Education the key

11/12/2014

A new OECD report appears to show inequality is growing in New Zealand.

But NBR editor Nevil Gibson discusses what it really shows:

. . . The four-page summary report based on a working paper, Trends in income inequality and its impact on economic growth (See report here), and statistical tables, has been seized on by the media the opposition as a “failure of trickle down economics” and a case for higher taxes on the rich and more redistribution to the poor.

In fact, this is not the case. The main reason is the dated nature of statistical material, while the policy suggestions carry a heavy caveat that “Redistribution policies that are poorly targeted and do not focus on the most effective tools can lead to a waste of resources and generate inefficiencies.”

The figures that show New Zealand’s growth was inhibited by increased income inequality are based on the period 1990-2010. The figures show “real disposable household income” in New Zealand from 1985 to the GFC (2008) was around the OECD average and well below countries such as Australia.

In the five years post the GFC, New Zealand disposable incomes among the top 10% fell 2.2% (OECD average 0.7%) while those in the bottom 10% fell the least, 0.5% (also the OECD average). Average New Zealand incomes fell  0.9% compared with the OECD average of 1.8%. . .

The GFC hit the richest but National’s policies to look after the most vulnerable during the GFC gave them some protection.

. . . But the main interest in the paper is the evidence it offers on the main mechanism through which inequality affects growth.

This is that the wider income gap between the lower middle class and poor households compared to the rest of society undermines education opportunities for children from poor socio-economic backgrounds, lowering social mobility and hampering skills development.

In other words, it is education rather than taxation that is the key: “a lack of investment in education by the poor is the main factor behind inequality hurting growth,” the report says.

“This compelling evidence proves that addressing high and growing inequality is critical to promote strong and sustained growth and needs to be at the centre of the policy debate,” says OECD Secretary-General Angel Gurría:

“Countries that promote equal opportunity for all from an early age are those that will grow and prosper.”

Few would argue that successive governments in New Zealand are seriously deficient in this area and the biggest deniers would be the Labour government of 1999-2008.

The OECD handout summarising the report observes:

“People whose parents have low levels of education see their educational outcomes deteriorate as income inequality rises. By contrast, there is little or no effect on people with middle or high levels of parental educational background.

“The impact of inequality on growth stems from the gap between the bottom 40% with the rest of society, not just the poorest 10%. Anti-poverty programmes will not be enough, says the OECD.

“Cash transfers and increasing access to public services, such as high-quality education, training and healthcare, are an essential social investment to create greater equality of opportunities in the long run.”

As mentioned, the paper also finds no evidence that redistributive policies, such as taxes and social benefits, harm economic growth, provided these policies are well designed, targeted and implemented.

Well-off New Zealanders already carry a high tax burden – more than half of the population pays no tax except GST – so I don’t think any party can justify higher taxes on the basis of this report.

As the report itself warns,” not all redistributive measures are equally good for growth.”

Inequality increased under Labour’s high tax, high spending policies of the noughties.

It has improved under National which has reduced taxes and taken a much more careful approach to targeting spending where it is needed most needed.

One of those areas is education:

The key message of the OECD’s report on inequality, released today, is investment in education and is not a prescription for higher taxes, says the Taxpayers’ Union.

The Union’s Executive Director, Jordan Williams, reacting to the OECD report and interviews with Grant Robertson and Russel Norman on this morning’s Morning Report says:

“Grant Robertson and Russel Norman want to use the report as justification to tax high incomes more, even though the top 6% of income earners already pay 37% of everyone’s income tax. They are trying to use the OECD report to frame small efficient government and incentives to work as a bad thing.”

“We’re disappointed that Mr Robertson continues to refer to the made up economic theory of ‘trickle down economics’. Mr Robertson must know that no such economic theory exists. No economist has ever argued that in order to make a poor person richer you should make a rich person richer first. Economists have, however, argued that economic growth and freedom makes us all, rich or poor, better off.”

“The biggest cost of living is people’s tax bills. Instead of wanting to solve inequality by cutting government waste and taxes at the low end, politicians immediately want to tax more so they can distribute it to constituencies.”

The background to the oxymoronic ‘trickle-down economics’ argument Messrs Robertson and Norman referred to on radio this morning to is available in a piece by New Zealand Initiative Researcher Jenesa Jeram republished with permission.

“Mr Robertson is now shadow Minister of Finance. He should be focused on arguing real economic data, not taking on his own straw men arguments,” concludes Mr Williams.

The poor won’t get richer by making the rich richer first. But nor will taking more than is fair and reasonable from anyone help those most in need.

Higher taxes and poor spending don’t help the poor and harm the wider economy.

Education is the key to helping the poor, along with carefully targeted investments in health and other services needed to provide equality of opportunity for them.


