Susan St John*
There is an astonishing lack of interest in the NZ Super Fund (NZSF), New Zealand’s largest publicly-owned financial asset (currently $58 billion) sitting on the Crown balance sheet, presumably to help us meet future fiscal demands of an ageing population. Paradoxically NZSF assets are treated differently to other Crown financial assets: they are not netted off against gross debt in the official net debt calculation. Does that mean they are not going to help us?
The NZSF website has very little analysis on what the fund is in fact going to do for us, being largely concerned with investment returns. Most people have a vague idea that the fund is going to make their NZ superannuation affordable.
It won’t. Others think, equally misguidedly, that it guarantees there will be no changes to the full wage-linked, individual universal pension at 65 today’s retirees now enjoy. It doesn’t.
When the Fund was established two decades ago, then-Finance Minister Michael Cullen claimed “By setting aside some Crown resources toward retirement income now, while we can afford it, we will be able to smooth out the cost over time.”
The idea was that workers of the 2000s should pay tax not only to cover the pay-as-you-go superannuation payments of the already retired, but a bit more to store up for the future when they themselves retired and there would be relatively more older people supported by the working age population.
The policy was based on arcane economic theory about deadweight costs that claims a steady tax rate paid over a time period is better for society than a low tax rate today and a high one tomorrow that produces the same average tax
rate.
A recent report (June 2021) from Treasury: The Golden Years: Understanding the New Zealand Superannuation Fund by Matthew Bell shows that under the current formula taxpayers will contribute to the fund until around 2055, when just small withdrawals begin (shown by the difference between the dotted and the heavy lines). But 2055? By that time, any remaining baby boomers will be aged between 90 and 110. Even by the end of the century, in 80 years’ time, the fund withdrawals supply only 11% of the net cost of NZ Super (NZS) and the fund itself is projected to be a massive treasure chest worth 30% of GDP (compared to 14% today).
In times of genuine budgetary surpluses, it may have made sense to set some cash aside to strengthen the Crown’s balance sheet. There is nothing wrong with fiscal prudence in times of economic good fortune. But why ring fence this fund and pretend it can only be used to pay for NZS?
It is a myth that the withdrawals post 2055 make NZSF more affordable and lessen the competition for scarce real resources. The fund itself is unlikely to have any impact on the growth of output. Moreover, the claims on future output are NOT reduced because the expenditure on NZS itself is not reduced (the way it would be if NZS were cut or the age raised).
The NZSF is not like a sovereign wealth fund that holds rental income from a fortunate local natural resource like North Sea gas. In contrast, the ongoing contributions to NZSF are made at the expense of other things that would better prepare us for the fiscal pressures of an ageing population.
Whether there are surpluses or not today, taxpayers contribute around $2 billion a year to this fund today at a time when the need for investment in the real economy in housing, health, education infrastructure and poverty alleviation and has rarely been more pressing nor so vital if we are to prepare for the real needs of the ageing population.
Where is the analysis that says who pays and who benefits from the NZSF?
Economists usually do separate the real economy from the financial one. As economist Nick Barr (Myths my grandpa taught me) famously said of setting up funded pension schemes “you can’t eat pound note butties.” What Barr means is that a store of paper assets including money itself is not a guarantee of the expected standard of living. The future depends on there being actual “butties” to consume. Translating his message for New Zealand: having a massive fund by the end of this century won’t help us at all if the brightest and best young skilled workers seek greener pastures where they can at least house themselves and see a future. The ageing of the population will mean competition for scarce resources intensifies regardless of the fund especially because society will also be coping with the impact and prevention of future catastrophic climate change.
The emerging poverty among older New Zealanders was discussed in the RPRC report on fiscal sustainability for the 2019 Retirement Income Review. Much of this poverty is driven by the inadequacy of the welfare system for those aged 50-65, and the way the housing market has become a speculative bonanza for the well-off instead of providing basic healthy housing for everyone.
Imagine if instead of squirrelling away $2 billion a year to this ring-fenced fund, the money was used to shore up the health system so it was capable of handling the pandemic and the future demands of an ageing population.
Instead nurses, midwives and doctors warn daily of the impending crisis in medical services. Having money in a fund won’t stop the spread of the Delta virus in the fertile ground of poverty, existing ill-health and overcrowding.
Imagine the saving on social costs if we had protected the welfare system, taxed housing properly and built social housing so we didn't have a large number of families ill, and subsisting in overcrowded, badly built slums and motels.
The major challenges we now face include designing enduring redistribution packages, keeping up the supply of basic commodities and essential services, strengthening the public sector, especially health and education, and preparing for challenges that private enterprise is clearly incapable of solving. The solution is not to be found in storing up treasure on earth "where rust doth corrupt and moth decay" for some mythical future.
The first step is to remove the straight jacket of the imaginary ring around the NZSF assets on the Crown balance sheet. Then let’s have a clear-sighted debate about the way we can capitalise on our past sacrifices represented by the fund instead of being a captive to a redundant funding formula.
