Economist Brian Easton wants the distribution impacts of public policy proposals and Budget policies to be more widely discussed because they lie behind so much ingrained inequality

Economist Brian Easton wants the distribution impacts of public policy proposals and Budget policies to be more widely discussed because they lie behind so much ingrained inequality

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.


It is too easy to stick to conventional thinking when we are in a totally new economic environment. Thinking about distributional issues allows us to think deeper.

Distributional analysis is not a high priority either in economic analysis or public discussion (except in the me-me-me demands).

Oh, I know that five years back, everyone suddenly discovered that household disposable income inequality was markedly greater than thirty years earlier, although the discovery was treated with ‘shock-horror’ rather than discussing why the jump had occurred. (The answer is the massive tax and benefit changes that occurred under Rogernomics and Ruthanasia.) More intriguingly, the jump was known a few years after it happened; why did it take decades for the conventional wisdom to become aware of it?

Here is another example. There is a fashion arguing that we should cut GST. The issue is far more complicated than the advocates allow. Even if there was a case for a spending boost, would we want to encourage spending on imports? How easy is it to implement? In any case, is a further spending boost a priority at the moment?

Instead, to illustrate the column’s central point, look at the distributional side of a GST cut. Consider professors of economics; they do not generally front for private lobby groups. Suppose they are taking home pay of $120,000 a year and that GST was cut 2.5 percentage points (back to 12.5 percent). A professor would receive a spending boost of about $3000 a year, or $60 a week. Not that they were thinking of this when advocating the GST cut. The point is that the distributional issue had not occurred to them.

The GST cut would cost the exchequer about $5b a year. With the much same amount we could eliminate the bottom income tax rate (it is currently 10.5 percent on the first $14,000). The effect would be to give a spending boost to just about all adults of almost $1500 a year – say $28 a week. It would be the same amount for a beneficiary as for the professor of economics. Anyone with an after-tax income under $60,000 a year would be better off. (And it would be easier to implement than the GST cut.)

So why do we not advocate zeroing the bottom income tax rate rather than cutting GST (or target more on children)? Public rhetoric ignores such distributional issues.

I am not expecting tax cuts this budget – go on, Grant, surprise me – but there is another major distributional issue which will also be ignored. The budget figures will show a massive increase in the public deficit – partly because the economy was slowing down anyway, but the deficit has also been severely compromised by the Covid Crisis. I’ll leave the budget papers to give the details but note that we are not alone; the IMF is expecting the average increase in public debt across all economies to be in the order of 11 percentage points of GDP.

There will be much discussion on the size of our debt increase, but an obvious question – a distributional one – is who in the private sector will hold the public debt?

It may be you; if you have not been hit too heavily by the Covid Crisis in economic terms, because your spending – on holidays, entertainment and purchase of things like books, cars, clothing and house repairs – has been cut back. So you may be holding more banknotes. Or perhaps your deposits in the bank have risen; one way or another, they get lent back to the government.

It is obviously an important economic question because public debt affects the private wealth distribution and also because we need to know what people will do with their increased reserves. Once the severe lockdown is over, much may be spent on those items which were held over. That  is exactly what the government wants in order to help the economy recover. (It will also generate tax revenue.) Some will be spent offshore; what will those foreigners who receive New Zealand money do with it? Some may be used to pay off debt or go into retirement savings. Some may go into housing or sharemarket speculation. Some may be put into new investment. And so on.

It will be surprising if this issue is discussed much in the post-budget comments. Instead there will be the usual focus on the budget deficit. Insofar as the private sector is involved, it will be explaining why they deserved more from the government. (Thankyous will rarely be reported.)

Unfortunately, that we do not have the data bases to discuss such distributional questions. About the time of the Global Financial Crisis, when comprehensive balance sheets were also vital to understand what was going on, we were beginning to develop them. But the squeeze on government expenditure undermined that development too.

Distributional economics is ignored not because it is unimportant but because it is too hard. The quality of public policy suffers.


Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

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26 Comments

Well Cindy promised a transformative government. Haven't noticed any yet, but here is their chance. With all the upheaval and at 55% in the polls there is no excuse not to.

Interesting distributional analysis and cost comparison of UBI to current (pre-COVID) welfare/transfer programs in the US;

https://www.annualreviews.org/doi/10.1146/annurev-economics-080218-03023...

Given we don't have the distorting Medicare and Medicaid programs (in other words given our healthcare is a universal one already), it would be a fascinating study to replicate based on NZ welfare/transfers system.

With so many about to become unemployed, it seems to me that this type of fundamental re-analysis of our welfare/transfers system needs doing.

Yes! Great idea

Nice article. Good points to notice when talking about public spending and tax. I see that this article has not initiated a lot of discussions. Maybe the title (or somewhere int he article) the write must have said something like "house prices will crash/soar" or something to that tune, then you would have easily had 200 comments.

because the article doesn't raise any topic of interest to most people who receive it in their inboxes at 3.25am Monday morning.....

Nail on head re: Budget coverage. There'll be the solo mum of 42 kids complaining there isn't enough, the company executives pushing back on any sort of employment or wage changes at all, even if they are long overdue corrections of a divorced reality between active labour remuneration and the passive earnings of a piece of land slightly outside the RUB and economists who say that the broader re-distributive objectives of lofty undefined ideals such as 'fairness' have not been realised. Usually it will be the same economist each time - no prizes for guessing who.

Who you won't hear from: Accountants, who will need to collect the tax and feed information into the system that collects it about how realistic or what sort of additional burdens these changes will create, mathematicians or financial modelers interrogating the assumptions of the arguments for and against the more contentious items , and anyone working for a salary who isn't a government employee - currently on reduced income - who is going to be handed the bill.

You can set your Fitbit to it.

I think bottom end taxes were introduced under the Lange Labour Government, and of course GST introduced on the grounds it would replace income tax. All Labour initiatives and all proof about how politicians feel about giving people money to spend. SO JA and GR do have an opportunity to truly transform the taxscape and income brackets. There are many more distributional issues in Government initiatives of course and Brian has made it easy to discuss, but I agree with him that address some can have a big impact on some areas of the equity gaps.

Easton fails the physics question. Sure, spread it around, but how much 'it' is there left?

The government is not financially constrained, it issues new currency every time that it spends. Spending comes first and taxation and borrowing occurs afterwards. The more that the government spends the more that will be returned in taxes and some will even become our savings. An article here in Independent Australia by economist Dr Steven Hail that explains it all. https://independentaustralia.net/politics/politics-display/modern-moneta...

How about removal of the bottom tax bracket and an introduction of a higher tax bracket(s). $70k as highest tax bracket is ridiculous. I think this would cause an easy reelection for Labour.

Yes key question should always be: who benefits?
Whose needs are met?
And what policy benefits most folk and/or society.
Problems: media think public will flick channel after 5 secs analysis plus economy is key concept for past 35 years which translates as anything interpreted or stated by media as “bad” for economy is verboten. Which means redistribution to bottom 50% is not open for debate

Yes, money pumped into the economy needs to be spent, to enter the great money-go-round, and preferably not vacuumed up by the banks to be kept as their profits. I think the best way to achieve this is to pump it in at the bottom. Remove to bottom tax bracket completely, say first $20k tax free, Over $120K around 45 - 50%, over $150K around 60%. Not just Labour but a National Government would also get elected on that. It'd go a long way to addressing the equity gap.

Correct - what the bottom do is spend it more on needs. The top spend it on wants.

Then surprisingly you'd find that almost no-one earns over $150K

Exactly. Work reduced hours or job share.

Not much wrong with that. It may even mean that more could go to the people who actually generate the real value in a business. Why should a CEO be able to be paid in excess of 10 time the median wage in their business?

