Economists and policy analysts have paid insufficient attention to the distributional consequences of change. Hence the rise of the angries.

In order to get to this column’s conclusion I am going to recall a little of my scholarly journey.

When I came back from England in 1970, I looked around for a research area. Distributional economics had begun to develop in Britain (under the leadership of Tony Atkinson) and there were lots of research opportunities in New Zealand. At the time I did not appreciate that it was a no man’s land to be avoided by most economists. Indeed, my status as an economist was diminished with the sneer of my being a ‘social economist’; I recall that those who made it spent more time in pubs than I did.

I suppose my work in establishing the foundations of today’s New Zealand statistical base for distributional studies, including poverty studies, is reasonably well known, but what is not always appreciated is that while the social statistician measures, the economist looks for explanations. That took me back into the trenches of the economic debate.

For instance, I found that the terms of trade (the price of exports relative to the price of imports) affected the income distribution because farmers’ incomes shifted up and down in the distribution as it changed. It is clear that the state of the labour market also affected the income distribution. I needed to think about investment returns to get from the wealth distribution to the income distribution (although I have been surprised at the general lack of interest in the profit rate).

That led to me back to macroeconomics but with a distinctive perspective. In particular I could not follow the macroeconomic behaviour I was interested in by ignoring the operating surplus, by pretending that the economy could be described by a single commodity, or by treating all workers as the same. (How to handle the inflow of mothers into the earning labour market was not a trivial issue.)

The same applied when I began to look at policy issues. I saw distributional impacts as fundamental and quite naturally assumed that the policy community did too. They generally do not.

Let me give a simple example which was critical to my thinking. An economist estimated the impact of a limited free trade arrangement with Australia. He found that there would be a very small (but positive) gain in GDP but a substantial reduction in wages. I did not trust the estimate but it drew my attention to the way small gains from trade could be associated with very large distributional shifts.

The paper was not alert to this effect; it was a part of the no man’s land that most economists stayed clear of. I became increasingly aware that policies were frequently advocated without attention to their distributional consequences.

You will not be surprised that the advocates of policy changes were often its beneficiaries. When I was able to measure the impact of a policy change, I found that the beneficiaries were far better off than the national gains they promised, which meant that others were markedly worse off, as the example illustrates.

Indeed one became aware that the economic debate in New Zealand was said to be about improving economic efficiency, but more often the equity (or distributional) effects were far greater. That is another no man’s land, isn’t it? Saying that the advocates of a policy were really seeking their own interests even if their rhetoric was in terms of the national interest does not get one invited to many cocktail parties. (We were told that ‘the task was to make the cake larger, not to share it out’, while the sloganeers jostled for a bigger share of the cake.)

The advocacy field is not flat. Some groups are far more vocal and better funded than others. I leave you to work out which – but there is a certain bias among the advocates which may be summarised by calling them the ‘elite’, although the elite often argues within itself over policies which amount to shifting the income distribution among the various groups within it.

What that means is that chunks of the polity not only get left out of the debates but that they are often made worse off. For instance, the austerity policies which occurred in Europe imposed on those with low and middle incomes while protecting the well-off. Remind me why one should cut government spending – say on health care – rather than raise taxes on the rich?

I became aware of the asymmetry thirty odd years ago, when the Rogernomics elite deliberately switched incomes in their favour, funding the switch by reducing the incomes of those lower in the distribution. The polity revolted in 1990 by voting out the Labour Government and again in 1993 by slashing the vote for the National Government after it followed even more repressive policies. (Because the polity did not yet trust Labour, it left National clinging to power by its fingernails.) But it also voted in MMP, which has sensitised the political process to many of those it had previously left out – not perfectly, but a whole lot more than in the decades before MMP. (Recall how the elite, including most MPs, fought against MMP.)

Elsewhere there is the same story but played out differently. Austerity is causing havoc to the political stability of Europe. In Britain the Brexit referendum gave disenchanted angries the chance to show their displeasure. (I am reminded of the story of the little old lady who after an election was told there was a ‘hung’ parliament. She responded that she did not know what that meant, but it sounded like a good idea. A lot of the angries do not know what they are voting for, but they know what they are voting against.)

