It’s good to see a business-funded think tank acknowledging that inequality matters – despite the fact that of late some measures (that exclude the affordability of accommodation) suggest it’s not getting any worse.
And on that the NZI authors pose the question of why – if it’s not getting worse – is newspaper coverage increasing? That’s not hard to answer and I will below.
In short the answer is it doesn’t matter whether inequality is rising or not; the long-term persistence of some types of inequality weighs down economic growth.
A second point NZI makes is that inequality isn’t the same as poverty. This is totally correct and discussion should not conflate the two lest our thinking leads to simplistic and flawed policy responses. I’ll deal with that as well as I cover various drivers of inequality .
There are two main drivers of inequality and they have quite different implications:
- Inequality arising as the consequence of merit-based economic success, and
- Inequality that comes from leveraging market power; profiteering without providing anything of benefit to others. This can include anything from regulatory protection to exercising monopoly power right up to outright corruption.
The first is the type that traditionally economists have lauded as an acceptable part of a market economy (as it provides an incentive for effort), the second obviously is a bad thing. So in effect we cannot – without having first determined what type of inequality we’re dealing with – conclude that the inequality we observe is a good or bad thing. And remember there is also life-cycle inequality (on wealth at least older people have had more time to accumulate assets) and education-based inequality. If the population is ageing then one would expect wealth-based inequality to rise, if the education base is improving one might expect income-based inequality to fall – although I’ve been to plenty of economies where education delivers diddley squat to recipients, e.g.; Egypt.
What we can say is that inequality arising from market power should be addressed by ensuring all participants have equality of opportunity. Note as an aside, that the trend is for educational opportunities to become more skewed as a result of increasing inequality – ie; a self-reinforcing feedback exists.
“… recent experience from China to America suggests that high and growing levels of income inequality can translate into growing inequality of opportunity for the next generation and hence declining social mobility. That link seems strongest in countries with low levels of public services and decentralised funding of education. Bigger gaps in opportunity, in turn, mean fewer people with skills and hence slower growth in the future.”1
“Inefficient” inequality begets further inequality when the children of the lower social classes don’t receive the same opportunities as others and so can’t escape the social position they are born into. This in turn impedes economic growth, because they don’t fulfil their potential. “The Great Gatsby Curve” concocted by Canadian economist Miles Corak, shows the relationship between intergenerational social mobility and income distribution. The more inequality, the greater the degree to which it is passed on, the lower the earnings mobility across generations.2
The conclusion that inequality has arisen because of merit, which underscores the acceptance of inequality as a necessary element of competitive economies (to which both Keynes and Friedman subscribed), does rely on the assumption that government ensures that all citizens are provided the basic services to be able to participate. There’s the rub. As Amartya Sen concluded, too often that doesn’t happen. His capability approach argues it is important to remove barriers to people fulfilling their (reasonable) aspirations.3
For Sen, ‘poverty’ is more than the narrowly defined income deficiency, it is deprivation in the capability to live a good life – far more meaningful than the narrowly-defined metric around income. In his book Development as Freedom he cites development as ensuring three freedoms – political, opportunity (including access to credit), and protection from abject poverty. Poverty in his definition, includes lack of at least one of these freedoms.4
And as the OECD has also concluded,
“Intergenerational earnings mobility is low in countries with high inequality ….The resulting inequality of opportunity will inevitably impact economic performance as a whole, even if the relationship is not straightforward.5
So as well as State-funded access to education (including pre-school education and re-training) and healthcare, cash payments to the poor or the instigation of a Unconditional Basic Income (UBI) should be seen as tools for citizens to enable fulfilment of their (reasonable) aspirations. Vitally, the public sector’s role in underwriting income needs to be unconditional – because each individual’s aspirations are different and no government agency, no matter how well resourced, can possibly determine those aspirations better than the individual.
Finally it’s important to acknowledge that the evidence so far suggests that it’s when inequality rises due to poorer households failing to get income rises in proportion to those of the population generally (the median), that one can identify the need for correction. Importantly there is no evidence that increases in income of the highest earning groups that increase the gap over the general population, cause any harm.vi
So inequality can be growth-inhibiting, how much depends on the source of that inequality – whether it’s deserved or imposed, whether it becomes entrenched intergenerationally so power (market and political) is concentrated, and whether it arises because the growth in lower incomes is persistently lower than the growth in the middle incomes.
