Economist Brian Easton says the ongoing decline in market income inequality stopped in the 1980s. Since then it has been stable, while 1990 public policy actively increased disposable income inequality

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

Thomas Piketty has a reputation for (literally and figuratively) weighty tomes. His 2013 best seller – 2.5 million copies – Le Capital au XXIe Siècle (Capital in the Twenty-First Century) was 696 pages. It was followed by a 2019 sequel, Capital and Ideology, of 1093 pages. It is claimed that the first is the most unreadable blockbuster on Google (second is Stephen Hawking’s A Short History of Time).

So it is with relief one turns to his 2021 A Brief History of Equality, with 274 (a fifth smaller) pages. It is consciously designed for the general reader; I found the translation more fluent.

The same themes are there: statistics and history show that economic inequality is widespread. One of the strengths is Piketty’s wider perspective from not being Anglo-American. The broad sweep of his account about France shows strong parallels with Britain and the US whose economic success was dependent upon imperialism and slavery. (Regrettably he does not pay enough attention to Germany.)

Piketty argues that the inequality is not an inherent feature of the market economy but is a political and social choice. He shows that in many Western countries inequality fell markedly between the late nineteenth century and about 1980. He advocates a more comprehensive welfare state.

Is that true for New Zealand? I summarised the available quality data in Chapter 50 of Not In Narrow Seas. Observe the ‘quality’; there is other data which a competent statistician would not trust.* Moreover, as the next few paragraphs illustrate, there are different measures of economic inequality and they do not always move in the same direction.

There is no New Zealand data I trust for the nineteenth century. If you want to believe that inequality was high then, so be it; I should not be surprised, providing you don’t think that the inequality was comparable to, say, Britain at that time.

The oldest almost-reliable data series is Census-reported individual incomes from the market, which begin in 1926. Despite scholarly caveats, it is possible to discern three periods. From 1926 to 1961, reported personal income inequality appears to have been broadly stable. From about 1961 to perhaps as late as 1991, inequality of personal income fell. A major factor in this decline was the rise of the income share of people in the bottom half of the distribution. By 1991, the decline had ceased and before-tax personal income inequality was roughly constant at about the level it had been in 1981.

Personal (before tax) incomes reported for income tax assessment can only be tracked back to 1937 before the personal series gets contaminated by business income. Because the IRD data is not granular enough it is only possible to follow top incomes. From 1937 the income share of those at the top 10 percent fell from about 35 percent to 25 percent in the 1980s. Since the 1980s the shares remain almost constant, although it seems that the share of the group just below the top 1 percent has increased, although not by much, perhaps because remuneration at the top of business and government agencies were rising faster than average wages and salaries.

Combining the two series, what seems to have been happening up to the 1980s is that inflation reduced the value of investment incomes and private pensions, while increases in paid labour-force participation meant a lot of women with low or zero income received big relative increases. Māori urbanisation would have had a similar effect. Unemployment was low.

The story of after-tax incomes is different. While market income shares remained much the same, the Inland Revenue data shows dramatic increases at the top after 1990. The top 1 percent of after-tax incomes leapt from 3.4 times the average after-tax income to 5.8 times.

This change was caused by major reductions in top income-tax rates at the end of the 1980s plus the introduction of tax imputation on dividends (in effect, corporation tax is now a withholding tax).

Combining this result with before-tax reported income, we can conclude that the increase in the after-tax share of those on top incomes came neither from working harder nor investing smarter. It came from the neoliberal tax breaks.

The disposable (after-tax and benefit) incomes of households are consistent with the personal income story. The effective income of the top 10 percent of households increased after 1990 by about the same 25 percent as the tax data shows. That means that those below – particularly the bottom 60 percent – had to take a hit. The biggest percent reductions were those at the bottom with their relative income share falling about 15 percent – not that they had much income anyway. (Children tend to be in the bottom.) Again we can conclude, broadly, that it was the neoliberal distributional policies which caused the increased inequality.

In summary

            – an ongoing decline in market income inequality stopped in the 1980s. Since then it has been stable.

            - since 1990 public policy actively increased disposable income inequality.

Piketty found a similar pattern for the affluent market economies he studied: falling market income inequality over a long period to the 1980s, a flattening out after. His argued the decline occurred when those who ran societies cared about having high inequality and took measures to reduce it. The measures included not just redistribution through taxes and transfers but ‘predistribution’, that is, managing the market economy to favour reduced inequality.

Among predistribution measures are:

            - prioritising low unemployment in economic management;

            - providing good quality ‘free’ public services, particularly healthcare and investing in skills of the young;

            - empowering workers, including high minimum wages, collective worker institutions and greater worker involvement in the management of the workplace;

            - pursuing a vigorous pro-competition policy, especially restraining monopolies.

Such a policy framework is an anathema to neoliberals and was abandoned when they came into power in the 1980s.

At the same time the distributional framework was undermined as the New Zealand-style generous welfare state (aiming to enable people to participate in and belong to their society) was replaced by an American-style minimalist one (with the lesser aim of enabling everyone to sustain life and health).

What is puzzling is that despite Labour having been in office for about half of the three decades since the end of the neoliberal changes, it has been timid in reversing their framework in favour of the traditional one of predistribution and redistribution. It has done some things but there is no obvious coherent vision. Explaining why is another column and a matter for public debate – unless one is committed to the neoliberal vision.

Piketty is not. He thinks inequality is a matter of public will, advocating predistribution and redistribution policies in each of his books.

* There is no long-run quality wealth series. I can immodestly claim that my 1956 and 1966 estimates of the wealth distribution are the best available before the official series which commenced in 2001. They are constructed using a quite different method and I am reluctant to make the comparison. This has not stopped others using unreliable data when it suits them.

*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.