Archive for the ‘Wealth’ Category
The health of a country’s sharemarket can be a rough guide to the underlying health of an economy.
I say rough because the 1980s sharemarket boom that ended in October 1987 wasn’t really supported by any true sustainable wealth creation.
It was a bubble that had to burst.
However, the New Zealand sharemarket has never really recovered, or at least not as well as those of other countries – the NZX has basically flatlined for the last 20 odd years.
In today’s NZ Herald, Brian Gayor who was a sharebroker in 1980s, asks: Where is the growth in the NZ sharemarket going to come from?
Early November 1986, he says in a reminisce about the glory days, was the “height of the 1980s boom as New Zealanders were captivated by the sharemarket and economic optimism was unbounded”.
But since…not so much.
Gaynor says NZ investors and business people have become “so turned off by the sharemarket that there are almost no new listings”.
He says “The domestic sharemarket won’t recover until the growth side of the equation is addressed”.
A personal perspective here: the BigCake household bought shares in TENZ (a NZX listed fund that invests in the 10 largest NZ companies) back in mid-1997 for $1.21 – yesterday TENZ shares could be bought for 87 cents.
Well done NZ’s biggest companies, that’s pretty impressive wealth destruction.
Anyway, Gaynor says the NZX desperately needs the Government to sell minority stakes in its commercial companies through stock exchange listings.
“But the Government also needs to be more innovative as far as private companies are concerned.
“A reduction in the corporate tax rate for the first five years that a company is listed on the NZX would be a powerful incentive to encourage more listings.”
BigCake thinks that this is the stockbroker in Gaynor talking. It’d encourage more listings, but (this time) BigCake would be very wary of investing in them.
Gaynor’s column has some interesting comparisons:
• Shares in 275 listed companies were traded on November 7, 1986. Yesterday 126 companies traded. We’ve never managed to top 275 since.
• Back in early November, 1986 a further 17 new issues had been announced or were to list before the end of the year.
• The Barclays capital index rose to 3893 on November 7, 1986. That index, which is still compiled by the NZX but is not widely available, closed at 2109 this Thursday.
• 24 years ago, the total value of the NZ sharemarket rose $1.25 billion to $39 billion ($52 billion in today’s dollars).A few days ago, at the end of October, the NZX’s capitalisation was $55.4 billion.
Dunno, but is middle class disappearing as a way of describing your status in life in NZ? Maybe it’s always been an oddity given it rarely pops up in common conversation thanks to our cultural aversion to the class system.
Anyway, middle class is still a big deal – and the cause of great angst – in the US.
The New York Times runs a regular feature Schott’s Vocab which seeks readers definitions of words. For middle class how about:
• Middle class is a state of illusion that makes you think you are not and will never be poor, regardless of your lack of assets and your levels of debt.
• Middle class (n.): poor
• Too poor to be rich; too rich to be poor
• The class that supports the poor and pays interest to the rich.
• The middle class spans the ever-growing gap between the rich and the poor.
• Middle Class is like a counterfeit Louis Vuitton purse: the illusion of wealth built on a lot of plastic.
What got Schott looking at middle class was the US political focus on this slippery to define group who are going through an existential crisis in the wake of the global financial crisis.
• Sarah Palin: “This election is about the little guy, the common man, independence, and the middle class – those forgotten and ignored for far too long, and now they’re fighting back. … They – we – are saying enough is enough.”
• President Obama: “Putting the American people back to work, expanding opportunity, rebuilding the economic security of the middle class is the moral and national challenge of our time.”
As Schott says the US middle class play a “crucial role in electoral math”.
Middle class in not a common part of the NZ political lexicon, but those who are ‘Too poor to be rich; too rich to be poor’ for sure also play a big part in our electoral math(s).
But what do we call them?
This post has been boiling away for awhile.
It pretty much gets some thought every time I do a post when I’m hit by the dull uninspiring language I’m sucked into using to describe economic growth.
Words and images are powerful beasts if they’re attached to vibrant, relevant and exciting ideas. I’ve found heaps of these ideas in the economic growth arena, but the life is crushed out of them by the words we use to describe them.
I’m not ignoring the fact that one person’s exciting idea is another’s crap one. However, most NZers have no fundamental problem with economic growth, as in they’d rather have it than not. It’s just that they’re not very enthused and that’s got a lot to do with the way it’s being sold.
Basically we need a new economic growth lexicon.
“Economic growth” as a way of describing our goal is both polarizing and dull.
.
