I’m working on a longish piece on how to pay for the global financial crisis, and it seems like a good idea to deal with some side issues separately. One of the standard post-crisis responses of governments, i has been to increase the age at which people become eligible for public old age pensions. This change is likely to flow through to other policies, for example by shaping the presumptions around the tax treatment of private retirement income.
I want to step away from these financial positions and ask the question: does it make sense, in general, for people to retire at older ages than in the past? For those who want the “shorter” version, my answer, on balance, is “Yes, at least in Australia”.
There are two main factors that should influence the age at which we retire. First, improving productivity means that any given standard of living can be achieved with less work, and we would expect at least some of this benefit to take the form of an increase in leisure, including more years spent in retirement. Second, and going in the opposite direction, we are living longer and (because of higher education levels and increased difficulty of entry to the workforce) starting work later[1]. So, with a fixed retirement age, the number of years out of the workforce is increasing, while the number in the workforce is decreasing.
At least in the Australian context, the second of these factors is dominant. In the last 30 years, the expectancy of remaining life at 60 has risen from 18 years to 24. I’ll guess that average age of entry to the workforce has also risen by about 5 years, say from 17 to 22. That implies a “typical” 1980 life course for full-time workers retiring at 65 of 48 years with 30 years pre- and post-work. The comparable figures now are 43 and 41. So, a proportion of the productivity growth in this period has been used to reduce the proportion of lifetime years spent at work, from over 60 per cent to just over 50 per cent.
By contrast, at least for full-time workers, there has been no reduction in annual hours of work. Official full-time conditions were fixed in the early 1980s at 38 hours/week with four weeks annual leave + public holidays and some long-service leave. That hasn’t changed, but there was a big increase during the 1990s in people working longer hours, and that’s been . Given that prime-age adults also have responsibility for children, this doesn’t make a lot of sense.
Those who think employment conditions reflect voluntary bargaining might argue that this apparently unsatisfactory outcome must reflect the preferences of workers and employers. I don’t buy this, at least as far as workers are concerned. But even if it were true, preferences are affected by policy settings such as pension ages. Leaving the pension age unchanged when life expectancy changes pushes people to work harder since their required savings increase. This is, on the face of it, a bad outcome. So, it makes sense for public policy to encourage later retirement, and discourage ultra-long working hours.
fn1. This assumes that time spent at school/uni should not be regarded as “work”. There are some complex issues here I’ll try to discuss more.
John Quiggin 
MH@4 and Billie@16.
Missed your detail in my scan. Agree with your sentiment.
@Ed
“I recall reading an interview with a German auto worker who after hearing that the retirement age had been increased to 69 years said to the effect “Why would they increase the retirement age to 69 years when a man of 50 years has difficulty coping with this physical work ?”
The mandatory retirement age in Germany was raised from 65 to 67 years (not 69) in early 2007 (ie before the GFC).
Apparently, there are some minor concessions for people in some occupations. But public servents are not allowed to work beyond the mandatory retirement age.
http://www.dw-world.de/dw/article/0,,2379004,00.html
It is hard to judge post-65 labour force participation rate if access to occupational and state pensions requires that your quit your job.
Where I am, most retirement savings is through defined contribution rather than defined benefit schemes. Eligibility for access is related to reaching a certain age not on employment status or quitting a long-term job. Labour force participation of seniors is much higher because retirement savings access is decoupled from quitting your current often long term job.
USA has about 100 trillion in unfunded liabilitys , and its cost will be borne by future generatons
I can not see how one can answer Host’s query without knowing oz Govt capacity to then pay , unless one does not care if a resultant Govt Debt is passed on to then curent workers , with ita neg consequenses Even aleged ‘self funded’ retirees if they live beyond average life age then may become a Govt Liablity , so evn that Group can hardly claim they should be able to retire whenever they want to seeing at a point it may be tax payers money financing them
In long term , supa guarantee being gradual increasd from 2013 to reach 12% from present 9% will giv a better retirement base for those workers entering workforse but that is a longterm soluton , which would be a LOT bettr had Howard increased Keatings 9% rate at all during our 12 years boom but Howard wasted boom moneys instead on midleclass welfare polisys cynically just for votes
It however does seem econamicly odd in productivity terms that fixed retirement forses some of our most capable & experienced workers/managers with all there accumulaqted wisdom to be lost simply on a age basis alone , a waste personally for themselves , there busines and our Country
@stockingrate
says
“This would not have been the case 20-40 years ago- so in my assessment the standard of living for many Australians has fallen in very important ways.”
