Book extract: The Piketty Phenomenon, New Zealand Perspectives: Why the fuss?

Copyright © 2014 Donal Curtin. Reprinted with permission from The Piketty Phenomenon: New Zealand Perspectives, published by Bridget Williams Books

Thomas Piketty’s book is many things, and ideologues of all persuasions have duly found whatever they wanted to find in it. In New Zealand and internationally people have mostly wanted to talk about the evidence for, and the processes generating, inequalities of income and wealth. As a reaction to a book, that’s fine. But as a guide to our national policy priorities, it’s been overdone, for two main reasons.

First, leaping to emphasise inequality outcomes should take a back seat to focusing on equality of opportunity. Sam Morgan makes a bundle from inventing and selling Trade Me? Excellent. Income and wealth inequality are made worse as a result? Certainly. Anyone worried about this? Me neither. But I would be worried if kids from the backstreets of Otara or Kawerau weren’t being equipped with the skills and knowledge to be Sam Morgans in their own right, and if all the opportunities were instead going to the descendants of, say, well-off economists. And I’d happily trade you a ton of bien pensant outrage over unequal outcomes for an ounce of extra effort put into improving the opportunity for decile 1 school kids.

Economic growth, like equality of opportunities, should also outrank inequality of outcomes as a more important issue. By far the best thing we could do for marginalised people in society would be to run the economy at a rapid clip for a sustained period of time. Nothing transforms the earning prospects of the young, the unskilled, and minorities like a good old-fashioned burst of faster economic activity. Two cases in point, one good and one bad. During the long United States economic boom of the Clinton years, the longest peacetime expansion in United States history, the unemployment rate for young (16–19) black men, normally one of the groups that finds it most difficult to get hired, fell from over 40 per cent to 20–25 per cent – still high, but enormously better. Conversely, here at home the post-global financial crisis slowdown had a particularly bad impact on Māori. The Māori unemployment rate, which was around 7.5 per cent in late 2007 and early 2008, soared to 15 per cent in the second half of 2012 before renewed growth got things moving in the right direction again.

So make sure everyone can have a fair go, and make sure there are plenty of opportunities to pursue: as policy issues these come first and second in my book. Looking at what you’ve got after all of that has happened is a distant third, especially as ‘squeeze the rich’ policies can inhibit Trade Me style innovations in the first place. Ironically, Piketty’s France, under the hapless management of President François Hollande, provides some striking examples. A proposal for a 60 per cent capital gains tax generated intense opposition from young entrepreneurs (calling themselves ‘les pigeons’, ‘the suckers’) who were shocked at the threat to the classic venture capital start-up model. Meanwhile a ‘temporary’ 75 per cent top rate of income tax has sent everyone from middle management to Gérard Depardieu into tax exile in the likes of the United Kingdom and Belgium.

The second main reason why I’m underwhelmed about inequality as a top New Zealand issue is that we’re not actually experiencing an acute attack of it. What does one of the most common inequality measures show for New Zealand over the long haul? Based on the after-tax numbers from the Ministry of Social Development – after adding in social welfare transfers and benefits – income inequality in New Zealand as measured by the Gini coefficient has been largely stable over the last twenty years (see below Figure 3.1). (The Standardized World Income Inequality Database maintained by Frederick Solt at the University of Iowa suggests it has been stable for even longer.) The tax and transfer systems, in other words, have done a fine job of evening out the modest widening of the pre-tax, pre-transfer position.

Figure 3.1 (Click to zoom)

We are also doing reasonably well by international standards. Figure 3.2 (below) shows that same Gini coefficient for New Zealand, again after taxes and transfers, and stacked up against the other members of the OECD. Among developed economies, the United States looks the odd one out, and indeed a lot of the traction behind Piketty’s ideas has come from a real problem in the United States, where inequality, even after any moderating effects from tax and the welfare state, is high (and rising). Here at home, however, our overall level of income inequality is slightly less than in Australia, very similar to the level in Ireland and Canada, and only a bit higher than in France. And, personally, I’d say France would be better off with our slightly higher inequality and our markedly lower unemployment rates, especially for youth. For all the supposed benefits of the European social model, it doesn’t match ours in outcomes, and costs much more: French government spending amounts to 57 per cent of gross domestic product (that is, the income that a country generates in a given year), and the country hasn’t run a balanced Budget in forty years.

