Inequality in New Zealand
Keith Rankin, 24 July 1998
The following is the title and an abstract of a report, released yesterday, by Massey University Economists Srikanta Chatterjee and Nripesh Podder. The full report is available on Massey University's web page.
SHARING THE NATIONAL CAKE IN POST REFORM NEW ZEALAND:
INCOME INEQUALITY TRENDS IN TERMS OF INCOME SOURCES
Using Household Economic Survey (HES) data in unit record form, this paper examines the trends of household income inequality in New Zealand over the period 1984-96. The observed changes in the overall income inequality are then decomposed by income components to measure the contributions of the different sources of personal income to the overall inequality. The application of the methodology for disaggregating the Gini co-efficient, including its more recent extensions by Larman and Yitzhaki (1984), Podder (1993) and Mookherjee and Shorrocks (1982), to New Zealand data is the first of its kind.
The following is the Newsroom headline report:
Economic Reforms Have Driven Wedge Between Rich And Poor - A new economic study has shown that 80 percent of households are getting a smaller share of the country's wealth than they were 15 years ago. The Massey University study [by Prof S. Chatterjee] shows that the gap between the rich and poor in New Zealand is now one of the biggest in the developed world. Eighty percent of households now receive 7 percent less of the 'economic pie' than they did in 1983 while the top ten percent's share went up by 14 percent. Finance Minister Bill Birch said he was not surprised by the results of the study but says the size of the cake has grown and that's important.
The following represents my views on the issues raised (or which should have been raised) in the media, and is not a commentary on the report.
The study, based on Household Economic Survey data of pre-tax "gross incomes", finds that only 20% of New Zealanders are relatively better off. Finance Minister and former Treasurer Bill Birch yesterday morning (on Radio New Zealand) tried to undermine the impact of the results by saying that tax changes and economic growth have protected those who are relatively worse off. And on the 9:30 pm TV1 news he claimed that "the report shows greater rewards for getting skills and getting into work". [Mr Birch's comments here are reported in the NZ Herald, 24 July 1998, p.A4. And the report is discussed in Peter Calder's Weekend Herald column, 25 July, p.A24.]
Birch is wrong on all counts.
There have been four rounds of tax cuts since 1983 (1986, 1988, 1996 and 1998) and all of them have favoured higher income earners over lower income earners. In 1996 and 1998 - but not 1986 and 1988 - it is true that the second quintile (the bottom half of the top 40%) gained more in percentage terms from the tax cuts, but even they gained less than the top 20% in dollar terms. People on the median income - $16,000 - received virtually no tax cut.
Economic growth since 1983 has done very little for the bottom 80%. Growth has been higher from 1992-1998 than it was from 1985-1992, but even that growth has been very slow for an economy in "recovery mode". Per capita growth from 1983 to 1990 was 0.9% per annum. From 1990 to 1997 it was 1.4% per annum. These rates compare with a 1953-83 average of 1.7% per annum.
Per capita growth was 2% per annum from 1978 to 1985; 15% over 7 years. From then, the mean slice of the economic cake grew just 19% in the 14 years from 1983 to 1997, and just 10% in the 12 years from 1985 to 1997 (0.8% per annum). Per capita growth was about the same in the 12 years 1985-97 as it was in the two years 1983-85!! Yet in the 12 years from 1929 to 1941, years that included the deepest depression our nation has ever experienced, per capita growth was 35%, or 2.5% per annum. The reforms of the 1980s and 1990s have been quite impotent in comparison with the reforms of the 1930s.
To anyone except the Greens, our recent economic growth rates are just pathetic. The economic performance is pathetic to the Greens as well, but for a wider range of reasons.
So, given that economic growth over the post-reform period has been virtually imperceptible, changes in relative income distribution have also been changes in absolute incomes. The top 5 percent has increased their incomes at breathtaking rates. The next 25-35% or so have increased their incomes. The remaining 60-70% have fallen in both absolute and relative terms, in gross incomes.
One final word on growth. New Zealander's have produced 10% more per person in real value terms in the 12 years to 1997. But, out of a GDP of $100 billion, somewhere from $7 billion to $10 billion is the income of foreign creditors and asset-owners. The biggest share of the 10% addition to the economic cake is owned by foreign residents rather than New Zealanders. The next biggest share has gone to the top 5% of New Zealand residents, who presumably also dominate the small amount of overseas generated income owned by New Zealand residents. Most of the remaining 95% of New Zealanders are experiencing reduced incomes.
It is even worse when we consider absolute levels of disposable incomes. There have been a number of fixed burdens that have been imposed on, in particular, the bottom 70%: higher taxes, higher housing costs, differential inflation (ie lower income recipients have faced higher rates of inflation), higher debt-servicing costs (arising from both higher interest rates and much higher levels of personal debt), and higher costs in making arrangements for the greater hours that those in the bottom 90% who are in work have had to work (eg child-care costs, transport costs, eating-out costs, home servicing costs, loss of leisure). As a result of these burdens, absolute levels of genuinely disposable income have fallen for most of us. The good news is that the prices of the things we use our uncommitted incomes on have fallen. But it's only the top 20% or so who have increased discretionary income; and the bottom three-quarters of the top 20% are in many cases too busy to consume more.