The American story is complicated by the corrupted (in the sense of ‘distorted’) electoral system. Trump promised to save the angries from Washington, but he is in the hands of a Republican Party which dominates the place. Many of those who voted for him are going to be bitterly disappointed.

The message here is that distributional economics may be a no man’s land for most economists but we are being ineluctably sucked into it. There exists much economic analysis which is useful for finding your way around it with which most economists and policy analysts are not familiar. Neither are their critics. (If you are in doubt ask them what the Scitovsky criterion is about.)

As for those of us already holed up there, it may lower our professional standing, but we sure get a different view of the trenches from it.

Comments (6)

by Charlie on February 04, 2017
Charlie

Hi Brian

I think it helps to view 1980s and 90's New Zealand from an international perspective rather than a local one.

By the time Muldoon was finished, NZ inc was close to bankrupt. It was in effect an Isolationist/Socialist state rather like a benign version of North Korea. It had propped up endless state-owned boondoggles which had eventually dragged it down.

The Rogernomics era was the severe pruning it needed in order to simply survive in an evermore competetive world. If anything the elite families of New Zealand were worse off after deregulation because they no longer held a monoply on import permits and local production once the economy was opened up. We now live in a world where the child of a solo mum living on welfare can become PM and an ex tow-trucker who left school at 16 can head the rich list!

The high standard of living and low unemployment post WW2 was always going to be temporary: As the rest of the world retooled after the war our temporary advantage evaporated. The decision of the UK to join the EEC was the last nail in the coffin. By the time 1984 came along NZ had no choice. Adapt or die. If we'd adapted earlier it could have been less traumatic.

Since then NZ has has to run on the smell of an oily rag because of our lack of capital: The result was short term decision making and a failure to invest infrastructure. We will pay for the pre-Lange era for generations to come whilst we play catch up.

But we are catching up!  :-)

 

by Brian Easton on February 05, 2017
Brian Easton

Dear Charlie,

Some of what you write is inconsistent with the evidence. Moreover, your comment covers a much wider range of issues than the column. So I will confine myself to its themes of my scholarly journey and distributional economics.

It is a matter of public record that I was a critic of Muldoonism when Muldoon was in power, a time – as it was under neoliberalism – when dissenters were treated badly. Many of those who supported Rogernomics were silent under Muldoon, although most of them no longer support it, presumably because the evidence of its performance did not match their hopes.

The distributional story is as follows (and written up in detail in learned articles), Undoubtedly some at the top of the distribution did badly, but the evidence is that on average they did not. Probably an older generation was replaced by a younger one.

In total the real disposable incomes of those at the top grew at the same rate as they had done under Muldoon. However, the economy stagnated in real per capita incomes for seven years (from 1986 to 1993). The top’s share rose because the tax changes favoured them. There is no evidence of growth in their real market incomes during the period of stagnation.

It follows that, if in a period of stagnation those at the top had a greater share of income, the 80 percent below them experienced a fall in their real incomes. It took ten and twenty years for many to return to the level they had attained before the Rogernomics policy changes. The main reason for this was that the tax and benefit changes worked against them.

It seems likely, that those at the top benefiting from the distributional changes were (and are) unaware of how tough it was (and is) for those at the bottom.

Just to finish off the story. The New Zealand economy came out of the Rogernomics stagnation about 15 percent below the economics growth track that it was on before Rogernomics was implemented. Its growth rate has since been much the same as it was before and much the same as the growth rate of the rest of the rich world. There has been no significant catchup.

It has been like having stopped running for a while so that we are now half a mile behind the bunch in a long race. Sometimes we catch up a yard (cheers from the crowd) sometimes we drop back a yard (silence). But on the whole we remain all that distance behind. It is the bottom of the distribution who have borne the cost of being so far behind.

This not to say there were no benefits from Rogernomics. But there were also great costs many of which, as best as I can judge, such as the stagnation and increased inequality, were unnecessary. Unfortunately nobody today writes a defence of Rogernomics anchored in the evidence, so it is difficult to make an alternative case other than by relying on loose rhetoric.