Figure 3.2 (Click to zoom)

As Piketty cautions, the Gini measure is a blunt tool: you really need to look at the finer detail of the income distribution rather than at one number trying to capture a summary. It shows the picture of New Zealand inequality from looking at the super well-off: the top 1 per cent of income earners, the group that includes the sometimes grotesquely highly-paid ‘supermanagers’ (and the group that is most at the pointy end of criticisms of income inequality). The data come from Piketty’s World Top Incomes Database, and go further back than the data presented in Figures 3.1 and 3.2. Piketty has sometimes had to use different estimates from different researchers for different time periods, hence the graphs like ‘New Zealand – 1’ and ‘New Zealand – 2’. I’ve also added in Sweden, just to see how we shape up against the gold standard of an egalitarian polity. This graph also, by the way, shows one of the big themes of Piketty’s book – the wipeout of the pre-First World War rentiers of the Belle Époque in France and of their equivalent in other countries.

What it shows, again, is that if there’s an acute inequality problem, it’s overwhelmingly an American one. There the top 1 per cent are back to levels of the Gilded Age of Gatsby’s day and, in this selection, only the British experience is comparable (though the global financial crisis and austerity measures seem to have moderated their top 1 per cent of late). But it’s hard to see a problem here in New Zealand (putting aside 1998–99 as an outlier) or in Australia for that matter. Both our economies have a slightly smaller share going to the top 1 per cent than France does, and both of us are comparable to the famously egalitarian Swedes. So, why the fuss?

But let’s suppose that even if there are more important issues to manage, and even if we are not actually experiencing an upsurge in income inequality, we’d still like to look at inequality and see what, if anything, we should be doing about it. Here I found myself agreeing with a lot of what Piketty has to say. True, his cunning plan of a globally coordinated wealth tax is hopelessly unrealistic. But there’s a lot of sense to what else he has to say.

He makes a fine case for a modernised, more effective ‘social state’ – what we call the welfare state – and rightly considers it one of the great advances of civilisation of the past century. Anyone still down the ‘welfare bludger’ end of the political debate could usefully read Chapter 13 of his book.

He’s also got me wondering why there’s so little information on the distribution of wealth in New Zealand: updated and expanded data on the level and distribution of wealth here would be very welcome. The latest information seems to have been a one-off analysis of 2003–4 data, which showed the top 10 per cent with 51.8 per cent of wealth, the next 40 per cent with 43 per cent, and the bottom 50 per cent with very little (5.2 per cent). These findings aren’t unusual for a developed OECD economy, and if it looks lopsided, the good news is that things used to be a lot more uneven. As Piketty’s book demonstrates, what has changed over the past century is the emergence of that 40 per cent, what he calls a ‘patrimonial middle class’, and which we also have. Note, by the way, that a lot of the reaction to Piketty’s book has picked up on the ‘law’ of r > g (the return to capital is more than the economy’s growth rate) and that as a result a small group of ultra-rich will inevitably end up owning the whole world. What history has actually shown (albeit marked by the impact of two world wars) is that ownership of capital is more widespread than a century ago. And it’s got me wondering if we couldn’t use the likes of KiwiSaver to take the process forward to another level, which would have benefits over and above further democratising the distribution of wealth (Piketty says much the same in a French context).

Finally, and I wouldn’t have said this before I read the book, I think I’m now open to a wealth tax, at some low annual rate, above some fairly high threshold. Not a capital gains tax, mind, for all the reasons that will immediately occur to you if you look at the tax returns Australian shareholders have to make. But a wealth tax is looking dangerously logical to me, even if we’re not quite picking out curtains yet. After all, you can be well off in two senses: earn a lot, or own a lot, and it doesn’t seem either right or efficient for the progressivity of our tax system to fall largely on those who earn a lot.

Copyright © 2014 Donal Curtin Curtin. Reprinted with permission from The Piketty Phenomenon: New Zealand Perspectives, published by Bridget Williams Books