There are negative connotations around both words. Economic, well there’s always been an public perception problem there, and growth is increasingly seen in cost terms rather than benefits.
Put the two words together and you’re pushing sh!t up hill.
The same problem applies to chunks of the way the pro-growth debate is couched:
• Wealth
• Productivity
• Gross domestic product per capita.
BigCake reckons anyone trying to sell economic growth to growth-sceptic Kiwis is going to fail if they solely push these buttons.
The (in PR speak) framing is just wrong:
• The majority of us are more interested in lifestyle than wealth
• Productivity improvements we have made have come from working longer (at the cost of lifestyle)
• GDP per capita – see lifestyle.
Governments have tried to sex up the issue with “economic transformations” and “economic agendas” with pretty dismal results in terms of rallying the troops.
So how do you frame the economic growth issue.
One word BigCake has always liked is progress. Definitions:
• Gradual betterment, especially the progressive development of human kind. (Merriam Webster)
• Advance or development, especially to better state (my old Pocket Oxford).
But that word has become old fashioned and a little bit political. It’s probably why it appealed to fellow blogger Policy Progress – a great word with a political subtext.
For a long while I think it was a powerful word for New Zealanders. It was a common theme in the first Labour Government’s thinking.
Some of its power came from the suggestion that progress was inclusive – everyone benefitted.
But it probably began to lose its power around the time people started saying ‘you can’t stand in the way of progress’. Then it was clear there were some losers.
Part of the problem is we now live in a much more complex, fast-moving, interconnected world. Finding an inclusive and non-weasel word or phrase to describe economic growth, that’s not so general that it becomes meaningless, is tough.
BigCake can’t think of one.
But I reckon part of the trick is to move away from having the economy as the central (and sometimes only) focus of what we want to achieve.
It’s more than that.
So…any suggestions?
I’ve not made any comments on the savings issue lately because I just haven’t had the time – well to post on anything actually.
I played a small role in the preparation of Treasury’s savings Discussion document – helping out with ideas for presentation and structure of the document.
A lot of the debate that preceded and followed its publication I think missed the point, or to be precise the big picture. It focused on the how we save rather than why we need to.
This was captured in the title of a speech, “Better Saved than Sorry” given by the Secretary to the Treasury John Whitehead back in 2007.
In it he said:
“Our judgement for further or stronger action [on saving] rests on a least-regrets approach in light of data uncertainties, macroeconomic imbalances, and the possibility that individuals are basing savings decisions on long-run expectations that could turn out to be mistaken.”
And that was before the Global Financial crisis.
One recurring BigCake theme is that size matters in economic growth.
Geography has delivered NZ a crap hand – we are a distant spec on the world’s consumer, financial and business maps and that seriously hurts our export businesses.
And this costs us heaps – an estimated 10% of our wealth generating potential according to the World Bank. That’s nearly $14 billion a year or the combined annual revenue of NZ’s big four oil companies.
So a shitload.
Anyway Southland – from an Auckland perspective – is a distant tiny spec on the nation’s rugby map, but somehow the little poor guys got up to beat big rich guys last week.
It’s something Southland have been doing week after week, except for a slip up against another little guy, Northland.
Phil Gifford in yesterday’s Sunday Star Times offered four reasons to explain how this was done:
1. The Southland team has heroes
2. The team shares its success
3. They keep their feet on the ground
4. They out perform expectations.
BigCake could add a few himself. Southland:
5. Make the most of the little they have got
6. Focus on their strengths
7. Are aware of their weaknesses
8. Are well managed and well led
9. Are lucky.
Which all looks a hell of a lot like a recipe for success for the little businesses that could.
In sport – where we suffer from the same distance and size constraints as business – we seem to be good at getting this recipe right. I think NZ sits near the top in terms of national performances at Olympic Games.
In business? Not so much.
BigCake may have got this wrong, but Kiwis appear to think that the our climb out of the hole created by the Recession will be relatively quick and somewhat painless.
For sure the latest McDermott Miller consumer confidence survey showed a dip in confidence, but most respondents were pretty upbeat about the state of the economy in five years time.
It’s a hell of a long way out to be picking how you’ll feel, but is this being too optimistic? Could the recovery be a long one?
Tyler Cowe, professor of economics at George Mason University (more famous for his blog Marginal Revolution) says economies are generally slow to pull themselves out of recessions driven by consumers pulling their heads in on debt..
“It can take 10 years or more, and we are only a few years into this process. As long as the deleveraging is going on, is very hard for government to stimulate the economy successfully.”