Indeed more can be done around the ways to get around this, like tax breaks for higher median wages in a business, encouraging business to pay their staff more. The Government doesn't really lose out, the tax still gets to them.

yes, money pumped offshore by all the foreign owned banks in NZ...time to reset, bank with a NZ owned bank.

There will be much discussion on the size of our debt increase, but an obvious question – a distributional one – is who in the private sector will hold the public debt?

When the government issues government IOUs (deficit spending) existing savers exchange their deposits (Bank IOUs) for Government IOUs, allowing the government to spend them into the system. It is always banks creating these savings via lending in the public arena to facilitate this arrangement.

When the RBNZ offers to buy these bonds via LSAP operations authorised RBNZ counterparty bank traders purchase them from the owners and credit them with savings deposits - bank IOUs. Thereafter, the traders sell the bonds to the RBNZ in exchange for reserves (IOUs) which act as an offsetting asset against newly created deposits for the bond sellers.

The minority rentier bond trading cohort can now reinvest, once again, in Treasury tendered bonds to front run the RBNZ's bond purchases for profit.

Unfortunately, no further bank lending is necessarily extended to the general population of taxpayers and their productive enterprises because they are not considered creditworthy in current circumstances, no matter how low interest rates plummet.

Only the government can create bank reserves either through its spending or by lending them directly to the banks. Bond sales don't fund the government, all spending is made by issuing new currency.

So what are his qualifications? you are seeking your information in the wrong places. An article here by prof of Economics Bill Mitchell on his blog that explains how banking operates. http://bilbo.economicoutlook.net/blog/?p=14620
He states "So we might qualify the statement that banks do not lend reserves. In a sense, they can trade them between themselves on a commercial basis but in doing so cannot increase or reduce the volume of reserves in the system. Only government-non-government transactions (which in MMT are termed vertical transactions) can change the net reserve position. All transactions between non-government entities net to zero (and so cannot alter the volume of overall reserves)".

So what are his qualifications? you are seeking your information in the wrong places

Recommended by Paul Krugman

This article may clarify matters

I've been advocating tax cuts for years, particularly at the bottom end. Somehow most people seem to drink the "government knows best" Koolaid that advocates that government spending is more important. Thus we have a stagnant economy with declining productivity and an unreformable regulatory framework.

It is really simple. If you want to stimulate the private economy, reduce interest rates and tax rates and simplify/reduce regulations. If you want to slow it, raise interest rates and let bracket creep increase taxes.

The most important driver of the private economy is private sector capital formation, ie retained profits in the SME sector. This is far more important than most government priorities as it funds productivity improvement and growth. What about a tax free band for them?

Instead we have dumb politicians advised by groupthinking authoritarian socialist bureaucrats protecting their tribe and the private sector gets what's left over, if anything. They are vaguely aware that they need private business to pay their salaries but business, to them, is a deeply mysterious practise of which they have no knowledge.

And the distrust engendered by years of promises like 'open and transparent', translates directly to the half-million or so SME's who are even more disinclined to tell any Gubmint what they are planning to do. Or Not to do. Or when.....

Interest rates don't work if the money only goes into asset prices.

Agree, we should be reducing taxes and encouraging productivity. Instead, we've spent the last two decades celebrating discouraging productivity and pushing all money into asset prices. We should be dropping company and personal income taxes and balancing it with a land tax instead.

Likely we won't have any party who actually goes for productivity, because the asset-owning voters will veto any move to a productive economy over an asset inflation based economy. We'll continue to blame socialism over everything else while voting for this.

Good article. What about the costs associated with the obscene remuneration packets of senior executives and CEO. The ratio and ratchet effects of such packages over the last 30 years have widened and increased to a huge disparity and needs to be addressed. The corporate elite are dining at the trough, and the USA model is not fit for purpose. Ample research on this issue, eg Deborah Hargreaves 2019 book Are CEO's overpaid", a well credentialed UK author. Paul Henry talks about re-sets and the new economy, but never comments on this elephant in the room.