In New Zealand inequality rose dramatically as a result of early 1990’s reforms, reforms which directly whacked lower income people. That inequality persists and is worsening if you look at wealth inequality (property). It suggests New Zealand has work to do if we want economic growth to fulfil its potential.
Acknowledging that “trickle down” has not delivered and ensuring there are opportunities for all, should be at the centre of policy now.
“… policies to reduce income inequalities should not only be pursued to improve social outcomes but also to sustain long-term growth. Redistribution policies via taxes and transfers are a key tool to ensure the benefits of growth are more broadly distributed and the results suggest they need not be expected to undermine growth. But it is also important to promote equality of opportunity in access to and quality of education. This implies a focus on families with children and youths – as this is when decisions about human capital accumulation are made — promoting employment for disadvantaged groups through active labour market policies, childcare supports and in-work benefits”.6
Notes:
1. The Economist, 13 Oct 2012, http://www.economist.com/node/21564421
2. Miles Corak (2013), “Inequality from Generation to Generation: The United States in Comparison,” in Robert Rycroft (editor), The Economics of Inequality, Poverty, and Discrimination in the 21st Century, ABC-CLIO.
3. Sen, Amartya (1985). Commodities and capabilities. Amsterdam New York New York, N.Y., U.S.A: North-Holland Sole distributors for the U.S.A. and Canada, Elsevier Science Pub. Co.
4. Sen, Amartya 1999 “Development as Freedom” Oxford
5. OECD, 2011 “Divided We Stand: Why Inequality Keeps Rising”, OECD Publishing
6. Cingano, Federico “Trends in Income Inequality and its Impact on Economic Growth” OECD 2014
Gareth Morgan is a New Zealand economist and commentator on public policy who in previous lives has been in business as an economic consultant, funds manager, and professional company director. This content was first published here and is used with permission.
59 Comments
The major issue of inequality in nz is housing. Merit and skill can still lead to succes, but overwhelmingly now whether or not you landed a house in nz before prices went mad is the major determinant of your financial future.
Like our old feudal past, increasingly it is the propertied gentry and their offspring who will do well financially, regardless of talent.
I do not mind someone in business who starts off with nothing and through hard and employing staff makes a great deal of money.
I do object to, however, someone buying 10 or so houses, thus denying families the opportunity to buy those homes and making a killing on the tax free capital gain.
This is what is creating inequality and child poverty.
Major social problems will ensue in the future from Government policies that encourage, through the tax system, investors to buy multiple houses.
I think the Monetary system itself is a major contributor to inequality. (More specifically , the implications of continually increasing money supply ).
there simply is no such thing as a free lunch. In a simplistic sense , every new $ that comes into existence has an effect on the value of every existing $..
The subtle way that increases in the money supply appropriates and redistributes wealth can easily be seen by a simple story of a counterfeiter who creates money and starts to spend it... At first it seems he is hurting noone..
He accumulates Real Assets and pays "top dollars" for those assets ...
The people he buys those assets from also benefit as they have lots of cash to buy other assets.....
No one is the wiser... it appears that the counterfeiters "village" is prosperous.
As things ripple outwards prices start to rise and ordinary people find they can no longer afford to buy Real assets like houses.
The counterfieter is generous and starts giving freshly printed money to close family.... and things ripple outwards again....etc...etc..
This parable might seem like fiction ...BUT... it is essentially how the FIRE economy has grown over the last 50 yrs.. ( NZs money supply was $85 billion in 1985 and today it is almost $280 billion )
In all my own reading and thinking, my view is that the only equitable way to increase Money supply , without it leading to inequalities , is to create it and give it in equal proportions TO ALL... eg a universal basic income.
( That money will find its way into "Capital formation" just as efficiently as does money created as debt, in our current money system )
If we want a money supply that is always growing , then rather than having the private Banking sector create new money as debt ( credit)... it is far better to have a universal basic income .
This can be varied and fine tuned and, along with fiscal policy, can have a far more direct influence on aggregate demand during times of economic contractions???
If there is one thing u can be sure of..... Central Bank actions do not directly benefit the "ordinary man"... At best , indirectly, the ordinary guy gets the "smell of an oily rag"..... gets crumbs.
( I think Central Banks, in their current form, are a Curse as much as they are a blessing )
http://www.otterwoodcapital.com/blog/central-bank-balance-sheets-grow-a…
There are many things that Gareth writes about that I disagree with....BUT.... I have always liked his idea of the "Big Kahuna "...
