Working Papers

What’s Not to Love About Dutch Disease?

Judith Sloan wants to know. I make similar arguments here.

posted on 12 August 2010 by skirchner in Economics, Financial Markets, Fiscal Policy

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I read your article and I agree to a point. Yes, the intention of the future fund was intended to pay for increased costs arising from an ageing population. But given a business cycle, isn’t it prudent to save a small portion (one or two per cent of GDP) in the good times to help pay for the bad times.

The only answer to that would be to repudiate stimulus in the bad times (I think an argument you have made before and one I almost agree with). But what about an economy at the zero lower bound?

If you give surpluses back in the form of tax cuts, you run the risk of a structural deficit.

Doesn’t it make sense for the ageing population to pay for themselves (ie have the surpluses arising from their economic activities now saved to pay for their entitlements later) rather than depend on fewer workers to pay for more retirees.

Posted by .(JavaScript must be enabled to view this email address)  on  08/13  at  01:43 AM

You can run a structural surplus without a SWF. Just hold it on deposit at the RBA where the return is likely to be just as good on average as anything David Murray can engineer.

The ZLB is not a constraint on monetary policy given that there is no in-principle limit on quant easing.

An aging population can pre-fund as much of their retirement as they want through private saving. The budget should not be seen as a retirement fund.

Posted by skirchner  on  08/13  at  04:08 AM

If I understand your reply correctly, it is the exposure to risk which is your issue with sovereign wealth funds. Fair enough, given the Chinese and Singaporean SWFs buying into U.S. investment banks prior to the GFC and the FF here in Australia suffering as Telstra’s biggest shareholder when the NBN was announced. I take your point on investing risk free.

But haven’t I read you commenting on surpluses before as a kind of revenue hoarding? That is more my point. Surpluses, in the good times, are necessary to consumption smooth given the business cycle.

I also think the jury is still out on quantitative easing though. In theory it is fine, but it hasn’t expanded credit to a significant degree in the U.S. It hasn’t closed the output gap in the U.S. or Japan even allowing for substantial lags. Admittedly, I don’t have the data to support these assertions, but I think they are reasonable given anecdotal evidence. 

And, while I am a firm believer in encouraging private saving, I’m not sure I would be too far from the mark in saying the majority of people would systemtically under-save for retirement. I agree that the idea of a government compelling people to forego consumption now and save (either in the form of higher taxes for public saving or super for private saving) is not a nice one, but if we can see past that the transfer of private to public saving is not a big issue. Compulsory super is paternalistic while retaing an element of choice. Taxes for public saving is just paternalistic. But unfunded retirements in an era of longer lives and increasing health costs is unthinkable.

Finally, I really enjoy your blog. Thanks for keeping it up.

Posted by .(JavaScript must be enabled to view this email address)  on  08/14  at  04:54 AM

My concern with SWFs is that you don’t want investment mandates being politically determined(eg, look at the Future Fund’s allocation to Telstra).

We should aim for a structural budget balance, which would result in cyclical deficits and surpluses from time to time.

QE isn’t a cure all, especially when there are real factors depressing growth. It is wrong to think that the authorities can just dial-up any growth rate they want through quant easing or any other measure. If they could, why would we ever need to experience a recession?

I don’t buy the idea that people under-save and super is not the sum of all retirement saving, so it is wrong to judge the adequacy of retirement incomes just based on super.

Maybe some people just don’t plan on retiring or are just not planning on living that well in retirement?

Glad you like the blog.

Posted by skirchner  on  08/15  at  07:32 AM

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