Inequality: I’m not yet convinced

By Bill Kaye-Blake 30/07/2013 12

I have started the book Inequality: A New Zealand Crisis. It’s slow going but want to start teasing out my reactions, so I’ll review it piecemeal. Today, we’ll look at Part One, the introduction. My apologies at the start — this is long and somewhat rambling.

The reason it is slow going is that I’m having to weigh up each sentence. I think there are logical flaws, so the book doesn’t carry me along. I’m sure some readers will enjoy the outrage and devour the book — I’m not one of them.

A major premise of the introduction is that we are all worse off when inequality increases. They rely on Wilkinson and Pickett’s The Spirit Level for this argument, even reproducing a figure from the book (see here for my take on that book).  But they know themselves that this isn’t true. On page 17, we are told

We are all worse off for having wide income gaps in New Zealand.

On page 16, by contrast, the argument is

in countries with large concentrations of income, the wealthy can use their power to argue for policies that further their interests rather than those of the economy as a whole.

When you put these two statements together, the argument is that the wealthy are working against their own interests by arguing for policies that favour their interests. Obviously, this is illogical.

I also think it’s a tactical mistake. People working to lessen inequality are trying to get other people on board, to make equality politically popular. They are doing this by saying that equality is in everyone’s benefit. But this is simply not true, and obscures the fight they have on their hands.

(There is a similar retrospective argument going on over slavery in the United States during this sesquicentennial of the Civil War. One side says that slaveowners could have been bought out and everyone would have been better off. The other side argues that this wouldn’t have been possible.)

A second issue is that equality/inequality is a muddled concept throughout the Introduction. It seems to stand in for ‘things we don’t like’ rather than having an independent definition. This was quite striking with the second personal profile in the book. It’s a profile of a family with mum, dad and four children. They moved from Auckland to Whanganui, then mum lost her job and things got tight. But ‘tight’ is a relative term. For example, the family can afford some after-school activities but not all of them. Is that deprivation or not? Most important, though, is the notion of choice:

But even though she’d almost certainly get work in Auckland, Kristine doesn’t regret the move to Whanganui. ‘Being down here enables us to do so many more things for the children. We get a far better lifestyle here, with far more time together as a family.’

So how is this inequality? This family is choosing non-monetary rewards over monetary rewards and dealing with the consequences of that choice. They know they have other options and choose not to exercise them.

Another issue is that the statistical basis for the arguments is not consistent. Sometimes, the talk is of personal income, which includes all the superannuitants. We are told, for example, that 30% of individuals have incomes less than $15,000. In the very next paragraph, we move to a discussion of household incomes, which look much less dire (decile 1, single person, no children: $16,600 or less). Further on, the discussion moves to disposable incomes (after tax) for single households, but figures for the top 1% of those earners are given as pre-tax amounts because of data constraints. In essence, the number of people at the low end is inflated, and the incomes at the high end are inflated. It would have been better to work harder at a consistent measure of income to present a fair picture of the situation.

This kind of ‘worst case’ picture doesn’t stop with the incomes figures. For example, we are told that

this country has a relatively small earnings advantage to those with degrees.

As it happens, I know a little about this topic. The footnote (ftnt 66!) to the statement correct notes that the OECD has measured returns to tertiary education. However, that includes not only degrees but also sub-degree qualifications. The composition of New Zealand tertiary education (comparatively more sub-degree qualifications than other OECD countries) drags down our average return.

This statement about a small earnings advantage also shows the incoherence of the whole introduction. In a relatively equal society, we should have low returns to increased education. The premium should cover the time spent out of the workforce but not much else. Just because someone didn’t get an education is no reason for them to be disadvantaged in the workplace.

If this strikes you as a silly argument, that’s because you are thinking about productivity and economic efficiency. Clearly, the book recognises that some inequality is okay (degree holders should make more money), but too much is not. What I want is a clear statement about where they think that line is, and how they propose to measure it.

12 Responses to “Inequality: I’m not yet convinced”

  • Where the book says [quote]We are all worse off for having wide income gaps in New Zealand[unquote], I’m pretty sure what they mean is that the economy as a whole is worse off. Lots of money locked up in the bank accounts and assets of a few people possibly isn’t good for the economy as a whole (though this might also be true under equality, if we were all equally very rich!) Look at India, for example (lots of wealth in the hands of just a few people, the rest have next to nothing, and the economy as a whole probably isn’t that healthy). This is particularly true if, as seems to be the case here, the rich don’t have to pay as much tax as they might do! Also, the wealthy might use their “power” to argue for policies which benefit them in the short term, but which actually diasadvantage them (or those who come after them) in the longer term …

    • Problem is that there’s little evidence of that inequality of the range and of the causes experienced in New Zealand actually does do any harm. From what I can tell of the literature, but I’m sure that Matt and Bill have read more of it than I have, where inequality comes about because entrenched interests block anybody else from doing stuff, that’s really bad, but because of the underlying institutional structure that generates the inequality rather than because of the inequality per se. Where inequality results from returns to differential skills, it’s harder to say that it causes anything nasty.

