The NZ Herald's Editor has declared its journalists will be promoted or fired on the basis of factors like how many clicks they get on their articles. Yes, the Herald is now officially "click bait". We're trying to avoid the mistake of writing shallow nonsense at this Blog. So on that note, here's a somewhat techy economics note. It may seem obscure, but could in fact imply that a major part of National's attempt to increase investment in NZ, and thereby raise productivity, will fail. Here goes. A country like NZ, where the household savings rate is low, may still be able to have high levels of investment by attracting foreign savings and foreign investment. That's what National and ACT are saying they can achieve by removing lots of regulations around foreign investment and by holding the Invest NZ Conference in a few weeks time. There is just one hitch. It turns out, on average, that countries have been remarkably unsuccessful at doing so, even when they do remove restrictions and make it easier for capital to flow into the country, like the Coalition is now doing. In the "real world", it turns out that in countries with high levels of investment, it is more often than not financed by domestic, not foreign, savings. This is sometimes called "home bias".
That is, people's savings tend to be invested locally. It is called the Feldstein-Horioka puzzle and is famous, at least in international economics. Look at your own investments - they're probably biased toward NZ. Look at one of the richest men in the US - Warren Buffet. Most of his investments are in the US. He's a firm believer in the American dream, often saying to his shareholders that one should “never bet against America.” He ain't attending the Invest NZ conference. Ain't interested in the PM's marketing pitch, power point slides, and glossy brochures. Buffet knows America - he doesn't know NZ. Buffet has a MacDonald's Gold Card. Will PM Luxon tell potential foreign investors about the Treaty Principles Bill? Has he invited Te Pāti Māori to present at Invest NZ? Buffet ain't going to spend the time learning about the Treaty and how it may affect his investments, although he would have to do so since that issue will affect returns. Horioka, the puzzle's Japanese inventor, visited Auckland University's Econ Department, mainly to see my colleague, Debasis Bandyopadhyay, last year, and I invited him to dinner. He's former President of Japanese Economic Association & Director of the Asian Growth Institute. His co-author, Marty Feldstein was his Harvard PhD supervisor and a former President of American Economic Association & Chair of the US President's Council of Economic Advisers.
Here is the graph (below) plotting domestic investment against domestic savings, using World Development Indicators (WDI). It is strongly upward sloping: the more locals save, the higher investment is in their own country. Should they be lousy savers, they cannot rely on domestic investment being financed by foreigners (in which case the graph would be flat). It is for this reason folks like me support increasing our national savings rate. Although PM Luxon & Finance Minister WiIllis now compare NZ to Singapore, they've omitted levelling with the Kiwi public about the key reason for Singapore's success: namely an exceptionally high domestic savings rate. In NZ we tax & spend about 34% of GDP. In Singapore they tax about 17% of GDP - the other 17% goes to personal savings accounts that help pay for retirement & health-care (Their corporate tax rate is half ours). Those funds are saved in the Central Provident Fund. The PM & Willis & their libertarian mates at the NZ Initiative, as well as Luxon's personal economics adviser, Matt Burgess, oppose Singapore-style mandatory savings accounts, even though they are the reason behind its exceptionally high standard of living & investment rate. So although our top two politicians have never heard of the Feldstein-Horioka Puzzle, and would no doubt label it a bit of silly academic economics (both have shunned the economics profession since being elected) it is actually an observed fact which may be the undoing of the Coalition's ambitions.
