The New Zealand Initiative’s new report on inequality

The New Zealand Initiative has just released a report on inequality, following one on poverty earlier this year. I’ve already commented briefly on the report in the media; below are some more detailed comments.

While I welcome any contribution to the debate on inequality, this one is, unfortunately, a little selective in the evidence it deals with, and mistaken in some of its key conclusions. It also fails to deal with important issues such as discrimination, politics and power. These failings greatly reduce its value in the ongoing discussions around inequality.

In the Stuff story on the report, one of the report’s writers, Jenesa Jeram, says: “Income and wealth gaps are red herrings for what is really hurting those on the bottom rungs of the ladder. It is the cost of housing that is exacerbating inequality, so we need housing solutions,” she said.

This seems to me incorrect. Yes, housing costs are a big problem, particularly for lower earners. But one fifth of the population (on one standard measure) is in relative poverty even before housing costs are taken into account. And that poverty occurs in a wider context of how income is distributed and redistributed, of incomes barely increasing over 30 years for the poorest while doubling for the richest. To dismiss such widespread poverty and inequality as “a red herring” seems seriously mistaken.

Perhaps the most fundamental omission in the report, however, is its failure to deal in any significant way with the long-running consequences of widened inequality. It makes much play of the fact that the big increase in inequality happened in the 1980s and 1990s, and this seems to be a justification for downplaying the whole issue.

Nowhere do the report’s authors thoroughly address the point that, even if a big shift happened 20 years ago, it can have an incredibly damaging long-running consequences. Inequality has strong and internationally accepted impacts on things like social mobility, trust, health and social cohesion. A continuing high level of inequality implies that those things will continue to be damaged – a point that seems to entirely escape the authors.

(It doesn’t help that they wrongly think that works making such connections, such as The Spirit Level, have been “debunked” by peer review. In fact, most of the dissenting authors they cite have never, to my knowledge, published anything on The Spirit Level in a peer-reviewed journal, and the main peer review of the book, by Birmingham University’s Karen Rowlingson, broadly supported its conclusions.)

The authors are also selective about which research, and which parts of specific research, they cite. For instance, they cite Helen Roberts’s research when it shows New Zealand CEO salaries to be below international levels, but they don’t quote the overarching conclusion of her research, which is that high CEO salaries are very much the result of their “rigging” the system by influencing boards. That finding, of course, would have sat uneasily with the report’s claim that many inequalities are justified on merit.

When it comes to perceptions of inequality, the report cites work by Peter Skilling on attitudes towards specific inequality-reducing policies; but when it comes to discussing people’s knowledge of wealth inequality, they cite international research showing people overestimate wealth inequality, but entirely omit Skilling’s finding that people drastically underestimate it! Again, this would have inconvenienced their argument.

Similarly, the authors cite one piece of research, by Hyslop and Mare, arguing that changes in household structure (such as there being more sole parents) explain half of the increase in inequality in New Zealand, but they don’t notice the conclusion of a more recent paper by Stillman et al finding that increases in poverty 1983-2003 “are not explained by either changes in the characteristics of households over time or changes in household employment patterns” and that “the structural reforms undertaken in the 1980s led to permanent changes in the distribution of resources across households in New Zealand”.

Despite having an entire section on income mobility, the report rather bafflingly fails to mention one of the key bits of work in this area, Miles Corak’s research showing that low social mobility is a direct result of high income inequality. Since Corak is one of the key people in this field, and visited New Zealand recently, it is surprising that his work could escape the notice of anyone writing about inequality.

Some of the other, broader omissions are also striking. For instance, the courts have, in recent decisions (especially the Bartlett case), been unequivocal in finding that many women are poorly paid simply because they are women. Discrimination is a huge cause of income and therefore wealth inequality. But nowhere is this discussed.

Similarly, economic power is absent. The report fails to note recent research from the IMF showing a clear correlation (and plausible causation) between reduced union coverage and increased shares of income going to the richest 10th. The IMF found this effect to be stronger in New Zealand than in any other country they surveyed. And it is not hard to see why: weaker unions lead to reduced bargaining power for ordinary workers, which in turn makes it more likely that senior management will take a larger share of company income. Yet there is no discussion of this: it is as if power does not exist.

Another baffling omission concerns politics. The report does not seem to consider why inequality might have been flat or falling through the 2000s, but MSD’s Household Incomes Report (which the authors cite elsewhere) is clear: it was thanks to policies such as Working for Families and a higher minimum wage. By failing to discuss this, the report gives the impression that inequality somehow stopped rising of its own accord.

The report’s problems are epitomised by their handling of the thought of the political philosopher John Rawls. The report quotes his thinking (at some length) on just and unjust outcomes, and then argues that Rawls was concerned with absolute poverty, not inequality, and that his philosophy is about ensuring that institutions don’t impede upward mobility or meritocracy.

Both points are essentially incorrect. Rawls’s famous ‘different principle’ is explicitly about inequalities between rich and poor, and when they are justified (when they work to the advantage of the least well off, is his basic answer).

More fundamentally, Rawls’s beliefs about the meritocracy are exactly the opposite of those the authors espouse. They may not be aware of it, but in A Theory of Justice, Rawls goes on to argue that, even once social and economic barriers to success are removed, people’s rewards should not be based on “desert” or merit, because we do not deserve the talents we have inherited, not even our capacity for hard work, which is itself inherited or shaped by our environment.

Rawls, in fact, argues that people’s talents should be seen “a common asset” and their benefits (in increased salaries and the like) should be shared as widely as possible (consistent with the difference principle). That his views should be so contrary to what the authors are trying to argue is perhaps symptomatic of the problems that their report encounters throughout.