and Chris also noted that prolonging the working lives of people is attempting to fix a symptom rather than the cause of capitalism. Some commenters have suggested we cannot exert too much pressure of bovernment budgets expecially given the size of deficits now – yet very few have joined the links to initiatives suggested by other threads – like the proposed rent resource tax.
Every country appreciates its entrepreneurs and business leaders but many countries also may need to start to look at the extraordinary benefits granted to largish business firms over the past two / three decades under policies of lower taxes, lower regulation and free movement of capital. In reducing the tax burden for businesses and entrepreneurs and also in granting “middle class welfare” have we created a leak in the bucket of government finances that requires a great many more people to be forced to live with a lower standard of living (and thus ultimately to a lower ability to contribute).
The initiatives needed should address the cause of “lower living standards” generally, rather than to patch over symptoms by prolonging people’s working lives. Some clearly need to pay more income tax in this country but I suggest it is not the average working Australian. That is why the rent resources tax is a good idea but it is a first step only and other large businesses should examined as well. The failure of trickle down is at the very heart of the problem. There is a large problem in many countries budgets (which will not be corrected by extending residents working lives) which is the culmination of policies which allowed profits to freely move untaxed around the globe.
Alice,
Any attack on capitalism these days is a direct attack of the retirement savings of ordinary workers.
We live in the age of pension fund socialism.
The majority of equity capital is owned by pension funds and other collective investment vehicles competing for the savings of ordinary people.
Much of the rest of physical capital is owned by workers through home ownership
In the age of human capital, 70-90% of all capital in the economy is human capital. The notion of unskilled workers labouring away with the capital supplied by the bosses is 19th century throwback.
The rentier rich has been long replaced by the working rich. They make their fortunes in their own life times – sometimes as business entrepreneurs, sometimes through rent-seeking.
It is also the age of specific human capital, with a proliferation of technologies and products. The rising specialisation of firms and their production inputs has forced firms to try harder to find those inputs that suit their needs best. Management has the task of finding the right inputs. The role and reward to managers has therefore risen.
An aging society will lead to a rebalancing of political power more into the hands of the elderly. This rebalancing will lead to more efficient taxes, more efficient spending, a shift in political power from those taxed to those subsidised, and shifts in political power among taxed groups.
The growth of a politically articulate middle class explained the growth of government in the 20th century. This growth was tempered and streamlined after 1980s through tax reform, deregulation, asset sales and other state sector reforms because the deadweight costs of growing taxes and regulation was provoking too much resistance from the taxed and regulated groups.
Government size seems to have been constrained in the past primarily by its ability to raise revenue. Growth rates in the new century appear to depend on factors constraining government’s ability to continue to expand the tax base.
@Cavitation
That’s really unfair.
If like me, you were drilled from high school to expect to work from finishing university at age 21 until age 55 if you could work for an organisation with early retirement, it’s unfair to move the goal posts the closer one gets to the finish line.
There are plenty of ways of reducing the waste in our current super system. Get rid of financial advisors, avoid retail super funds, employ quality[not expensive or cheap] personnel in super funds management. Get banks and insurance companies out of the super fund arena – they are in business to make a profit – ergo members contributions are being eaten by profits.
An example of stupid investment decision by super fund. Queensland Nurses bought Mt Hotham and spent lost of money upgrading the resort. The skiers are well pleased but the super fund had difficulty finding a buyer with deep enough pockets to pay for all the investment.
Yes. I see we are in agreement for a change.
Governments’ important role in facilitating productivity is becoming appreciated more and more.
