Whole Latta Derp

By Eric Crampton 01/08/2014 6


If one of the the points of a public broadcaster is to provide basic factual information to voters prior to an election, so that they can then make up their own minds about what policies are the appropriate responses to the current state of the world, then TV One failed magnificently last night* with Nigel Latta’s infomercial.

The video of it is here (Series 1, Episode 4 if the link changes).

Latta made the case that:

  • inequality has been increasing substantially;
  • that the rich in particular have done well in recent years;
  • that poverty has worsened;
He also spent a lot of time talking with poor families about that life isn’t exactly easy for the working poor. 
Now you can take whatever position you like about the appropriate level of support for the poor and for the working poor, and about the appropriate level of inequality. But, those positions should at least be informed by a basic level of understanding about the current statistics and trends. If inequality has been worsening continuously for the past two decades, that could yield different views about appropriate policy than if inequality has been pretty stable for the past couple of decades. Similarly, if real incomes among the poor have been declining over the past couple of decades, that too could easily yield different views about appropriate policy as compared to a situation where real incomes among the poor have been rising a bit more slowly than among richer cohorts. 
I’m not here going to take a view on appropriate policy. But I will put up the baseline facts that should be common knowledge among anybody wishing to have a view as to appropriate policy. This is all from the latest report on the topic from the Ministry of Social Development.
First, as noted last night, inequality has not been increasing. There was an increase from the mid 1980s through the early 1990s, and it’s been flat since then. Last night I put up the Gini time series, but that’s hardly the only measure of inequality. Let me here quote the Ministry of Social Development report:

Overall, there is no evidence of any sustained rise or fall in inequality in the last two decades. The level of household disposable income inequality in New Zealand is a little above the OECD median. The share of total income received by the top 1% of individuals is at the low end of the OECD rankings.

That’s one of their big bolded summary findings. Inequality is flat, we’re hardly out of line for the OECD, and whatever you think about inequality in NZ, it’s not being driven by the top 1%.
Here’s another graph: the 80/20 ratio. That one says how much more money somebody at the 80th percentile (earns more than 80% of the population) earns compared to somebody at the 20th percentile. AHC is After Housing Costs; BHC is Before Housing Costs. AHC shows a rise through the mid-90s, then noise around a 3.0 level. BHC shows a rise through the early 90s, then a slower rise through the early 2000s, then a drop back to the early 90s level, then noise around a level consistent with the mid-late 90s.

If you like ratios other than 80/20, the paper has a wide set of them, both Before Housing Costs and After Housing Costs. They’re all a bit noisy, but they’re all basically flat since at least 2001, with some flat since the mid-90s.
And here’s that big middle class squeeze: the proportion of total income going to individuals in deciles 4 to 9. The fifty percent of the population in the upper middle class earns about 55% of total income. 
Latta focused a lot on wages at different levels rather than the kinds of numbers above. We do have a reasonably progressive tax system with substantial transfers to the working poor. The numbers above reflect the after-tax-and-transfers income at the different deciles. The tax and redistribution system has worked to maintain pretty stable levels of inequality over the last couple decades on a wide variety of measures of inequality. It is a substantial mistake or deliberately misleading to portray things instead as a rising trend in inequality. And since I’m told that the Treasury Chief Executive told Latta, on footage left on the cutting room floor, that inequality was flat, Latta seems to have been wilfully seeking to mislead the public about the basic facts around inequality during and election campaign on a publicly funded television station. 
This is not right. Public broadcasting is supposed to at least give everybody the correct basic facts so that voters can then deliberate about how to interpret and deal with those facts in policy choices. When it instead deliberately misleads the public into taking the narrative pushed by the Labour Party, I start wondering why we have a state broadcaster. Public broadcasting isn’t supposed to make people dumber.
Enough on inequality. The MSD report also has the basic facts on poverty trends. Latta put up a one-year big increase in incomes at the top end of the distribution during the post-GFC share market recovery as representative of how the poor have suffered from the GFC as compared to the rich. Here’s real household income changes over the period by decile:
The very poorest cohort did ok, though much of that was a rise in NZ Super. Things stagnated for the working poor; middle to upper-middle cohorts did fine. Folks in the 9th decile did about as well as folks in the first decile, while those at the very top stagnated. 
How about over the longer period? 

