Mac Mckenna
Inequality seems to be the most formidable critique of the free-market economic model.
Opponents of capitalism argue that increasing income inequality (which they often mistakenly label "poverty") undermines all of the prosperity that the economic reforms of the 1980s have provided.
A common falsehood is that poverty is getting worse.
People who attempt to justify this stance use the share of people below 50 per cent of the median income as a measure of poverty. Under this definition, doubling (or tripling or quadrupling) everyone's income will not reduce poverty at all.
Even worse, it is possible that on such a measure New Zealand may appear to have higher rates of poverty than a really poor but more equal country in, say, Africa.
The truth is that markets and "neoliberalism" have reduced global poverty more rapidly than any economic system in human history.
Opponents of markets who condemn rising inequality should take the time to read recent research by the New Zealand Institute of Economic Research.
Their study shows income inequality in New Zealand has not changed since 1990 and consumption inequality, which is perhaps a better measure of real inequality because people smooth consumption over their lifetime, has improved. This research supports similar findings by economic think tank the New Zealand Initiative last year.
Over the past century or so, income inequality in the developed world has followed a U-curve. Inequality fell after the World Wars because Governments increased taxes on high earners to fund the restoration of damaged infrastructure, which reduced top incomes.
In New Zealand, the top effective marginal tax rate rose from about 5 per cent in 1910 to 70 per cent in 1950, where it remained for a further 30 or so years. In the late 1980s - long after the restoration of infrastructure was complete - New Zealand finally cut the top effective rate to about 35 per cent (ie, Rogernomics).
Of course, reducing tax rates to such a degree was bound to have some effect on inequality. If it did not, then taxes would not serve any redistributive purpose.
However, the changes to inequality were very minimal. Income inequality increased very slightly in the late 1980s, although even this is likely an overestimation due to the better reporting of higher incomes as the lower tax rates reduced the incentive to avoid tax, such as by keeping profits in companies.
Ever since this brief adjustment period there has been no change in inequality whatsoever.
So where is all the inequality propaganda coming from? It would appear the emotive headlines and political commentary is principally an importation of the United States narrative. From 1990-2014, the top 10 per cent of earners in the US increased their share of income from 38 per cent to 47 per cent.
In New Zealand over that same period, the top 10 per cent did not see any growth in their share - remaining at just 31 per cent.
The most deceptive claim is that the costs of increased inequality (which hasn't occurred!) exceed the gains in living standards, prosperity and reduction in poverty that the free market has achieved. This is simply not true.
Since the 1980s reforms, growth in gross domestic product has been robust and sustained. However, even GDP understates the improvement in living standards. Just think about some of the changes in the world over the past few decades.
- Almost all of human knowledge lives in our pockets.
- Health concerns are largely the result of excess consumption - for the first time in human history we are consuming too many calories rather than too few.
- International travel is affordable to the majority.
- Entertainment options have no bound.
- Life expectancy (particularly in the developing world) has grown at breakneck speeds, and absolute poverty in the western world has been all but abolished.
There is no comparison between the costs of inequality (which are minimal at best) and the benefits of freedom, prosperity and reductions in real poverty. The comparison would be laughable if it were not so harmful to public policy.
To replicate these rapid improvements of the past few decades, we should further liberalise trade and migration, cut taxes, reduces barriers to entrepreneurialism and innovation, and keep the Government out of the private and voluntary activities of individuals.
Markets have been, and continue to be, the solution to our problems.
Mac Mckenna is an economist at the New Zealand Taxpayers' Union.