Constraints placed on the growth of government, and its ability to efficiently raise revenue to play its vital role, are likely to constrain growth rates in the new century. Fortunately, that is now less of a worry. All this once fashionable, low tax, laughter curve, supply-side nonsense seems to have finally gone the way of the dodo.
@Jim Rose
Jim Rose says
“We live in the age of pension fund socialism. ”
Just when I finally thought you had made a point I could agree with (alas not this one). Id like to counter with the comment that actually we live in the age of super fund capitalism Jim Rose and pension fund socialism has died leaving lots out of pocket in their old age.
We also unfortunately live in the age of share price bonus fund capitalism for people like mining executives (and other increasingly greedy fly by night bosses undisturbed and unconstrained by what they pull out of the company to remunerate a small elite) and its leaving increasingly less money for employees and income taxes and thus pension fund socialism for ordinary workers.
@Alice
Managerial slack troubles you.
It is possible to gather information on executive compensation as a share of the revenues of public companies. They are in their annual reports.
A common estimate of the pay-performance relation (including pay, options, stockholding, and dismissal) for chief executive officers indicate that CEO wealth changes $3.25 of every $1000 change in shareholder wealth.
If your hypothesis about managerial slack is true, the risk adjusted returns from more conservative investment strategies will outdo those with greater exposure to shares. I do not know the extent to with regulation stops you from being free to choose in your retirement savings vehicle and level of risk in your investment strategies. An important question.
This portfolio rebalancing will unintentionally but still very effectively stave capital to the mining and other sectors that mishandled the incentive conflicts and managerial slack you decry.
Mining sectors are more heavily populated with active investors and speculators so incentive conflicts and managerial slack will be uncovered sooner because of the pure profits of superior alertness to the same and buying and selling share, futures and options accordingly.
@Jim Rose
You assume the market is unnaturally intelligent Jim Rose and you also assume shareholders have more power than they do to rid themselves of managerial slack and excess, even if they dont want to rid themselves of shares in the company.
@Alice
The market is a process that gets by with a minimal amount of information.
People can watch a few pointers to learn what they need to know to adjust their affairs. Those few pointers are a few prices that signal through profits and losses if they need to buy more or less, innovate in what they do and look for new sources of supply. They do not to need to know why to do what needs to be done.
The discovery of corporate governance devices that control incentive conflicts between owners and managers are an entrepreneurial opportunity for pure profit. Entrepreneurs profit from developing internal controls that assure current and prospective investors in managerial firms that their interests will be protected and share values are at less risk.
Limits on self-serving discretionary behaviour by directors and managers include:
• division of decision management rights (initiation and implementation) from decision control rights (ratification and monitoring)
• performance-based compensation to motivate managers to act in the owners’ interest such as giving managers stock options staggered across time as a bonding device instead of cash bonuses;
• career concerns that tie the labour market prospects of managers to having worked in successful companies
• M-form corporate hierarchies to divide power and allow comparisons and improve monitoring;
• competition within the ?rm for top-level management positions; and
• Competition in the product market which assures that ?rms whose managers engage in too much discretionary behaviour will fail, costing the managers their jobs.
Changes in the prices of shares. loans and corporate bonds are the means by which capitalists have supreme control on the supply of capital to errant managerial firms. These prices are determined by speculations in the capital and money markets and decide how much capital is available for the conduct of each firm’s business and it creates performance and survival incentives to which the managers must adjust their operations in detail.
Capitalist-entrepreneurs steer capital to the better performing firms. Investors will not freely yield control of their assets to people who are not expected to act in their best interests.
I do not know the extent to which regulation stops you from being free to choose about retirement savings vehicles and formats including home ownership.
Regulatory capture is as common in retirement savings as it is elsewhere. Regulatory capture is inherent to corporate capitalism, which you support, and not to the free market, which you oppose.
@Jim Rose
Oh dear Jim Rose…perhaps you had better read this article….
http://www.smh.com.au/business/inefficient-market-theory-is-the-one-you-can-bank-on-20100604-xkkp.html
@Alice
Your points about managerial slack, if valid, should found a low-risk, high yield savings and investment strategy. You have your whole working life to profit from it.
