The Inequality Blog

Today is Budget Day eve, an appropriate time to be thinking about what the morrow might bring when it comes to policies and solutions. So, following last week’s column on why centre-right voters might be concerned about inequality, here are some policies that a centre-right government could implement. I don’t necessarily expect to see anything of the sort; in fact, in the last 24 hours, it’s become unclear whether we will even see any progress on child poverty, the one area the government has specifically promised to address. But that’s not to say that there aren’t things National could do to address income imbalances.

In fact, there are plenty of things that centre-right governments can do, and have done in the past, to reduce inequality, bearing in mind that income gaps fell right across Keith Holyoake’s long tenure as prime minister from 1960 to 1972. Many of the long-term investments in health and education are well understood and fairly obvious, so I won’t discuss them here, although it is worth noting that with the long-term cost of child poverty estimated at $6 billion-8 billion, a little bit more early investment would make good sense on economic grounds alone. But what else is there on the table?

For a centre-right government, most of the traditional anti-inequality warhorses from the tax and benefits stable are of little interest. But not all of them. Across the spectrum, there is a good argument for taxing all forms of income equally (the Treasury certainly thinks so), and last week’s announcement of a very limited capital gains tax could easily be turned into the real thing. That would reduce inequality at the top end, but also help channel investment away from real estate and into more productive things.

Also on the tax-benefits issue, a number of people, including the Prime Minister and his biographer, John Roughan, have noted that while pensions rise in line with wages, other benefits rise only in line with inflation, and are thus falling further and further behind the average wage. If, like Adam Smith, you think that what people need to escape poverty is set by society’s average standard of living (the things, in his words, that society has deemed that “credible” people cannot be without), there is a good argument for indexing benefits to the average wage. And that’s no small matter. If that had been done since the early 1990s, the standard unemployment benefit would be 15% higher than it is now – helping lift tens of thousands of people and their children out of poverty.

Perhaps counterintuitively, the universal basic income (UBI), an unconditional cash grants to every adult every year, isn’t out of bounds either. Milton Friedman was a big fan, on the basis that a small measure of security would give people a stable base for being more entrepreneurial. And in New Zealand, one of the UBI’s biggest advocates is Gareth Morgan, no one’s idea of a firebrand left-winger. Though not without its flaws as an idea, the UBI is worth taking seriously.

But as I said, tax and benefits aren’t the main thing for the centre-right. Jobs are much more important, and the government is clearly making an effort in that regard. But certain areas remain woefully neglected – training in particular. Yes, there are more apprenticeships, and some other reforms underway, but other countries still invest vastly more than we do. Think about Denmark’s fabled flexi-curity model: it makes it quite easy to fire workers (the ‘flexi’ part), but then invests billions of euros in retraining them if their industries have disappeared or their skills have become obsolete(the ‘security’). It’s an acknowledgement that while people should seek work, you can’t always expect them to get there on their own.

And it is in the world of work that centre-right arguments about inequality can really come into their own. After all, it is a well-established conservative principle that reward should be linked to effort and talent. But we know in New Zealand that although the economy has grown significantly in the last 20 or so years, the average wage has fallen well behind: if it had kept pace with growth, it would be about $10 higher than it is. That’s a lot. One way to restore ordinary staff’s share of growth would be through stronger trade unions, but that’s clearly a nonstarter in this context. So what else?

Well, there’s an argument that too much of company income goes to the chief executives and senior managers. There’s certainly a mountain of international evidence showing that big income gaps within a company are extremely demotivating for ordinary staff. If they don’t feel like pay rates within their company are fair, they switch off. In contrast, when staff feel they are being paid fairly, they are more likely to internalise the company’s goals and work harder. Companies with highly engaged staff are, the evidence shows, far more profitable than others. And the evidence is that higher CEO salaries in New Zealand can’t be explained by increased levels of performance. So a centre-right government could apply at least some gentle pressure on top-level salaries (maybe starting with some of our extraordinarily well-paid government chief executives). If both CEO and senior manager salaries were a bit closer to what they should be based on effort and contribution, you might have a bit more to share around amongst ordinary staff.

More appealingly, perhaps, a centre-right government might think about company ownership. As the American writer Jeff Gates once noted, the strange thing about capitalism is that it creates so few capitalists: very seldom do people have any meaningful stake in the company where they work. So the government could do a thing or two to encourage employee share-ownership – tax incentives for companies that give all staff share options, for example. That would tackle wealth inequality and income inequality (given the income that those shares would generate), as well as boosting staff’s sense of being part of the company and therefore their motivation.

