Utopia, you are standing in it!

Last May, the Dominion Post had a feature on how New Zealand inequality was amongst the worst in the world:

Rising inequality has been the norm in most developed countries, but few have seen it increase by as much as New Zealand.

Since the 1980s, New Zealand’s inequality – which had been low by OECD standards – drew closer to levels seen in more unequal countries like the United States.

They support this claim with a Gini Coefficient chart that I’ve been unable to source at the OECD. I therefore use another that is freely available in New Zealand and which I have used in the past. My data source on the Gini coefficient has the advantage of been a complete series back to the early 1980s rather than five yearly observations in the OECD data sourced by the Dominion Post.

Figure 1: Inequality in New Zealand and the OECD trend: the Gini coefficient

Source: Bryan Perry, Household incomes in New Zealand: Trends in indicators of inequality and hardship 1982 to 2013. Ministry of Social Development (July 2014), Figure J5.

Figure 1 shows there is no evidence of a substantive rise or fall in inequality in New Zealand since the mid 1990s. Nearly all of the increase in inequality was in the late 1980s and early 1990s. Not mentioning that nearly all of the increase was in a short period leads to a poor understanding of the data before their readers. Rising inequality is not an on-going problem in New Zealand. There was a large rise in inequality in the late 1980s and early 1990s.

The next figure that I’ve been able to reproduce is the income shares of the top 10%, top 5%, top 1% on top 0.5% income earners in New Zealand  – see figure 2.

Figure 2: Top Income Shares, New Zealand

Source: top incomes-parisschoolofeconomics.

Our intrepid reporters in the Dominion Post claim that figure 2 shows that:

In 1986, the top 10 per cent took home 26.5 per cent of New Zealand’s income. In 1999, it was 37.8 per cent and in 2004, it was 33.2 per cent.

Oddly enough, our intrepid reporters decided to stop at 2004 for no particular reason. They also chose to truncate their chart at 1986 for no particular reason other than to lead the coincidence that the top 10% income shares were higher in the 1960s and 1970s that now– see figure 2 . That is, the top 10% in New Zealand earned more in the days before the scourge of neoliberalism came upon the New Zealand then after it – see figure 2. This detail was worth disclosing. Did neoliberalism reduce the income divide in New Zealand between the top 10% and the rest? Figure 2 suggests that it did.

The best that veteran grumbler Max Rashbrooke could spin to make these good old days of higher inequality than now to look like good old days before the scourge of neoliberalism beset New Zealand was to ignore the fortunes of the majority of the population in his dewy eyed view  of his childhood:

New Zealand up until the 1980s was fairly egalitarian, apart from Māori and women, our increasing income gap started in the late 1980s and early 1990s

A more worthy analysis of figure 2 is to note that top income shares in New Zealand haven’t changed that much except for a bit of a spike in the late 1980s. This increase in inequality in New Zealand in the late 1980s and early 1990s  – see figures 1 and 2  – was quickly followed by a long economic boom  – see figure 3.

Figure 3: Real GDP per New Zealander and Australian aged 15-64,  2014 US$ (converted to 2014 price level with updated 2011 PPPs), 1.9 per cent detrended, 1956-2013

Source: Computed from OECD Stat Extract and The Conference Board. 2015. The Conference Board Total Economy Database™, May 2015, http://www.conference-board.org/data/economydatabase/

This boom after next to two decades of minimal real economic growth per working age New Zealander benefited everyone and, for example, the unemployment rate fell to a record low of 3.5% about 2005. The supposedly more egalitarian 1970s and 1980s were lost decades of growth – see figure 3.

Figure 4: Real equivalised median household income (before housing costs) by ethnicity, 1988 to 2013 ($2013)

Source: Bryan Perry, Household incomes in New Zealand: Trends in indicators of inequality and hardship 1982 to 2013. Ministry of Social Development (July 2014).

As shown in figure 4, between 1994 and 2010, real equivalised median New Zealand Pakeha household income rose by 47%; for Māori, this rise was 68%; for Pasifika, the rise in real equivalised median household income was 77%. These trends pass the difference principle developed by John Rawls.

The large improvements in Māori incomes since 1992 were based on rising Māori employment rates, fewer Māori on benefits or zero incomes, more Māori moving into higher paying jobs, and greater Māori educational attainment (Dixon and Maré 2007). Labour force participation rates of Māori increased from 45% in the late 1980s to about 62% in the last few years. Māori unemployment reached a 20-year low of 8 per cent from 2005 to 2008. That and the return of wages growth after years of stagnation as shown in figure 5 is something to celebrate.

Figure 5:  real GDP per capita an average real wage, 1965 – 2014, New Zealand

Source: Council of Trade Unions.