Over the three decades from 1982 to 2013 different income groups fared differently over different periods. The net gains over the last two decades from the mid 1990s to 2013 were similar for all income groups. Because of this similarity in net gains, income inequality in 2013 was similar to what it was in the mid 1990s.

Latta was right about one thing though: housing costs have hit disposable incomes of the poor by more than they’ve hit disposable incomes among the rich. MSD reports that, because of strong increases in housing costs, AHC incomes for households in the bottom two deciles are lower in real terms than in the 80s. But, again, most of the increase in hardship came in the early 90s. 
Follow the blue line. This one’s defined around 1998 real before-housing-cost incomes. If you were in a household that earned, in inflation-adjusted terms, and after housing costs, less than 60% of median 1998 incomes, you’re in the cohort that follows that blue line. 
You can see a sharp rise in the early 90s, then a slow drop through 2009, then a hump during the GFC that reverses. Ignore the discontinuity in 2007 that obtains when they rebased the measure. The proportion of low-income households is higher than it was in the 80s but the trend since the mid 90s is basically flat or declining. Is this just me cherry-picking measures? No. You get the same thing on the relative income lines. If you don’t like current poverty or inequality rates, that’s fine. But they’re a “it’s been like this for about 20 years” thing, not a “John Key is Evil” thing. The current state of affairs is roughly the same as it’s been through many terms of both National and Labour. 
And now, same thing again for children in low-income households. 
It’s hard to pull any worsening trend out of this. There was a big increase in the early 90s, and a fall since then. 
Finally, Latta focused a lot on the working poor. The MSD report makes real clear that poverty is primarily among beneficiaries. 
Nigel Latta’s big beef seemed to be with the reforms of the 1980s. Those reforms did yield a wide range of changes, including to inequality and poverty measures. Latta, throughout the documentary, presented what seemed to be an ever-worsening trend in poverty and inequality. And he seemed to be importing a lot of the American narrative around the top 1%. 
Here’s the NZ data on the top 1%, both in time series and as compared to other countries, again copied directly from the MSD report:

Income inequality in New Zealand, 1984 to 2013 HES
1984
1994
2004
2009
2012 & 2013 for HES, 2010 & 2011 for tax records
Household disposable income, adjusted for household size … data from sample surveys (HES)
Gini x 100 (trend-line)
26.6
32.5
32.9
32.9
32.9
Share ratio, D10 to D1
6.1
8.2
9.1
8.6
8.3
Share ratio, Q5 to Q1
4.1
5.1
5.5
5.4
5.3
Share ratio, D10 to D1-4 (Palma)
0.92
1.21
1.31
1.29
1.27
Percentile ratio, P90 to P10
3.5
4.1
4.2
4.4
4.2
Percentile ratio, P80 to P20
2.4
2.7
2.9
2.9
2.7
Individual market income … data from tax returns – avg of year noted and the one either side
Top 1% share
5.6
8.9
9.0
7.8
7.8
Top 10% share
28
33
33
30
30
Top 10% – 1% share (ie P90 to P99)
23
24
24
22
22
Income inequality in New Zealand compared with other OECD countries, c 2011-2012
(%)
NZ
OECD-34 median
DNK
NOR
FIN
FRA
AUS
CAN
UK
US
Gini x 100 (trend-line)
32.9
30.5
25.3
25.0
26.1
30.9
32.4
31.6
34.4
38.9
Share ratio, D10 to D1
8.2
7.6
5.3
6.1
5.5
7.4
8.5
8.5
9.6
16.5
Share ratio, Q5 to Q1
5.2
4.8
3.6
3.7
3.7
4.7
5.4
5.2
5.6
8.2
Share ratio, D10 to D1-4 (Palma)
1.27
1.18
0.87
0.85
0.93
1.18
1.27
1.19
1.40
1.74
Percentile ratio, P90 to P10
4.2
3.8
2.9
2.9
3.2
3.6
4.5
4.1
4.1
6.1
Top 1% share – tax records
8
The latest available from 2009 to 2012
6
8
8
8
9
12
13
19
Top 5% share – tax records
21
17
19
21
21
21
27
28
36
Note further that at least some of the rise in top incomes comes from reporting changes when the tax system was fixed to reduce the incentive to under-report incomes for top earners. 
The American narrative around the “1%” simply does not here apply.
Take from all of this whatever policy preferences you want, while thinking hard about the kinds of things Nolan urges you think about. You can’t start thinking properly about appropriate policy if your background facts are all wrong. Hopefully this corrects some small fraction of the harm that Nigel Latta did last night. Even better, read the whole MSD report on it.