The problem with part time 'wanna be' socialists like GM is that once you hit 8 figure wealth it doesn't matter how much you get taxed as there will always be enough. What GM proposes is to once again have a socialist government dip their sticky fingers into the 'hard working' kiwi's that earn 6 figure salaries and to then redistribute their wealth to those without. Really GM is like a Russian oligarch, happy to keep the cash but wants the rest to goosestep, eyes right....
There is nothing communist or socialist about ensuring - as much as possible - that everyone has equal opportunity. Of course that doesn't lead to us all being equal because of merit. Now merit-based rewards is something the Alternative RIght does not subscribe to, even though free market economists do. What the Alternative RIght or Libertarian cohort espouse is that inequality that arises from protection and privilege be perpetuated. In other words you are not free market at all (at least in the economist's sense of a free market where there is no concentration or barriers to entry and exit) but rather you are laissez faire, see nothing wrong with privilege and protection. That is about as anti-market as you can get, it reflects a deep fear of competition. And of cause human rights simply are not on the Alternate Right's radar. No wonder ACT never got anywhere. As the literature referenced in the blog attests, its is economically inefficient inequality that needs to be eradicated - and of course that means the barriers that prolong and entrench privilege need to be smashed.Of course the occupants of that cohort will yelp but as the economics literature tells us, economic growth and incomes overall will increase. It's a no-brainer to those of us who differentiate between national- and individual well-being.
GM, wow....your comment above is actually quite frightening...
In NZ we have:
*Free schooling
*Relatively inexpensive universities and polytechnics
*Student loans interest free
*Universal pension
*Universal unemployment benefit
*Relatively free health care (OK so there are a some waiting lists for chronic diseases)
*50% of households earn more in tax credits or pay no income tax what so ever
*Lets not forget social housing
*I think i read somewhere we even supply school lunches (but maybe i was daydreaming)
NZ is anything but a free market and am sure if Lenin / Goebels viewed our system they would say its almost perfect in that their is no homeless & everyone is taken care of
The only problem with NZ is that we have a lot of fantasists (a bit like the cool people at school) who think the world owes them a living...(sorry guys but to be famous you have to climb the mountain or actually split the atom)
Poor parenting is to blame mainly, sprinkled in with a bit of illogical religious cultural thinking of any type and then you have a powder keg of stupid. If you believe in the supernatural and think the world owes you a living while attending free schooling and moving onto the benefit....good luck to ya...
You've stretched the truth by quite a lot there, but that's not surprising. But the single most important expense in one's life, putting a roof over one's head, cancels out all of what you said, having become just plain unaffordable, along with the "buts" that go with pretty much every point you made, eg 50% of households paying no tax - what is GST then, chopped liver?
Lucky as Im pretty sure the dole would be the only potential source of work.
Most people want to live where their family and friends and work is, where ever that may be. This bollocks theory of the youth getting it all handed to them on a plate and not wanting to work for anything is just a bunch of "i had it so tough" oldies venting their collective spleen.
No Zac, Gareth makes a good point re merit based rewards. What he, and most others tend to forget is that those who are eloquent and capable tend also to be very good at arguing their own case for pay and conditions, the rest of us, the vast majority are not and consequently get ripped off big time providing the basis for the inequality. Thus there is a need to ensure that mass bargaining or legislation is in place to ensure the majority get their share of the pie. After all it is on their backs that most wealth is made. In the last 30 or so years those very capable people who are running businesses have also managed to convince the Government that they can be trusted to look after their work force, while at the same time they have worked hard at eroding pay and conditions as an easy way to generate higher returns.
Don't disagree there. But most people will vary in what they perceive them to mean. For example being born in to a low socio-economic household would be seen by some as a barrier, while there are many examples of people who have fought their way out of that circumstance. Is just being averagely educated and talented a barrier? This is the majority of a population, what opportunities exist for them? Some perceive race to be either a privilege or a barrier - depends on perspective.
All perfectly reasonable Gareth and the vital takeaway is social mobility. Let's face it, becoming reasonably comfortable financially is not difficult in present day New Zealand and poverty is largely the result of personal
choice. Having said that it is totally unacceptable for hard working Kiwis to be paid less than a living wage or have to rely on a government hand out to put a roof over their heads or raise a family. We have half the people on hand outs of one sort or another and that, to me, indicates that there is something very wrong with the whole set up. Why are folk working full time unable to cover this from their pay never mind dental care, or insurance or opticians or saving for retirement. What has gone wrong here? Masses of low quality immigration has certainly not helped.
