Brian Fallow 's Opinion

The Economics Editor of the NZ Herald

Brian Fallow: Playing politics with poverty hides truth

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Both the Left and Right are too quick to push ideas about inequality that don't stand up to scrutiny.

Photo / Thinkstock
Photo / Thinkstock

If the issue of inequality and poverty is to loom large in this election year there are a couple of cherished beliefs on both sides of politics that need to surrender to evidence to the contrary.

One is the idea that inequality is the price we have to pay for economic growth - and by "we" people tend to mean "other people".

Research by economists at the International Monetary Fund published last month challenges the idea that there is any such inescapable trade-off.

Indeed the IMF paper Redistribution - Inequality and Growth by Jonathan Ostry, Andrew Berg and Charalambos Tsangarides concludes that "lower net inequality [that is, after tax and transfers] is robustly correlated with faster and more durable growth".

Just as empirically challenged is the belief that New Zealand is now one of the most unequal societies in the developed world and that inequality is getting rapidly worse.

Neither of those assertions holds up, even when the figures are revised to adjust for the fact that the Treasury and Statistics New Zealand double-counted accommodation supplement payments over three recent years in the data they supplied to the most comprehensive recent work on this issue, the 2013 Household Incomes Report by Ministry of Social Development analyst Bryan Perry.

That is not to say that the prevailing level of inequality is just fine or that it is no worse than it has ever been. But a case for change built on exaggerated or out-of-date claims is just too easy to dismiss.

The IMF economists trawled through a large dataset of countries and years, looking at inequality before and after tax and transfers.

"There is surprisingly little evidence for the growth-destroying effects of fiscal redistribution at a macroeconomic level," they concluded.

"We do find some mixed evidence that very large redistributions may have direct negative effects on growth duration ... but for non-extreme redistributions, there is no evidence of any adverse direct effect. The average redistribution, and the associated reduction in inequality, is thus associated with higher and more durable growth."

Perhaps most relevant for us right now, they looked at the durability of growth.

"Many growth take-offs fizzle after a few years; critical to successful development over the long term is thus the ability to sustain growth rather than ignite it."

"That is not to say that the prevailing level of inequality is just fine or that it is no worse than it has ever been. But a case for change built on exaggerated or out-of-date claims is just too easy to dismiss."
Brian Fallow

They found a strong negative relationship between the levels of net inequality and the duration of growth spells, that is, the less the inequality the longer the growth spells.

"It is hard to go from these sorts of correlations to firm statements about causality," they caution, and "we know from history and first principles that after some point redistribution will be destructive to growth.

"[But] on average across countries and over time, the things that governments have typically done to redistribute do not seem to have led to bad growth outcomes, unless they were extreme. And the resulting narrowing of inequality helped support faster and more durable growth, [quite] apart from ethical, political, or broader social considerations."

"Income inequality in New Zealand remains very similar to that in Australia, a little above the OECD median using the Gini and around the OECD median on other measures such as the ratio of the income shares of the top decile to the bottom decile."
The Ministry of Social Development

A standard measure used for comparing inequality over time and among countries is the Gini co-efficient. It reflects differences in income between each person in the population and every other person in the population. It has a value of zero if everyone has the same income and one if one person has all the income. In New Zealand's case there was a steep rise in the Gini co-efficient, that is in inequality, between the mid-1980s and the mid-1990s.

Since then it has wobbled around an essentially flat trend line.

Correcting the double count of accommodation supplement means 20,000 to 30,000 more children are now counted as living in poverty depending on which measure is used. It has not increased actual poverty, of course. Nobody's income is lower as a result of the data error.

When revised in light of the error, the 2012 Gini co-efficient before housing costs in 2012 was 32.4, essentially unchanged from 32.5 in 2010, 2007 and 1996.

Among developed countries New Zealand is in the same neighbourhood as Australia, Canada and Japan, higher than some European countries with Ginis in the mid-20s but well below the United States at 38.

"Income inequality in New Zealand remains very similar to that in Australia, a little above the OECD median using the Gini and around the OECD median on other measures such as the ratio of the income shares of the top decile to the bottom decile [8.6]," the ministry says.

After housing costs inequality is higher, at a Gini co-efficient of 37.7, in line with the trend of the past 20 years but much higher than in the 1980s.

On a commonly used poverty line - 60 per cent of the median disposable income after housing costs, 19 per cent of the population count as poor. That is up from 17 per cent before the revisions but in the range of 18 to 20 per cent which has prevailed since the mid-1990s.

However, the proportion of children on the wrong side of that poverty line is 27 per cent, up from 25 per cent before the revisions and up from the 20-year low of 22 per cent recorded in 2007.

Economist Brian Easton, in a survey published last December of the surprisingly extensive research on economic inequality in New Zealand, says poverty lines based on median incomes are flawed because "poverty" can be reduced by transferring income from the middle of the distribution to the top.

But the salient conclusion from the research is that more than 80 per cent of the poor are children and their parents (and others in their households), he says.

"The majority of the poor are parents with jobs and their children (although they may have had only one or two), living in their own home albeit usually with a mortgage. The proportion in poverty is higher among solo parents, those without jobs, living in rental accommodation and with a brown ethnicity (but there are fewer of each category). More women than men are poor. While the incidence of poverty is higher among Maori and Pasifika, there are more poor who are not of their ethnicity."

Easton ends his paper with some challenging questions.

"What would [New Zealand's] founding 19th-century migrants have thought about the fact that, after allowing for each country's size and affluence, New Zealand is now more unequal than the countries they left? And what would those who invited them here have thought, had they known their descendants would be firmly at the bottom end of the unequal distributions?"


Debate on this article is now closed.

- NZ Herald

Brian Fallow

The Economics Editor of the NZ Herald

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