[Update: ‘Derp’ is the constant, repetitive reiteration of strong priors. Latta should have updated after talking with the Treasury Chief Executive. He instead just repetitively reiterated his priors about inequality, herping a flerp of derp in the process.]

*First published at Offsetting on 30 July.


6 Responses to “Whole Latta Derp”

  • With all respect, and while I appreciate the figures and graphs presented here, having seen the program on TVNZ on 29 July 2014, Nigel Latta was actually putting the emphasis on the increased income AND wealth gaps that substantially widened in the mid 1980s, which covers 3 decades, not just 2 decades. Also did he present the issues with huge debt that private individuals in this country have accumulated by borrowing for ever more expensive housing, student loans and consumption.

    It is of course true that income inequality only changed a bit over the time since the mid 1990s, but what is of concern is, that the income and especially wealth gap that widened substantially since the late 1980s has become so manifested, is has not been significantly reduced again.

    Some (partly admittedly) older reports on wealth and disparities in New Zealand:
    http://www.stats.govt.nz/browse_for_stats/people_and_communities/Families/wealth-and-disparities-in-new-zealand.aspx
    http://www.teara.govt.nz/en/income-and-wealth-distribution/page-3
    http://www.teara.govt.nz/en/income-and-wealth-distribution/page-5
    http://www.eastonbh.ac.nz/2013/12/economic-inequality-in-new-zealand-a-users-guide-summary/

    I have never thought much of only targeting the mythical powerful “mega rich” top 1 per cent as being the “issue”, and one needs to look at the greater picture, as Eric is trying to do here. But he is only really looking at income, not wealth that some accrue, and have continued to accrue disproportionally even during and after the Global Financial Crisis (GFC). He does not appear to address tax system changes benefiting wealthy and high earners more than middle and lower class earners and end-consumers.

    IRD figures include income data gathered to measure taxable income, but there are still supposed to be between 2 and 7 billion New Zealand Dollars earned in the “black economy”, that are not measured and included as taxed income.

    Some wealthy, big earners and that includes individuals – as well foreign and some local corporations – have significant amounts of “income” flowing out of the country into overseas accounts as dividends or various forms of “investments”, a fair bit into tax havens. Also other countries may offer some with dual citizenship better tax conditions dependent on tax residence status. I spoke to one such individual, relatively wealthy New Zealander late last year, who was openly explaining how he keeps his wealth in a Caribbean tax haven, lives in the US and only comes here occasionally.

    Much private “wealth” of the middle class is also counter balanced with massive private debt, like the housing stock. Housing speculation, along with market pressures, coming from migration and population growth, together with easily available credit (largely from Australian owned banks) have inflated housing costs. Incomes have not kept up with this, while too many still only work in employment that is not earning much to finance an increasingly costly living. Grocery and some other consumer goods cost a fair bit more here than in many other OECD countries.

    Taxation has been shifted more from income tax to consumer tax based on GST, which saw a 20 percent increase just a few years back, and this had especially impacted on low income earners, while high earners got more benefits from tax cuts.

    Many property transactions are also GST exempt:
    http://kiwi-living.blogspot.co.nz/2009/04/gst-on-new-zealand-property.html
    http://www.peninsulabay.co.nz/investing-in-nz.html

    Property investment and speculation is relatively easy in New Zealand, also for offshore investors, and it is advertised in Australia, China, the UK, South Africa and Singapore.

    As stated, some foreign investment here has led to increased flows of dividend and other income from New Zealand to overseas parent companies, their shareholders and their accounts. This represents income and wealth that is not directly reinvested here, and thus “lost”. Much manufacturing activity has moved off-shore, so we have structural problems that Latta also mentioned, where we import much we consume and only export the raw materials for value adding elsewhere.