NZ one of better for inequality

25/06/2014

The left have done their best to make inequality the problem of the moment.

Fortunately for New Zealand, though not the left’s campaign, the OECD facts contradict their story:

New Zealand was one of only six developed economies in which both income inequality and disposable income inequality was flat or slightly better between 2007 and 2011, according to the Organisation for Economic Cooperation and Development.

In its latest report, which looks at the impact of the global financial crisis on inequality across 33 developed economies, the OECD confirms New Zealand performed relatively well through the GFC and its aftermath, Finance Minister Bill English says.

“The domestic recession in New Zealand under the previous government in early 2008 and the global financial crisis that followed were tough on many New Zealanders and their families,” he says.

“However, this Government ran large deficits and borrowed through that period to continue its significant support programmes. At the same time, we also set a track back to surplus and supported an economic recovery that is now delivering more jobs and higher incomes.

The opposition criticise the increase in debt but give the government no credit at all for using it to protect the most vulnerable from the worst impact of the GFC.

“This latest OECD research confirms that while inequality increased in many OECD countries during the global financial crisis, this was not the case in New Zealand.”

Using data compiled for the Ministry of Social Development’s household incomes report, the OECD’s latest Income Inequality Update confirms that both income inequality and disposable income inequality were flat or slightly better in New Zealand between 2007 and 2011.

It also finds that the disposable incomes of the top 10 per cent of New Zealand’s income earners were hit harder than the bottom 10 per cent of income earners through this period.

“Across the OECD as a whole, the opposite was true,” Mr English says. “The bottom 10 per cent of disposable incomes fell by twice as much through the GFC and the top 10 per cent.

Mr English says that the Government remains focused on supporting the most vulnerable New Zealanders by improving public services, lifting education standards and supporting more New Zealanders off welfare and into work.

“It’s in these areas that we can make a real difference to the lives of New Zealanders most in need.”

The easiest way to solve inequality is to make the rich poorer – as the left want to do by taxing them more.

That might close the gap between the top and bottom but will do nothing to improve the lot of those in most need.

Addressing their problems, as the government is doing through better public services, higher achievement in education and helping those who can work to do so is the only way to get sustainable improvement in living standards for the vulnerable.

The OECD report is here.


Another angle on inequality

09/03/2014

Most discussions on inequality focus on income, and pre-tax income at that.

There is another angle on the topic:

. . . If you measure consumption inequality, it is far lower than pre-tax income inequality, because the top 40 per cent of earners pay more in than they get out, while the bottom 60 per cent get more out than they pay in. Indeed, in Britain the top 1 per cent generate about 30 per cent of the total income-tax haul. After such redistribution, the richest fifth of the population has only four times as much money to play with as the poorest fifth. . . .

This comes from a post by Matt Ridley who points out that poverty and inequality are both falling.

. . .  by any conceivable measure, absolute poverty has fallen dramatically over the past few decades, so why should it matter if the rich get richer? Today’s British poor spend half as much of their income on food and clothing as in the 1950s, while working many fewer hours, living about eight years longer and having access to phones, cars, medicines and budget airlines that would have amazed even the rich in the 1950s.

Moreover, here’s a question I’m willing to bet that chimpanzees would do better than people at: given that inequality has been rising recently in China, India, America and many other countries, is global inequality rising or falling?

The answer: it’s falling and has been for several decades, however you measure it. The reason is that people in poor countries are getting richer more quickly than people in rich countries are getting better off.

That fall in global inequality has accelerated since the start of the financial crisis. As Africa now experiences record rates of growth, the number of people trying to live on $1.25 a day is plummeting fast. Mr Rosling likes to show two charts in his talks: the graph of global income was once a two-humped camel; now it’s a one-humped dromedary, with the vast majority of the world’s people in the middle.

Here’s another question that I fancy the chimps would beat the people at: did poverty and inequality in Britain increase or decrease as a result of the recession? The answer is that both fell. Inequality has fallen to levels not seen since the mid 1990s, as it usually does during recessions, though it is still higher than it was in the 1970s. Meanwhile the Left’s favourite measure of poverty — those earning less than 60 per cent of the median income — has by definition gone down, because median income has gone down. Redefining poverty in this relative (and very inadequate) way has therefore rather backfired. . .

A percentage of median income is a very blunt instrument with which to measure poverty because a fall in the incomes of higher earners will improve the measure but make absolutely no impact on the problem.

