Why Interest Will Return To Student Loans

I think interest will return to student loans sooner than anyone with a student loan wants to acknowledge.

Let’s recall the two opposing forces in New Zealand politics:

  • baby boomers who have frittered away their life earnings and expect state handouts until death
  • younger generations who have been exposed to a user pays society from birth and expect nothing but a bill

Acknowledging these two opposing forces, let’s think about how democracy works for these two teams:

  • baby boomers turn out to vote in high numbers because they have to
  • younger generations turn out to vote in low numbers because they don’t care about a system that doesn’t care about them

What this means is that, over time, the baby boomers will keep voting themselves privileges at the expense of younger generations.

John Key has cynically acknowledge this. Even though he claims interest on student loans being reinstated would be political suicide, he has taken the drastic step of saying he would resign as Prime Minister rather than tinker with National Superannuation.

NZ Super is the “third rail” of New Zealand politics. It can never be touched because the people who vote would go mad.

Interest on student loans, however, is a second-order issue. It affects the grandkids who can’t be bothered to call their grandparents anyway.

Far less likely to get massive political opposition aside from platitudes spouted by the spineless opposition benches.

Interest will return to student loans. And it sure won’t be pretty.

My generation is the cattle that baby boomers will keep milking until they are all dead. Then, there won’t be anything left for my generation because we will have become Greece.

Entrepreneurial Trial And Error

The entrepreneurial process involves a lot of trial and error.

The reason the economy won’t recover is that it’s very difficult for non-wealthy people to start the “trial” part of the process and New Zealand’s sick culture punishes the “error” part of the process far too much.

I’ve made my fair share of entrepreneurial mistakes, but the lesson I have drawn from them is that New Zealand is the worst place in the world to do business.

No one wants to talk about how the theory of how entrepreneurs can create new jobs runs completely counter to how the baby boomer elite have pulled the ladder up after themselves in many industries.

When wages are low, the cost of living is high and access to credit is difficult, we’re all getting the economy we deserve.

New Zealanders hate entrepreneurs. They hate people who stick their head above the parapet. They’re like crabs trying to stop the other crabs from climbing out of the barrel.

Entrepreneurial trial and error is the only way we can catch up with Australia. While there are definitely some Kiwis doing well and delivering great product or service innovations, we need literally thousands more of them.

Until the barriers to entry are lowered and rent seeking watered down, that’s not going to happen. And we’ll keep wondering why over 175,000 are spending the holidays unemployed.

Increase The Retirement Age Now

 I don’t think baby boomers realise what current trends in emigration, average tax paid, average transfer payment received and attitudes towards older people will converge to.

The inability of people to perform basic math means that we’ll never have entitlement reform.

The government will borrow from overseas to pay people who are no longer working.

Many of these people never worked a day in their lives. Many more will live to a very old age and receive far more in taxes that they or their children will ever pay.

And wealthier couples who sell their $800,000 villas in Auckland and retire to the Bay of Islands will keep getting superannuation even when they could live comfortably off the interest or dividends their capital would provide.

This isn’t about political ideology – it’s a mathematical imperative that there are some restraints put on the exploding cost of superannuation before we turn into Greece.

But because we have cast our lot at the foot of universal suffrage, the political reality is that nothing will ever change.

It’s New Zealand, we’ve been on a trajectory of decline since the 1950’s and we’re never going back up the OECD rankings in anything.

The current level of Kiwisaver contributions are so pathetic that the relief they will provide to future governments in reducing superannuation payments based on the level of assets you have will barely dent the cost.

How can the 2020 government possibly reduce their debt or keep rolling it over through issuing more debt when faced with the likelihood of riots in the streets?

Get ready for lower living standards everyone! We’ll shoot through the Reinhart-Rogoff debt/GDP lower growth threshold faster than any other developed country!

Premature Tax Cuts Increased Japan’s Long Term Government Debt

Over at the Institute for New Economic Thinking there is a fascinating presentation by Nomura Research Institute Chief Economist Richard Koo. He shows what happened when Japan prematurely cut taxes in the late 1990’s and early 2000’s.

 

The reduced tax revenue because of the premature changes in Japanese tax policy was JPY103.3 trillion. In 2012, Japanese government debt stands at almost JPY1,100 trillion – so some 10% of Japanese government debt can be traced back to these cuts. While Japan would still be running a budget deficit and have substantial government debt, any possible reduction in these two things is arguably good in the long run.

I’m interested in exploring whether all of the negative things I’ve read about Japan are true. Could they become Greece because of their enormous debt levels? What impact will their declining population have on their government finances? If big brands like Sony and Toshiba are making massive losses, what can that tell us about Japanese productivity and innovation levels?

Tomorrow I’ll be looking at the effect of the changes in tax policy in New Zealand since 2005 and their impact on the government deficit. Have tax cuts and Working for Families accelerated the increase in government debt? With unemployment at a 13 year high, were tax cuts really a solution for creating new jobs?