*Susan St John is an Associate Professor at the University of Auckland Business School. Based on the Retirement Policy and Research Centre's contribution to the Auckland Business School Alumni series Shaping our Futures: Pressure Points in our Policies: Facing up to the Ageing Population.
52 Comments
It doesn't matter whether it has 'done pretty well' to date, or not. You correctly identify the need for future resource-availability to underwrite the believed-in proxy.
This is a huge step in the discussion. Wealth is actually 'access the resources and energy'. Child poverty, then, is: Child lack of access to resources and energy. Old-age poverty is ditto, and future poverty merely a time-shift of same. Economists missed the point with their 200-year-old idea of 'labour productivity', in these days where labour does less than 1% of the work; thus worrying about a supporting 'workforce' was largely nonsense. What will be needed, is an earmarked resource/energy stream/supply, for future use. It would be nice to think that that was manageable; chances are that the planet is too overpopulated and we won't 'manage'. We'll fight and collapse.
Using the existing 'fund' to best insulate us from future events? NZ would do well to commandeer and ring-fence enough food-producing land adjacent to cities, to feed inhabitants (including the old). It would do even better to make services as easily-maintainable and resilient as possible. And it would do well to have an honest conversation about limiting population - because ex-fossil energy, we can probably only feed 2 million long-term-sustainably.
This article is a good start. Thank you.
pdk
"You correctly identify the need for future resource-availability to underwrite the believed-in proxy."
An interesting situation has arisen in Scotland. A substantial new oil field-the Cambo field- has been discovered near the Shetlands and it could be quickly brought on-line. It has recoverable reserves of at least 800m barrels. Now, as I am sure you know, in Nov. Glasgow will be hosting a major climate summit- COP-26. Will the UK government give it the go ahead? The Scottish government has a real dilemma on its hands. Until very recently, it was all for exploitation of the oil fields-'it's Scotland's oil', but now it under pressure from environmental groups to oppose all new drilling.
I don't know how this will play out short-term, but I have little doubt that if/when people begin to believe that a lack of primary energy-fossil fuel-threatens their material well-being, then this field and others will be developed. Parties which oppose( like the Greens) will quickly find themselves voted out of office. I don't know when the music will stop, but it won't be 2050.
Just as Alan Greenspan said about retirement funding to the Committee on the Budget, House of Representatives, March 2, 2005. "There is nothing to prevent the government from creating as much money as it wants and paying it to somebody but we need to ensure that the real resources are there that the money can be spent on". https://www.youtube.com/watch?v=DNCZHAQnfGU
Real economy? "from a fortunate local natural resource like North Sea gas".
The whole concept was false; Norway turned real energy into digital betting-tokens (shares - worthless ex energy going into the system). It was a dumb as Jack swapping a cow for some magic beans (one wonders whether his problem was that he'd graduated in economics). Some of what Norway did was good social infrastructure, granted; how much was future-appropriate (read Kunstler's Long Emergency, or the Hagens paper referenced below) is an interesting question. Almost all infrastructure is fossil-fuel-assuming; much is useless without it.
There never was a lump of money where somebody did not want to spend it now to solve some immediate problem. Those lumps just attract those without any long view.
Kiwisaver is the way. Ensure everybody pays in adequately, and in 30 - 40 years it could allow us to cease national super entirely. yep. Ditch National Super.
As for those current problems of homeless and the underclass living in motels. There is lots to be done, but a clueless labour government does not have clue of how to even start. Mostly it's about building social cohesiveness rather than their current divisive mode.
Only when the government runs budget deficits are 'net financial assets' created that can add to our savings. Budget surpluses conversely reduce our savings as explained here
https://gimms.org.uk/fact-sheets/sectoral-balances/ and here, https://www.economicsjunkie.com/sectoral-balances-and-private-saving/
tl - you're missing the point. St John correctly is asking what 'savings' will be cash-in-able for? It doesn't matter if the Government of the day was in the red or in the black; in the future; no resources, no underwrite.
She only mentions climate (the exhaust, no more) but the real problem is the declining availability and quality of remaining resources. The biggest is the declining availability of energy (without which nothing happens) and the declining EROEI of every 'next energy source'.
Again, this is the paper: https://www.sciencedirect.com/science/article/pii/S0921800919310067
i am not disagreeing with you, most people along with the government only focus on the financial side of retirement. The government should be building the capacity of the economy to support an increasingly ageing population. Training more doctors and nurses would be a good start.
I noticed that benefit worth $400,000 when I arrived, obtained residency, then citizenship and then retired 11 years after arrival, having earned an average of less than $50k per year - certainly I paid modest income tax. Other countries usually charge for their pension. When I was working in the UK the pension was pro rata of 40 years of NI contributions; it has dropped to 30 years since then. In other words if I had changed residency in the opposite direction I would be getting 11/30ths of a UK pension (which is less generous than the NZ super). This is a subject only mentioned by immigrants because any Kiwi saying it is accused of xenophobia.