As poverty and inequality improve the differences between rich and poor become less obvious:

Imagine being told that one of the people in a meeting is a genuine billionaire (I owe this idea to Professor Don Boudreaux). How would you tell which one? His bodyguards, private jets and grouse moors are outside the room; his shirt and jeans are unlikely to give him away (as they would in 1900); his Rolex could be a cheap imitation; his teeth, girth and height are probably unremarkable (unlike in 1800); even his Diet Coke is the same as everybody else’s. Much more than in the past, most inequality in this country these days — though by no means all — is in luxuries, rather than necessities.

That helps to explain why some welfare is now directed at people who already have more than enough, though it doesn’t make it any more right.

. . .  does income generally grow faster for people in the lowest fifth of the population or people in the highest? It’s the lowest, because many of those people are young, low-paid people just starting out on their careers, while many of the richest fifth are older people at the peak of their pay, about to retire. That is to say, the category “poorest fifth” may not seem to show much change, but the people in it do. Income mobility is far from dead: 80 per cent of people born in households below the poverty line escape poverty when they reach adulthood.

Mobility is very important. It’s not just how much people have which matters but the ability for those with less to get more.

But why, when both poverty and inequality are declining are both regarded as more serious issues?

None of this is meant to imply that people are wrong to resent inequality in income or wealth, or be bothered about the winner-take-all features of executive pay in recent decades. Indeed, my point is rather the reverse: to try to understand why it is that people mind so much today, when in many ways inequality is so much less acute, and absolute poverty so much less prevalent, than it was in, say, 1900 or 1950. Now that starvation and squalor are mostly avoidable, so what if somebody else has a yacht?

The short answer is that surely we always have and always will care more about relative than absolute differences. This is no surprise to evolutionary biologists. The reproductive rewards went not to the peacock with a good enough tail, but to the one with the best tail. A few thousand years ago, the bloke with one more cow than the other bloke got the girl, and it would have cut little ice to try to reassure the loser by pointing out that he had more cows than his grandfather, that they were better cows, or that he had more than enough cows to feed himself anyway. What mattered was that he had fewer cows.

For some the problem isn’t how much they have but that others have more.

If they use that to motivate themselves to improve their situation that can be good.

If it just makes them resentful and feel they’re owed more, even if they have enough, it’s  merely envy.

Hat Tip: Anti Dismal


Zero-sum fallacy

04/11/2013

Damien Grant says inequality isn’t the fault of the rich:

A recent book edited by Max Rashbrooke, Inequality; a New Zealand Crisis, portrays an alarmist view of an unfolding dystopian disaster. However, Rashbrooke and many of those concerned at rising inequality fall for the zero-sum fallacy; the idea that there is a set amount of cash in the economy.

The fallacy goes that if Bob has made an extra dollar then he must have taken it off someone else; the rich get richer and the poor get poorer.

The easiest way to dismantle this illusion is to imagine two farmers. The first is content with his lot but the second works extra hours to build himself a new cow shed, making his farm more valuable. He has become richer but not at the expense of his neighbour. . . .

Not only has the farmer not become richer at the expense of his (or her) neighbour, s/he may well have helped increase someone else’s income by using more goods and services and/or employing more people.

Economic growth is driven by innovative entrepreneurs adding to the total economy. They sometimes become rich by retaining some of the extra wealth they created. Equally, a surgeon who works long hours will derive a large income, but only as a result of repairing the lives of his patients; both benefit from the transaction. We can reduce inequality by restricting the amount of operations he performs, and rising income tax has that effect.

However, that will not reduce poverty, it will exacerbate it. The rich will buy the reduced number of operations and the poor will miss out. . .

The focus on inequality is driven by the belief that life isn’t fair; that those with more have taken advantage of those with less and that there’s little or nothing those with less can do about it without state intervention – higher and more taxes and more redistribution.

Life isn’t fair but the easiest way to reduce inequality is to make the rich poorer which doesn’t help anyone.

The problem isn’t that some people have more than others, it’s that some people don’t have enough.

The causes for that are many. The state has a role in helping address some of those including poor education and health either directly through its own programmes or indirectly in funding other groups to help.

It also has an obligation to do so in a way that tackles the real problem of poverty, not one that merely addresses the symptom of inequality.

#gigatownoamaru is seeking to provide opportunities for entrepreneurs by becoming the fastest town in the Southern Hemisphere.


Unequally rich or equally poor?

23/06/2013

The problem of inequality might have some traction if you go for emotion rather than facts, but people tend to be better off when inequality is greater and less well off when incomes are more equal:

Earlier this year, the Work Foundation published a study of inequality in Britain that threw up some uncomfortable findings for those who believe that income differentials are the root of all evil. The hypothesis put forward in The Spirit Level is that greater income equality fosters health and happiness while inequality is a direct cause of misery and unrest. ‘If you want to live the American dream,’ says Spirit Level co-author Richard Wilkinson, ‘you should move to Finland or Denmark’. But why travel so far? Inequality varies greatly within countries and so, since wealth disparities are most visible at the local level, moving to a more equal city should yield benefits.

