Far too much public commentary on wealth inequality obscures what is actually is going on. 

This column is a grump about the poor quality of public discourse. It is illustrated by the recent outburst over the distribution of wealth in New Zealand and some rather inept public responses to the recent re-publication of some data, where people with little expertise used the opportunity to pursue their political and ideological goals while displaying, to the expert, their incompetence.

I guess that means I need to defend my expertise. Forty years ago I calculated New Zealand’s first distribution of wealth using the data reported for estate duty (a method, incidentally, pioneered by my University of Sussex mentor, Tibor Barna).

I knew it was a good quality estimate after Tony Atkinson reviewed it. Before he died recently he was the dean of modern economic distributional studies – theory, research, advocacy – as Thomas Piketty acknowledges. Tony went over it with me, asking why I did certain things; I explained that better data did not exist. (He was somewhat more brutal with another New Zealand calculation which did not seem to understand what the method involved.)

The estimates were for 1956 and 1966. Unfortunately a change in the early 1970s in the reporting of estates of the deceased precluded using the method after that. This did not stop the New Zealand Planning Council publishing as if there had been no change, despite an obvious cross-check showing the invalidity of their estimate and despite the error being drawn to their attention. Poor quality work in public discussion is not a recent phenomenon.

There being no alternative data, the research interest lapsed until about a decade ago when Statistics New Zealand began directly surveying households asking them about their assets and liabilities. (Recall, I was surveying, in effect, the recently dead, via their estate returns and then adjusting the sample for relative mortality by age.) Its most recent (just published) report was for the year ending June 2015.

It is a thoroughly professional report. Tibor and Tony would give it a tick. However it may require a bit of technical knowledge to read it; technical knowledge which none of the public commentators seemed to have. The following few remarks will get you ahead of them.

First, be careful about whom you are talking. It may be household data or individual data (SNZ collects both). The individuals may be adults or the whole population, including children.

Second, because it is from sampling we cannot get very refined estimates of ownership at the very top. (In particular there is not the data to use the method I used for the top of the income distribution.) In fact SNZ gives most of its distributional data only by fifths or tenths of the population (although there are hints that it can go down to hundredths). Ten percent of the adult population (i.e. over 15 years) is about 360,000; one percent involves 36,000 odd people.

Trying to refine the top of the distribution by anecdote is not very intelligent. The recent outburst, chose a couple of billionaires, Graeme Hunt and Richard Chandler, neither of whom would have been covered, even implicitly, by the household survey. They may hold New Zealand passports as well as other ones, but I am confident that neither reside here for tax purposes. Moreover, very little of their wealth will be invested in New Zealand despite what some commentators said.

It would have been just as sensible to have used Bill Gates for the comparison. He owns ten times more than Hunt and Chandler together, probably earns more from New Zealand (via his Microsoft holdings) than they do, and pays us as little tax here.

Third, never forget that older adults own a lot more wealth than younger ones. That should not surprise you, since most individuals own just about nothing when they are under the age of 30 – many are in debt from student loans. Instead, the young have heaps of human capital which generates earned income some of which is saved. (Incidentally perhaps as much as half of our wealth is inherited on average – that is what the data in the 1950s and 1960s suggested. Fortunately, most of us are not orphans before the age of 30.)

As we get older, our human capital declines because our ability to earn into the future diminishes. But it is offset by our savings, so our wealth rises. As a result, about three-fifths of all New Zealand net wealth is held by those over the age of 55 although they make up only a third of the population. Comparisons between the poorest and richest wealth holders are contaminated by comparisons between the young and old.

The published SNZ data does not enable an evaluation within each age group,* but my earlier estimates suggested that wealth inequality was much the same within each cohort (except those under 25). I do not know if that is true today. And, of course, the inequality within each age group is much less than inequality across all age groups.

While what we know is helpful for some purposes, the SNZ and my data is too coarse to be of much use if one is interested in the very, very rich. They are not captured in the wealth data and most are not significantly in the tax data.