Susan,
You would need a great deal more than $400,000 to buy NZS. You can only use the risk-free rate of return for this and that comes only from government stock. Since NZS increases each year, you would have to use long-term index-linked stock for the calculation.
Susan. Two people close to me have Kiwisaver of about $330K and $340K Not 60 yet.
And would be even easier to get to such sums if they were not burdened with paying taxes for other peoples super.
Seems you fall into the camp that believes the government (taxpayers) can afford what individuals can't. A view I don't have.
Just some quick maths, in the 47 years between the age of 18 and 65, if you contribute $8,510 per year you will reach 400,000 by time you are 65.
Currently the government gives you $500 of that, your investment growth should provide a bit more (and an increasing amount as it compounds) and as you get older you earn more so will contribute more.
Probably missing your point :)
My biggest gripe, why the F is our kiwisaver taxed!! its just removing our ability to compound as our tax is removed every year. A better system would be to have a flat tax once you start withdrawing it
At least if it taxed now you know what the tax rate is. Who knows in the future.
My own view is ALL of your kiwisaver is basically tax because the government dictates when you have access to it, and I have no doubt some future government will include those savings in a means test. As they do overseas.
Definitely save for retirement, but do it privately. You miss out on the current $500 year but that's chicken feed in the scheme of it all.
Yes those that can move will move, but when they leave they will be replaced by immigrants, hopefully some of whom can make a net contribution so with luck (certainly not competence) we will have a net neutral demographic position.
The existing NZ culture will be a memory and a new culture, a much more Asian culture will surface.
So refreshing to see an article that focuses on actual real resources. People have forgotten that money is simply a Govt-mandated medium of exchange for real resources (and for the payment of taxes).
Anyway, the idea of Govt 'saving or investing money' is, to be frank, crazy. Firstly, why would a Govt stash money away when it has access to an unlimited amount of it? And, secondly, even if you do view money as being somehow scarce, why would you stash money away when you have any number of infrastructure and development projects that offer a far greater return? We are spending millions on emergency housing, the effects of poverty, clean water infrastructure etc.
Nope - you have applied a pre-bias (or she has not grasped the global-ity of the Limits to Growth).
"The future depends on there being actual “butties” to consume."
That's global butties, the competition is all-encompassing (and will end in war(s) over 'what's left'). The best place to wear that? NZ - a conclusion to which a good number of CEO-types have apparently tumbled. A young person venturing overseas this late in the global trajectory, is uninformed (who is responsible for that?) Not that there are any guarantees.
This is an interesting article that raises some debatable points; firstly and most concerning Ms St John appears to be arguing that politicians should be able to pillage the NZSF. I acknowledge that this is somewhat crudely put, but as far as politicians are concerned, history teaches us that the quality of their spending decisions is highly questionable. As it is for the Government to be able to pillage it, then surely they would have to change the legislation that governs it?
Another point, and Ms St John, obliquely touches on it, is that the 'retired' population is projected to peak in 2050, and Ms St John identifies that Boomers will be aged between 80 - 110 at 2055, so will be being replaced by later generations, albeit in lesser numbers. So arguably the demand on the SF will decline slowly around that time.
What is not mentioned is the amount required to fully fund NZS, only that it will fund only 11% of the cost (in 2100). So what is the annual cost of NZS? The chart above suggests that currently the NZS is or can be fully funded by the NZSF (Aggregate NZS net expenditure v NZSF contribution rate).
Finally our politicians seem reluctant, unwilling or just don't understand the need to invest in NZ to build resilience towards the future. They persist in overseeing declining living standards at the same time as telling us that the cost of our pensions is increasingly unaffordable (ironically while they are busy feathering their own nests with a retirement package that can only be envied). I agree that change is needed, but I simply cannot see that giving them licence to pillage the NZSF as a positive way to achieve this.
Susan
This is an extremely unbalanced article, that appears to ignore the bulk of the international literature and much of the New Zealand literature, except that produced by people in the Auckland Retirement Centre. There is an extremely well established literature, started by the three Nobel prize winning economists Franco Modigliani, Paul Samuelson, and Peter Diamond over 55 years ago, that examines the relative welfare properties of a transfer pension system like New Zealand Superannuation and a save-as-you-go investment system like the New Zealand Superannuation Fund. The key results depend on the relative size of the growth rate of the economy, and the return to investments. When the growth rate of the economy exceeds the return to capital (not the interest rate but average return to equity and debt investments), a transfer scheme is better than an investment scheme. This is because investments in businesses and capital and technologies are a poor way of transferring resources to the future. This is not the world we have lived in for the last 60 years - the return to capital has been much higher than the economic growth rate. In the real world, where the return to investment exceeds the growth rate of the economy, a transfer pension scheme transfers resources to older generations at the expense of much higher opportunity costs on younger generations As Diamond pointed out in 1965, these costs fall on current and future generations of young people who have to pay much more for the pensions they shall receive than if the taxes they paid had been invested in a fund like the New Zealand Superannuation Fund. Over the last two decades in your writings you have consistently ignored or downplayed this opportunity cost on current and future generations of young people, who, as Matthew Bell pointed out, will have to pay substantially higher taxes for the pensions that they will receive than the current generation of baby boomers have had to pay. You may think it is appropriate for future generations to pay much higher taxes than you or I had to pay to provide us with pensions when we are old. It is your right to like a system that imposes large opportunity costs on current and future generations of young people costs. I happen to disagree with you – I would much prefer to payer higher taxes now so that the increase in the tax obligations of future generations does not increase as fast as it is predicted to increase under the current New Zealand superannuation scheme. But neither my - nor your preferences – are particularly important here.
