By Bernard Hickey
Feedback loops are a great way to change behaviour.
Just think of those electronic signs by the side of the road near school zones that flash up your speed and warn you to slow down immediately.
They are remarkably effective.
I got to thinking about this idea of feedback loops after test driving a Honda Insight a few weekends ago. It's a petrol-electric hybrid car that has all sorts of tricks and techniques to reduce fuel consumption. It has a stop-start motor and also charges its batteries when braking.
But I found it's best trick was the glowing green light that showed up on the dashboard whenever you were driving carefully. Whenever you put your foot down it changed from green to blue and showed the actual fuel consumption at that moment in litres per 100 kilometres.
I found myself deliberately leaving my foot off the gas to hit the 5 litres per 100 kilometres target I wanted to achieve. By the end of the weekend I had ratcheted down my average to 5 kms/100kms. It was a marvellous feedback loop for my driving behaviour.
It got me wondering. Just imagine if New Zealand's politicians and consumers had a similar type of feedback loop applied to their spending and borrowing behaviour.
It might change our terminal short termism in a hurry.
At the moment Prime Minister John Key has made a deliberate decision to govern for the short term by running continued budget deficits that encompass such Middle Class welfare as the 39c to 33c income tax cut, Working For Families tax rebates, Interest Free Student Loans and 20 hours of free early childcare. Key is paying for this over-spending now by borrowing overseas and loading this extra debt onto future generations. Like many consumers, he is choosing to consume now and have someone else pay later.
The long term effects are horrendous. This foreign borrowing, much of it from the Chinese government, is helping to push our currency up to record highs. As happened from 2002 to 2008, this will kill off our non-commodity exporters for another generation. However, a strong New Zealand dollar is in the short term interests of Key as a politician because it keeps petrol cheap and makes imports and foreign holidays accessible for consumers and voters ahead of the November 26 election.
John Key is choosing short term consumption and votes ahead of the long term health of the economy. It's almost as if he needs some sort of dashboard that flashes up in front of his face every time he makes a decision to keep spending money the nation doesn't has. Perhaps it could show how much the national debt rises every time he pushes on the budget accelerator? Or maybe how many high value jobs are destroyed every time the currency rises another cent? Or the future value of lost dividends and increased interest payments whenever assets are sold and money borrowed?
But to be fair to John Key, he is not the only one obsessed with short term consumption at the expense of long term jobs and wealth.
As dictated by its Policy Targets Agreement, the Reserve Bank is also focusing on the short term inflation outlook rather than the long term health of the economy. It is letting the stronger New Zealand dollar do its dirty work of keeping inflation between 1-3% over the next couple of years.
But what happens in four or five years time when our export sector is decimated and we are running up massive current account deficits, as as forecast by the Treasury? Perhaps Alan Bollard needs the same dashboard with the lost jobs and higher foreign debts that John Key needs.
And consumers, ultimately, need some sort of feedback loop to stop the short term focus on consumption. All of the flashing signs consumers have now are to borrow and spend. Everything is interest free for the first 36 months and at half price in the advertisements. What if everyone had a flashing sign on their wallets and mobile phones that showed how much that debt would cost over the long term and how many high wage jobs the associated borrowing was destroying?
If only New Zealand had a national 'dumb debt' feedback loop we might actually have a chance of turning around the economy.
38 Comments
FYI from an emailer:
Great article. I could not agree more on the need for New Zealand to diversify its earnings into exports and scale back some of its entitlement programmes in the present climate, additional multi million dollar Prime Ministerial pet projects such as the national cycle way and additional funding for private schools must be the first to go.
I was however unsure and wondering if you would be able to clarify your statement towards the end of your column, "the Reserve Bank is also focusing on the short-term inflation outlook. It is letting the stronger New Zealand dollar do its dirty work of keeping inflation between 1-3 per cent over the next couple of years".
I would have thought that a rising New Zealand dollar would lead to cheaper imports and would add to inflationary pressures in the economy, rather than aid the Reserve Bank goal of limiting inflation between 1-3%. Or are you referring to a run away New Zealand dollar ( and its associated flow on affects) may give the Reserve Bank the necessary reasons to raise the Official Cash Rate and other associated methods? Kind regards
Matt
Good idea....what will hurt a Pollie is when a short term decision comes back to haunt them....a dashboard could do that....
The economics ROI of the Honda?
Honda Hybrid, what was its cost? $38k? its std equiv is about $22k?.....say it lasts 15 years....given its complexity thats probably its limits, a std car 20 years? My little car is 15 and going fine....
So over its life you have to save $16k in gas plus interest that $16k earns in 15years, thats $5k compounded at 2% so $21k.....say 15 years, is $1400 a year....what's its servicng costs? bet its more than a std car.....
$1400/$75 per tank = 13 tanks of gas less a year......thats all I use in a year! Looks like it makes no sense for me anyway.......
Now the MiEV starts to look interesting, no petrol, petrol shortages immune and for a family town car, practical, until of course you see its price tag $60k....uh no.....guess Im walking....
regards
"What you measure is what you get." So choose wisely.
