Things I've Changed My Mind About

Changing your mind should be easy. When faced with evidence proving you incorrect, it makes sense to update your thinking. Unfortunately, it’s not that easy.

I’ve worked hard to fight my instinct to cling to cherished beliefs in the face of facts that might suggest otherwise. Although it remains a challenge, it is getting easier.

Below are some concepts I’ve changed my mind about over the last couple of years.

The Canadian Pension Plan (CPP)

Employed Canadians begin the year by making payments into the Canadian Pension Plan (CPP). While I know I’ll likely get this money back, and then some, in retirement, I’ve always resented these forced deductions - I believed I’d be better off investing the funds myself.

And when the scope of the CPP was expanded a few years ago, further increasing payroll deductions, well, let’s just say my resentment inflated in kind.

But, lately I’ve met people whose retirement income will depend on the CPP and other government programs. Unfortunately, they never learned the importance of saving, or weren’t in a financial position to do so. Despite this, I was surprised to learn they resented the CPP deductions more than I did. Given the choice, they never would have participated in a program that would one day comprise the lion’s share of their retirement income. It made me realize how critical forced savings are to the viability of many people’s retirements.

I still grumble at the sight of these deductions from my pay, but I’m no longer bitter. I’m increasingly comfortable having a worse financial outcome knowing it will make a big difference to those who need it.

Property Redistribution

I’ve long considered the concept of property redistribution objectionable. Taking land from the wealthy seemed more like a strategy for left-wing populists to buy votes or support for their regimes, rather than a viable method to grow their economies.

After reading How Asia Works by Joe Studwell, I’ve realized that property redistributions isn’t always politically or ideologically motivated, but rather, it can effectively be used to improve the economic output of emerging economies.

Studwell demonstrates how property redistribution enabled a number of developing economies to grow more effectively, including Japan, South Korea, Taiwan, and China. Early in their development, these countries ensured all citizens were given property for agricultural purposes. With adequate guidance and support, it not only improved the plight of the downtrodden, it also dramatically improved crop yields, and consequent economic growth.

In contrast, Southeast Asian countries failed to implement property redistribution, or did so half-heartedly, resulting in inferior crop yields, despite superior growing conditions. As agriculture is one of the economic foundations of a developing country, economic growth of these countries was hampered.

Property redistribution doesn’t always work. It can even be disastrous if done without the proper incentives, motivations, direction and support. Zimbabwe, South Africa, and Venezuela are prime examples. However, after learning that property redistribution seemed to be a critical factor in the success or failure of many Asian countries, I have altered my thinking on the subject.

Debts and Deficits

I’ve long believed governments should do whatever they can to reduce their levels of debt. Financial history is filled with the devastating results that can come from excessive debt during times of economic stress.

However, after reading Ray Dalio’s The Big Debt Crises, I’ve evolved my thinking. I still believe the option to go into debt should be employed more sparingly than it currently is, but there are times when it can be useful.

Dalio’s book, which is a detailed history of financial crises, illustrates how debt - the amount of money a country owes - can improve the long-term prospects of an economy. It is most useful when it enables economic growth to increase more rapidly than the level of debt itself. For example, let’s take a country that isn’t borrowing money in a given year, and has an annual GDP growth of zero per cent. If, by borrowing to invest in its economy, its debt increases by two per cent, but the economy grows by five per cent, the country has likely used this option wisely.

In short, when a country’s GDP grows faster than its debt, it’s debt as a percentage of economic output actually falls. This is a positive outcome.

Having said that, it’s also wise to account for hard times.

During recessions, an economy shrinks in size, often forcing governments to borrow considerably to help the economy grow and make ends meet. Unfortunately, the borrowed funds not only need to be repaid, but repaid with annual interest - dramatically adding to a nation's annual expenses, which leads to even more debt.

Therefore, when an economy is growing well on its own, it’s usually prudent to use debt sparingly, or preferably, to pay it down. Reducing debt in prosperous times protects against future debt crises, and also helps prevent the economy from overheating.

So, although I’m more comfortable with the use of deficits and debt than I was before, I still believe they should be used sparingly and with prudence.

Information in this article is from sources believed to be reliable, however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views are those of the author, Matthew Lekushoff, and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their investment advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member - Canadian Investor Protection Fund.