You know of all these over-priced shares to avoid because of managerial slack, other under-priced shares because of better or even hands-on governance, and under-priced bonds because the risks of buying shares are under-estimated because of unchecked managerial slack. Long-run super-normal profits from buying and holding bonds are just going begging.
The risk facing you when investing to profit from managerial slack is managerial slack is common knowledge. Managerial slack was even known to a Scottish tax collector and second hand dealer in ideas when he wrote the Wealth of Nations in 1776.
There is a large literature on share price anomalies such as the January effect, the holiday effect and so on.
These anomalies disappeared soon after they were discovered because people profited from buying the under-priced shares, which eliminated the price gap.
Your hypothesis is a share price anomaly known for hundreds of years persists and has defied all human ingenuity to profit from attacking its cause: managerial slack.
The ageing of society will increasingly stave of capital to higher risk investments such as shares. The retired will want lower-risk and more stable returns on their nest-eggs, and these savings of the retired will be a more and more of all savings. Lifting retirement ages will make little difference to the size of these retirement nest eggs.
This growing caution of the average investor, who may be retired, will increase further the returns from reducing risks of investing in shares. This is to win older investors back to the fold. This growing caution will increase the returns to you of investing at the ground floor before the organisational innovations take hold.
P.S. Do you have any explanation of the proliferation of passive investment funds such as Vanguard that buy and hold diversified portfolios designed to duplicate and track the share market index and minimise trading and other costs?
P.P.S Most professional money managers fail to beat the market. For the capital market to remain efficient, there have to be lots of these rational investors who believe enough in the market’s inefficiency to spend their careers trying to beat it. Their entrepreneurial alertness correct pricing errors that will always emerge. Thank you for your poorly paid services.
@Jim Rose
Hey thats OK Jim Rose – lots of services and returns have been poorly paid of late – I am not alone.
At the risk of pouring oil on troubled flames, as Sam Goldwyn is reputed to have remarked, I visited these issues here in some detail over a year ago. To recap, my general conclusion was that the government pension age could be raised gradually, and it could be made equitable for those just coming up on the retreating pension age by providing matching income tax breaks that cut in at an entitlement age that gradually lowered. That way, people could save and invest productively so they could self fund retirement or shorter work earlier than the retreating pension age (a point that some readers missed). Without that investment generating real returns, it wouldn’t be an actual improvement over funded superannuation schemes – but that isn’t a very high bar to clear, what with their fee structures and all.
@P.M.Lawrence
Governments have been using backdoor methods to put up or set the background to put the old age pension qualifying age for some time and to compel people to fund their own retirements.
The lift in Australian pension age from 65 to 67 finishes on the 30th anniversary, as I recall, of the compulsory superannuation. No coincidence. The implicit tax on superannuation for ordinary workers is high because it reduces or eliminates any old age pension they might otherwise get.
In New Zealand, the tax incentives for the Kiwisaver retirement savings schemes are conditioned on access to accumulated savings being limited to the same age as the eligibility age for the government old age pension, called New Zealand superannuation. New Zealand superannuation has no income, asset or work tests and the eligibility age is 65. This eligibility age increased from age 60 to 65 between 1992 and 2002.
Setting the Kiwisaver eligibility age equal to the government old age pension, called New Zealand superannuation rather the current age of 65 could have been a coincidence.
There is a mainly pensioner supported party that narrowly lost its 6 seats in the NZ parliament last election, but it is trying to stage a comeback.
Do not be surprised to see grey power and family first team up for the Oz Senate. Their mix of social conservatism and fiscal conservatism but only for everyone else will be a dangerous combination.
Rather than raise the pension age, why not put a limit on the age until which you continue to receive a pension. Why not stop the pension at 80? Say 80 and you’re out? Out on your own? After all, 80 is a good innings.
@Jim Rose
Yes. Where else would one look for world’s best practice?
Iceland, perhaps?
@Freelander
As you know, the Icelandic old age pension system is composed of a tax-financed public pension scheme, mandatory funded occupational pension schemes and voluntary pension saving with tax incentives.