That said, you might care to look at this like an 'influence tree'. There's sure to be a simple example on the web that shows how ROI is influenced by the layers of other ratios under it. (Standard stuff, easy to google.) Am thinking you could then develop same, and please, oh please do show the influence of the legalised tax avoidance and tax breaks that also influence NZ's debt.
Another thought, analyse both NACT and Labour's budget calcs and debt tracks and in particular look at which one will look healthier for NZ once in surplus. Given, Labour will not have sold income earning assets and have policy that is more supportive of the broader real economy, eg. ring-fencing, R&D tax credits and they would review and modify monetary policy. Whereas in comparison, it seems to me, NACT will leave the subsequent track more risk prone, less sustainable and would simply fall back on their favoured excuse of idelogy to jack up GST, implement unaffordable tax cuts and sell off more assets. What else would they do?
Cheers, Les.
Maybe you could have a live bubble ( that shrinks or expands according to the current debt burden). It could be an interactive graphic that changes with a time input . One should be able to see the past and future projections.
To make it more interesting you could have the bubble on the back of a GEN Y cartoon character (carrying the weight of the debt burden ). An interactive graphic could be fun to watch.
I've been thinking about this for a while as well. Not just for the Govt but Business & Joe Public as well. We're all still living in a fantasy world with our credit cards, mortgages, HP's etc... It's time everyone got to see how stupid we are as individuals & as a nation.
I'm thinking that we need a dashboard to be added to the Business segement on the national news as part of the usual FX rates, NZX pluses & minuses.
A seperate row for each type of debt; Govt, business & public with a total National debt. Each row to be colour coded Red or Green with a % change from the previous days reading. Also included on the dashboard is the current interest rate for each type of debt (not sure how we'd do this as there's so many different funding sources).
If we showed this every night then the public can see what they are doing & how they are impacting on our CAD.
Two weeks after Labour announces its CGT its ratings jump back,
33.3%
http://www.roymorgan.com/news/polls/2011/4685/
As always look at the trend as individual polls jump back and forth.....effectively no change....in the last few months......ths most interesting trend is ACT is going nowhere so far...if Donny Brash was expecting some shock and awe from his new position, he must be disappointed.
regards
The debt feedback loop would overnight become the pollies debt feedback fiddle....the real problem is the voters in NZ are and envious bunch of mememe lot who will vote for personal gain...That is the culture in NZ. Look at Shipley and the way she would not help in Chch for less than 3 times the normal state payment just to meet with some other swine and make decisions. That is the sort of people we are.
The naivety of your article is that you believe that the average NZ cares about our future debt..(They may say they do but if you tested it and said hey you’re going to live on $150 less a week to help out our future generations…) The only thing that matters to most is paying the bills, having the latest apple gadget, holidays and that someone else is going to be taxed to pay for it..
Criticism should be laid at our democratic system that is not for the greater good but very much about what’s in it for me…
All forms of media and marketing that cause us to measure our success by how people live on shortland street..
You can’t stop people voting to protect their lifestyle.. that goes for the beneficiary, large families reliant on working for families as well as the rich..
Bernard you are enabling the 'it’s not my problem it’s the government in fact its all John Keys fault'.. Therefore I don’t need to accept any responsibility for the debt of this country.. You are doing the same as the politicians and protecting yourself from negative public opinion.. grow a pair…
If no one brings it to the attention of the average Kiwi they won’t care, that’s why we need more articles from the media that bring it to their attention.
Part of it is the governments fault, this and previous ones, they make the policies.
The more educated people are, the more likely they are to vote for people that have responsible economic polices.
"Criticism should be laid at our democratic system" - Criticism should be laid at our education system, and the anti-education stance of most NZers.
"The only thing that matters to most is paying the bills, having the latest apple gadget, holidays and that someone else is going to be taxed to pay for it." - Let's not forget the horrendous, unsustainable and unservicable property debt racked up by the binging babyboomers.
I agree it's a national, local and individual problem..
Hence the second to last paragraph:
"And consumers, ultimately, need some sort of feedback loop to stop the short term focus on consumption. All of the flashing signs consumers have now are to borrow and spend. Everything is interest free for the first 36 months and at half price in the advertisements. What if everyone had a flashing sign on their wallets and mobile phones that showed how much that debt would cost over the long term and how many high wage jobs the associated borrowing was destroying?"
Assuming you read that far down...?
cheers
Bernard
Thanks Bernard… yes I did read the full article, and I agree with you that warning signs would be great..(and I forgot to say that it was a good idea.. sorry) I took issue with the level of blame pointed at the current government… Look at what Goff is promising and acknowledging that further borrowing is required.. Why no brown matter thrown in that direction? Why not at the people themselves for always wanting something out of whoever the government is… didn’t seem a balanced blame apportion to me.. that’s all.. Cheers
Of course I read the whole thing and the idea of requiring (how?) everybody to have some sort of microchippy device fixed into their wallet or mobile phone to tell them how much their debt is costing them seemed to me to be tacked on as a fanciful afterthought, belonging in the realms of science fantasy, whereas you seem to be serious about the idea of a national debt clock.