The New York Times story where I spotted this piece by Cowe was headlined – “Not a True Recovery at All”.
That this type of Recession can be long and painful is not something that BigCake has heard much of at all – well not at all.
And it looks like Kiwis don’t believe it’ll be the case.
One thing though, long and slow may be good. A fast recovery would increase the danger of slipping into our old debt-fuelled spending ways.
But 10 years before we get to the “new” normal?
That’s going to be tough.
[Photo credit - Two black holes a mere 3,000 light years apart. NASA pic via Flickr]
Patience it turns out can make a hell of a lot of difference to economic growth.
And BigCake doesn’t think Kiwis have been a particularly patient bunch. Off the top of his head he can think of a number of examples of Kiwi impatience:
• Our poor savings record.
• Our attitudes to R&D – ‘hell, it takes 10 years to pay off’.
• Little strategic planning by businesses.
• The 3-year election cycle.
• The state of our infrastructure – rundown because someone figured that they couldn’t afford to invest ‘today’ but maybe “tomorrow’ someone else could.
• Our equity market’s high dividends (by world standards) as opposed to reinvestment in a company.
So I reckon we’re pretty bloody impatient. And as a state of mind that’s likely to be a downer on long-term sustainable economic growth. The superior performance of northern (Protestant) Europe versus southern (Catholic) Europe is an example. Asia is a more recent one.
But maybe the Global Financial Crisis has made Kiwis more patient.
We’re saving more and we’re investing in infrastructure. The All Blacks, the impatient chokers of yester year, have become deadly masters of playing the long game.
Patience, or its “alter ego impatience”, is a key factor shaping when, and if, we decide to “save or spend, trade or invest, work or quit, stick or twist, says Andrew G Haldane, Executive Director, Financial Stability, Bank of England.
In a great paper given earlier this month, he says “As such, patience has important implications for the evolution of economic and social systems”.
Patience of course generates savings to finance investment by companies. The resulting capital is then the main driver of future goods and services.
Haldane’s paper brings together lessons from economics, history, psychology, neurology, sociology to assess patience and its implications for economic and financial systems.
He says evidence points to two evolutionary paths:
• Patience becomes self-reinforcing. For example, financial liberalisation may encourage patience and improve choice, unlocking growth.
• Impatience is self-reinforcing. Financial liberalisation can also unlock impatience, generating over-trading and under-investment.
China, for example, appears to be proceeding along the latter patient path.
“For countries which have already liberalised, the choice is how to promote patience while harnessing impatience. These are real public policy choices.”
Other great Haldane quotes:
• “…we often hear ‘double or quits’. Such gambles for resurrection can explain the ruin of bankers as well as gamblers, including most recently Lehman Brothers and Bear Stearns.”
• “Self-destruction, like self-improvement, is part nature, part nurture. Finance has both these raw ingredients. Most traders’ brains harbour the impatience gene. Often, they harbour little else.”
• “Consumer credit is one means of bringing forward tomorrow’s spending to today. In that sense, credit addiction and drug addiction are close relatives.”
• “Just as patience can ward off great disaster, impatience can ruin a whole life. Generations of dieters and addicts are testament to that.”
US researchers have come up with a magic level of annual income – US$75,000 or NZ$100,000. Earn more than this and you’ll see little improvement in your emotional wellbeing, such as having time to spend with loved ones, avoiding pain and disease and enjoying leisure.
And you’ll be increasing your chances of being a smug arsehole.
The study was done by Daniel Kahneman and Angus Deaton from the Center for Health and Well-being at Princeton University. The $100,000 number of course relates to the US.
Their findings were based on analysis of more than 450,000 responses to the Gallup-Healthways Well-Being Index, a daily survey of 1000 US residents.
The pair point to two different aspects of wellbeing:
• Emotional – the quality of your everyday experiences such as joy, stress, sadness, anger, and affection. Basically what makes your life pleasant or unpleasant.
• Life evaluation – what you think of your life. [ie Struggle St or smugness] Income and education are big factors here.
When plotted against income, they say life evaluation rises steadily. Emotional well-being also rises with income, but grinds to a halt beyond an annual income of US$75,000.
“Low income exacerbates the emotional pain associated with such misfortunes as divorce, ill health and being alone.
“We conclude that high income buys life satisfaction but not happiness, and that low income is associated both with low life evaluation and low emotional well-being.
“What the data suggest is that above a certain level of stable income, individuals’ emotional well-being is constrained by other factors in their temperament and life circumstances.”