    Conflicting views on some of this were presented in a NZ Herald opinion article from Jan. 2014:
    http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11192796

    Also Rebecca Barry Hill writes on Latta’s last program in the Herald today (02 Aug. 14):
    http://www.nzherald.co.nz/entertainment/news/article.cfm?c_id=1501119&objectid=11302475

    So while Eric presents graphs and so merely on income officially earned, and tries to attack TVNZ as public broadcaster, perhaps he should explain to us, whether privately owned and run media, like TV3, Sky TV, various radio networks and print media are more dedicated to “inform” us objectively, or not. I observe that TVNZ are simply feeling pressured to follow certain “market driven”, and with that “advertising revenue dictated” trends, which has resulted in an overall lesser quality in broadcasting. But despite of that, I found Nigel Latta’s program not as poor and bad as stated above.

    • I didn’t say anything about wealth because the MSD report didn’t have anything about wealth. Latta presented a case alleging that there’s been an increase in income inequality over the past 30 years that continues, rather than one that happened in the late 80s through mid 90s and levelled off since then. He was very wrong about that. I said nothing about the case on wealth inequality for two reasons. First, I don’t have good time series data on it. Second, much of it will be due to the recent run-up in housing prices. While Latta correctly noted the very substantial problems caused for the poor by too-expensive housing, he didn’t once mention housing supply as potential reason.

      Note too that the MSD figures I put up are after tax-and-transfer.

  • I left a comment here nearly exactly 24 hours ago, and for some reason it has not been published. Are any differing opinions “allowed” here, or will only “supportive” comments be published?

    • More plausibly, on a weekend, I don’t clear through comments held for moderation until either Sunday night or Monday. The system grabs some comments for the moderation filter, especially if there are a lot of links. Yours got there, now out; a spam one got deleted. Why do you jump to assume things?

  • “As stated, some foreign investment here has led to increased flows of dividend and other income from New Zealand to overseas parent companies, their shareholders and their accounts. This represents income and wealth that is not directly reinvested here, and thus “lost”.”

    Lost? How so? Let us assume for a moment that some foreigners make a NZ$1 profit which they wish to take it back to, say, China. How do they do it? Clearly a New Zealand dollar isn’t worth anything in China so the Chinese holder of NZ currency will have to sell their NZ$1 to buy Yuan. But why would anyone want to buy said NZ$1? The only use for a NZ$s is to buy something made in NZ. Thus the buyer of the NZ$s must want it to buy a NZ export of some kind or spend it within NZ. The NZ$1 doesn’t go overseas in any meaningful way, it gets spent on New Zealand produced goods and services no matter who gets the profits from the ownership of local firms. If a New Zealander gets the profits they spend them on New Zealand made goods and services, if a foreigners gets the profits they sell the NZ$s to someone who wants to buy New Zealand made goods and services.

  • 1. Thanks to Eric for clarifying a few details. I appreciate some people have weekends and are thus not monitoring their posts 24/7, so apologies for rushed presumptions. I am pretty active over a fair few blogs and also do lots of reading plus other work, so I do get a bit impatient. Apologies for that also.

    2. Paul Walker, yes, of course NZ Dollar revenues and profits do not get “lost” as such, and they will flow somewhere else, but my suggestion was, that it would be more beneficial for New Zealand, if profits and dividends earned here would be re-invested here, in higher value productive activities.

    As for the NZ Dollar, it is one of the most traded currencies in the world, also for speculative purposes, which makes it more “valuable” than it perhaps should be. There were the stories of Japanese housewives “investing” in NZ Dollars, trying to make gains from currency appreciations, which in New Zealand’s case are not always justified by to the actual economic performance, but rather by high interests here, which attract currency investments by speculators.

    Funds transfers do not always go directly from NZ Dollars to certain other currency denominations, there are many movements via the US Dollar and so, which is still the preferred currency for international trade and other transactions.

    And NZ Dollars flowing back could actually also go into such investments as “housing” and other real estate, not necessarily for buying NZ made goods or low value processed commodities.

    What benefit is there for more investment in buying more NZ real estate, including land like farms, which drives up the local prices, which out prices many local investors, and which is used by some overseas companies and individuals to simply buy a larger share of assets here, to earn them yet more down the line? Some benefit, but I dare to ask, it will not necessarily benefit most of the ordinary New Zealanders.

    You can turn the country into a playground for the wealthy from all over the place, seeking refuges from disasters to strike where they may come from, but such “investment” will eventually slow and stop, and not create much gains, unless it is going into value added production and demanded quality services. The latter is not happening enough, I am afraid.