Mitchell on income inequality

January 28th, 2014 at 10:00 am by David Farrar

Inequality in NZ and the oecd trend

From Lindsay Mitchell.

The Gini coefficient is what most on the left say is the best measure of . This clearly shows no worsening trend, and in fact most of the OECD is getting more unequal, but not New Zealand.

Mitchell also looks at the standard measures of . These are not measures the right might use such as actual need, but the normal proportion of median income. What is the record for NZ from 2007 to 2012:

  • AHC fixed line 60% dropped from 18% to 14%
  • AHC moving line 60% dropped from 18% to 17%
  • AHC moving line 50% dropped from 13% to 12%
  • BHC moving line 60% dropped from 18% to 16%

So when a politician claims NZ has more poverty or income inequality, just ask them a simple question. On what measure.

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22 Responses to “Mitchell on income inequality”

  1. KiwiGreg (3,129 comments) says:

    I bet North Korea has a lovely GINI coefficient.

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  2. big bruv (12,380 comments) says:

    The truth is indeed bloody inconvenient for the left.

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  3. Fletch (5,727 comments) says:

    Yep, and as I posted (yesterday?), the same Gini index shows that the United States is worse off under Obama than the last 2 presidents.

    http://news.investors.com/012414-687632-obamas-state-of-the-union-inequality-ideas-have-failed.htm

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  4. Fletch (5,727 comments) says:

    Margaret Thatcher points out that “income equality” actually makes the “poor, poorer and the wealthy less rich”

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  5. Manolo (12,641 comments) says:

    Lindsay Mitchell would make an excellent minister. Why not tapping on her skills and experience in a future government?

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  6. backster (2,000 comments) says:

    I agree with Manolo, why National haven’t already shoulder tapped her for one of the numerous advisory Commissions beats me.

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  7. ChristineY (7 comments) says:

    As we are going to spend 2014 arguing about income and wealth inequality we need to agree what measures we will use to clarify the debate.
    The extremes between the message that the national median hourly rate is slightly less than $18.40 per hour (i took that from John Key’s career interview on the Herald site) and thus $38,272 per annum for a fulltime before tax wage compared to up to $150,000 for a household income (Labour’s best start package) demonstrates vast differences in the measures being used to define income inequality. Even if a household had two fulltime median wages generating their income at $18.40 per hour the household income at $76,544 is just over 50% of $150,000. And this is before we try to incorporate the impact of WFF on household income.
    I’m sure the politicans will want to fudge which measure they are using to suit their message. However, I’m hoping the blogosphere both left and right can influence forcing some clarify.
    David Farrar, can you list for us all the measures being used and their source as a starter?

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  8. davidp (3,328 comments) says:

    With poverty being defined as a percentage of the median income, then (by definition) poverty and inequality are always going to increase when the economy is doing well. Like it is at the moment. The only way to reduce poverty and inequality is to let your economy tank so that everyone is poorer.

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  9. JC (840 comments) says:

    As David Goldman says in the Asia Times its not income inequality that is the problem, its knowledge inequality.

    I wont use his exact examples but 50 years ago when employment was very high just about everyone had a working knowledge of the economy, ie, could fix cars , mend clothes, could learn to lamb a ewe, fence a paddock, build a lean to or operate a wide variety of machinery.. a very basic education and/or a learning period was sufficient to cover most jobs in a 1950s economy and provide a good life.. not any more.

    JC

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  10. Albert_Ross (178 comments) says:

    Is it actually true though, that “The Gini coefficient is what most on the left say is the best measure of income inequality”? Any sources for that?

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  11. jedmo (27 comments) says:

    What kind of “1984 Doublespeak” is it, that we can’t apparently define poverty in terms of “actual need”, which is surely the only way to measure it?

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  12. Weihana (4,475 comments) says:

    What is the ideal level of inequality?

    Any consideration of inequality is a double-edged sword. On the one hand some inequality is necessary to distinguish value in various activities and to thereby encourage people towards those activities which are more valued (as determined by demand). On the other hand excessive inequality would be subject to some diminishing returns both in terms of creating additional incentive and in limiting opportunities to those who are worse off. So it is not at all clear whether a Gini coefficient in the low thirties is too high, too low or about right.

    Lindsay Mitchell states:

    “Compared to the sixties – when inequality was lower – reliance on benefits is much, much higher. It was just a given that the welfare state would eventually drive up inequality.”

