Illuminating inequality

Hautahi Kingi

You bump into an economist searching for his lost keys under a streetlight and ask if he is sure he is looking in the right place. “Almost certainly not,” he replies, “but this is where the light is.”

For nearly a century, economics was limited by the solitary light of national income growth, leaving other measures of well-being in the dark. 

Thomas Piketty’s book challenges this orthodoxy, by bringing questions of wealth and distribution to the forefront, thereby illuminating the shadows ingored by economists for too long. He claims that “a market economy, if left to itself, contains … powerful forces of divergence [in the distribution of wealth], which are potentially threatening to democratic societies and to the values of social justice on which they are based.” 

Unfortunately, the evolution of inequality in New Zealand mirrors the troubling global pattern Piketty unveils. Income inequality in New Zealand peaked at the beginning of the 20th century. In 1921, the income share of the top 0.1% was 45 times the national average. Top income shares then fell rapidly due to the chaos of world wars, the great depression and new public policies, rather than some harmonious economic inevitability. 

In New Zealand, the income share of the top percentiles continued to decline until 1986, when the country was at its most egalitarian and the income share of the top 0.1% was just 10 times the national average income.

Although much of the recent rise in inequality is due to unequal wages, Piketty believes the long run concern is the uneven distribution of wealth. Again, New Zealand is no exception, the top 10% own over half (51.8%) of total private wealth. The top 10%  of wealthy individuals own over half (51.8%) of total private wealth, while the bottom half collectively own a mere 5.2%.

 People are often surprised at the extent of inequality here. However, it is no surprise to M?ori and Pacific people, whose average income in 2013 was $43,600 and $39,700 respectively, while it was $52,000 for P?keh?.

 So where to from here? Piketty’s suggestion of an internationally coordinated tax on private wealth holdings has been widely dismissed as utopian. I believe the pessimism is unfounded. The hitherto futile attempts at international climate change agreements have not dissuaded organisations from attempting to find a solution.  Efforts continue because we know the drastic consequence of inaction.

Our small size, far from being a hindrance, is an advantage; proud moments in New Zealand history have stemmed from us refusing to await the lead of larger countries. 

?Why the fuss?

Donal Curtin

Thomas Piketty’s book is many things. In New Zealand, people have mostly wanted to talk about the evidence for, and the processes generating, inequalities of income and wealth. 

As a guide to our national policy priorities, this has been overdone, for two main reasons. 

First, leaping to emphasise inequality outcomes should take a back seat to focussing on equality of opportunity. Sam Morgan makes a bundle from inventing and selling Trade Me? Excellent. Income and wealth inequality are made worse as a result? Certainly. Anyone worried about this? Me neither. 

But I would be worried if kids from the backstreets of Otara or Kawarau weren’t being equipped with the skills and knowledge to be Sam Morgans in their own right, and if all the opportunities were instead going to the descendants of, say, well-off economists. 

Economic growth, like equality of opportunities, should also outrank inequality of outcomes as an important issue. Nothing transforms the earning prospects of the young, the unskilled, and minorities like a good old-fashioned burst of faster economic activity. 

Second, I don’t believe New Zealand is experiencing an acute attack of inequality. Based on government numbers, and when incomes are measured after tax and after adding in social welfare benefits, inequality in New Zealand using the Gini coefficient, the most common measure, has been largely stable over the last 20 years. The coefficient varies between 0 (complete equality) and 100 (complete inequality ie one person has all the income.)

If there’s an acute inequality problem, it’s overwhelmingly an American one. There, the top 1% are back to levels of the Gilded Age of Gatsby. But it’s hard to see a problem in New Zealand, where we have a slightly smaller share going to the top 1% than France does, and are comparable to the famously egalitarian Swedes. So, why the fuss? 

But let’s suppose we’d like to do something about inequality. Here I found myself agreeing with a lot of what Piketty has to say. 

He makes a fine case for a modernised, more effective welfare state – and rightly considers it one of the great advances of civilisation of the past century. 

Finally, and I wouldn’t have said this before I read the book, I think I’m open to a wealth tax, at some low annual rate, above some fairly high threshold. Not a capital gains tax, but a wealth tax. After all, you can be well off in two senses: earn a lot, or own a lot, and it doesn’t seem either right or efficient for our tax burden to fall largely on those who earn a lot.