Brian.

by Charlie on February 05, 2017
Charlie

Brian, I think we're talking about the same thing, but maybe seeing it from different viewpoints.

Up until the end of Muldoon NZers were in effect over paying themselves and borrowed both internationally and from future generations to do it. Furthermore, a lot of employment was in effect 'sheltered unemployment' because the government was propping up uncompetitive industries.

Sure there was a reset under Rogernomics - it was inevitable, and, yes, we will be playing catch-up for decades to come.

Broadly speaking, those who suffered after Muldoon were those whose labour was worth less in a global marketplace than they were earning before. This was execerbated by the opening up of Asia, with China alone increasing the global labour pool by 50% under the Deng reforms. We've seen a massive rebalancing of labour/capital.

So the problem wasn't Rogernomics per se, it  was due to two factors:

1. The consequence of years of 'sheltered employment' prior to '84

2. The rise of Asia

There's no use crying over spilt milk. One can argue endlessly about what the 4th Labour government could have done but they didn't have the luxury of hindsight. Either way, they got us to face economic reality and back on the track to long term prosperity.

by Brian Easton on February 06, 2017
Brian Easton

It is hard, Charlie, to find evidence that the ‘problem of Rogernomics’ was as you list. Certainly, as some of us argued under Muldoon, there was a need for market liberalisation. But those who implemented it did a botch job. Some of them would like to repeat the exercise. It is to their advantage that we should ignore their past failures.

I would be interested what evidence you have about the consequences of ‘sheltered employment prior to '84'. The record is that in a four year period about half the labour force were made redundant and were sufficiently concerned to register with the Department of Labour. Impressively soon, most found a job. I would think that was one of the successes of Rogernomics.

I have no idea what you mean by the ‘rise of Asia’. Are you in the right decade?

Should we not cry over spilt milk? Those who spilt it to their advantage would agree with you, Charlie. Indeed they may want to celebrate the spilling, using 'alternative facts'. The rest of us need to learn from the episode so as not to repeat the mistake.

But you are right, the milk has been spilt. What could have been a golden opportunity was botched. And today there are people still suffering from it.

by Charlie on February 06, 2017
Charlie

Brian,

Two examples:

Up until the point where the mutton subsidies came off an engineer friend was frantically running around the country building freezer stores to accomodate lamb carcasses that the Muldoon government was subsidising the production of, but could actually not sell abroad.

At the same a farmer friend was rearing sheep on marginal land in central Otago, totally reliant on the regional subsidy. When they subsidy came off he was bankrupt within three months and lost his farm....land which is now growing some of the best Pinot Noirs in the world.

This is what happens when you prop up favoured industries - misallocation of resources and economic distortion.

In recent years I have had the chance to discuss this with two people who were there at the first Lange cabinet meeting. One a politician and one a civil servant. They tell the same story: The incoming government was faced with an absolutely dire cash crisis and they had to make a choice between devaluing (resulting in a predicted 42% inflation rate according to the Treasury) or sell off state assets. They chose the latter route.

You don't tell us what they "botched" and what "golden opportunity" was missed. Please elucidate!

(Regarding China - Deng made his first tentative steps in 1978 and they continue to this day)

 

 

 

 

by Brian Easton on February 10, 2017
Brian Easton

As Donald Trump has taught us, Charlie, it is easy to twitter partial truths, half truths, alternative truths and non-truths. It is a laborious task to respond to each of them. Eventually he says something so obviously stupid that everyone laughs. (You cant really mean that Deng posed a problem for the Rogernomes can you?)

But what you say has nothing to do with the original column so let’s leave it.

Except you do ask evidence of the Rogernomics botches. I have looked at all the long stagnations of the NZ market economy (we have been about a third of the time in that state since 1862 – no data before) and the Rogernomics stagnation is the only one I cannot explain by an external shock. At the microeconomic level consider how many of their policy changes, criticised at the time, have had to be reversed.

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