An additional incursion into the discretionary incomes of the struggling middle classes is the various forms of "insurance premium" we are being made to feel obliged to pay. These include private health insurance, private school fees, and retirement savings.
The picture that I have painted so far is still incomplete. There is now a huge inequality between young and old, and rapidly growing inequalities within each demographic group: eg female incomes are much more unequal than before, Maori incomes are much more unequal, the incomes of middle-aged pakeha men have diverged. And so on.
Mr Birch is quite wrong about the impact of skills. Skills only return high incomes when they are scarce and in demand. Those who have become very rich have often done so by acting to ensure that the skills they have remain scarce. (PS: A simple unsubtle example is established doctors protecting their patches from immigrants.) In this context, the key skill is "experience" rather than being qualified. By making it much more costly for young and not-so-young people to gain new skills, and by making it very difficult for qualified but inexperienced people to use their skills, the reforms have served to protect experienced professional workers of a single generation. Those with high salaries today are able to command such salaries because they are protected by these entry barriers that prevail in an unregulated market economy. According to the textbooks, there should be many qualified and experienced people willing to take on, say, Christine Rankin's new job at WIA (Work and Income Agency) for say 200,000 per annum, or $150,000 or whatever. It is a result of market failure that there is (allegedly) nobody as capable as her who is willing to take on the job for less remuneration.
Another aspect of this problem today is the insider-outsider problem. It may well be that there are others equally able to do the new WIA job as Christine Rankin. But she is the insider, and they may be outsiders. What defines an insider? An insider is a person who 'plays the game', does not criticise the post-reform environment, takes a dim view of those who do criticise it, and maintains a particularly bland curriculum vitae. It is interesting to follow the problems faced by 58-year old Ian Williams ("A CV to take us all meekly to oblivion", NZ Herald, 14 July 1998, p.A13) who had a cv which included a whole range of experiences which would have made him able to do just about any job better than most people. Needless to say, he is unemployed.) Under the post-reform environment, people seen as "risky" are anathema to the employing fraternity. We have created one of the most risk-averse economic environments imaginable. We are outsiders if we have skills but no experience, but having both skills and experience by no means makes us insiders. We have to be seen to support the system before the system will benefit us. But even that may not be enough.
There are two other reasons why some people have become rich. Despite having created a system that provides career rewards for risk-averse people who 'play the came', and do not 'rock the boat', the system creates much unwanted economic turbulence, much of which is a result of its natural inclination to reject and exclude huge numbers of talented people. An environment of uncertainty and much rejected talent is an environment in which entrepreneurship can flourish. Most innovative people who do their own thing in this environment do not become rich. But a few do. Successful entrepreneurship is a route by which some outsiders can become insiders, if they so choose. (Some successful entrepreneurs, such as Dick Hubbard, prefer however to remain outsiders.)
The fourth way in which some people become very rich is by doing nothing, giving complete lie to Birch's claim that skills and hard work constitute the road to riches. These people are the pure capitalists, the rentier capitalists, the sleeping partners. The returns to the owners of privately owned assets - be it money in the bank, shares and bonds, real estate - have increased significantly after the late 1980s. For every tenant there is a landlord; for every debtor there is a creditor. The major income gain arising from our new form of capitalism has been rentier income, and not entrepreneurial income. This is why we have become so risk-averse. People with private property that pays them a good income regardless of their work never want the national boat rocked by people who question their right to a disproportionate share of the national cake.
It's very easy to say that (or to imply that) we can all become rich through hard work and increased skills. The reality is that, if we are not rich today, we are more likely to become rich by being related to a person who owns a lot of private property. Failing that, there are probably few strategies that yield higher expected future incomes per dollar invested than buying a Lotto ticket. For those without private property or access to parental income deriving from private property, every strategy offers a chance of success, and a much bigger chance of failure.
One final point about the structure of inequality. We hear a lot about family poverty. There is a lot of targeted family assistance, however. Thus families face huge poverty traps, but are not necessarily the most impoverished. In fact many of our most disadvantaged people are people trying to support and participate in the lives of children for whom they do not have custody. People of both sexes who have lost families, for whatever reasons, are amongst our poorest. The statistics for people without children are misleading because many of our richest people are also people who are not caring for children. Young single people, young couples, divorced older people, and couples with just one employed person on a low wage are among some of our poorest people.
Is there a way to reverse the trend to inequality? We cannot solve the problems of poverty or the more general problems of inequality simply by redirecting money towards families. We need to move to a variation of capitalism very different to the rentier/insider capitalism that our reforms, and the anarchic forces implicit in globalisation, have created for us.
The capitalism that I see as the way out of the inequality conundrum is called, by me anyway, "public domain capitalism". It emphasises public property rights. Much of my writing past and future is devoted to the "public domain" / "social wage" theme.
Srikanta Chatterjee, author of Sharing the National Cake and an economist for whom I have much respect, broadly supports my views on the dangers of inequality, and on where we can go to make a better economy.
Rankin File | 1998 titles