What is important is the standard economic position that when the return to capital exceeds the growth rate of capital, a transfer based system imposes large opportunity costs on current and future generations of young people, and these costs can be reduced by a savings scheme such as the New Zealand superannuation fund. This is not a controversial statement – it is standard economics. Of course, you may prefer to impose these costs on future generations – that is your right and your choice. Just don’t dress it up as an economic necessity.
Incidentally, as you may know (although you avoid referring to it in almost all of your writings), in 2014 – 2015, the Retirement Commission and the Treasury jointly funded a study investigating the preferences of a wide range of New Zealanders about the taxes that current and future generations should pay to fund pensions. (I was a co-author with Joey Au and Trudy Sullivan – this work won the prize for the public policy paper at the NZ Economic Association conference in 2015, and the prize for the best Treasury discussion paper.) They found that 65 percent of New Zealanders of all ages and both genders would be happy to increase taxes now by 2 percentage points if it would reduce the increase in taxes on future generations by 2 percentages points, from a 5% increase down to a 3% increase. This trade-off is possible so long as investments in the New Zealand Superannuation fund exceed the growth rate of the economy by approximately 2% per year. This is a rate much smaller than what they have achieved in the past, and much smaller than what they can expect to achieve in the future if the past century of investment returns is a guide. This survey thus supports the conclusion that paying additional money into the NZ Superannuation Fund in order to reduce future taxes while still maintaining future pensions is actually a popular strategy, your personal preferences notwithstanding. But again, this is not about your preferences or my preferences. It is about economic mechanisms and the overall dominant position in the literature is that when the return to investment is higher than the growth rate, a transfer pension system such as New Zealand Superannuation imposes large costs on young people. This is simply not controversial anywhere in the world – read any standard exposition (eg Barrell and Weale 2010 or Sinn 2000 or Diamond 2011)
Barrell, R., & Weale, M. (2010). Fiscal policy, fairness between generations, and national saving. Oxford Review of Economic Policy, 26(1), 87-116.
Sinn, Hans Werner (2000) “Why a funded pension is needed and why it is not needed” International Tax and Public Finance 7 (4-5) 389-410
Diamond, P. (2011). Economic theory and tax and pension policies. Economic Record, 87, 2-22.
Your essay suggests you would like to spend more currently on housing, health, education infrastructure and poverty alleviation. Good on you. May I suggest that you suggest that NZ increase taxes on the current generation to pay for this spending, and make contributions to the NZ Superannuation Fund as well, rather than asking future generations to pay for this spending and your future pension by getting them to pay much higher taxes than you or I have to pay. You might find 65% of people would agree with you.
In my view it is unfortunate that since the 1970s New Zealand has embarked on a unique programme of superannuation and taxation policy that imposes very large costs on young people. In the 1970s NZ bucked the trend of the rest of the world and created New Zealand Superannuation, a non-contributary transfer pension scheme that is known to impose large opportunity costs on young people by getting them to pay much higher taxes than they need to pay for their own pensions. In the late 1980s NZ adopted a series of half-baked tax reforms that created incentives to generate artificially high land prices (as you yourself described a couple of weeks ago). Baby-boomers like yourself and myself have done very well from these unique policy initiatives, at the expense of very large costs on current and future generations of young people. It is not much recompense, but in return we owe young people the courtesy of conducting appropriate economic analysis of New Zealand’s problems, using the research of some of the world’s best economic thinkers (such as Diamond, Kotlikoff, Weale, and Sinn) as our guide. They have now developed sophisticated models exploring the interactions of economies populated by people who differ widely in terms of age, income and wealth. These models consistently point out that transfer schemes like NZ Superannuation impose large welfare losses on current and future generations of young people. They indicate a tax system similar to New Zealand’s can be expected to create artificially high land prices, also adversely affecting young people. For some reason you assiduously avoid reference to this large body of technical work. Perhaps New Zealand would become a better place if there were more engagement with these ideas – the standard ideas in the literature - so that the country can design and adopt policies suitable for the pressing problems of the 21st century.
(Disclaimer: I am over fifty, but not old enough to get a pension for several more years).
Andrew Coleman
A lot of words, Mr Coleman.
