Bernard Hickey: Income fairness improves economies

Huge disparities in wages, and access to healthcare and education, contributed to the global recession. Photo / AP

You know an economic idea has crossed to the mainstream when big ratings agencies start talking about it.

So it's notable when one of them warns that growing income inequality is slowing economic growth. Until a few years ago, only those on the more socialist left were stating this. The issue was framed around fairness rather than economic efficiency.

This month, Standard & Poor's warned that growing income inequality in the United States was slowing growth in the world's biggest economy, and lowered its growth forecast for the next decade from 2.8 per cent to 2.5 per cent a year.

"Aside from the extreme economic swings, such income imbalances tend to dampen social mobility and produce a less-educated workforce that can't compete in a changing global economy," Standard & Poor's wrote in the detailed report.

"This diminishes future income prospects and potential long-term growth, becoming entrenched as political repercussions extend the problems," it said.

"Our review of the data leads us to conclude that the current level of income inequality in the US is dampening GDP growth, at a time when the world's biggest economy is struggling to recover from the Great Recession and the government is in need of funds to support an ageing population."

Standard & Poor's is well aware of what can go wrong when large numbers of households see their real incomes fall, as happened in the US over the past two decades.

To make up for those lower incomes, the households' first instinct was to borrow more in the expectation they would eventually catch up once their incomes rebounded. But when incomes kept falling and the borrowing kept on at the same rate, those household budgets eventually hit a brick wall.

That's what happened during the global financial crisis. American households defaulted on their mortgages and brought the world's financial system to the brink of collapse. That has focused the minds of ratings agencies, bond investors and banking regulators globally.

Standard & Poor's suggested various measures to reduce inequality in the US, including shifting income to those on lower incomes and improving access to education and healthcare.

The US is, of course, very different to New Zealand. Our education and healthcare systems are largely publicly funded and accessible to people across the income spectrums.

Our minimum wage is higher than in the US and over the past 15 years, New Zealand has reintroduced a significant amount of income "shifting" to those on middle to lower incomes, particularly those in working families and the elderly.

Younger, childless people and those out of work have had a tougher time. However, the measures to help stabilise New Zealand income inequality levels since the late 1990s did not improve them at all.

Surveys show income inequality is growing as a political issue in New Zealand, but has yet to reach the sort of fever pitch that it is now at among economic policymakers and some parts of the political spectrum in the US and Europe.

New Zealand's relative success in avoiding the blowout in inequality levels seen in America in the past 15 years should not lead to complacency.

The work referred to by Standard & Poor's indicates forces of economic gravity are at work that naturally push inequality higher.

That's because cycles of poverty deepen inequality, and the growing political power of the wealthy entrenches and deepens that inequality by introducing tax cuts and protecting special interests.

The work has to be done year after year to reduce inequality or at least stop it from getting worse. New Zealand's political debate has yet to acknowledge the economic pay-offs of reducing inequality.

A healthier, better educated and more stable population is much more economically productive. Reducing inequality is a way to improve economic performance, rather than purely about fairness or "keeping up with the Joneses".

Redistributing income and making healthcare and education cheaper for the poor is an economic growth strategy.

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