Goofynomics
June 5th, 2009 at 2:36 pm by David FarrarMatthew Hooton hits the mark in NBR today. Go buy a copy for the full column, but here are some extracts:
It’s embarrassing to even chronicle Labour’s descent into economic lunacy this week but it now seriously proposes that borrowing to invest in global sharemarkets is not only a good idea but a one-way bet.
Borrow no matter how gaping our fiscal hole, nor how long the books will remain in the red, Labour insists.
This and only this, it claims, will stop superannuation entitlements to those aged 44 or younger being butchered.
It’s sad seeing Phil Goff reduced to such nonsense. Clearly, he now has no expectation of ever becoming prime minister.
Basically Goff has said that no matter how fire the deficit or debt is, he supports borrowing to save.
Dr Cullen launched his fund when permanent surpluses were forecast. With zero gross debt being on the medium-term horizon, it made sense to establish a sovereign wealth fund.
Connecting it with superannuation, though, was entirely political. Even Dr Cullen made clear there was no link to future entitlements and future taxpayers were always going to have to meet 89% of costs.
Bill English’s decision not to borrow for the fund will increase that by just 3%.
Moreover, in national-income terms, Mr English’s decision relates to just 0.2% of GDP from 2030.
It is ridiculous to worry about such a number. The smallest economic shock over the next two decades – positive or negative – could double or eliminate it, as could small productivity changes.
The media hysteria over the suspension has been put into context by Matthew. 0.2% of GDP.
Failing that, maintaining current entitlements would simply require reducing our surplus or increasing our deficit by 0.2% of GDP, 20 years hence. That hardly justifies the preposterous notion that we should borrow more now to invest in stocks.
Yet that is what Labour is demanding we do.
In reply, Mr Goff says governments can’t lose. He bases this on the banal observation in a Treasury paper that long-term returns from a diversified portfolio are likely to match the market average which, most probably, will exceed the risk-free rate over time.
Armed with these Corporate Finance 101 assumptions – and apparently with certain knowledge that sharemarkets are about to bounce back – Mr Goff demands that Mr English borrow another $20 billion over the next decade, and calculates it will deliver a net return of $8 billion sometime in the future.
No other politician in the developed world would contemplate such lunacy. Take Mr Goff’s argument to its logical conclusion and why stop at $20 billion?
Why not $200 billion to get $80 billion profit, dead cert?
Make it $2 trillion or more and perhaps tax could be abolished altogether with all government services being funded through the sharemarket.
This isn’t Goffonomics. It’s Goofynomics.
A name is born.
Mr Goff should ask why no other political leader in the history of the world has proposed this before.
Perhaps it’s because they understand it’s not government’s role to borrow from taxpayers yet to be born to risk on Wall Street with the promise of free money in the future.
What amuses me most of all is how Phil Goff treats a 50 year Treasury prediction of returns on managed funds as the holy writ, when Treasury can’t even predict from month to month what the deficit will be.
Related posts:
- Roughan on Super Fund
- Absolute hypocrisy from Labour over NZ Super Fund
- Editorials on Super Fund
- Some Super Facts
June 5th, 2009 at 2:45 pm
What’s truely ironic is Goff’s recent love of Capitalism, surely if it’s returns are so good, then giving us tax cuts 5 years back would have produced a better return for the economy than increasing the public sector in the way they did.
Vote:The contradictions of Goff’s position is breathtaking in it’s utter gall.
June 5th, 2009 at 2:56 pm
Of course this is essentially what the US did with Freddie and Fannie – borrow at government guaranteed rates and lend at commercial rates – how could they possibly lose?
You often see shades of this wilful ignorance in unions campaigning for wage rises (particularly against banks) “Look at how big their profits are, they can afford it”, never acknowleging that the size of the balance sheet and risk undertaken has some correlation with the earnings.
Crazy talk, but this man would wish to lead our country.
Vote:June 5th, 2009 at 3:41 pm
I’ve seen so many times, people asking experts the question of whether to pay of the mortgage, or invest in shares.