Bernard seems to think it is possible to consider economic policy without regard for the political framework.Worked OK for Stalin but unfortunately everyone over 18 gets a vote here.
I take it his policy platform is to put interest back on student loans, scrap working for families, scrap the free childcare allowance and increase tax rates. Also seems to think trying to control the fx market is a good idea for this little economy and that a land tax would help. Apart from the fx thing and the income tax thing that is probably not a bad list. Problem is that it would hand the keys to the exchequer to a Labour/Green coalition and the cause of our deficit problem stems from that bunch of nitwits.
The debt clock proposal is a good one and would be a positive contribution to debate from this site.
Absolutely agree Philthy.
Selling prime assets to basicly pay the grocery bill is just dumb dumb dumb.
The Manopouri project, for example, has been a cash cow to the NZ people and I'm sure, with other electricity sources facing difficulties worldwide, Rio Tinto would just love to get their greedy hands on it. The most challenging large engineering project in our history, built under the public works act at great cost in human life and using a unique geography and natural resource to generate vast quantities of clean electricity. You don't sell stuff like that. Ever!
Well not "ever" cos if it stops bloody raining down there....get the picture KD!
Another way to look at this is National are making the changes that will put the infrastructure beyond the reach of a greedy future Labour govt. And who's to say the geothermal generation technology might not develop in leaps and bounds leading to a gargantuan power capacity that is destined to be constant for a million years. How funny would that be.
Not likely Wolly, there is nothing now, or in the foreseeable future, that can compete with a bought and paid for hydro electric scheme in a high rainfall area like the Manopouri catchment.
If National continue with this mad idea you can almost guarantee a new Labour Government, greedy, stupid, whatever.
An interesting read, Grant "Australian stagflation "
NB. for those who like historical perspective: Germany started World War 2 in 1939 because Hitler came to conclusion that it was cheaper to kill the creditors than to pay them off. One may start wondering whether the US may, at some point, start thinking in the same way.
http://gregpytel.blogspot.com/2011/04/china-is-buying-up-world_07.htmlA debt clock is irrelevant without context. As the Zeitgeist-ers on here will attest to, all money is lent into existence, therefore all money is debt, so of course there are massive debt tabs building up all over the place.
The challenge of the perpetual growth (or capitalist) model is to maintain serviceable debt levels. A debt clock that tells an individual that they now owe $50k is irrelevant to a person earning $1m a year. It's also useless to someone owing $1m but only earning $50k (they will be getting plenty of feedback from their lenders).
Just counting up the debt means nothing. Unfortunately though, determining whether the debt is serviceable is a compex thing and changes so regularly and so unpredictably, that developing a useful and permanent index on this is nigh-on impossible (whether it be for an individual or the country or anything in between).
Im pretty sure We are meant to use debt/money to provide critical infrastructure and social services for our societies, and our governments outline future budgets that fluctuate depending on our ability to service debt, just like people do when they talk to the bank about borrowing more to extend the kitchen, or selling the batch to pay down the mortgage.
So you can count up the debt all you like, but they'll just tell you that indicators point to stronger growth in coming years and we will be back in surplus before you know it (wink).
It's not exclusively National and John Key who play this game, it's all of them, whoever has the reins at the time it becomes an issue.
How can more debt point to stronger growth, when all that the debt is going into is buying consumer goods, mortgages, and paying other debt?
If the debt was going towards something that might be productive in the future, then maybe, but it's not, it's going into paying off mortages, and in the governments case just paying it's bills, not building anything new that might earn money.
Also their plan is to do the exact opposite of building things that will provide more growth in the future, when they'll be selling off things that currently earn 15% pa and could earn much more in the future.
If you are showing debt then it makes sense to identify "sensible" debt separately to "profligate" debt. "Sensible" debt being such as borrowing for necessary infrastructre (some roads of national significance are dubious though) and for counter-cyclical purposes.
Profligate debt being pro-cyclical or any handout I don't receive.
Good call Hickey.
We could have avoided this crisis if we'd kept an eye on debt.
Even now, 90% of NZ-ers have no clue that the "boom" that gave Mikhail Kullen so much tax revenue to play with, was based on debt and certain to end in tears.
Getting this point established would really help NZ-ers make a fair assessment of what a totally useless Finance Minister Mickey Mouse Cullen was.
Lange left NZ-ers in no doubt what Muldoon did to the economy. Key is NOT a "communicator" like Lange was.
Corruption in Nz govt & foreign corporate takeover which began in the 60's, equals the decline of our country. The job of hiding it from the vast majority including people who have a brain, has been quite incredible.
Until people get their heads around this, it is nothing more than farting in the wind.
Excellent article but likely to fall on deaf ears. As Noel Leeming reported at the weekend consumers have been taking advantage of the strong dollar and buying up large screen TVs and other consumer goods by the truckful. We have learned nothing from the last two years (and why should we given the behaviour of this government) and sadly for many the inevitable crash when it comes will be painful and a horrible surprise, but at least they will have a large TV to look at even if they cannot pay the power bill.
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