In short, there are plenty of things that National could do to address inequality. As to whether it will or not … well, we’ll just have to wait for tomorrow.

At the moment, the left is dominating the debates on income inequality. But it doesn’t have to be this way. There are plenty of reasons for people on the centre-right to be concerned by widened income gaps – and plenty of things they can say on the subject. Here are just three.

The first reason that the centre-right might worry about inequality is very simple: the economy. A well-functioning economy is key to centre-right thinking; it’s the thing that has to work before all other plans can come to fruition. Yet there is growing evidence that big income gaps are bad for growth. Both the IMF and the OECD have issued heavyweight reports showing just that.

The links between inequality and weak growth are many. A very unequal society has a lot of people who are struggling and marginalised; they – and in particular their children – are unlikely to make the economic contribution they could in a more equal world. Even middle class families see wages stagnate and struggle to invest in their children’s education as they would like.

At the other end of the scale, large amounts of income flowing to the richest tend to result in asset bubbles and speculative investment. Just look at the GFC: as poor households saw their incomes falling behind because most of the growth was going to rich families, they borrowed to keep up and to buy houses – and that borrowing came of course from the rich, who needed a home for all that cash splashing around. When that situation became untenable, it all unwound, and voila: a major global recession.

A second thing that might concern the centre-right is the effect inequality has on social mobility and equal opportunity. Social mobility – the idea that people should be able to do well, regardless of who their parents are – is another key centre-right value, and sometimes people insist it’s more important than income inequality per se. But there’s plenty of evidence that you can’t separate the two. The graph below, known as the Great Gatsby curve, shows that the very equal Scandinavian countries have ‘generational earnings elasticity’ of less than 20% – that is, less than 20% of your income as an adult can be predicted from what your parents earned. That’s pretty good: not perfect, but not bad either.Corak Great Gatsby graph

In very unequal countries like the US, however, fully half your income can be predicted from what your parents earned. That means that huge amounts of advantage are transmitted, and there’s nothing like a genuinely equal opportunity – a fair go, as it were.

It’s not hard to see the link, either. In very unequal countries, kids get very different starts in life, and that just compounds and compounds in later life. In equal countries, by contrast, most families have enough income to give their kids a good start in life, and free-to-all public services help close up any remaining gaps. Of course, as the graph shows, New Zealand is doing okay-ish at present. But we’d surely like to move closer to the Scandinavians – and the graph implies that we won’t be able to do so without first closing income gaps.

The third and final centre-right concern – and one that is fundamental to everything else – is around social cohesion. This is an idea dear to the hearts of what the British call One Nation Toryism, and what New Zealand commentator Colin James calls “small-c conservatives”. As he puts it, such people value order, since an orderly society “is likely to be safer and more congenial than a disorderly one”.

But a society in which there are large inequalities “is likely to become disorderly or at least less orderly”. We know from international evidence that as income gaps widen, people lose their understanding of and sympathy for the lives of people at the other end of the spectrum. Trust declines; volunteering to help others declines. That being so, “it would make small-c conservative sense to reduce those inequalities to the point where they do not threaten disorder.”

And that, James argues, points to the idea that we should think of a cohesive, well-functioning society “as economic infrastructure”. A well-functioning economy “requires investment in infrastructure: failure to build, restore and maintain roads or water or waste systems, for example, has an economic cost over time and investment in them a corresponding economic benefit over time. … If we accept that a cohesive, well-functioning society — one of unique individuals bound in common purpose — is also infrastructure, underlying and underpinning the superstructure of our material wellbeing and thus necessary to a well-functioning economy, we will invest in them, that is, build, restore and maintain them.”

The above arguments provide a solid foundation for a centre-right push towards greater equality. And where better to finish than with a quote from a former speechwriter to George W. Bush? Writing a few years ago, David Frum argued that equality in itself “never can or should be a conservative goal. But inequality taken to extremes can overwhelm conservative ideals of self-reliance, limited government and national unity. It can delegitimize commerce and business … Inequality, in short, is a conservative issue too.”

 

The Maxim Institute thinktank have a new paper out on how to measure poverty – and it endorses the idea that people need to be able to participate in society, not just survive, if they are to be deemed to have escaped poverty.