Our social mobility is in decline and certainly very different from the 1960's to 1980's period. Part of the reason can be seen when you look at the divisions/differences between communities. When I was at school the local Lawyers kids were in the same class, school and sports teams as the freezing workers. You don't see that now so there is less understanding or friendship between the different sections. That's a shame and has no doubt contributed to the decline in social mobility making it harder (but still not all that difficult) for a kid from the wrong side of the tracks to succeed financially.
The thing I've noticed with the poor is a preference for really dumb decision: dicking around at school, buying stuff they don't need with money they haven't got, wasting their spare time when they could be improving themselves mentally, physically or financially but the most destructive thing is the expectation of an open cheque book welfare system destroying their motivation.
That striving to succeed is inherent in us all and we are all from a very long line of survivors - right back to the primordial swamp no less - that doesn't just disappear in a generation or two.
'and poverty is largely the result of personal choice.'
that is the sort of garbage that has been perpetuated by most of our politicians for the last 25 years and is symptomatic of the great decline of this nation.
That statement of yours is just so wrong. Inter-generational poverty and the culture that surrounds it is not so simple as for someone just to throw it off like a set of old clothes. Mindsets get ingrained and perpetuated. Despair gets ingrained. It is like pathological depression. Easy for someone not afflicted just to say 'get over it'.
Man, what a red neck, self interested and immoral country we have become.
"Mindsets get ingrained and perpetuated"
Very true. I wrote about this recently. I was doing a job for a woman back in the early nineties - a time of high unemployment. Her son was with her and asked about my work. I gave him a bit of a run down and asked him (bright young lad of about eight) what he would like to do when he grew up. At this the mother loudly interrupted "there'll be nothing for him, he'll be on the dole like the rest of us".
I thought that was terrible but unfortunately we have got into the habit of telling people that they can expect to fail, become victims and many have accepted that. Crazy! Everything you do will lead you further towards or away from your goal and is hugely more important than what happened in the past. If you're going nowhere that is where you will end up and that is why I say that social mobility or, perhaps more importantly, the perception of social mobility is vital. If people want to be poor then that's OK as well, just don't go around blaming everyone else.
What's wrong with a supernatural belief system? If you are talking mainly about Christianity, it has underpinned Western civilisation since the time of Christ, and many great minds past and present were Christian.
I have a reasonably high IQ myself and two degrees, and my twin cousins got scholarships to major USA universities (Stanford and Harvard). We are all Christian. Perhaps you should leave your preconceptions behind. Also, plenty of Muslim families produce pretty good students and scholars.
I'd suggest 'dumber children' comes from poor parenting, and a lack of family cohesion and morals, which are at least partly explained by the decline of religion.
I don't think people spending a bit of time in church, meditating, praying and singing hymns is a problem we have to waste too much time on. I do think people are searching for something to lift their spirits and make them feel awesome. I suggest to people they accept Trump as God-Emperor and strive to make everything great again.
Trashing religion as unintelligent superstition in amongst a conversation that engages with the plight of the poor seems rather dumb to me.
The Dawkins and Hitchens of the world have nothing to offer the poor, spitefully opposed as they are to one of the greatest social commonalities of human history. In the end what the denatured modern offers is more moral relativism and weak appeals to individual responsibility.
OK that's your opinion keywest...
I would suggest that religion, whilst intrinsically good, can also offer much in terms of personal direction and motivation, which are surely good things to have in life from all sorts of perspective (including utilitarian concepts of personal productivity)
My observation of religious people from low socioeconomic groups is that they do better than their neighbors.
They get to mix with a wider range of people, develop good habits and raise loving caring supportive families.
They are wealthy in quality of life and even if tithing their church have better outcomes than their neighbors.
Thumbs up for religion from me.
I would prefer their church not tithe them until they own a home, but that's another story.
Gareth, can you name me the countries that you respect because they give everyone equal opportunity?
NZ is a great country and we are extremely lucky to be living here!
No one needs to be living in poverty in this country and if they are then it is through bad choices.
The opportunities are out there for everyone if they are prepared to look for them and/or take advice.
Yes, but tax is really important too. The government needs a lot more revenue, and needs to be pumping it into education, in particular. Stories abound of teacher shortages worsening in Auckland, with housing astronomical, and immigration continuing it's highs (lows?), this is a really big issue.And with these issues, guess which schools will suffer the most? .
