderson said in the 1922 Lowell v. Brown case[*], the Ponzi scheme was “simply the old fraud of paying the earlier comers out of the contributions of the later comers.” So long as the number of late comers—you might call them suckers—grows, the fraudulent scheme has life.  When it stops growing, the reality is the same for us as it was for Bernie Madoff.

Confronting the reality of the situation is the first and necessary step to putting the unsustainable pyramid scheme to an end.

* * * * *

* * In the final chapter of his book Capitalism: A Treatise on Economics, Reisman has a whole raft of similar transitional policies to pull the teeth of big government. And fortunately for you, you can read the whole chapter online.