This is significant because ‘participation’ can be such a dividing line in politics. For those on the left, the 1980s Royal Commission finding that everyone should be able to ‘participate and belong’ in society has been a touchstone. If you can’t actually enjoy the things that others enjoy – such as being able to offer hospitality to guests, buy presents for birthdays, or have new clothes occasionally – then you are still in poverty

Those on the right have tended to favour a more basic definition – that people simply need the bare necessities, such as food and shelter, in order not to be poor. Society doesn’t have a responsibility to provide anything more than that to those who are struggling. And on first sight, the Maxim definition looks to be in this tradition, arguing that

Poverty should be defined as a situation where a person or family lacks the material resources to meet their minimal needs as recognised by most New Zealanders.

 But they go on to explain that “minimal needs” are determined

 …by what most New Zealanders consider necessary for a minimal acceptable standard of living to participate in society: a range of items or activities that no one should go without. These needs may be social or material and go beyond what’s required for mere survival.

That’s heartening, because if Maxim, generally regarded as being on the centre-right, have come up with this kind of definition, it raises the chances of cross-party agreement that everyone, regardless of income, should be able to participate in society.

Maxim also argues that to better define poverty, the public should be invited to say what ‘basket’ of goods and services people would have to be able to afford in order to participate in society. I’m ambivalent about this. While I generally favour maximum democracy, I’m not sure that the public at large, especially its more comfortable and more out-of-touch members, has a good handle on what people need at the lower end of the spectrum.

Also, previous New Zealand focus group work from the 1990s shows that the amount of income people need to participate is about the same as the main internationally standard definition of poverty, which is 60% of the average household’s income. So there’s a good chance that any public survey would just confirm that finding, thus reinventing the wheel.

On the other hand, something that the public had signed up to would have more buy-in than something determined by government, so one can see Maxim’s point.

Either way, though, Maxim’s work is a promising development, and a sign that the conversations around poverty and inequality are really taking root.

The Reserve Bank has just published a revised set of its household balance sheets – how much New Zealand households own and owe.

The data is significant because it includes for the first time some things like how much households have invested in businesses that aren’t listed on the stock exchange.

The result of the changes is to add assets to the total household balance sheet worth around 84% of New Zealand’s annual income – a pretty significant change, and one that I’ll discuss in more detail in following posts.

I’ve just come across this graph about who gets to go onto higher education in developed world countries – and it seems to make pretty damning reading for New Zealand.

Well educated parents' advantage

Basically, it suggests that if you have highly educated parents, in this country you are nearly 10 times more likely to be in higher education – university, polytechnic or ‘college’ in American-speak – than someone whose parents are not highly educated. That’s the worst ratio in the developed world, by a long chalk.

(A brief word on how the ratio is calculated. In New Zealand, there are twice as many tertiary students with highly educated parents than you would expect based on how many highly educated parents there are in the population. In contrast, there are only one-fifth as many students with poorly educated parents as you would expect. If you divide two by one-fifth, you get 10 – and that’s the ratio.)

Data can be flawed, of course, and we have to ask ourselves, does this seem likely? It is true that the data for New Zealand doesn’t include some qualifications that probably attract more students with poorly educated parents, making our ratio seem worse than it really is. But that is also true for the United States, Canada and Australia, and they all seem to be doing far better than us on this data.

It seems hard to believe that we could have a worse record than the United States, where tertiary education is so expensive. But they do compensate for that with scholarship schemes far more extensive than those here. (Not that I’m necessarily recommending scholarships as the way to counteract socio-economic disadvantage.) So it’s still plausible.

Assuming the data are correct, then, how is the influence influence transmitted from parents to children? Probably not through tertiary education as such. The advantage will be gained because the children of better educated parents will have a better start in life, and thus do better at primary and secondary school, setting them up for later educational success.

And we know that 70-80% of children’s attainment at school can be explained by their socio-economic background, with just 20-30% influenced by what happens within schools. So this data looks like further evidence for doing something about poverty in New Zealand.

UPDATE: The Ministry of Education has responded with the following information, from Claire Douglas, head of graduate achievement, vocation and careers:

Education is central to inter-generational mobility. Unfortunately this data  doesn’t present an accurate picture of the role tertiary education plays in New Zealand.

The graph does not compare apples with apples, with the result that New Zealand’s inter-generational mobility is underplayed.