What you didn't do, is read the link I provided upthread. I know this, from your dogged adherence to - well - a mantra, really. Try divesting all the economics-nonsense, and thinking from first principles. Hard, but necessary.
https://surplusenergyeconomics.wordpress.com/
Interesting you reference Samuelson - he acknowledged he'd got it wrong back around 1965 (via Keen). I use one of the Samuelson-derivative models when discussing the failure that is as-taught Economics. Here is the better diagram - which incidentally tells us that growth is limited:
https://commons.wikimedia.org/wiki/File:Diagram_of_natural_resource_flo…
Note the difference: Energy and Materials inputting from the left, leaving degraded on the right. Energy is not recyclable; energy entropy is irreversible. Materials are partially recyclable, but this requires energy (you will be away back at 'labour productivity', I'm guessing?). Now look at Fig2, in my first link. See the problem? You folk (St John and you were the same, from a physics POV, I sense she is starting to 'get it') don't diagram the input/output physics, thus you operate in cloud-cuckoo-land. Worked until it didn't. The Limits to Growth folk were right, all the way along. Sorry about that. And as Fig2 shows, we are in repercussion-territory. The sad joke is that I learned much of this, at your own University. Which suggests that tertiary education, as formatted, is a little flawed.
The problem now, is that all forward bets - money, debt-issuance, shares-held, bonds-held, some assets held (depending on future usefulness) - are bets on even more resources (materials) and energy coming in from the left in the diagram, IN THE FUTURE. This cannot physically happen; the trend is to less, not more. Essentially, seems to me we've lost 'price discovery' on money - but we're sure about to find it. I suggest it's time that economics was taught to include what all current students will live through:
https://www.amazon.com/dp/B07741S7Y8?pd_rd_w=YQ1qm&pf_rd_p=e8b530db-439…
https://royalsoc.org.au/images/pdf/journal/152-1-Turner.pdf
https://www.resilience.org/stories/2021-08-16/revisiting-the-limits-to-…
All those pension/retirement-expectations (splitting hairs is splitting hairs) are unbacked bets on the future. Not only are they bets that there will be energy and resource in the future, they are bets that there will be enough work do-able in the future, to deliver all that the young require, plus enough to support pensioners/investors. There is zero chance of that underwrite - read the first few posts from Surplus Energy Economics.
I suggest it is time for folk in your position - and St John's - to be pointing out that GROWTH is in near-term trouble (indeed I'd argue has been on life-support for a decade and more), and that the repercussions mean that most current bets are off. That collection of bets includes more than pension/retirement expectations, it includes farm and house debt-repayment (requires future work to repay future debt), indeed all debt.
Your paper https://www.otago.ac.nz/economics/otago637902.pdf fails my above links, I suggest.
For instance: "future generations are likely to have higher incomes than current generations because of economic growth"
Where did that come from? I've known about this pending impasse, since 1975 (I was 20). Why is it not being taught, even yet, in some silos (yet the best I ever heard, was in the Otago Uni Staff Club (visiting Prof Ellen Moseley-Thompson, as it happened).
Hello Mr (or Ms?) Powerdownkiwi,
I was responding to Ms St John, not to your comment. If you would like to engage, I am happy to do so in the future. But it is frequently useful to clarify basic concepts and to try and avoid confounding issues.
The advantages of a saving/investment system depend on the relative size of the return investment and the economic growth rate. They do not require having positive growth. You seem to be obsessed with energy use, and while this is partly understandable given that much of the growth of the last two hundred years has been based on intensifying energy use via the use of carbon "fossil" fuels, there is no requirement that future energy use will be dependent on these fuels. Economists have understood this for a rather long time, and while many models simplify reality by ignoring energy use, not all do. You are obviously familiar with these models; personally, I found Ayres and Warr (2009) "The Economic Growth Engine. How Energy and Work drive material prosperity." provided a useful guide to the general reader, as did the shorter paper by Stern, D. (2003) Energy and Economic Growth. It is not true that all economists ignore energy.
Obviously the earth is not a closed energy system, receiving far more sunlight than it can possibly use. If humans were only reliant on fossils fuel, future economic growth would be limited at some point of the distant future, and output may have to fall. But humans are not simply reliant on fossil fuels, and the cost of renewable energy sources is steadily falling providing hope that high living standards for billions of people will continue in the future. Many of these processes are capital intensive, which is a major reason why a save-as-you go investment system that invests in renewable energy may be a very good idea. But even if growth is limited or people choose to consume less and have negative growth, the basic calculus that a save-as-you-go system provides better returns for current and future generations of young people when the return to investments is greater than the growth rate still holds. A pension system based on a system of transfers is basically inefficient in a dynamically efficient economy where the return to saving exceeds growth, independent of the growth rate.