Most advise paying off the mortgage. Especially when interest rates were higher, and paying of the mortgage early does not incur taxation unlike investing in shares.
All I can surmise, Labour are taking the approach that anything national says is bad. Even if it is something labour support privately they will publicly attack.
Sad , sad, sad. John Key is so much better than goff. JK at least supported labour on issues he agreed with (See the antismacking bill for example).
Vote:June 5th, 2009 at 4:14 pm
“What amuses me most of all is how Phil Goff treats a 50 year Treasury prediction of returns on managed funds as the holy writ, when Treasury can’t even predict from month to month what the deficit will be.”
Oh good – run along and tell Mr English and the S&P boys they didn’t need to worry about longer-term debt projections cause nobody has a clue what they’re based on anyway…
Vote:June 5th, 2009 at 4:35 pm
This is bullshit.
Vote:Good years, bad years. the Fund is a long term game.
This Gov is a short term game.
Happy little swollen baby boomers.
Oh, and hooten is horrible, quite unmentionable in polite society.
June 5th, 2009 at 4:40 pm
wreck – key didnt agree with the anti-smacking bill. he supported it after he negotiated a new clause that made the thing more palatable. after all, Helens bill was going to go through anyway.
Vote:June 5th, 2009 at 4:43 pm
Surely its a great idea to borrow to save if your cost of borrowing is lower than revenue from saving? This argument is pretty simple. If we can really expect an 8 billion net profit from borrowing we should do so. But this argument only stands if this 8 billion profit is a certainty. It is not. Therefore risk factor comes into account. Therefore the decision on whether to suspend contributions should hinge on risk. I honestly don’t have an answer for this. But the line that ‘borrowing to save is stupid’ is in itself stupid.
Vote:June 5th, 2009 at 5:01 pm
There’s no guarantee that the investment would return $8 let alone $8 Billion. The bottom line is Goff wants us to borrow to gamble. Borrowing to gamble IS stupid.
Vote:June 5th, 2009 at 5:21 pm
The Greens never supported the Cullen Fund in the first place.
The Greens would have ensured the tax base was sufficient to pay for the needs of our elderly – and that doesn’t mean increasing income tax (for those who will be quick to bite on that issue). It means totally rejigging the tax system, including introducing eco-taxes that tax waste and pollution rather than productive enterprise, a capital gains tax to level the playing field between those who derive their income from property speculation rather than productive enterprise, and a reduction in personal and corporate income tax (which I’m sure the righties here would really like).
I agree with DPF that Labour’s idea of “borrowing to save” is just plain stupid economics.
But the Nats’ freezing of payments to the Cullen Fund won’t work either, because it will eventually result in the need to raise the age of entitlement.
Do we really want to end up like Malaysia where your restaurant table is waited on by an octogenerian who still has to work but waiting on tables is the only job s/he can get?
Think Green folks – we’ve got some good economic ideas that the LabNat parties can’t seem to get their heads (or wallets) around.
Vote:June 5th, 2009 at 11:21 pm
Borrowing to save is not stupid economics. But RightNow has a point. The question is how big a gamble is it?
A tax on pollution is effectively a tax on production – because generally pollution results from production. Don’t get me wrong, a tax on pollution may be the right way to go to even out the externalities, but lets not be naiive about the consequences. The tax will hurt ‘productive enterprise’ and this will have ramifications for employment.
As for raising the age of entitlement, why not? Would raising it to 70 really have a significant impact – people are living longer, healthier lives. Why is there an obsession with 65?
Vote:June 6th, 2009 at 7:42 pm
Dear Mr Toad,
Surely even you can see that any measures that suck more money out of the economy in the form of tax are likely to have a negative impact on the economy. With such novel measures as proposed our manufacturers and others will have even more reason to relocate offshore.
It’s a typical left scenario to suggest new taxes will work, remember the Alliance’s Financial Transfer Tax.
Vote: