www.wairaka.net/ubinz/IR/items/1999B07SSTRichPoorAHubbard.html

part 10 of "The State we're in" series, Sunday Star-Times, 7 November 1999
 

The official death notice of New Zealand's egalitarian society was posted ear her this year It caused little fuss.

The gap between rich and poor has increased more here than in any comparable country, according to a report by Statistics New Zealand. The rich got a lot richer during the economic revolution. The poor stayed poor, or got poorer.

This was not big news: news is only what shocks us. The land where traditionally Jack was as good as his master, it seems, expired quietly after a long illness. The death must have been expected.

This reaction itself raises some questions about the state of New Zealand as it enters the new millennium. And so does an official government report which so comprehensively buries an ancient national legend.
 

Those on the highest incomes did best, according to the report, New Zealand Now: Incomes. The average real disposable income of the top 10% of households rose from $62,000 in 1982, before the reforms began, to $82,000 in 1996.

In short, their real income rose by about a third.

The average income of the bottom 10% (or decile) of households stayed steady, on a little more than $11,000.

Nearly all those in the middle lost ground. The two groups bang in the middle of the scale, deciles five and six, saw their income drop by 9%and7%.

Only the second-to-top group - decile nine - showed a small increase, of 3%. Most of us, in other words, were losers in the great experiment.

These figures are "real" or inflation-adjusted, to ensure that 1982 apples are compared with 1996 apples. They compare the actual purchasing power of incomes in both periods.

Changes in wages and salaries were the greatest reason for widening inequality, the survey found. This effect includes not only the widening gap between high income earners and low income earners, but the rise in unemployment.

Despite the economic recovery from 1991 to 1996, the report says, "market income inequality did not reduce, but rather remained at about the 1991 level".

The tax changes in the late 1980s - the top personal tax rate fell from 66c to 33c - were also important. The cuts to benefits and to National Super, while not insignificant, had less impact on inequality.
 

It depends what you mean by poor. Statistics NZ figures say that the income in the bottom tenth fell from $11,900 in 1982 to $11,400 in 1996. However, John Scott, principal author of the report, says this is not "statistically significant". But the picture is different if one considers the lowest two groups, or the bottom 20%. Its average income fell some 4% during the period. The poorest fifth did get poorer.

These facts allow politicians to quote the report and draw precisely opposite conclusions. Prime Minister Jenny Shipley, in a written reply to questions from the Sunday Star- Times, invokes the report and says: "The rich have got richer, but the poor have not got poorer."

Labour leader Helen Clark also referred to the report and said the poor had indeed become worse off.

John Scott says simply: "It depends who is defining poor."
 

Almost certainly not. Scott says the department has not analysed the new data in detail, but "as far as we know the 1996 position is pretty similar to the present day".

Victoria University economist Bob Stephens says the tax cuts had little effect on lower income groups. "The major effect was on the higher incomes."

Is this a true picture of inequality in New Zealand? Have Stats got it right?

Economists of both right and left have praised the report. But it is fair to point out what the report does not tell us. It refers only to incomes that is, the cash received by households from wages and salaries, investments, and from the government. It does not measure assets, or "wealth". We know very little about that kind of wealth in New Zealand, or about how its distribution has changed.

Stats gets its figures from the Household Economic Survey of about 3000 households each year.
 

Some say the situation is more extreme than Statistics suggests. Stephens analysed the same material and came up with even more extraordinary results.

He found the average real income of the bottom tenth of households actually fell between 1984 and 1998 by about 3.5%. In his view, the poorest have got poorer, no ifs, buts, or maybes.

By contrast, he found that the income of the highest 10% grew by an enormous 43%.

"The New Right policy aimed to stop 'middle class capture'," says Stephens. "Well, they've certainly stopped the middle classes, because they have become poorer. Now it's the upper income group who have done the capturing."

Wellington economist Brian Easton came to comparable conclusions by a slightly different route. Updating an earlier study of the HES data by Mary Mowbray, he found that the poorest households - those in both the bottom two deciles - had fallen substantially. The average income of the top tenth had increased by a third.
 

Stephens excluded self-employed people who declared losses, and those whose declared spending was more than three times their income. "We dropped out the people we considered probably aren't poor."

Statistics leaves in these loss-makers. "Some people can spend more than they earn in the short term," says Scott. "Self-employed people are the classic example. Other examples might be immigrants who might bring quite a lot of money into the country but don't have a job. Or you might get recently retired people who have just come off a high income."

What this shows, though, is that all measurements of income distribution involve judgements: who to leave in, who to take out, and how to take the measurement.
 

Not according to the author of the report which Prebble cited to support his claim.

The politician cited a Massey University study which, he said, showed "not that the rich are getting richer and the poor are getting poorer, but that the poor are getting richer, but at a slower rate than the already well-off".

He was referring to a study by Massey's Professor Srikanta Chatterjee, with Australian economist Nripesh Podder. They too found that the gap between rich and poor had greatly increased under the reforms. The share of the national income received by the poorest 10% had dropped, while the share of the top 10% had increased.

Prebble's argument - also proposed by former Treasurer Bill Birch when the Chatterjee study came out - was that the national cake had grown. So although the poor might have a smaller share of the larger cake, the actual slice was still bigger than it was before.

"At that stage," says Chatterjee, "I hadn't done any further work so I couldn't say whether that was right or wrong.

His work looked only at income shares, not actual income. But further work on his study by Canterbury economist Paul Dalziel - and approved by Chatterjee - suggest Prebble and Birch were wrong.

Dalziel found the average income of the bottom tenth of households fell nearly 9% between 1983 and 1996. The average income of the top 10% had increased by more than a quarter.