We need to take the leaf out of some of the Asian countries and start respecting teaching a lot more, and paying a lot more too. Especially in Auckland. So we need new taxes that bring in more $$$ to fund this, as well as all the other social services and infrastructure that are falling apart.
I'd suggest:
- CGT
- Stamp duties on foreign property investment
- Progressively higher rates of income tax on incomes above 100K
Wouldnt have a problem paying teachers more if they were worth it!
However, is extra pay going to be enough to entice better teachers?
Not sure whether it is the teachers abilities or the current curriculum but what I do know is that currently many kids are leaving our education system without the necessary skills to succeed in the business world and financial world!
Pay needs to be better, especially in Auckland. Whilst there will always be good people who go in to teaching because they are passionate about it, unless conditions / remuneration is better there will be many borderline ones who won't go into it.
Better pay doesn't mean everyone gets a free ride - of course advancement up the pay scales should be based on skill, experience and performance like any job.
I can't stand teacher bashers - yes not all of them are good, like any profession.... But they are doing an incredibly important job, that is not easy.
As well as better pay, there needs to be more of them. As I have some friends / family that are teachers, the workloads can be a big issue. An average-ish salary and being overworked is not a great recipe for retaining / attracting teachers, so both aspects need to be addressed.
A teacher's salary is probably not too bad in the regions, but it's not great in Auckland relative to costs of housing, so there should be a different Auckland pay scale.
Why should there be a different pay scale for teachers in Auckland.
Where do you draw the line?
Queenstown is expensive as well!
If you choose to live in Auckland then you have to take the bad with the bad?
Article in the NZ Herald today about a couple who have sold up and bought in Geraldine.
A police detective and his wife who is a teacher.
Hates the commuting and cost of living in Auckland now.
Lifestyle is far better out of Auckland.
Off course there are big problems in Auckland with employment.
They say that people go to Auckland for the employment opportunities.
Maybe the corporates pay more but the average wage is no different to anywhere else in NZ.
With the price of houses in Auckland it will be very hard in the future keeping workers there let alone enticing people to Auckland especially the young .
Those teachers who rent are already paying the market rates I think. They're just ranting about their salary， which even on top of the range (~ 72k) is still not enough to save for buying a new home. A lot of the teachers I know actually went through divorce so they wouldn't have fallen under the FHB category. You're right though，they choose to teach in DGZ as it is a real privilege ;)
A capital gains tax at the taxpayers marginal rate is the way forward. Home ownership hovering about 50% tells of the peril of a taxation system that favours capital. So now the buyers are investors both local & foreign. But that is not the only subsidy to capital, add the tax deductibility of running rental losses & government subsidised rents & it's a dozzy prop to the middle or upper middle class or foreign property investor.
Not a level playing field.
Gareth invites us to take a leap of faith that modern humans remain as aspirational as ever, that it is the corrosive effect of intergenerational wealth inequality alone which inhibits the deprived segment of the population from accessing other possibilities. That more money would fix the problem. But after decades of welfarism, is this still the case?
Perhaps the absence of aspiration is for many, no longer just the product of deprivation. Instead it is a legitimate political statement, a valid lifestyle decision. A worker shortage in Auckland but tens of thousands unemployed. The level of existing welfare support is weighed against the daily grind and rational economic conclusions drawn. Have we passed an evolutionary philosophical tipping point where even if Amartya Sen’s bottom line of sound education and more state support were met, aspiration levels would not improve?
Talking about welfarism I see that one of NZ's greatest heroes of modern times has been forced to go on the dole. Is this another sign of the times?
Beyer, a former Carterton Mayor, was a Labour MP from 1999 to 2007 during which time she took a prominent role in bringing in prostitution reform and civil union legislation.
It would appear that being an iconoclast isn't all that appealing to private employers.
The interesting thing is that she fought for what she perceived to be unfortunate people when she was able to but none of those people are supporting her now apart from the grudging assistance of the welfare machine. It would be nice if those groups she helped would came to her assistance now.
teachers issue:
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=117…
The market will solve it all???
Jeez...get with the program.
http://www.dailymail.co.uk/tvshowbiz/article-3868816/Justin-Bieber-rent…
Tiny country, tiny rentals, tinny houses.
Think big....a rockstar economy, we ain't.
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