Top 1% has got one-fifth of recent growth, says OECD

Large income gaps pose one of the most severe challenges that New Zealand faces, according to speakers at a conference organised by the Institute for Governance and Policy Studies.

The conference, entitled ‘Increasing Inequality: Causes, Consequences and Responses’, heard first from the OECD’s Michael Forster.

From 1980 to 2008, New Zealand’s top 1% captured 20% of total income growth, Forster said. While the top 1%’s income share had fallen around the world after the global financial crisis, “all the signs points to the fact that this was a transitory halt in the shares of the top income earners”.

Also on the international front, he said: “As the jobs crisis persists and fiscal consolidation takes hold, there is a great risk of further rises in inequality and poverty.”

The OECD’s analysis showed that technological change and increasing rewards for skilled workers had played a big part in increasing inequality, but other factors – including a less redistributive welfare system – had also widened income gaps.

Policies were needed in three key areas to reduce inequality: investment in skills and training, creating more high-quality jobs – “in the past, there was too much emphasis on more jobs … [we need] jobs which can provide a career” – and reforming tax and welfare systems.

On the last point, Forster said there was “scope for reviewing some tax provisions in light of increased tax capacity among top income households”.

The conference also heard from Professor Robert Wade, a New Zealand-born political economist from the London School of Economics.

Wade outlined the significant health, economic and political costs of inequality. While some mainstream economists claimed that inequality was needed for growth, the very equal northern European countries had some of the world’s highest growth rates per hour worked, he said.

In fact, inequality posed a threat to the economy by reducing the spending power of the lower and middle classes, and by helping create the kind of asset bubbles that had led to the global financial crisis.

But it was the political costs of inequality that were most concerning, Wade said. Great wealth created a “money-empathy gap” that led the top 1% to demand policies very different from those sought by the general public.

This great wealth also allowed the top 1% to get their way, he said, citing research showing that US politicians are much more responsive to their wealthy constituents than to their poorer ones.

To stress the fact that everyone was affected by inequality, Wade used the metaphor of a swimming pool “with a urinating and a non-urinating section”. In this metaphor, “Those people in the non-swimming section cannot insulate themselves from the behaviour of those in the urinating section.”

All proposed laws should be assessed for their potential impact on income gaps, Wade said, even those – like monetary policy – that appeared far removed from income distributions. In particular, campaign finance reform was needed to stop the wealthy from unduly influencing politics.