  • That may or may not be the case, but wasn’t really my point. Let me try to put my point another way. Inequality results in a few people having a disproportionate amount of wealth. Unless the government puts their taxes way up to compensate, much of that wealth is typically locked up in bank accounts and assets. Only a little bit flows back into the economy. That money could have been better spent on healthcare, education, conservation etc. If someone is a billionnaire, most of their money is just going to be inherited by their successors ad infinitum, and is therefore effectively money taken OUT of the economy. Of course they will pay some taxes, and buy some goods and services, and employ some people, but I expect that the bulk of the wealth of a typical billionaire will never flow back into the economy …

  • Also, to address your point, it is not the inequality itself that causes “nastiness”, it is the competition to be one of the “haves” rather than the “have nots”. I expect many rich people are actually a lot nicer than many “wannabe rich” people who are climbing over each other to get to the top, and trying to trip up the competition …

  • Stephen
    Money saved does not represent resources taken out the economy; it represents resources made available for others to use. Either the money saved is lent by banks to investors, house buyers, etc., or if it is just kept under the mattress it allows the Reserve Bank to print more money, lowering interest rates (to go to investors, etc.) and providing interest income to the government to pay for healthcare, education, conservation, etc. As Landsburg points out, the miser is the greatest philanphropist:

  • Seamus,
    Well, yes, so they say, and maybe, maybe … though I’m not entirely convinced …
    Few people, I expect, would be easily convinced that Elison’s superyacht, for example, is actually helping to pay for their kid’s education! Note that “investors, house buyers, etc.” are already in the better off half of humanity, at least in a global context, but it is not so clear to me that money saved is helping where help is most needed …

  • Stephen,
    I certainly wouldn’t be convinced that Elison’s superyacht is helping anyone, but that is the opposite of what you were saying. Money spent on a super yacht is returned directly to the economy; I was commenting on money not spent but squirrelled away.

    And absolutely, it is not helping where help is most needed. This is a point I am sure Bill will come to. People who worry about inequality tend to focus on inequality within a country, ignoring the fact that in a global context inequality has been plummeting for quite some time and continues to do so.

  • Seamus,
    We’re on the same page about the global context!

    I’m more confused now about the superyacht example, though I am an idiot when it comes to economics! I guess you are right for as long as he doesn’t go and sell it? If he does do that, then the money he pumped into the (US) economy gets sucked out again, or am I just confused? I guess he would have to sell it to another rich guy, so it would just be a case of money already out of the economy changing hands?

  • Stephen
    You are thinking in terms of money, and spending being a good. Except in some short-term, recession contexts, you need to see beyond the veil of money to the real activity going on. When Ellison makes an enormous amount of money, he has created value (as shown by the fact that people were prepared to pay so much money for his products). A large chunk (but not all, probably not even the majority) of that value is captured as income for Ellison. If Ellison then spends that money building super yachts, he is then using up that share of the value he created. He is not destroying value as he gets to enjoy the super yacht, but it is not being shared around. If, on the other hand, he saved the money rather than building super yachts, he would have created a lot of value and not used any of it up. (Of course, that doesn’t deal with the distaste some of us feel for the shenanagins going on in San Francisco at the moment, but that is a separate issue!)

  • “If Ellison [Elison] then spends that money building super yachts, he is then using up that share of the value he created”

    But he can sell it whenever he likes, thereby sucking all the money back out of the economy? I suspect that mega rich people are not good for the economy overall, as the book suggested…

  • Though, if he does sell it, then he gets the money back again to potentially spend on another project which employs people and buys good and services. I really don’t understand economics!

  • Stephen: Again, don’t think in terms of money, think in terms or the creation and usage of resources. Elison earns income by creating value. He destroys value by consuming (which is fine, as that is the ultimate end). In the case of a good like a yacht, the resources used to make the yacht are used up in its production, but it continues to provide consumption value over time. if Elison then sells the yacht, no value is created or destroyed, there is just a rearrangement amongst people of who holds what assets. If someone who would otherwise have saved uses the money to buy the yatcht and Elison then spends the money he receives, value is used up. If, however, the buyer diverts from other consumption and Elison saves the money he earns from the sale, value is released to the rest of the economy.