The latest Ministry of Social Development’s report is out: Household Incomes in New Zealand: trends in indicators of inequality and hardship 1982 to 2012. Yesterday The Herald ran two pieces on the report with very different conclusions – Brian Fallow’s Rising inequality largely a myth and Max Rashbrooke’s Rich get richer. The poor? Have a guess. So who’s right?
Let’s not beat around the bush – Max Rashbrooke is right. Fallow’s argument is weak for several reasons. First – right out of the gate he sets up a “straw man” to fail (Fallow):
The idea that New Zealand has become one of the most unequal societies in the developed world is just not supported by the data.
No it isn’t supported by the data (though we’re above the OECD median, which is bad enough). But not many people make this claim. The claim that is usually made, with perfect justification, is (Rashbrooke):
Income gaps in New Zealand increased extraordinarily quickly in the 1980s and 1990s, in what was the developed world’s fastest rise…
Spot the difference? We used to have a relatively equal society. We’ve had the developed world’s fastest increase in inequality, but we have a ways to go before we make it to the top of that particularly depressing league table. Fallow spends much of his article debunking his own straw man.
The second weakness in Fallow’s case is his short term view (Fallow):
A standard measure of income inequality is a thing called the Gini coefficient; the higher it is, the greater the inequality. Since the global financial crisis New Zealand’s has whipped around – it fell in the latest survey, reversing a jump in the one before – but the trend line through it is flat at a value of 33.
That “jump in the one before” was to the highest level ever. Here is coverage of the same MSD report from last year 2012:
NZ inequality at highest level
Household incomes dropped and inequality rose to its highest level ever in New Zealand last year, a Ministry of Social Development report shows. … It shows the gap between rich and poor widened substantially in 2011, putting inequality at its highest level ever.
So yes, the 2013 result is lower than 2012 – but we are talking fluctuations around a historic high. And the trend line is “flat” only in the very short term – here is what is has been up to over the last 3 decades (Rashbrooke):
Income gaps in New Zealand increased extraordinarily quickly in the 1980s and 1990s, in what was the developed world’s fastest rise; they then fell a little under Helen Clark, thanks mostly to Working for Families, but since the global financial crisis have been pretty flat.
Fallow makes a similar mistakes comparing high and low income (Fallow):
The average over the past four household economic surveys is that the top decile have received 8.5 times the income of the bottom one, after tax and transfers. That puts us in the middle of the OECD rankings, and lower than Australia and Canada (8.9 times), Britain (10 times) and the United States (16 times).
The definition of income here is household disposable (or after-tax) cash income from all sources. So it includes transfer payments like New Zealand superannuation, Working for Families tax credits and welfare benefits.
The tax and transfer system dramatically reduces income inequality among the working age population compared with market incomes alone, reducing the Gini score by 22 per cent. Again, this is similar to Australia (23 per cent) and not much worse than the OECD norm (25 per cent).
Once again looking at the measure over the short term, and once again stressing that we aren’t top of the OECD (when no one said that we were). Rashbrooke agrees on some factors, but takes a longer view (Rashbrooke):
The report shows that most low-income households have had small – a few hundred dollars a year – increases in their spending money (after taxes and housing costs are accounted for) since the GFC.
Against a backdrop of falling wages and high unemployment (especially in the 2011-12 period for these figures), these very small increases seem to be due to the Government’s tax cuts, and the welfare state insulating some households from the worst of the recession.
Income trends elsewhere are variable. Middle-income households are not much better off than they were a few years ago. People in the upper reaches, those just below the top 10th, have had a decent – $2000 or so – increase in their discretionary cash. They get most of their money from salaries, and those higher salaries have grown despite the tough times. But the top 10th have seen an 8 per cent dip in income, owing to lower returns on their investments, which make up more of their income.
…it’s also worth remembering that none of this changes the overall picture, which is that in the last 30 years, incomes for those at the top have doubled, while those at the bottom have stagnated. Someone in the lowest 10th of the country has, after housing costs, just $11,500 a year to spend. That figure (adjusted for inflation) in 1982? $11,000.
That’s why inequality is now such a live issue.
In short, Fallow’s headline claim that rising inequality is “largely a myth” is completely wrong. In his favour, however, his article actually goes in to some relevant factors in a lot more depth than Rashbrooke, even though it doesn’t exactly help his case (Fallow):
Wealth is distributed more unequally than income. Those in the top income decile receive about 25 per cent of gross income but those in the top wealth decile have 50 per cent of total wealth. …
A richer picture emerges when the report turns to housing costs (mortgage payments, rents and rates).
Housing costs amounting to more than 30 per cent of a household’s disposable income are counted as high and are often associated with financial stress for low to middle income households, the report says. In the 2012 survey just over one household in four had high housing costs. It has been there or thereabouts for the past five years, up from one in five in the early 1990s and one in 10 in the late 1980s.
Both authors are agreed that there is no clear trend in measures of child poverty over the last four years, but once again Rashbrooke puts it in context (Rashbrooke):
In all this, rising housing costs – which have outweighed many other gains – are crucial. They are partly responsible for the child poverty rate stagnating at around 270,000, one-quarter of all children, on the broadest measure (those living in families with less than 60 per cent of the average income, after housing costs). This rate had fallen sharply in the early 2000s, and is important because families under that line struggle to afford the necessities of life, according to both local focus groups and international evidence.
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