Peter Lyons: Lessons on money missing in education

I taught in a school once that has the motto, "knowledge is power". Photo / Getty Images.

Opinion

It's back to school this week. I am starting to regard teaching in New Zealand as a low-paid charitable pastime.

I hope this does not sound like an arrogant Hoskinian statement. That would be an insult to the many wonderful, dedicated colleagues I have taught with over the years. But I am at the stage, like a very fortunate portion of middle-aged New Zealanders, where I make more on paper from the assets I own than from my day job.

I feel uneasy about this for a number of reasons.

The media seems to obsess about house price inflation in Auckland but the reality is that the prices of other financial assets such as shares have also boomed in recent years.

I started investing in shares over 20 years ago. I was aware I had inherited a gene that was likely to lead to blindness.

I was concerned about my ability to generate an income. Like many Kiwi males, I ignored the issue until it overwhelmed me.

When I realised I was losing the ability to drive and my options were closing down, I initially succumbed to feelings of self-pity and despair. After I regained my non-economic equilibrium, I wanted to ensure I was not reliant on my day job to fund my modest lifestyle.

I was fortunate in my background in economics but I was determined to improve my financial literacy in the area of investment. I researched extensively on the subject. Initially it was more out of a sense of necessity than a passion to learn.

A study in the UK several years ago found that most respondents would rather clean their toilet than improve their financial literacy. I taught in a school once that has the motto, "knowledge is power". It took me until middle age to realise how true this is.

I have been very fortunate in recent years to be able to share some of this knowledge with my students in a classroom. It frustrates me that we do not teach more practical financial skills in our schools.

It is almost wilful negligence. We seem more interested in preparing students for university than for life.

The most important lesson I have learned is that wealth begets wealth but debt often begets indebtedness. Those with assets such as property or shares earn rent and dividends as well as capital gains which add to their wealth.

Many of those with debt regard the payment of interest as the norm and the accumulation of debt as a lifestyle option. So the polarisation of wealth inequality grows.

But there is an insidious aspect to this. Our current economic policy has encouraged this process of wealth apartheid. In recent decades our economy has been run based on a doctrine called monetarism.

When the economy needs a shot in the arm, the Reserve Bank lowers short-term interest rates to pump up demand in the economy. Lower interest rates encourage asset inflation in property and shares. This is what has happened in recent years. So those with property and shares become much wealthier on paper.

Lower interest rates make it easier to borrow to buy assets. They also encourage people with money in the bank to seek higher-yielding investments in shares and property, further pumping up prices.

Capital gains are treated very benignly in New Zealand. So a factory worker in Mangere is likely to pay a higher portion of her income in taxes than someone with a portfolio of shares or rental properties. Those on the right side of the ledger are pulling away rapidly.

Meanwhile lower interest rates encourage those on low incomes with limited financial literacy to borrow and spend more. Hire purchase rates on cars, electronics and the like fall. Interest-free purchases become the norm.

Those who are spenders - often those who can least afford it - are encouraged to spend more.

So the wealth gap widens. The "haves" with financial assets and understanding get richer on paper. The "have-nots" get further in debt buying items that do not appreciate in value.

The vast bulk of tax paid in New Zealand is paid by wage earners rather than asset owners. Yet in recent years the asset owners are reaping the biggest gains.

• Peter Lyons teaches economics at St Peter's College in Epsom and has written several economics texts.