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.