The public pension scheme pays a basic pension from the age of 67 and a means-tested supplementary pension after retirement.
Means testing will wipe out the supplementary public pension for most people who have paid into occupational pension funds during their working life. As a result, public pension spending in Iceland is 2% of GDP, compared to the OECD average of 7.2%.
The occupational pension system dates from collective bargaining in the 1960s.
The Iceland pension funds were hit very badly as their equity stakes in the fallen banks became worthless overnight, the value of bank bonds collapsed, and asset prices of all kinds tumbled. The result was that the real rate of return on the Icelandic funds was negative to the tune of 22% in 2008, and their assets as a share of GDP fell from 134% in 2007 to 119% last year. Another figure of their 2008 losses is 25%.-
Is this 22 to 25 per cent fall any better or worse that your retirement portfolio?
So even best practice isn’t as good as it used to be?
“Do not be surprised to see grey power and family first team up for the Oz Senate. Their mix of social conservatism and fiscal conservatism but only for everyone else will be a dangerous combination.”
Thanks Jim. I’m going to be having nightmares thinking about that scenario now. A bunch of cheesy-grinned, morality regulating, nanny statists teaming up with a bunch of whining, over-entitled senior citizens.
Can everyone excuse me please? I have a weak stomach. I think I’ll have to go to the bathroom.
@Freelander
Hey why not look to Norway which taxes its Petroleum industry aty &8% but can afford to fund generous pulic health and education and retirement systems. Maybe Norway has the plot with actually collecting tax right in the first place instead of punishing those least able to pay by continually moving the goalposts further away in terms of retirement age and access to their, in most parts, humble super…
such a one sided argument that focuses on what goes out of the fiscal budget without a glance at what isnt coming into the fiscal budgets. Pardon me sor saying so but some get off very lightly indeed…but dont even get examined.
Best most efficient most productive practice is lopsided. Sick to death of hearing ways people can work longer by do gooders intent on protecting government budgets from “the dreaded welfare” but dont mind large business tax cheats and transfered and avoiders in all their mighty glory.
Plug the wealthy tax leaks before you look to pulling in the belts of the working poor further.
78% above
@Monkey’s Uncle
Stay in bathroom ahile MU. There will be a lot more greay hairs coming without enough super. You better steel yourself.
@Monkey’s Uncle
Stay in bathroom ahile MU. There will be a lot more grey hairs coming without enough super. You better steel yourself.
oops
@Freelander
I assume your brevity is the by product of Australian superannuation funds being so heavily hit by the financial crisis, with real pension fund losses of 26.7% in 2008.
This is the second worst investment performance for private pensions in the 30 OECD countries, after Ireland!
The USA was on Australia’s heel with a real pension fund losses of 26.25% in 2008.
Iceland was next with a real pension fund loss of 22.9%, which is a shade under the weighted average OECD private pension fund real loss of 23% in 2008.
At least Iceland had a collapse of its banking system as an excuse.
Investment losses in Australia were particularly large because of the large share of equities in pension-fund portfolios. Share markets in OECD countries all fell by around 45% in 2008. Icelandic pension fund exposure to the share market was maybe 2/3rds of Australia’s.
@Jim Rose
Are you trying to tell us the global financial bubble burst?
@Jim Rose
Well then, the rent resource tax is just a tiddle of a drop in the ocean of investment losses from the GFC isnt it? RRT also takes from large mining firms and gives to low income earners. (Its been a long time since Robin Hood was here rather than his evil cousins, the Robbing Hoods.)
“At least Iceland had a collapse of its banking system as an excuse.”
Got excuse. After all, the collapse of its banking system had absolutely nothing to do with Iceland being world’s best practice. Had nothing to do with Iceland at all.
@Freelander
No – Jim has his history, blames and beliefs all skewiff Freelander…as they say there are more than two sides to politics – left , right and plain wrong.
@Freelander
If your pension fund losses are still no more than the weighted OECD average for private pension funds, and those portfolios had to absorb a banking system collapse, the private pension funds must have known what they were doing prior to the 2007 crisis.
