Bernard Hickey points to IMF research showing reducing income inequality can actually improve economic growth in the long run

Bernard Hickey points to IMF research showing reducing income inequality can actually improve economic growth in the long run

By Bernard Hickey

For 30 years economic policy-makers thought that redistributing income was a bad idea. They thought raising taxes on the rich and giving money to the poor was like putting sand in the gears of the economy.

They thought it discouraged people from striving to improve themselves and made the economy less efficient.

It was this thinking that drove the movement towards a flat tax in the mid-1980s and powered the current Government's big 'tax switch' in 2010 that cut income taxes for the highest earners and increased the GST rate to 15%.

The standard prescription from the biggest brains at the International Monetary Fund, the OECD and the World Bank was that any country interested in boosting long term economic growth should cut taxes and reduce the size of government.

But then the Global Financial Crisis hit and now even the biggest brains at these think-tanks are re-thinking their views on redistributing income.

It turns out rising income inequality actually puts sand in the gears of the economy.

When poor and middle income households find their incomes are flat or falling they compensate by borrowing more. Eventually they can't borrow any more and some can't afford to pay the interest on the debt they built up.

This is the Global Financial Crisis (GFC) in a nutshell, particularly in America.

Secondly, when those on higher incomes get an even bigger share of the national income they tend to save more of it rather than spend it.

This 'hoarding' of cash often slows consumption growth and can make financial systems less stable, particularly when it's sent across borders in 'hot' money flows that can disappear as fast as they arrive.

This week the IMF, a bastion of fiscal conservatism and pro-market policies for decades, released a paper titled "Redistribution, Inequality and Growth." It concluded after looking at a fresh set of data on pre and post tax incomes across countries large and small found that more equal countries grew faster over the long run.

The study also found that those Governments that did redistribute incomes didn't actually hurt their economies, apart from the most extreme examples such as Zimbabwe.

"Thus the combined direct and indirect effects of redistribution - including the growth effects of the resulting lower inequality - are, on average, pro-growth," the IMF said.

It's this sort of research and the debate around clearly growing inequality in America and other big developed countries that is encouraging the Labour/Green Opposition to try to make inequality a big election issue.

So far it hasn't got much traction. The Government has simply denied that inequality has worsened on its watch.

It has pointed to the Ministry of Social Development's analysis of Household Economic Survey figures from 1982 to 2012 that showed post-tax income inequality worsened dramatically from the mid 1980s to the mid 1990s, and has been basically stable ever since.

The figures even show a slight improvement from the mid 2000s as a ramp up of redistribution of income through Working For Families and other transfers lifted post-tax household incomes for lower to middle income groups.

The Government's argument is that New Zealand is different to the likes of America and it has good point.

The introduction of Working For Families, our publicly-funded health and education systems, a relatively high minimum wage, accommodation supplements and New Zealand Superannuation have stopped much of the rot that has set in in America.

The Government's retention of these social safety nets since 2008 and its decision to run big budget deficits from 2009 to 2013 to cushion the blows from the GFC and the Canterbury Earthquakes have stopped post-tax income inequality from getting worse.

But it also hasn't done much to reduce post-tax income inequality, which the IMF says would improve economic growth prospects. The figures the Government relies on have also taken a battering this week. Statistics New Zealand and the Treasury revealed an error in their analysis of the data used in the MSD report that meant they had double-counted accommodation supplements.

The corrected figures show inequality, using the internationally accepted Gini measure, was marginally higher than previously estimated, but not enough to change the basically flat trend.

Despite the Government's rearguard action, this issue will not go away. The growing debate about inequality elsewhere and the latest IMF report have changed the landscape under the Government.

Inequality is not only a threat to economic growth, but an opportunity. Politicians can now credibly argue that reducing inequality is more than just about fairness. It can also be a way to increase the economy's growth potential.

The politics of envy can morph into the politics of growth.

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This column was first run in the Herald on Sunday. It is used here with permission.

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This article is showing up in the news section, but not on the home page. It might be expected behaviour, but I thought I'd mention it.
From the figures I've seen wages as a share of household income hasn't really changed very much pre and post working for families, so I would be wondering if it had that much overall effect on the overall economy. It shifted around where some of the non-wage income was coming from.
One thing I hear a lot from overseas visitors is that one of New Zealand's core values is fairness. While not the most exciting value, it does make it hard to make public policy changes that only benefit a few, and harder yet when those changes cause suffering with those who have less resources to cope with the changes.

It took a team of 'experts' at the IMF to figure this out?
Wouldn't have thought this was Rocket Surgery (which is a cross between Rocket Science and Brain Surgery FYI....)

Idiocracy rules in this day and age it seems.......

This is nonsense from Bernard Hickey.
 
It wasn't a 'Financial Crisis' - he's been told
 
It was a 'can no longer underwrite' problem - he's been told.
 
The IMF are part of the problem - he's been told.
 
Growth is unsustainable - only question is when will it cease - he's been told.
 
Income is the ability to actually purchase - he's been told.
 
That which may be purchased, will reduce from here on - he's been told.
 
Sure, the poor fall over first - but making them 'richer' won't increase the amount of processed planet available for purchase. It will merely lead to a bidding war, which they will still lose. He's been told.
 
Horse, water, lead.............      sigh.

I have to call you on this, as even in an ecomony that has to move to a base of decreasing energy there are still debates about the degree to which we are all in it together or go it alone.
The new IMF evidence is that countries that do not let a section of the population have better structural access to resources do better than those countries were people have structurally unequal access to resources (and the news in the article is this contradicts previous economic wisdom).
This principle also persumably applies in a situation of diminished resources and managing the transition, so it is far from a nonsense article in the areas you are concerned with.

Good reply, dh.
 
Yes, egalitarian-ism is the only valid approach to keeping society cohesive on the way down.
 
Allowing individual 'freedoms' just leads to a Tragety of the Commons.
 
But Hickey - like the child poverty studies - doesn't allow that there are lids/limits. Yes, you can remove wealth from the 'top 1%', but that won't sate the bottom-end demand. Both expectations are going to be fallen short of.
 
The article fails to examine the reverse growth paradigm, and what 'equality' will mean as it impinges. One positive is that below a certain wealth-inspired self-confidence, folk tend to inter-relate and inter-rely, which gives you a community cohesion. We started to lose that on the way up, somewhere in the '30's.
 

Peak oil.

I am opposed to taxing the so called wealthy, if for no other reason than resentment by those who feel they have less .
Our present tax structure is fair and equitable,  we live in a social security utopia ......and still find room to complain  .
We are basically a cradle to grave nanny state

  • We are born in Hospitals free of charge
  • Mom and Dad get help to pay for Kindy  
  • Plunket nurses call on us for free  to check we are okay
  • If we get sick or injured  the state will hopsitlaise us for free
  • We get educated for free ( And still huge numbers drop out and join the ranks of the unemployed)
  • In good socialist equality terms , our NCEA is has been dumbed down so everyone gets a chance to finish it .
  • Even university education is made simple with interest free lans , student grants, etc
  • We assist the most vulnerable and the unemployed
  • We have a massive social safety net
  • No one need starve in NZ  
  • Hell , we even have middle class welfare called Working For Families
  • And when we retire , the state pays us a pension.
  • Then if we need frail care in old age ...... the Goverrnment obliges  

And we still complain about inequality
 

Boatman - how long do you think that keeps going?
 
The dinosaurs lasted 170 million years, the median multiple and the welfare state have lasted less than 100. Why do so many folk unquestioningly think the recent is permanent?

Are you seriously arguing that it's a problem - in New Zealand - that rich people are saving too much