The reporters in the Dominion Post also fell for the recent  OECD analysis suggesting a connection between economic growth and inequality:

One study by the OECD suggests rising inequality was responsible for wiping a third off New Zealand’s economic growth in the past 30 years

It estimated the rate of New Zealand’s GDP growth was stunted by as much as 15.5 percentage points between 1990 and 2010 – more than any other OECD economy.

The analysis of the OECD depended crucially upon how greater inequality reduces the ability of the lower income families to invest in human capital:

The evidence strongly suggests that high inequality hinders the ability of individuals from low economic background to invest in their human capital, both in terms of the level of education but even more importantly in terms of the quality of education.

The OECD theory of inequality and lower growth is there is a financing constraint because of inequality that reduces economic growth because of less human capital accumulation by lower income families.

The OECD put a lot of their growth inequality nexus eggs in one basket. The OECD was implying that student loans and other government interventions are not closing credit constraints on financing higher education despite decades of rapidly rising tertiary education attainment, which is partially illustrated in figure 6.

Figure 6: tertiary educational degree attainment (%), New Zealanders aged 25–34, 2000-2013

Source: OECD StatExtract.

This is interesting because in 2002, with Pedro Carneiro, James Heckman showed that lack of credit is not a major constraint on the ability of young Americans to attend college. They found that credit constraints prevent, at most, 4% of the U.S. population from attending. Credit constraints is weakening as a rationale for a lack of an accumulation of human capital, and can be easily solved.

Another difficulty for the OECD is the increase in inequality in New Zealand was, as noted before in figures 1 and 2, in the late 1980s and 1990s. To blame low economic growth to the tune of 15 percentage points on events of some 25 or 30 years ago is a long bow.

Higher education has been free for the low income families for several generations. Student loans are readily available. It is hard to believe that such a readily solvable problem is a major source of inequality and lower growth. Moreover, as Aghion said:

Economists and others have proposed many channels through which education may affect growth–not merely the private returns to individuals’ greater human capital but also a variety of externalities.

For highly developed countries, the most frequently discussed externality is education investments’ fostering technological innovation, thereby making capital and labour more productive, generating income growth.

Despite the enormous interest in the relationship between education and growth, the evidence is fragile at best.

The 15 percentage point reduction in New Zealand economic growth since the late 1980s because of inequality is so large over a 30 year period that this half a percentage point reduction on average per annum qualifies as an independent source  of business cycle shocks and an equally implausible driver of real business cycles.

Our intrepid reporters closed by claiming large increases in child poverty:

In December last year, the second annual Child Poverty Monitor showed a slight decrease in the number of Kiwi children living in income poverty, from 27 per cent to 24 per cent. But 30 years ago, it was 14 per cent.

Figure 7 below shows their numbers, which is child poverty in New Zealand for poverty thresholds of 60% relative to a contemporary median measured both before and after housing costs.

Figure 7: % child poverty in New Zealand (before and after housing costs), 60% relative to contemporary median, 1982 – 2013

Source: Bryan Perry, Household incomes in New Zealand: Trends in indicators of inequality and hardship 1982 to 2013. Ministry of Social Development (July 2014), Tables F.6 and F.7.

The first thing to notice in figure 7 is before housing costs child poverty has been pretty stable for 30 years the New Zealand. Few celebrate this.

Figure 7 does show a large increase in after housing costs child poverty in the late 1980s. Since the early 1990s, after housing costs child poverty has slowly tapered down from the high 30% in the mid-1990s to 24% now – see figure 7.

In the longer run after housing costs child poverty rates in 2013 were close to double what they were in the late 1980s mainly because housing costs in 2013 were much higher relative to income than they were in the late 1980s.

– Bryan Perry, 2014 Household Incomes Report – Key Findings. Ministry of Social Development (July 2014).

Before housing costs child poverty in recent years as been the same as it was in 1982 – see figure 7. Although there were large cuts in the social security benefits in the 1991 mother of all budgets in New Zealand, before housing child poverty increased to 25% but was back to 20% by the mid 1990s.

As figure 7 shows, the problem was not income, but the rising costs of housing that had to be paid out of  benefits and wages. The Left over Left will not let go of the 1991 benefit cuts even 25 years later despite the fact that the issue was rising housing costs rather than perpetually higher before housing costs child poverty.

The problem is not income, it is rising costs of housing. Increasing wages and benefits will not solve that if more money is simply chasing the same limited stock of land and urban housing.

A proper comparison of the diverging trends in figure 7 between before housing costs child poverty and after housing costs child poverty rates since 1982 gives a much clearer picture of what is increasing child poverty. It is rising housing costs as a result of regulation on the supply of new urban land.

Source: OECD Better Life Index.

The driver of inequality in New Zealand is government regulation of the land supply – policies supported by the middle-class and the left-wing parties. Rising inequality is not inequality between high and low income earners as suggested by the Dominion Post.