Financial crises are not new. Karl Marx wrote about them.
The United States had its savings and loan crisis beginning in 1984. During the late 1980s and early 1990s, the Nordic countries experienced some of the worst banking crises the wealthy economies had known since the 1930s depression. In 1992, Japan’s asset price bubble burst and ushered in a decade-long banking crisis.
These financial crises all follow periods of loose and then tight monetary policy combined with regulatory capture and implicit promises of bail-outs.
You want regulatory intervention and discretionary stop-go monetary policy.
You must live with the reality that political power rotates between parties, include to those you would never vote for, and that there will be special interest deals.
@Alice
My history of retirement savings policy is governments are slowing making people fund their own retirements, be they rich, middle-class or poor. What is your history?
This policy requires people to save for retirement when there could be better returns to investing in home ownership, mortgage repayment and consumption smoothing. What is your history?
My history of retirement age policy is the increases to 67 and beyond make some ordinary workers stay in back-breaking manual labour. What is your history?
My history is more than one in four Australian seniors live in poverty. This is the fourth highest old-age poverty rate in the OECD countries and more than double the OECD average. Only Ireland, Korea and Mexico have higher old-age poverty rates. Your history is spent threatening to sue if your superannuation nest egg is disturbed.
I am sure you support governments forcing people to fund their own retirements and stay in back-breaking manual labour while you keep your middle-class tax breaks.
To oppose compulsory retirement savings would require you to support people being free to choose.
@Jim Rose
No so Jim Rose – I do not agree with mandatory super at all. I think most people do save for their retirements and invest along the way without having to be “forced” through superannuation to do so. I believe the monumental accummulation of forced “super” globally has contributed to the bubble and the GFC, due to which many savings have simply evaporated into thin air and are unlikely to be recovered. I think mandatory super has force fattened and distorted the financial industry on a global scale beyond any notions of the financial system being the smooth wheels that facilitate and serve “real production.” The overly wealthy global financial system has created imaginary trading instruments with nothing real behind them all, except the ability to wreak havoc on a global scale – casino capitalism.
I think it (forced super) has shifted great amounts of wealth away from real production to sheer unbridled speculation and has or will prove wasteful and costly and dangerous in the end.
I would like to see an end to middle class welfare but by the same account I would also like to see the equivalent of super be given as wages, to be spent or saved or invested as the employee sees fit. I have no doubt that superannuation has made both governments and financial managers wealthy but it has come at the cost of citizens like you and I.
I suspect, that despite the length of time we have been told manadtory super “is good for us”, I dont believe it is and I would love to know the real impact on people who are boomers coming to retirement with insufficient in their super now due to the GFC and now sagging returns. What is the real cost? Is it more or less than providing an age pension ton the less well off amongst us?.
@Jim Rose
Yes Jim Rose – on the matter of super I do support individuals being “free to choose.” This does not mean I support individuals being “free to choose” across the board on all matters, and I do not support individuals or firms like Mining who think they should be “free to choose” not to pay their taxes.
That is possibly the difference between you and I. I suspect your objection to regulation and government intervention is far more extensive than mine.
@Alice
Thanks for the response. I will get back to you later on the time inconsistency and Samaritan’s dilemma reason for supporting mandatory savings.
Yes. The Japanese got themselves into trouble by following Milton. The quick cure of inflation was far worse than the disease. Milton’s re-inflation strategy didn’t work. Pity about Milton. No legacy except of failed ideas. But that doesn’t stop acolytes or proselytisers – like Jimbo.
@Jim Rose
Oh so you mean you will get back to me on why we should be good samaritans and not let individuals “choose” regarding super – as always Jim Rose I typically find the right willing to bandy about the individuals right to “choose” but also be completely on side with the individual having no right to choose to have all their super paid as wages (rather than squirrelled off by “good samaritans” like the government and fund managers).
What you really mean is that we will tell you individuals what is good for you and when and we would prefer you think you are “free to choose” when you are not. So in the meantime, work harder and longer so we can keep funnelling your super by way of governments and the distorted financial empires.
Such hypocrisy is truly mind bending.