Personally, I have advocated for some time that an important component of the solution to the 21st century's most obvious problems - global warming and international poverty - is greater investment by rich countries in green energy production in poor countries, so that people in poor countries can develop without cooking the planet. If you ever visit Morocco you can see an example of this - the wonderful Noor solar plant. Morocco is now receiving reasonable investment by European pension funds in renewable energy. It is very disappointing that last century NZ adopted a transfer-based pension scheme that does not accumulate capital, and which is preventing New Zealanders from investing in green energy plants in the 21st century. Perhaps we shall be fortunate enough to reform the system and be able to contribute to a far more renewable and sustainable global energy system in the future.
I expounded on these issues at greater length in a paper on the topic of international population, growth, and retirement income written in 2018. . I think a shortened version was published on interest.co.nz a few years ago.
Coleman A.M.G. 2018. Population ageing, global warming, and the Sinbad century. Paper prepared for the Hugo Group CEO Retreat, Millbrook Estate, Queenstown, in August 2018.
You seem to think that a world primarily reliant on fossil fuel energy resources is doomed. I am not so pessimistic, and neither, it appears, are the scientists and investors making massive research investments and physical investments in cheap renewable energy. Time will tell whether the world will make the transition to a high (renewable) energy, high income state, or whether people will have to use less energy and have lower incomes. Frankly, I think young people get this much better than older people, and I look forward to the time when they take over the reins and implement more sensible policy.
Andrew Coleman
That I regard as unacceptable, from an Academic. Firstly, shooting the messenger (obsession) is invalid. Secondly, introducing emotions (pessimistic) is invalid (we are talking facts here). Thirdly, my links (which you haven't read, have you - ask yourself why?) tell you that 'time will tell' is invalid.
Horse, water, drink. Sure, you were reacting to your fellow-discipline-er; sure, my comments are inconvenient (please desist).
But "and the cost of renewable energy sources is steadily falling providing hope that high living standards for billions of people will continue in the future." is just plain false. Without energy, there is no work. Without work, there is no money-underwrite (all else is virtual). Yet you still argue that the 'cost' of energy will 'decline'?
Try reading the links, eh? Without preconception(s). And tell me what energy source is going to supply what materials (resources) in what quantities, defying how much entropy in the process. You are the one conflating, I suggest. Conflating an artificial construct with a finite planet.
Hello,
it can lead to increasing inequality (Piketty's argument) but it does not need to do so. The return to capital can exceed the growth rate indefinitely so long as people consume rather than reinvest most of the return from an asset, for then the stock of assets does not grow at rapid rates. Consider a situation where there is zero growth - say you have a factory producing a constant level of profits that are consumed or even an apple tree producing apples that are all eaten. The return to capital is positive, and thus exceeds the growth rate (zero). This situation can continue indefinitely. If the profits are saved and invested, you can get increasingly inequality, but if this goes on for long enough you might expect the return to capital to reduce because there is so much of it. The world does not seem to have reached this situation yet.
Having thought on it a bit, if I were marking that as an essay, I return it for revision.
"Obviously the earth is not a closed energy system, receiving far more sunlight than it can possibly use."
Incorrect. You are thinking in human-use, not global terms. Find out how much solar energy is already commandeered by humanity.
"If humans were only reliant on fossils fuel, future economic growth would be limited at some point of the distant future, and output may have to fall."
Incorrect. Study EROEI (Hall et al -and my links). Output will indeed fall, no ' may have to' about it.
"But humans are not simply reliant on fossil fuels, and the cost of renewable energy sources is steadily falling providing hope that high living standards for billions of people will continue in the future"
Incorrect (maybe correct re hope, but I'm talking deliverable material/energy here). Again, read the links. Please provide evidence of materials availability, by type.
"Many of these processes are capital intensive,"
Correct as far as it goes - but capital is a proxy for work/energy, and resources. See PDK's comment to St John, upthread, re Child Poverty; extrapolate.
"Time will tell whether the world will make the transition to a high (renewable) energy, high income state, or whether people will have to use less energy and have lower incomes."
Conflations abound there. We WILL end up on renewable energy, by default. Some of us have gone on ahead, indeed we are decades ahead.
But: High? High what? And high income? Expects to be spent at high rates, one presumes? On what? I'll grant you that numbers can be virtued-away via 'value added'', but this is a core resource-depletion slash entropy problem, not 'income'; that's just hopeful proxy. People will indeed 'use less energy'. As to lower incomes - how about 'less parts of a finite planet per head'? Would that not be the better measure?
Please read the links.
Hello Mr or Ms Powerdownkiwi
I hadn't realised you were so sensitive, never having met you. (Or perhaps I have, how can someone tell?) The word 'obsessed' does not necessarily have a negative connotation, it means to focus on one thing. Similarly, to describe someone as 'pessimistic' because they think it is unlikely that people will discover cheap ways to produce plentiful energy from the sun's bountiful supply in the future is scarcely an insult. Some people are optimistic and think it is possible that people will make such discoveries. Other people are pessimistic and think it is unlikely that these discoveries will occur on the necessarily scale or within a sufficient time frame. Personally, I don't find it particularly helpful to look for harm where none was intended. But each to their own. Incidentally, you might want to give someone time to read the links that you post in a comment section when they are actually commenting on the headline article.
