Within the next decade Japan will become the world’s forth largest economy, en route to becoming the seventh. The cause of that demise? Too much saving falling into the wrong hands.
Meanwhile the New Zealand government implores New Zealanders to save more, and warns that the consequences will be dire if we don’t. Its rhetoric is alarmist, any theoretical underpinning for it, absent. But the pure politics of selling fear is compelling. To boot, the hand of our government’s control over capital markets becomes ever larger.
It might be churlish to accuse the politicians of being self-serving but there is no other rationale for their adherence to a path that, as Japan is demonstrating, leads to hell – paved with the good intentions of politicians though it might be.
Firstly, Japan. With the world’s best household savings performance how come it has come unstuck? The answer is that a profligate government has over a succession of decades, squandered those resources and more. In fact with a government debt to GDP ratio of 160% the Japanese government has pretty much the world’s worst record in this regard. The Japanese government crowded out its private sector by taxing high, imposing all manner of compulsory savings schemes, and then redistributing both its tax revenues and the accumulated savings of its citizens, in a manner that in the end, undermined the financial viability of its economy.
In the way characteristic of politicians the world over, the Japanese political genus sought to win over friends and influence everybody by controlling everything in Japan that moved. Firms, so long as they played the political patronage pantomime, were recipients of endless loans, suspensory loans, and grants from the government – no matter how bad the business case for throwing good money after bad was. And the citizens whose taxes and savings were requisitioned to finance this circle of influence, were co-opted by the guarantee of lifetime employment and pensions beyond belief. The poor underlying commercial performance of Japanese firms was no barrier to expansion. Government subsidies and loans were ubiquitous. Any surplus from high taxes quickly disappeared.
But poor investments, no matter how much money you throw at them, are poor investments. After decades of official profligacy, the Japanese economy hit the mud in 1990. Government deficits rocketed under the vain attempts to prop up collapsing Japanese businesses. Over the ensuing 15 years the economy has really struggled, generally stagnating with now 40% of its labour force having little more than part time or pretend jobs. Prices have fallen, no more dramatically than in its property markets. Interrupted only occasionally by the impact of demand for industrial goods from the burgeoning economies to its West, Japan remains on a slide to less-than-mediocrity. Its citizens are paying dearly for the authoritative, mercantilist nonsense which constituted the “Japanese miracle”.
Fast forward to New Zealand 2005. We have a government resolute in relentlessly increasing its influence. It is what we want, voting booths don’t lie. Labour has overseen a massive increase in the tax collect and it’s this that has underpinned its commitment to spend – partly on current account which is revealed in its operating budget, but primarily on capital account, which is not so obvious.
Hospitals, infrastructure, job jolts and stacks of bureaucrats are the primary and direct recipients of the government largesse. Political priorities drive this reallocation of national saving – hospitals are written cheques in order to get their sob stories out of the headlines, Job Jolts are imparted to instil nationalistic appreciation of government’s central role in generating economic growth (pity Anderton’s best results for extra jobs are in his own bureaucracy where policy wonkers are now stacked floor to ceiling). The infrastructure spend simply adds fuel to an already-stretched economy and will underpin further increases in interest rates over 2005.
But more sinister is the impact on the efficiency of private sector saving and investment from the psychology of big government with its Helplines installed at every regional fairground. National and regional public spending programmes championed by Anderton and funded by Labour, virtually guarantee swathes of economically inefficient investment as politics dictates priorities. It’s not just the non-commercial priorities of direct government investment programmes, but more insidious is the impact it has on private sector investment.
In such a climate of government-led initiative, the private sector’s business managers become predisposed to investments that ‘please the government’ rather than their shareholders. Political allegiances evolve between business and politicians. That is the start of the slide to national economic mediocrity. Muldoon perfected it, Anderton has tried to and the Clark/Cullen regime is more than a little partial to it. We are on course.
The other side of the equation is government’s undermining of the private sector’s propensity to save and fund its self-reliance. Proliferation of State welfare and universal entitlement has traditionally been blamed for undermining private savings rates. But to this the modern social democrats (a.k.a. socialists) have added all manner of maternalist initiatives such as workplace super schemes and the Cullen Fund. The message the latter send is a very loud – “don’t worry we’ll look after you”. So rational but ignorant households don’t worry and their savings rate plunges.
By removing uncertainty, or at least purporting to remove uncertainty from people’s lives maternal governments construct a moral hazard whose damage is only revealed when there is very little those hurt can do to repair it. This is the lesson of Japan, where government assumed all the responsibility – commandeered peoples savings via tax, imposed compulsory savings schemes and made the investments (in grants to non-viable businesses). The capital waste has been unprecedented. Becoming elderly in Japan is a nightmare. It is also the lesson from New Zealand 1984.
How different is Japan 1980 really to New Zealand 2005 with our Cullen Fund and more compulsory acquisition of private savings on the way, increasing government influence over investment and the crowding out that high tax take represents? The Cullen Fund is investing far and wide with those funds that should be in the hands of New Zealand households and businesses as their reward for effort. They would ordinarily be spent and invested in New Zealand. The cost of trying to shore up New Zealand Superannuation (which itself undermines private savings rates) this way promises to be horrific. But it is irrelevant to today’s politicians who will all (with the exception of Jonathon Hunt) be long retired by then.
The conventional wisdom is that New Zealand hasn’t a high enough savings rate. This is nonsense. We squander our savings on lowly productive investments. So long as political popularity comes out of the barrel of a subsidy rather than from selling the punters any vision of a medium term of self-reliance and earned prosperity, the voters will demand more government projects and more help from politicians to manage our personal financial problems.
Gareth Morgan, 2005.
© Copyright; Foundation for Economic Growth and various authors. Individual authors retain their own copyright.
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