@Freelander
Wrong again.
Did the Bank of Japan follow a constant monetary growth rate rule in the 1980s? Of course not!
You appear to be unaware that Friedman opposes discretionary monetary policies.
Friedman never stopped favouring a fixed rate of money growth rule as his first preference for a monetary policy rule. He, unlike you, proposed abolishing the Fed.
The Bank of Japan spent the 1980s pursuing a stop-go monetary policy.
The Bank of Japan switched almost annually between inflation control and co-ordinated exchange rate targeting together with the Fed, Bundesbank and Banks of England and France under the Plaza accord of 1985 and the 1987 Louvre Accord.
You appear to be unaware of these exchange rate targeting agreements and how they stand in stark contrast to one of Friedman’s most famous essays, which was his 1950 case for flexible exchange rates.
Japan, as its part of the Louvre Accord, printed yen to buy dollars. The acceleration in monetary growth led to higher inflation and, initially, to higher real growth. The most notable result was the bubble economy – an explosion in the prices of land, shares, and other assets. The Bank of Japan reacted belatedly in 1990, reducing monetary growth.
Not surprisingly, in 1998 Friedman said “A decade of inept monetary policy by the Bank of Japan deserves much of the blame for the current parlous state of the Japanese economy.”
Friedman’s 2006 prediction for Euroland was “The euro is going to be a big source of problems, not a source of help.” His reasoning in 1999 was “Some among them will be affected by developments that would have called in the past for a depreciation of their currency. But given that they are locked into a single currency, the alternative will be a recession.” Freidman also said in 1999 that “I do not believe there would have been an East Asian crisis if there had been no IMF.”
As a foot-soldier of corporate capitalism, you oppose abolition of the Fed and IMF and supported the Euro.
Of course.
How could it be Milton’s idea of obsessing over inflation? Milton’s detailed idea about monetary growth had already been refuted early in the ’80s, so they didn’t use that. As I said, Milton has no legacy except failed ideas. Even his idea of obsessing over inflation is a failed idea, in large part responsible for the failure of that failed economy, New Zealand.
But I can see you are upset that I have taken the name of your Milton in vain. Peace be upon him.
I like your quote “I do not believe there would have been an East Asian crisis if there had been no IMF.” LoL. Milton certainly did say a lot of silly things. Of course, the IMF’s advice after the crisis was nonsense, as Stiglitz and others said, but it was hardly responsible for causing that crisis. The remarkable thing about Friedman and Greenspan is that it is rumoured they did what they did uninfluenced by drugs. One would have hoped they would have had an excuse (like Iceland).
@Freelander
Milton is discredited well and truly along with his Chicago boys. No-one will swallow that nonsense ever again Jim Rose (some new nonsense maybe) but the logic of Freidman and friedmanite policies now leaves a sour aftertaste across the globe. It wont be me who buries Friedman, the new generation will be doing it for us and we wont even have to ask.
i before e except after c …pardon
@Alice
You appear to be a double-secret wide-eyed libertarian. I am not.
The reason we need to have mandatory retirement accounts is not because people are irrational about saving for their retirement, but it is precisely because people are rational and politically cunning in a rent-seeking body politic.
If, for example, somebody knows that they will be cared for in old age even if they don’t save then what is their incentive to save? Wouldn’t it be rational to spend instead on consumption and home ownership and rely on the old age pension?
The time inconsistency problem is that the government will tell people that they need to use their own savings for retirement, but then change its mind when it sees that old people are destitute.
The expectation of an old age pension can lead people to behave in ways that keeps them in poverty after retirement. Most of their assets could be tied up in their home because this cannot be means tested. Overcoming this Samaritan’s dilemma requires strategic courage.
Mandatory savings accounts are the solution. The details should involve no fiscal discrimination. In a majoritarian democracy, general rules that apply to all citizens inhibit majority cycling and rent seeking. A government service or social transfer must be available to all or to none.
Where I live, prior to 2007 there were no tax concessions for retirement savings. A Labour government introduced capped dollar for dollar tax credits for retirement savings by people below age 65, which advantaged the middle class.