I have read one of your links this evening, by Hagens. It doesn’t seem to make particularly new points, but is fairly wide ranging in its arguments that people are unlikely to easily adjust to a situation in which accessible energy supplies are much lower than their current level, should this occur in the future (a scenario which he considers very likely). Personally, I found Smil’s (2017) book “Energy and Civilisation” better structured and more convincing, but it is ten times as long and so able to develop an argument at length. Smil is ambivalent in his conclusions; he realises that there have been many astonishing energy developments in the past; he is not particularly confident that solar and wind power as we currently know them (and on their current trajectories) will be the main ingredient in any future major reduction in fossil fuels; he sees considerable scope for reduction in western energy use through much less waste, and a possible reconstruction of tastes towards less energy intensive goods and services; and he is not particularly confident that people will respond in time. I get most of this, but don’t know enough to know which way the arguments will fall. I do agree with him that the key energy developments this century will revolve around the way people in developing countries will use energy. And, to get back to the point of disagreement with Susan St John, this is while I believe it is really important that we have a pension scheme that actually generates savings, so that these savings can be used to invest in fossil-energy reducing technologies and equipment. That is why a transfer-based pension scheme designed in the 20th century may no longer be suitable for the 21st century. Such a solution is consistent with a commitment to a big reduction in consumption levels should people want to voluntarily make these adjustments before they may be required to make them by necessity (should a more positive outcome not occur).
Smil is worth quoting on one of his last arguments. He doesn’t believe there is currently a crippling shortage of oil, gas, or coal. Rather, there is so much available that if they were all burnt it is likely to cause a sea level rise of 58 metres. He and many others argue that problem is that fossil fuels are so plentiful that they are causing global warming and that this may make life extremely difficult, not that they are so scarce we shall run out of them any time soon. Humanity has survived a large increase in sea levels at least once in the last 20,000 years (for example, Australia used to have a 25% percent larger land mass than it currently has), but a sea-level increase of that size in a world with the current population would surely cause chaos. I find it very interesting to note that people are still debating whether fossil energy use needs to reduce now because it is so scarce that it will soon run out or because it is so plentiful that its combustion will generate so much C02 that the planet will be irreversibly transformed. With this level of uncertainty it seems really important to create a diversified pension system that combines some pay-as-you go elements with some save-as-you go elements
I was thinking of this interchange, as I listened to an IPL in Archway 1, last night. I'll bet you weren't there.....
Thank you for bothering to read - most don't. Obsessive? Maybe; I just reckon that if we don't address things in proportion, we're in trouble. Eventually, of course, it becomes too late even if we do address things in proportion. What I find interesting is your ability to jump from the physics, to economics; sort of a dissonance? Let's stay with the physical.
That Georgescu-Roegen diagram I sent you, tells us that it is energy and materials (I call them resources) which the 'economics' box requires. We can therefore (cranially) bypass money, and see that all we are doing is apportioning resources, and the energy required to procure, process, consume and eject them. The resources come in three categories; Finite (which includes the stored fossilised-sunlight energy), Renewable, and Sink (the ability to absorb; from wetlands to the atmosphere to the ocean; nitrogen, CO2, acidification). All three we are drawing-down, and have done at exponentially-increasing rates. In the case of finites and renewables, we also cherry-picked the best, first. Thus we have a compound dilemma; it used to take the removal of 10 tons of 'overburden' (a human-centric term if ever there was one), to get at one ton of copper. It now takes the removal of 400 tons. The compounding factor is that the oil we drive the diggers with, has gone from an EROEI of perhaps 100:1, down to somewhere in the 'teens'. https://hal.archives-ouvertes.fr/hal-02383025v5/document (FIG5 is a thought-provoker).
Thus we can extrapolate: https://surplusenergyeconomics.wordpress.com/professional-area/
All three resource-types are being hoed-into at unsustainable levels, the rate-increase has been - until recently - exponential. Clearly that was going to stop, with exponential suddenness; as Malthus, Soddy (he's worth the read - note his Nobel-Prize discipline! and the fact that he saw Economics as my kind do), Hubbert and Georgescu-Roegen, Meadows et al, etc etc , have warned. Thus we can be very sure of the physics - growth and doubling-time have taken care of uncertainties; the World3 program was tried with 'Double Resources' (as if we had a whole 'nuther planet):
https://www.linkedin.com/pulse/i-did-data-check-world-model-forecast-gl…
"BAU2 assumes double the resources as in BAU. More abundant resources do not avoid a collapse; its cause merely changes from a resource scarcity crisis to a pollution one."