    Yet she doesn’t actually provide any evidence for this assertion. Indeed higher inequality as compared to the sixties is clearly associated with market reform in the 80s which has little to do with “the welfare state”. Moreover, several European states with welfare systems more generous than New Zealand have lower GINI coefficients.

    On the other hand, the fact that inequality increased after market liberalisation doesn’t mean that those market reforms weren’t a good idea either. Inequality can still rise as everyone becomes better off just as it can fall while everyone is worse off. Moreover, the reforms were implemented out of necessity so one has to also consider what might have happened if they weren’t implemented: you can’t simply compare it to the sixties.

    So ultimately looking at the GINI coefficient has limited usefulness in determining whether some policy is needed or helpful. The questions still remain: will the policy actually reduce inequality and is that, on balance, a good thing which outweighs any potential negative effects? Or to put it another way, will any effort to redistribute have a negative impact on overall productivity and growth and to what extent?

    Ultimately each side of the political spectrum will employ some level of faith to answer this question. The left will generally always view inequality as something to be abolished, and the right will always view ‘the market’ as the ideal solution to every problem. Perhaps a practical approach is to question whether any party offering a handout is also offering some way to grow the resource base of the economy.

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  13. nickb (3,629 comments) says:

    Lindsay Mitchell would make an excellent minister. Why not tapping on her skills and experience in a future government?

    Manolo, surely you jest.

    Nikki Kaye is clearly Paula Bennett’s successor in the welfare portfolio. We should be so lucky

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  14. Weihana (4,475 comments) says:

    JC (827 comments) says:
    January 28th, 2014 at 12:12 pm

    As David Goldman says in the Asia Times its not income inequality that is the problem, its knowledge inequality.

    I wont use his exact examples but 50 years ago when employment was very high just about everyone had a working knowledge of the economy, ie, could fix cars , mend clothes, could learn to lamb a ewe, fence a paddock, build a lean to or operate a wide variety of machinery.. a very basic education and/or a learning period was sufficient to cover most jobs in a 1950s economy and provide a good life.. not any more.

    We haven’t a hope of winning that race in my view. Machines are learning and improving at an exponential rate. Recent studies estimate up to half of the population are likely to be displaced within the next 20 years or so (IIRC). Of course new opportunities will always be created but it’s whether most people will be capable of taking advantage of them which is the problem.

    Previously most new technologies have created opportunities across the board from highly skilled to simple labour and even the uneducated benefitted from some jobs being eliminated. But if the new technologies can also do all the simple jobs that might normally be created then the domain in which humans can compete becomes increasingly narrow. If a company can build a robot to flip burgers and serve customers at McDonalds that same robot will also sweep the floors in the factory that creates those robots.

    To maintain our current economic system we must expect that everyone becomes managers, engineers etc. or contributes something else which is creative and not yet automated. We could spend enough money to get everyone in society a university degree but I don’t think that means they will necessarily get jobs. In a similar way I think even if we trained every child to be a talented musician, the vast majority of them still will not win a Grammy or even be able to earn a living on their musical talent.

    The dynamic between land, labour and capital is going to be fundamentally changed by artificially intelligent machines and so too will our economic system. Of course, we also will not know how exactly it will change until it actually happens.

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  15. Weihana (4,475 comments) says:

    jedmo (20 comments) says:
    January 28th, 2014 at 12:47 pm

    What kind of “1984 Doublespeak” is it, that we can’t apparently define poverty in terms of “actual need”, which is surely the only way to measure it?

    Who determines what “actual need” is? “Need” is a fairly ambiguous and subjective term. Does someone “need” a refrigerator? Do they “need” an automobile? Our concept of “need” evolves over time. Certainly before these things were invented they wouldn’t be considered “needs”. But now they are basics that people generally “need” to keep food fresh and to get to their places of work etc.

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  16. Weihana (4,475 comments) says:

    davidp (3,120 comments) says:
    January 28th, 2014 at 11:48 am

    With poverty being defined as a percentage of the median income, then (by definition) poverty and inequality are always going to increase when the economy is doing well. Like it is at the moment. The only way to reduce poverty and inequality is to let your economy tank so that everyone is poorer.

    This is only true if growth inherently increases inequality. Surely it is possible that an economy can grow without inequality increasing. Indeed your position would imply that everyone economy with lower inequality than us must have an economy that is performing worse than ours.

    Surely it is more correct to say that measures of inequality do not necessarily reflect the overall state of the economy. Rising inequality can correlate both with everyone being better off and with everyone being worse off.

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  17. scrubone (2,971 comments) says:

    That the “gap” is increasing is just one of those things politician say – regardless of whether it is or not.

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  18. labrator (1,691 comments) says:

    Things rapidly better in the late 80s yet for some we’d apparently be a lot better off if Roger Douglas hadn’t intervened.

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  19. PaulL (5,776 comments) says:

    @Weihana, to the extent that inequality is a prerequisite for growth there would be a correlation between inequality and income. As a generalised thought experiment I would suggest that perfect equality would result in low to zero growth (i.e. if I earn the same irrespective of whether I work, what skills I have or what I do, then why would I do anything at all), and that perfect inequality would also result in low to zero growth (i.e. if the guy at the top takes all the money irrespective of how hard I work or what skills I have or what I do, then why would I do anything at all).

    Logically there is therefore also an optimal level or range of inequality that is high enough to provide incentives to work harder/better/faster, but not so high that you feel like the outcome is pre-ordained – that changing what you do has no impact on the outcome.

    If this is true, then countries with “moderate” inequality would have the highest growth rates, and therefore over time the highest income.

    If we looked at a lot of other govt policies through this same lens, we’d ask questions about other incentives that also correlate to how hard/fast/smart people work. Things like high effective marginal tax rates for those in receipt of WFF, or those who are moving off a benefit.

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  20. slijmbal (1,134 comments) says:

    http://en.wikipedia.org/wiki/List_of_countries_by_income_equality – it lists by country over time lots of the various inequality measures – it lets one sort by various types of measure at specific times.

    Such measures can rightly be criticised as they can individually be rather simplistic but as a group are good proxies for inequality.

    I had a good play, sorting, spread sheeting etc …

    Of interest was that NZ had decreasing inequality compared to other countries starting in the 90s and overall was one of the least ‘unequal’. Generally speaking the richer Scandinavian countries and the old favourite Holland topped out the lists as most equal with NZ snuck in behind in recent times.

    Many of these figures were before redistribution via taxes and benefits and with NZs historically high %age of GDP taxed by the government this implied NZ was even more ‘equal’ as more money from the higher earners would be taken from such earners (don’t give me the crap about NZ being a low tax environment – I lived in Holland before coming to NZ and a greater %age of my income disappeared in tax here than in Holland as we have a much flatter tax regime that kicks in sooner – Holland is, in theory, a high tax regime. NZ is a high tax regime well disguised).

    The -ve side of such ‘equality’ is that it rewards mediocrity and punishes success. It also completely avoids the issue of true need (Weihana’s “ahh Grasshoper what is need?” nonsense aside about defining need and his conflating wants with needs). There are plenty of measures of true need and I don’t doubt that as a group NZ measures well. I’ll check them out another day.

    NZ is becoming more equal not less so according to the real numbers.

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  21. Tom Jackson (2,262 comments) says:

    That graph says we are worse than the OECD average and shows that the bulk of inequality kicked in with the neoliberal reforms of the fourth Labour government. It’s not really getting better quickly enough, and this shows that those reforms have to go. They were proposed by idiots and supported by idiots, so it’s about time we got rid of them.

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  22. Weihana (4,475 comments) says:

    slijmbal (1,093 comments) says:
    January 28th, 2014 at 6:33 pm

    The -ve side of such ‘equality’ is that it rewards mediocrity and punishes success. It also completely avoids the issue of true need (Weihana’s “ahh Grasshoper what is need?” nonsense aside about defining need and his conflating wants with needs). There are plenty of measures of true need and I don’t doubt that as a group NZ measures well. I’ll check them out another day.

    There are also plenty of measures of length (metres, feet, parsecs etc.) but there is nothing intrinsically more valid about one than the other. To measure length according to any one of these standards is an objective measurement, but the unit itself is no more valid than any other, it just needs to be consistent.

    The point is the fact that you define some criteria to assess “true need” and then measure a country according to that criteria, does not mean the criteria you have established is somehow objectively more valid than any other. It is still subjective and simply your opinion, hence it is just as relative a measure as a proportion of the median income. The difference being that instead of being measured relative to median income it is measured relative to your subjective criteria of “true need”.

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