My preference is a uniform tax credit into a retirement savings account with a percentage of wage contribution so that after a 45 year transition, everyone can support themselves without the need for public help. The tax credit would stop at age 65.
Superannuation contributions in Australia differ from social security taxes abroad in that the funds go into private savings accounts that are actuarially sounder but heavily regulated rather than a state sector Ponzi scheme. Neither of these is voluntary.
@Jim Rose
But people don’t have to be cared for. It is very anti-libertarian of you to impose forced saving on your fellow citizens just because the body politic doesn’t let people who choose, their choice to die penniless in the streets by not having saved for retirement.
But, the amusing thing about libertarianism and libertarians is the coercive mentality they invariably possess. Even though they preach freedom, it is freedom to agree with them and to live in a society designed by them. They support the idea of democracy but not one in which the vote counts unless the vote coincides with their views. Very democratic.
Very classically liberal, not.
@Freelander
As to your Friedman refuted in the early 1980s obsession, the decades from 1980 saw wide acceptance of free market policies in rich and poor countries: private ownership, sales of numerous state owned commercial assets, free trade, responsible budgets, lower taxes and deregulation.
Since 1980, as the world embraced these free market policies, living standards rose sharply, while life expectancy, educational attainment, and democracy improved and absolute poverty declined. Is this a coincidence?
You also appear to be unaware that central banks around the world replaced discretionary monetary policy with a transparent commitment to price stability as their primary goal on the premise that inflation is a monetary phenomenon.
Newspaper coverage and policymakers’ statements of the day show that in the 1960, 1970s, 1980s, and until the early 1990s and the Keating depression in Australia, monetary policy was not seen central bankers and ministers as determining inflation.
The 2007 financial crisis arose after central banks in the early 2000s departed from the rule-based monetary policies that replaced double-digit inflation of the 1970s and beyond with low inflation and sustained economic growth for up to 25 years.
As for monetary aggregates in the early 1980s, monetarists blame fluctuations in inflation on excessively volatile growth in monetary aggregates.
The U.S. data supported this hypothesis until 1982. Since 1983 monetary aggregates have been essentially uncorrelated with subsequent inflation in the U.S.
Kochin pointed out in 1973 that a well designed monetary policy would lead to zero correlation between any measure of monetary policy and subsequent inflation.
The reason for this is the correlation between any variable and a constant is zero. If monetary growth is stable, it will have no correlations with any variable. If the effects of fluctuations in monetary aggregates were not precisely known then the optimal policy would produce negative correlations between monetary aggregates and inflation.
P.S. Asian crisis – the fact that, for example, Thailand had a pegged exchange rate and the IMF was around encouraging it to have a pegged exchange rate meant that lenders elsewhere underrated the exchange-rate risk.
P.P.S. Michael Dooley wrote excellent papers on the Latin and Asian crises as insurance attacks. Credit constrained governments accumulate liquid assets and IMF lines of credit both to prop up pegged exchange rate regimes and insure poorly regulated domestic banks owned by cronies.
Crises come when liabilities equal insured assets. The magnitude of both these aggregates is uncertain, and expectations are subject to change.
The timing of crises and the scale of capital inflows leading up to a crisis are the anticipated outcomes of private investors’ incentives to exploit a pool of government insurance.
Uncertainty about the size and distribution of local and IMF insurance can generate unpredictable defaults that intensify and prolong losses in national output. Contagion arises from a crisis in one country reducing the expected size of IMF lines of credit to other countries with high fiscal deficits.
“Should we retire later?” is the title of this thread. I am pretty sure the topic relates to the retirement age of individuals, particularly in Australia, rather than some long retired macro-economic ideas on monetary policy.
@Ernestine Gross
see post #42 by Alice and #41 by Freelander. These two introduced into this thread their mistaken views on modern history and Friedman.
Ernestine Gross, this was bad first day out for you as a wannabe apprentice imoderator – forgot to police all offenders.
Jim Rose, I’ll ignore your comment @48 on the grounds of containing wrong assumptions.
@Ernestine Gross
Then respond to my post #44.