Kahneman and Deaton say if measures of well-being are to be used to assess human welfare and to guide policy, their findings raise the question of whether life evaluation or emotional well-being is better suited to these aims.
There’s been a long standing sh!t fight over housing and saving.
But at the bottom of the saving debate BigCake reckons is our relative impecuniousness. Kiwis don’t save enough because we haven’t been able to afford to (or at least we haven’t been willing to stop spending on things we want rather than need).
Savings of course being what remains of your pay packet after consumption.
On one side of the housing war zone, there’s a group that says ‘no worries’ about Kiwis piling their money into housing, after all they’re saving for the future and they’ll eventually be able to cash up.
On the other are those who say our love affair with housing crowds out investment in more productive exercises.
Treasury’s Saving in New Zealand – issues and options discussion paper probably gives ammunition to both sides.
Housing is the Mr Blobby of NZ investment. About 95% of our net wealth is tied up in our homes, investment properties, baches etc much more than in other countries Treasury looked at. The next highest are Australia and France with around 65%.
In the US it’s less than half.
But housing as a percentage of disposable income, at 5 times disposable income, is pretty average – about the same as Australia’s, less than for the UK, France and Italy but more than the US and Canada.
One thing not mentioned is that our houses are often crap (at least compared to the above countries) so we’re paying more for less.
Anyway, Treasury’s interpretation of the above is that we’re not over investing in housing because our stock of housing wealth is not unusually high. “Rather it is more a reflection of the low rate of household saving more generally.”
Which means we spend more than other countries? Don’t think so.
It’s just that after paying for our housing and consuming, we have less left over to save.
Later in the discussion document Treasury does ask whether NZ households’ relatively low stock of financial assets is a reflection of an ‘over investment’ in housing or a reflection of the low rate of household saving more generally?
Could even be a bit of both.
Treasury agrees with arguments that investment in housing has had preferential tax treatment compared with investment in debt or equities, leading to our preference for holding wealth in the form of housing rather than financial assets. “Even so, these tax distortions do not explain New Zealand’s low rate of national saving, other than to the extent that the wealth (or collateral) effect from rising house prices encouraged more consumption at the expense of saving.”
High debt, Treasury says is the counterpart to very low levels of private saving. “New Zealand’s household debt levels doubled in the last 15 years as a fraction of disposable income. They are now around 160 percent of disposable income.”
Debt is one of the coping mechanisms we use to make sure we can keep up with our spending expectations. I’ve posted before on the tricks consumers in Western countries have used to overcome the fact that their incomes were not keeping up with all the goods and services they were producing.
The Spirit Level’s take on the consequences of inequality is proving a great way to frame a bunch of issues, including health.
Maori Party MP Rahui Katene’s bill to take GST off health food (including fruit and vegetables, breads and cereals etc) got dumped by Parliament yesterday.
Katene I think presupposes that the poor don’t spend as much on healthy foods as the more wealthy because they can’t afford to do so.
The Spirit Level (which I have posted on before) suggests this is not the whole story. It’s not only the absolute amount of money in a food budget that comes into play when explaining the poor’s poor health, it’s also their relative wealth or status.
What’s driving the poor to not eat enough healthy food is not just that they can’t afford it, but also a raft of psychological issues arising from feelings of not being valued, feeling inferior etc.
So making healthy food cheaper may not make as big a difference as the Bill’s backers had hoped.
You’ve got to go to the underlying causes of why the poor have higher levels of heart disease, cancer, lung disease, depression etc. And that, say the book’s authors, is income inequality.
“…in rich developed countries … material living standards are now high enough to have ceased to be important direct determinants of population health.”
It’s social status, social networks and stress in early childhood – “psychosocial factors” – that are increasingly important.
I still haven’t read the whole book, so haven’t seen whether the authors try to weight these two effects – what we can afford versus our relative wealth.
Anyway, they say numerous studies show the same thing – “…for most kinds of ill-health, low social status has a clear impact on physical health, and not just for people at the very bottom of the social hierarchy.
“There is a social gradient in health running right across society and where we are placed in relation to other people matters; those above us have better health, those below us have worse health, from the very bottom to the very top.”
The book has bunch of graphs to back this up. All of them show a direct relationship between income inequality and life expectancy.
The level of health expenditure doesn’t make such difference. The US spends more than twice as much on health as most of the other 23 countries the book looks at, but the highly unequal US has the fourth lowest life expectancy.
So understanding our social issues is a bit more complex than BigCake for one first thought.
But may be there’s a simple fix – reduce inequality.