The Work Foundation shows us exactly where these pockets of egalitarianism are. The most equal city in Britain turns out to be Sunderland, followed by such places as Bradford, Peterborough and Burnley. The least equal city is London, followed by the likes of Reading, Guildford and Milton Keynes. For the most part, inequality is concentrated in the wealthy south east of England and, as the study notes, ‘cities with high median wages almost always tend to have high inequality.’ The more equal cities, on the other hand, ‘tend not to be very affluent’. This trade-off between wealth and equality will come as no surprise to economists, but it is reassuring to know that the wealth in the less equal places trickles down. As the study notes, ‘more affluent cities are more unequal, but affluence – on average – leads to wage gains for those with low skill levels’. Furthermore, whilst unemployment is higher in more equal cities, people with low skills find it easier to find work in less equal cities. In short, inequality is associated with people across the income spectrum being better off, while equality is associated with people being equally poor.

Being unequally wealthy is better than being equally poor and better is not just about income:

. . . In the mid-1990s, the US government gave thousands of people living on welfare the opportunity to move from poor neighbourhoods to more affluent areas. Their names were picked by lottery, thereby creating a randomised experiment. The Science study measured the subjective well-being of those who moved and those who stayed after a period of 10 to 15 years. Those who moved were significantly happier. Other studies of the same people have found that those who moved were also significantly healthier, had better mental health and were less likely to be obese.

It is important to note that those who moved did not become wealthier than those who stayed. Still living in social housing, they went from having an income that was average by the standards of their community to having an income that was low in absolute and relative terms. They found themselves at the sharp end of inequality and yet they were healthier and happier than those they left behind. 

Only a certain sort of social scientist could find it remotely surprising that people prefer living in a nice neighbourhood. It is true that people compare their living standards with those of their friends and neighbours, but there is little evidence that such comparisons dictate their well-being. People who leave the ‘more equal’ towns and cities of Britain to seek a better life are unlikely to regret it.

The focus on inequality tends to lead to redistributive policies which are generally counter-productive to economic growth and low growth hits the poorest hardest.
Rather than worrying about how much people have in relation to others, policy makers should focus on providing the environment and opportunities which help people help themselves.

Hat tip: Lindsay Mitchell

 


More equal not always better

04/09/2012

Growing inequality has become another cause of the left, but being more equal doesn’t necessarily make anything better.

Theodore Dalrymple illustrates this in a column on Britain’s National Health System:

. . . equality in health is not necessarily desirable in itself. Suppose that the infant-mortality rate in the highest social class is three per 1,000 live births, while that in the lowest is six per 1,000 (approximately the case in Britain today). Then suppose that we could reduce the rate by one death per 1,000 births in each social class, yielding two per 1,000 in the highest class and five per 1,000 in the lowest. A cause for rejoicing, certainly—but not from the point of view of equality, for the ratio of deaths in the lowest class to deaths in the highest class would widen from 6:3 to 5:2—that is, from 2.0 to 2.5. Surely, however, only a latter-day Lenin would reject such an improvement because it increased inequality. Similarly, an increase in the infant-mortality rate of the highest social class, to six per 1,000, would represent an advance to complete equality; but again, no one but a Lenin would wish it. . . .

The easiest way to improve inequality is to drag the top down but that would make things worse for those people without doing anything at all to improve matters for those at the bottom.

A wide gap between rich and poor might increase envy from those at the bottom but the real problem isn’t how much those at the top have.  It’s that those at the bottom don’t have enough, although how much is enough is open to debate.

Helping those in greatest need get enough ought to be the goal even though that might not close the gap between them and those who are better off.


Address causes not symptoms, Joris

07/02/2012

Joris de Bres  has leapt on the inequality band wagon:

The Race Relations Commissioner says inequality is still the most pressing race relations issue facing New Zealand.

Joris de Bres says New Zealand must continue efforts to address the “appalling” rate of Maori youth unemployment and recognise the need to keep people in work.

Inequality is a symptom, it’s not the problem.

Unemployment is a problem but it won’t be solved until the causes are addressed, among which are poor education, poor health, and drug and alcohol abuse.


Remediation must be measured

21/12/2011

Quote of the day:

It’s just fine to measure the wealth gap, or incomes, or disposable incomes, in fact measure anything you like, raw. It’s also just fine to measure such things after whatever is done to remediate what is considered to be unacceptable.

But it isn’t fine to use the raw measures to argue that more remediation must be done. You must measure after the remediation that is already done so that you can decide whether further is needed or desirable. Tim Worstall.

 

 


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