I'd add one overarching point to Matt's, which isn't original to me but does apply. The case for markets never lay in their perfection but rather in the relative imperfection of alternatives. I'm teaching intermediate micro this semester. We go through the welfare theorems, and they're beautiful. We know that they don't apply generally. However, it's really hard to improve on the imperfection of markets. Both markets and policies are imperfect instruments. Markets fail relative to blackboards, but regulatory solutions often fail relative to the real world market alternative.
Hickey's patchwork of proposals gives a small chance of improving short term outcomes but with longer term risks for the overall economy. Nolan, linked above, highlights most of the risks. Here's one I find worrying:
The NZ Super Fund [the government's "lock-box", invested in broad markets] is already making great strides to lift its proportion of New Zealand investments from its current 20 per cent to the 40 per cent recently mandated by the Finance Minister Bill English.Because he personally has lost faith in modern portfolio theory, he wants to force all of us to invest locally. Yeah, things have been rough for the last few years. But the proposal here seems pretty worrying.
What's wrong with making it more than 60 per cent? Do we really believe all the modern portfolio theories about global capital markets and investment returns over the long run? I've certainly lost the faith and would much rather the money was invested here than in some US dollar denominated asset that's about to be devalued sharply.
KiwiSaver [a tax preferred individual retirements savings vehicle] funds should also be subject to a government mandate to invest locally. Just over 40 per cent of the NZ$5.5 billion invested in KiwiSaver has been invested overseas.
It should also be closer to 60 per cent. It may not be easy or cheap for fund managers to find investments here. But that's what they're being paid for isn't it? The real danger with KiwiSaver is we force more savings to fix a local capital shortage and the majority is simply shipped offshore because it seems easier and cheaper to do it.
If there is ever going to be a move to compulsion then there has to be a quid pro quo for that effective public subsidy to the funds management industry: keep it local.
Again: The NZ SuperFund basically exists to help government top up its superannuation payments when the pay-as-you-go part from taxes comes up short relative to obligations. We have nowhere near a fully funded government pension system. When are tax revenues likely to be in significant shortfall relative to pension obligations? During domestic recession. When are domestic portfolio returns likely to be at their worst? During domestic recessions. So we'd have to liquidate assets at the bottom of the market. Now, maybe we'd be able to get by with divesting only the foreign part of the portfolio during a domestic recession and save the domestic part for a more solid ongoing stream of payments. But given how heavily exposed the NZ government is to domestic risk, I'd have thought having next to no domestic assets in the NZ SuperFund would be optimal.
If KiwiSaver were compelled to invest locally, I'd exit KiwiSaver: my domestic exposure through housing is far too great a part of my overall portfolio. The tax advantage of KiwiSaver isn't worth taking on additional domestic risk for lower overall returns. But Hickey wouldn't allow that. He sees a domestic investment mandate as being compensation for compulsion. I suppose it depends whether you weigh at all the interests of the folks whose money's being taken.