The graph originally comes from the 2012 OECD publication Education at a Glance. The results for most of the countries came from a survey run by the OECD.  But for some countries – New Zealand, Canada and the US – the results came from a separate survey,  the Adult Literacy and Lifeskills (ALL) survey in 2006.    

In most countries, the question asked if university graduates’ parents had attended university.  However for the ALL survey used to generate results for  NZ, Canada and the US, the questions asked if the university graduates’ parents had had tertiary education of any kind. This  included those with trade qualifications and diplomas. That meant  for these three countries, a wider group of parents were counted as having a tertiary qualification. That in turn diminishes the pool of university students counted as coming from households without qualified parents, and thus a lower OECD ranking for mobility.

That difference in the survey used means that inter-generational mobility for NZ, Canada and the US shows as much lower than it would had they participated in the main OECD survey.

The results particularly skewed New Zealand’s rankings because we have had, over the years, the highest proportion of our population who had non-university tertiary education.

Which are all reasonable points, and were acknowledged in the original post to some extent. The question is how much does difference does the nature of the survey make? The ministry is saying it shows mobility “much” lower than it really is, but the OECD obviously doesn’t think it makes a material difference. In addition, as noted above, the other countries also affected by this bias still have far, far higher mobility rates than us, so the problem remains.

Yesterday’s announcement by John Key that, in future, salaries for MPs will rise only in line with salaries for ordinary public sector workers is a big deal for two reasons.

First, it provides more evidence that the public is very concerned about inequality in general, and high salaries in particular. Key has made noises about dealing with the MPs’ salary issue before, but never acted. That he is doing so this time shows the growing scale of public disquiet on the issue.

Of course, MPs’ salaries (at around the $150,000 mark), though large, are nowhere near as big as those of private sector chief executives, say, who in New Zealand can earn $3 million-$4 million. Since CEO productivity is about as hard to gauge as that of MPs, and their remuneration therefore equally difficult to justify, you have to wonder when more attention will turn to the private sector. Still, a focus on the public sector is fine for the moment.

The other interesting thing about the Key announcement is that it implicitly endorses an important concept for reducing inequality: pay ratios. The idea behind pay ratios is that the pay of an organisation’s highest earner should be no more than, say, 12 times that of the lowest paid earner.

Key’s announcement will fix MPs salaries at roughly, I would guess, five times that of the lowest paid public sector worker (assuming they are currently on the minimum wage of approximately $30,000), and his own $430,000 salary at approximately 15 times that of the lowest paid worker. (What is an appropriate ratio is of course up for debate. A future government might legislate to reduce that ratio to, say, 12 to 1, so that the PM doesn’t earn more in a month than anyone in the public sector (or elsewhere) does in a year.)

With this principle established, it could be extended elsewhere: to public sector chief executives, for example, some of whom earn over $600,000. And, as above, the real issues with higher pay are in the private sector. So we might see some of our biggest companies adopting pay ratios – or being encouraged to do so by activist shareholders. Now that would be a step in restoring fairness to the economy.

One of the things that banks like to do is send out research notes about what they think the “key themes” of the future will be. The ANZ research note issued earlier this month is typical of the genre, with a lot of phrases like “change is the new normal” and “the trend is your friend”.

But, fascinatingly, the final one of its six key themes is “addressing income inequality”. The bank says:

A degree of inequality can be expected (and is necessary) in any market economy. However, rising income inequality dampens economic mobility, reduces education standards, and makes an economy less flexible. Rising social tensions can also lead to political instability. There are good economic reasons for addressing inequality. New Zealand looks to be pushing a number of the correct buttons but has a way to go. Job creation, raising educational achievement, and encouraging flexibility across the education sector need to be at the epicentre of a multi-pronged strategy.

One could quibble with much of the analysis, of course. The focus on education, while not completely without merit, is in many ways a distraction, an attempt to shift the debate to social mobility, as opposed to directly addressing inequality. We have to remember that it’s the actual size of our income gaps that are the problem, and you don’t change them by making it easier for people to move up and down the ladder.

Nonetheless, the research note is a striking demonstration of how central inequality has become to our public debate.

In fact, the note points very much to what we will see this year, and the ones after: lots of people talking about inequality, but many of them trying to divert the debate into related, but less important areas.

