READER REPORT:

Focus on the core problems

EDUARD VAKS
Last updated 05:00 30/11/2012

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Here are a few ideas, in no particular order, to help solve the economy's problems:

Property

I have been hearing a lot about how a capital gains tax will stop New Zealanders investing in property and move much-needed funds into more productive sectors. I disagree, because it doesn't address the real problem, which is being able to borrow at very low equity rates.

There are plenty of places in the world where there is a capital gains tax and property prices are higher than in New Zealand. Rental property is not a good return on investment but people don’t seem to care it is seen as secure. Any capital gains tax that does not adjust for inflation is unfair, if you buy a house that costs 10 donkeys and sell it for 10 donkeys at a later date you have not made any real profit even if donkeys cost twice as much.

When a typical person goes to buy a house they go to the bank and ask, "how much can I borrow?", the bank says, "well, you have $X so you can borrow $Y". They really don’t care if you will ever pay it off as long as you can meet interest payments. So now they now go and are willing to spend $Y. Everybody does this so the price goes up to the value people can afford to borrow. This is even worse for people with investment properties because as soon as their properties increase in price, they can go out and buy more since the rent they will get will cover interest.

How do you stop banks lending money out on low equity? One way would be regulation but I disagree with that, the Government needs to simply state that it will not guarantee any bank that lends below a particular threshold. People would be much less willing to put deposits into such a bank so forcing them to comply.

This mechanism would truly reduce house prices, and that is why I believe is not being mentioned. But in the end what negative effect does having low house prices have on New Zealanders if you are selling and buying a new one? Unless you're downgrading, it's positive. If you live in a house, none. You still have a house to live in. If you are giving it to your children it's positive. If you have more children than houses they don’t have to pay as much for their houses. The people who really benefit from high house prices are the lenders that charge interest on the lending.

I have also heard the argument that if we don’t allow low equity borrowing you are disadvantaging poor people. This is wrong. You are stopping them temporarily from going into a lifetime of debt once property prices lower their ability to borrow will be increased and they will not have to spend their life paying the mortgage off.

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We are very inefficient in our use of stuff. If we just shared our toys then we could consume much less, while extracting the same utility.

Stuff

How many of us own items that we use once in a blue moon, and keep them because it might be useful one day. It may be a drill or a wheel barrow, lawn mower, cake tins etc. Hire places are expensive to the point if you are going to use it more than a couple of times you might as well buy it. I think if we shared these things locally expenses would reduce and we could also buy higher quality products. This does require trust and a mechanism of tracking stuff but we now have the technology.

Knowledge

Even more important than sharing things, sharing knowledge can help us grow as a country. With the internet we now have the ability to share knowledge with the entire world efficiently. We need to stop trying to protect a few vested interests who say knowledge is theirs and share it with the world as soon as practical. As technology develops, it should be shared.

I have faith that the market will adapt to any regulation we give it, the free market is nothing if not adaptable.

Let things fail, we will recover

Greece will recover, it will not just disappear because it is bankrupt, the people who lent money to Greece will lose. Enough with throwing money at an economy that is failing. One of the features of a market is that it punishes bad investments, and the people who lent money to Greece have made a bad investment. Maybe next time it will stop people lending to people who can’t afford to pay it back. The other European economies should not be paying.

Stop being blinded by money

Our main metrics of how well our economy is doing is based on money. This is an an OK measure, but we have to remain focused on what our true goal is and it is not to make money.

For me it is to live in a reasonably fair society that people have a reasonable chance to succeed. Where there is a safety net for everyone to live a reasonable life, but still a motivation for everyone to try to do better.

Imagine a world where we don’t have foreign countries to rip off in our old age pensions. We all save $1,000,000 for our retirement but there are only two people working. Well, it doesn’t matter how much money you have, the problem is not enough is being produced. We have to invest in our children make them more efficient since each of them will have to support more since we have an ageing population.

Another example is moving women from the home to the workplace. Let me say I believe women should have the choice and I have nothing against women working. The point is that when they were at home they were productive too, it was just not measured as part of the Gross Domestic Profit. I recently read how if Japanese women returned to the workforce then it would increase Japan’s GDP. It probably would, but there is no way to measure how much would be lost from the people who love their children not bringing them up.

My suggestions may not actually increase GDP, but that is not what is important. It is about producing and using the things that we have more efficiently and living better lives. The point is stop trying to manipulate the numbers and actually focus on the core problems.


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