Bernard Hickey: Reform tax to spread recovery fairly

Stock markets around the globe slumped when Ben Bernanke threatened to turn off the money-printing drip by mid-next year. Photo / Getty Images

Drug addicts and alcoholics can appear normal, even when drugged and boozed to the eyeballs. They can even go to work as long as they are "medicated". Only when drugs and the booze are withdrawn do we see their real state.

We saw this week what happens when financial markets and investors addicted to freshly printed money find out the "drug" may be withdrawn soon.

Stock markets around the globe slumped when US Federal Reserve chairman Ben Bernanke threatened to turn off the money-printing drip by mid-next year. Long-term interest rates rose sharply. Most importantly for New Zealand, even China's new leadership got in on the act, forcing up interest rates to their highest point in a decade. The NZ dollar fell three US cents to its lowest point in a year. Banks started raising fixed mortgage rates. Now we'll see just how sustainable the economic recoveries in the US, China and NZ are.

Will we see yet another false start before a relapse to medicated remission? It depends on just how addicted a swathe of developed economies are to low interest rates. That means consumers and households, which constitute more than 60 per cent of spending in these economies.

That in turn depends on how indebted they are and what is happening to their real incomes. That is the truest measure of their economic health.

NZ shares a big problem with the US and Europe. Our household sectors are still heavily indebted and incomes in the middle and lower income groups are barely above where they were five or six years ago.

Figures this week show NZ's real per capita GDP is still 1.3 per cent below 2007's. Most of the gains in any economic recovery have gone to the top few per cent of the population. Property owners in Auckland and owners of stocks have been the major beneficiaries.

A study of the US recovery from 2009 to 2011 found the incomes of the top 1 per cent rose 11.2 per cent, while the real incomes of the bottom 99 per cent fell 0.4 per cent, which meant the top 1 per cent captured 121 per cent of the recovery's gains.

True economic rehabilitation requires reform to more heavily tax the incomes and assets of the wealthiest 10 per cent then redistribute that as income to the bottom 90 per cent. Until then, the addicts will sweat until their next dose of cheap money.

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