One may well be outraged by the group avoiding paying taxes on their income but that is an international problem. Certainly we should not contribute to it; the Panama Papers say we do. (Typically though, New Zealanders did not appear among them, and they seem to be more about money laundering than avoiding paying New Zealand taxes. I am told that the Singapore Papers will be more revealing about our lot – if they are ever released.)

Should we be outraged by wealth inequality in New Zealand? Personally, I am more outraged by income inequality. But let me finish with a couple of further thoughts.

First, about third of New Zealanders’ net wealth is held in home ownership and it is relatively equally distributed. One might resent some people having bigger and better houses than others, but surely we should be really concerned with the distribution of wealth excluding housing. That is much more unequally distributed. (Incidentally, while attention is drawn to a fall in the rate of home ownership, the outraged do not seem to have noticed the big fall is among the under-thirties, reflecting later settled family formation. The distributional economics of housing is a big topic which I must write about in detail some day – when I have done more research.)

Second, I do think we need to think carefully about how influential the rich and their money should be in our political life. I have made some suggestions in relation to those who are not resident for tax purposes.

So, yes, there may well be a problem with the distribution of wealth in New Zealand. But that is no reason for our misrepresenting the situation using data we do not understand.

In terms of the theme of this column, though, the previous sentence applies to far too many issues we go on about in public.

 

* Were there the resources, the SNZ data could be used to generate more insights.

 

Comments (7)

by Dennis Horne on January 24, 2017
Dennis Horne

First let me say I appreciate these expert essays. Thanks, Brian.

Seems to me we need to get back to first principles. Telling young people there's no inflation when they can no longer afford to buy houses in their own country ... 

Frankly I think we are heading for oblivion. We deal with global warming by denying we deny it. We have neither the will nor the resources to deal with abrupt climate change.

I would be quite prepared to trade our present demockery for some leadership. Three wise men? Brash, Easton ... I'm open to bribery for the third - just to keep a flavour of democracy's failings.

by Katharine Moody on January 26, 2017
Katharine Moody

Interesting points, Brian and thanks for the link to SNZ report really good information. We seem to have a high percentage of owner-occupied RE assets in trust, notwithstanding the point they raise about farms. I wonder how we compare on a per capita basis with other OECD nations in that regard?

And a question - why are you more outraged by income (as opposed to wealth) inequality?  

by Brian Easton on January 27, 2017
Brian Easton

Commentators talk, Dennis, as though the notion of ‘inflation’ has a unique definition. In fact the prices for different commodities move differently. Many of them move at similar, but not identical, rates. A price index measures the average change in these prices, typically weighted by the level of use of the commodities. The most frequently quoted price index is the ‘consumer price index’ (CPI) but economists use many others.

However sometimes the prices of groups of commodities move quite differently. The Reserve Bank reports the price of tradeables (those commodities which can be exported or compete against imports) and the price of non-tradeables (those which are not directly involved in the external sector). They have quite different patterns of inflation.

One of the biggest divergences has been between changes in the general level of prices (say the CPI – there are better ones) and changes in housing prices. That is your concern, Dennis. The Reserve Bank is asked by the government to target the CPI but it could have been asked to target house prices (in which case it would have aimed for a higher interest rate) but not both.

It’s concern is that high house prices involve high household and financial sector debt which threatens the stability of the financial sector (the overseeing of which is also one of The RBNZ’s statutory responsibilities). Thus it is not officially directly concerned with housing affordability except insofar that in the long term it threatens consumer price and financial stability. I have never asked them but, if pressed, I expect they would say that affordability is the responsibility of other government agencies.

I have never seen a discussion on international comparisons of housing held by trusts, Katherine. It would probably be very complex because it would reflect very different legal arrangements.