So now we turn to money. This is a forward bet on there being future energy and resources (entering the Economy box from the left, in the Georgescu-Roegen graphic). One can waste time tracking all sorts of things (called stuff like: the velocity of money) inside the box, but ultimately the destination of money - indeed of all perceived stores of 'wealth', is to acquire a portion of the resource/energy stream. Money is keystroke-issued, based on fractional backing by stuff that is largely notional anyway. Since 1970, and exponentially-increasingly since 2007/8, the key-strokers have tried to kick-start a dead motorbike, even as the battery flattens and the fuel-tank drains away. There is now a collection of forward bets which has never been bigger, hoping to access a pile of resources (including the one-off bonanza that was fossiliesd sunlight) which has never been smaller. Good luck cashing that lot in without rampant - and endless, given the continually-dwindling resource/energy underwrite - inflation. Which is what we are predictably seeing, now that the flow of keystroke-issued debt has flowed into inflating the 'price' of EXISTING items like houses, old Falcons, indeed any second-hand price-rises (old things in physics terms are decaying; heading for Entropy - they should be being valued less with time, not more).
We have apportioned our access to those energy/resource flows, in many ways. Bu force, by colonialism, by lobbying, via strikes, by monopolisation - the social churn is of no consequence to the physics; it's the amount consumed/spat out, not the who, that matters. In pension/retirement terms, the bets are held in the form of shares (worthless in the face of no energy/resource flow), deposits (bit suspect; they were only keystroke issued bets to start with), bonds (another bet-upon-a-bet) and so on. All are bets on future physical flows. More bets? Then either there has to be more flow, or the bets are worth less of the flow, each. It ain't rocket science, and optimism/pessimism don't come into it. To be advocating the accumulation of forward bets, without ascertaining the rate of (and state of) resource and energy stocks, seems to me somewhere between cognitively-dissonant, and criminal. Remember, it requires resources and (current-form) energy to create the capturing of your 'unlimited' (which it isn't; all sunlight is doing something biosphere-wise NOW, and humans cannot live without a supporting biosphere - especially beyond the end of the resource-draw-down phase).
I haven't read the Smil 2017 offering; I have read the 1990-s version. Can't remember him delving into the EROEI problem. The best recent overview is Blip (Clugston), I'd add Collision-Course (Higgs); you're welcome to peruse my library. I think you need to ask yourself about 'profit'; it's a merely human construct, aimed at out-proxying others at the resources/energy trough. You could call it law-enforced enclosure... Indeed you end up realising that all law is resource-access related (property is sunlit acreage) adjudicating; which is why we see the colonised on the wrong side of it.
I must away and do something physical......
Thanks for the recommendations for readings. I had never heard of Soddy, who seems to have been a very interesting intellectual. While I agree that a focus of real quantities is essential to understand economics, I don't agree that finance can be ignored as it is a mechanism that helps reallocate resources. If we reduce the production of consumption goods and services now and redirect these resources to research, the future world may be considerably better off because of discoveries that enable a reduction in the use of fossil fuel energy, or an increase in alternative energies, not to speak of medical technologies that enhance living standards. Finance enables investments in firms that conduct this research (but they also allow investments in other firms). The MIT economist Acemoglu has written extensively on the need for and usefulness of research directed towards green energy (and the reduction of resource use), and the way that this provides some possibility of sidestepping reliance on non-renewable resources. He remains hopeful about the potential for directed research. As someone with a much worse command of the field than him, his hope strengthens my own hope that some of the worst implications of resource constraints can be bypassed if sufficient effort is made to find substitutes. I remain convinced that such efforts are worthwhile, and hopeful that they will lead to a positive outcome.
AC
Greener pastures? Only Australia, really, and they don’t really like us. The UK has enormous structural problems, and London is prohibitively expensive, and about the place worth living over there. The States? Ok, if you’re a really high income earner and afford NY, SanFran or LA. Otherwise it’s hillbilly heroin. Then there’s health insurance. Canada is up and down, and too cold anyway. And I heartily disagree with the author’s faith in the public sector. Private enterprise isn’t perfect, but at least there’s an element of choice.
Imagine a completely sorted healthcare system which without increasing taxes. It's completely possible.
1, Shut down ACC
2, Adopt the Ozzy Medicare system of funding and care.
3, Use the $40 to $47 billion dollar ACC "reserves" to fully fund all the necessary corrections required to the health system.
4,Voila, A system good to go with WINZ backing up long term sickness and accident benefits.
The problem is that National and Labour governments simply dont want to fix health.
And a further benefit of ridding the country of ACC is that then you can bring meaningful corrective behavior to transgressors by bringing Civil Suits for recklessness. For example; working currently with 37 yr old woman T boned on State Hwy 1. Car passing on blind curve hit her. Result: She is on the benefit for life and lost her baby as she was pregnant. Now crippled. And the hit to the deviant driver? Not even home detention-and not hit to his pocket book =or his Insurance Company. Without ACC she could be receiving private flow of funding for life (or massive settlement), and he would be sued for recklessly causing it. Soon recklessness all through society and even hospitals and doctors would be curtailed.
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