For years now, one of the main reasons given for dismissing inequality as an issue has been about economics: you need income gaps to generate growth. Without a wide gap between rich and poor, who would have the incentive to work harder and do the things that generate income for everyone?

That argument, which had already looked flimsy, was dealt what looks like a final blow with the report out yesterday from the OECD, which found unequivocally that growing income gaps are bad for the economy.

New Zealand, which had the developed world’s biggest increase in inequality from the mid-1980s to the mid-2000s, has seen more economic damage than most. According to the OECD’s calculations, our economy grew about 30% in the last two decades – but it would have grown by 45%, or half as much again, if inequality had stayed at 1980s levels.

So the defences for inequality are falling rapidly. As the OECD report points out, the ‘trickle-down theory’ has already been pretty thoroughly discredited; the evidence of the  last 30 years is that the income generated at the top tends to stay there, under the current settings. The OECD also rejects another argument in favour of inequality – that the standard remedy of tax and spending would hurt the economy – by saying explicitly that redistribution is good for the economy, if done well.

The OECD report could, of course, be challenged, and some economists were already asking last night where the detailed calculations were to back up its findings. But the report is hardly the first to make these points (though the most high-profile, and the most emphatic); and that makes it harder to ignore. Earlier this year, IMF researchers argued exactly the same thing, providing detailed evidence that more equal countries have better economic growth.

It’s not even a very counter-intuitive idea. After all – and this is broadly the point the OECD makes – if you have a society in which a large chunk of the population are starved of the resources they need, their economic contribution is unlikely to be huge.

When families lack the income they need to pay doctors’ fees and keep healthy, or to fix their car so they can travel to a new job, or to give their kids the equipment and clothes they need to succeed at school, it’s obvious that economic growth will suffer. You could argue that these are problems of poverty, not inequality, but really the two are inseparable; the reason some people have so little is that the fruits of economic growth are going largely to our richer citizens.

Of course, inequality matters for reasons that are far greater than economic growth. But the economy is paramount in the minds of many who still need to be convinced that growing income gaps are a problem. So this report – demolishing a key argument against inequality, backing redistribution, and pointing out New Zealand as the country worst affected – is a landmark one, and may represent the moment when inequality really became too big to ignore.

I was speaking a little while ago at a literary festival, in a panel session on poverty and inequality with Canterbury University’s Bronwyn Hayward and broadcaster Wallace Chapman, when an audience member got up and spoke, with great emotion, about the struggle that she and her husband faced in making ends meet on his salary stacking shelves at a local supermarket. Like many others in this situation, she had to deal with the extreme distress created by ever-increasing bills and inadequate income, a situation which often threatened to overwhelm her.

Sometime later, I received this e-mail:

 

Dear Max, Bronwyn and Wallace,

Thank you for your enlightening panel talk on equality and poverty. It has profoundly adjusted my view of poverty within New Zealand.

If you remember during the questions the young women who burst into tears, I am that woman.

I wanted to let you know that, after it ended, many women came over to me with so much compassion in their hearts. Many of those women pushed money into my hands insistent that I accept it. I came away from that talk $165 richer.

But more than that, I had the realisation that there are people that have money that they personally don’t even need; that while I have lived in poverty my whole life, this is not how the majority of people live.

As a writer, this realisation has sparked a desire in me to write a book about this phenomenon. This barrier in our existence needs to come down, so those who struggle realise there’s a world of plenty all around us, and those that do not struggle, financially, can comprehend what it’s like to live without any assets.

Thank you all for this inspiration.

Of course, individual instances of generosity like this are not going to solve the systemic issues that leave one fifth of the population in poverty. But generosity and compassion of this kind have to be at the heart of any response to this widescale problem.

The author of the letter is also quite right to suggest that many people struggle to realise what it is like to live in poverty, and that one of the most crucial tasks of the years ahead is to somehow get through to those who currently refuse to see the reality around them.

I’m delighted to have been awarded the 2014 Bruce Jesson prize, to work on a book on wealth inequality in New Zealand. Wealth – as opposed to income – inequality is increasingly a hot topic. I also think it’s time that we looked not just at what’s happening in deprived neighbourhoods but also at how life looks for those at the top of the heap.

It’s not a conversation that we in New Zealand are very good at having; in fact, we tend to find it embarrassing. But we need to find ways to talk about wealth and privilege, given their growing force in our culture. That’s what I’ll be doing for the next while.