Income is the foundation for sustainable spending and, in the words of the 1972 Royal Commission on Social Security, enables people to be able to participate in, and belong to, society. As the column explains, physical and financial wealth is only a part of the totality of individual’s wealth which includes human capital, and it has a pattern related to age.

Where I do get outraged is when the wealthy unduly interfere with the political process. See Person votes vs Dollar notes

(I do get greatly irritated by individuals who think that their wealth makes them more intelligent, knowledgeable, handsome or whatever and by those who fall for the canard.)

 

 

 

by Katharine Moody on January 28, 2017
Katharine Moody

Thanks for the response, Brian. For quite some time I've felt that it is far more pressing that we address income inequality, and particularly such inequality in the early years of an individuals entry into the workforce. Just like the first 5 years of one's childhood are critically important for physical and mental health - I think the same can be said about the first five years of "adulthood".

I seem to recall reading about (I think?) a Scandanavian country where every individual in their first 5 years of working earned an equal salary, regardless of the type of job/work they did in those first 5 years. I don't recall the detail but as I understood it, the wage was reasonably high - higher than many would eventually earn in later life... and the policy intent was an egalitarian/equal beginning for all young adults.

Does that ring a bell to you? I'd be keen to read more on it if it rings a bell and you can point me in the right direction.

 

by Charlie on January 28, 2017
Charlie

Brian, you forgot to mention why exactly you are outraged by income inequality.

I can envisage two options:

1. Are you are enraged that some people have done very well for themselves, mostly through hard work, intelligence plus maybe a dash of luck?

We have the likes of Graeme Hart who left school at 16 and became a panel beater and then tow truck driver but has finished up at the top of the rich list. Then we have John Key born in a state house to a solo mum and brought up on welfare to become Prime Minister of NZ for eight years.

Are these the people you're outraged by?

2. Or are you outraged by those living at the bottom of our society?

The families that abuse their children, commit crime, soak up vast amounts of taxpayers money in welfare, health, education, police and in the justice system and who, despite endless and expensive intervention, condemn the next generation to the same dark existence

Having measured inequality, which end of the spectrum would you like to fix?

 

 

 

 

 

 

 

 

by Brian Easton on January 30, 2017
Brian Easton

Sorry, Katherine, I have never heard of that. If anyone has please let us know.

I intended to indicate, Charlie, I was outraged that some people’s income was insufficient to enable them to be able to participate in, and belong to, society. This applies particularly children; their inadequate income is no fault of their own, and its damages their (and soceity's) future prospects.

I was not thinking particularly about those on high incomes. That reflects an approach articulated by the 1972 Royal Commission on Social Security (who introduced the phrase ‘participate in, and belong to, society’). They said nothing about the top of the income distribution although implicitly they were arguing that everyone had an obligation to those at the bottom

A similar view was articulated by Walter Nash in the 1930s who said something like that the sick, the young and the old should be the first charge on the state.

Unfortunate timing meant that the Royal Commission did not know John Rawles’ masterly Theory of Justice, published in 1970, which said, I simplify, that one judges a society by the way it treats those at the bottom. A key notion was that even those at the bottom would support some inequality (i.e. have some on higher incomes) if they were the beneficiaries of the inequality too (as when an entrepreneur gets paid well for an innovation which benefits us all).

by Charlie on February 04, 2017
Charlie

Thanks for your response Brian.

Looking at this from a purely mathematical perspective, the term "income inequality" implies some form of statistical comparison between rich and poor - either a ratio or a difference, yet you agree the problem of poverty has nothing to do with rich people so it is an irrational measure.

A good test for this is to consider the hypothetical case of removing half of the wealth from the top 10% of society and destroying it. Income inequality would be dramtically reduced yet the poor would still be poor.

So let's forget the high earners - they look after themselves and their children.

I too am outraged by the failure of those on the bottom rungs of society to get ahead. What are we (and they) doing that keeps them down, generation after generation? I think that would be a more fruitful discussion - and I welcome any thoughts you may have.

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