"These data support reports," says Dalziel, "that poverty and social exclusion have caused widespread problems, particularly among low income households with children."
 

Some say no, because the poor can get richer. Prebble says the New Zealand poverty studies "only looked at snapshots in time of how many people were in various income bands".

Studies in the United States, on the other hand, "found that over time, a person starting in the bottom quintile was more likely to end up in the top quintile, than someone starting in the top quintile was to stay there.

"What really matters is not whether you are rich or poor, but whether you are able to improve your lot in life by your own efforts. What is required for this is a free and open society where people are not held down by welfarism and high effective tax rates."

Business Roundtable executive director Roger Kerr makes a similar point. "The poor will always be with us, especially if we measure poverty on a relative scale, but the same people are not always poor, he said in a June speech about the Statistics NZ report.

"People's incomes change markedly over time as they move between education, part or full-time work, different jobs and so forth. One recent New Zealand study showed that almost half of those on welfare benefits in June 1992 were off benefits a year later. Another showed that a quarter of the taxpayers in the bottom income quintile moved to a higher quintile one year later."

This is clearly an important point. If the poor are only temporarily poor, the problem of poverty looks much less grave.
 

Some clearly and famously do. Winz boss Christine Rankin moved from being a solo mum to a highly paid chief executive. By the same token, some of the rich clearly become poor. The question is: how much movement is there?

Economists give varying replies.

Wellington economist George Barker analysed tax data on person al incomes in 1996 and found that at least a quarter of the lowest-in come group moved into higher in- come groups in one year. After seven years, the percentage rose to 46%.

Another study of the tax data, by John Creedy, found that while there was movement from higher to lower incomes and vice versa, "those with relatively low incomes receive, on average, relatively larger proportionate increases," says Barker.

"There is no systematic tendency for success to breed success, or failure to breed failure."

In another study based on a Christchurch health survey of families between 1978 and 1991, Barker and co-author Tim Maloney found that "relative poverty is a transitory state for many families".

Half of the children never lived in relative poverty during the 14-year period, says Barker.

"Between 40% and 78% of the remaining families that did experience low-income spells were poor for only one to three years. At most, one out of every 10 families was poor in 10 or more years.
 

Some economists say poverty is "stickier" than this suggests.

"I would think that the usual mobility story is less than we thought," says Stephens. Recent overseas work gave a different picture than the American studies - cited by Prebble and others which suggested high mobility.

"The degree of mobility is probably not as great as was once thought, either between generations or within an individual over time," says Stephens.

Brian Easton says the tax data suggest "if individuals were in the bottom three quintiles they tended to stay in the bottom and if they were in the top quintile they tended to stay in the top quintile".

There are always exceptions, he says, but the top quintile is "very stable". And in the lower sections there is considerable "churning" - movement both ways between poor and slightly less poor.

The problem with the welfare studies cited by Kerr, he says, is that nobody knew what happened to beneficiaries once they quit the benefit. They did not necessarily go to a job.

There is little reliable information about mobility in New Zealand, says Easton. John Scott of Statistics NZ agrees. The department is developing a survey on it.
 

"We've clearly had a significant shift in philosophical opinion, even if we don't realise it," says Jonathan Boston, Victoria University's professor of public policy.

"The terms fairness and equality of opportunity no longer have the same meaning as they did 15 years ago. For example, it would have been regarded as utterly fair 15 years ago that people had free tertiary education. Probably the majority of people would no longer regard that as fair."

There are now political parties prepared to campaign "quite openly in the case of Act and almost openly in the case of National" for greater income inequality. This would not have happened 20 years ago, he says.

There has been a broad and significant shift from egalitarian notions of justice and fairness to a different idea where people who did more were entitled to receive more.

He laments the fact politicians in the current election campaign do not say just what they mean by a "fair" or 'just" society. What was needed was some hard thinking and serious debate about these differing notions of justice.

"Instead of that," he says, "we are left with extremely open-ended if not vacuous rhetoric."
 

Clearly some have but others seem to be rediscovering its virtues.

Governments since 1984 have defended their policies as fair and necessary, but few have claimed they would lessen inequality.

Roger Douglas, in his 1988 Budget which cut the top income tax bracket from 66 [ps] to 33 cents, talked about "real equality of opportunity".

Shipley, asked last week whether she was concerned by the growing gap between rich and poor, replied: "My Government sees its role as protecting the less well-off, and to help them to improve their prosperity, while allowing our best and brightest to succeed. This success is New Zealand's success."

This seems to mean: No, she will look after the poor but not try to close the gap with the rich.

As we have seen, Prebble also sees no reason to plug the gap.

But Labour's view has clearly changed. Helen Clark says she is concerned about the growing gap. "Over the last decade New Zealanders have watched their society be come more divided between the 'haves' and the 'have-nots'. As a result far too many are excluded from the mainstream of New Zealand life."

The Government must aim to reduce inequality, she says. "Allowing the gaps to continue to grow would mean that many would be left with no hope."

Winston Peters is also worried. The Government "can and must" reduce inequality, he told the Sunday Star-Times.

The Alliance, of course, has always viewed the widening income gap as an unmitigated evil.
 

Many do but the strength of our allegiance to egalitarianism is impossible to gauge.

A 1998 survey of 2000 New Zealanders asked whether incomes should be made more equal or whether larger income differences were needed as incentives.

The results, says researcher Alan Webster, "point to a nearly even three-way split". A third tended to favour greater equality, 29% were in the middle and 36% tended to favour larger income differences.

Another question asked whether reducing the income gap should be one of the responsibilities of the government. About 28% thought it should and 32% thought it probably should: a total of 60%.

We remain divided and probably confused about egalitarian New Zealand - and must wait to see if it is to be revived or buried.
 

PS