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Gareth Morgan separates the politics out of the inequality debate to find what is behind the real problems we face

Gareth Morgan separates the politics out of the inequality debate to find what is behind the real problems we face

By Gareth Morgan*

Judging by the questions we have received, inequality seems to be one of the hot topics of this election.

There are probably a number of reasons for this. The 2010 book Spirit Level summarised the latest incarnation of this debate, arguing that more unequal countries do worse on a range of measures including health (especially mental health), education and crime.

Then in 2013 French economist Thomas Piketty added fuel to this fire by arguing that capitalism “naturally” leads to greater and greater inequality.

Most recently we have had our own Nigel Latta on the television musing on this topic in Aotearoa. 

What do we mean by inequality?

At its simplest, inequality is the gap between the haves and have-nots.

People talk about inequality in a number of different ways, and it is easy to get confused:

Inequality of income – some people have a bigger pay cheque than others.

This is what most people mean when they talk about inequality. It refers to income people receive, and it is usually measured with the same data used to collect tax.

Inequality of wealth – some people own more stuff than others even though their taxable income might not be that much higher.

This can reflect the impact of any of the following; inherited wealth, the reality that ‘money makes money’ so capital can compound in the hands of an astute investor, the tax loopholes available to income from capital that are not available from wages income. 

Inequality of opportunity – some people have a better start in life than others.

This may be related to poverty (whether measured in income or wealth), but it may arise because some people suffer from poor access to health and education services needed to enable a full participation in society and the economy. It is less to do with the gap between the rich and poor per se. 

What kind of inequality are we worried about?

The problem with talking about inequality of income and wealth is that it implies equality is the aim.

Clearly in a capitalist society this isn’t the case – no one has a problem with people being rewarded for working hard and getting ahead.

That is the obvious problem with the byline for the Spirit Level: “Why More Equal Societies Almost Always Do Better”. Actually, no, that couldn’t be more wrong, the most equal societies failed. Communism wrote its own epitaph in the Soviet Union and China by surrendering to capitalism and lifting living standards accordingly.

So, assuming society is bound to have some inequality in wealth or income, how much should worry us? At what point do the pluses outweigh the minuses? We don’t really know. These questions plague the inequality conversation, including defining the ‘poverty line’, which is usually set as an arbitrary proportion of average income.

Surely we want to make sure that the poor have enough to participate. That is the approach taken by the Nobel Prize-winning economist Amartya Sen. Granted, what is needed to participate in society will change over time as new technology becomes available, but it seems to make sense to focus on giving everyone the basics they need to get ahead. That is why here at the Morgan Foundation our view is that it’s inequality of opportunity that is the real issue, rather than inequality of income or wealth. 

That means we should be focused on making opportunities available to all members of our society, rather than fretting about the gap between the rich and poor.

What about the Spirit Level? 

Despite all the work by authors of the Spirit Level, there is no strong case that inequality causes some of the problems they claim. Just because two things are correlated (have similar trends) doesn’t mean one causes the other. There is evidence that the most unequal societies also have the poorest people. That means that all the factors attributed to the gap between the rich and poor in the Spirit Level could just as easily be caused by the fact that the poor are far poorer in the economies that don’t perform as well. 

In fact this cause seems more likely than the Spirit Level narrative. Why would the gap between the rich and poor drive negative outcomes? Would the activity of the well-off does impede progress for the poor? Or is the thesis in the Spirit Level little more than the conventional socialist rhetoric of jealousy and status anxiety? 

It seems more credible that it’s a lack of access to the fundamental bottom-line health and education services, or similar human-rights entitlements that is trapping the poor. In the developing world at least, the general view is that lack of political enfranchisement and basic human rights plays a huge role in entrenching grinding poverty. The “locking-out” of significant portions of the population is the real issue, preventing people getting ahead. Lack of equality of opportunity may be driving the trends in poverty (and hence inequality). 

What has driven the rise in inequality?

In the developed world there has been growing inequality of income since the mid-1980’s as capital market deregulation, regulatory reform and the information technology revolution have seen online communication emerge, production processes automate, and world trade explode. This has led to stagnation and reduction of real wage incomes for many in the developed economies as their jobs have been exported or automated. On the other hand the profitability of businesses that have surfed this trifecta of online, automation and globalisation has risen enormously – and with it the incomes of their senior executives whose remuneration is linked to profits.

So who’s to blame for this rising inequality within developed economies – those who invented the IT, those who have done well from these global trends, governments that have not redistributed the gains via taxation, the victims for not re-skilling themselves, those who agreed to enfranchise millions of people in the developing world (and in the process disenfranchise many in the developed world) via deregulation? Certainly economic theory would suggest – and the evidence confirms – that there has been a net economic gain. The issue of course is that those displaced by the changes are in the main, in the developed world and hence highly visible by Western media.

What is happening with inequality in New Zealand?

Despite all the discussion from Nigel Latta on the subject, inequality of income in New Zealand has not grown since the decade of Rogernomics/ Ruthenasia in the late 80’s and early 90’s.

Well it hasn’t grown at least once the impacts of tax and welfare (like Working for Families) is taken into account.

So that suggests that in our country at least there is a policy to cap the polarisation of income distribution.

As for inequality of wealth, we can’t say. Due to the lack of any reliable wealth data in our country, we have no data on the distribution of wealth.

This is a pretty massive gap in any analysis of inequality, particularly since we know that the wealthy can arrange their finances to minimise the amount of income tax they pay – through trusts, businesses and most significantly by investing in property and exploiting the loopholes that favour income from capital. 

Nor do we have a measure of inequality of opportunity.

When it comes to the things we really want to measure, official statistics often let us down. We’ve talked a lot in the past about how GDP is a poor measure of overall progress – well that applies at the individual level also. Is increased income really a good sign of improved well-being and vice versa? It can be hard to know because well-being means different things to different people.

Nevertheless it is what a person is concerned about improving and only part of that story relates to income or wealth for that matter. What if extra income is coming at the expense of leisure time? Someone might choose to work less in order to grow their own food, spend time looking after their children or a loved one. Perish the thought – they might be happier to have a lower income if it means they can swim in their local river. All these factors matter to an individual’s well-being. 

In our book The Big Kahuna it’s inequality of opportunity that really matters, and to assess that we clearly have to look at measures beyond income and wealth. Equality of access to quality healthcare and quality education and training is a major issue here, as both these things are essential for any citizen to get ahead, any child to grow up and be just as able to fulfill their potential as the next.

We know from our work on the book Health Cheque that there is not equality of access in the health system. There, the squeaky wheel gets the oil, and the educated middle and upper class is far better at getting what they want from the health system than the poor and ethnic minorities.

In researching for our upcoming book on the future of the Treaty of Waitangi, we discovered that there is an ethnic bias in both social and economic disadvantage – that when we correct for age and income, we still find that Maori and Pasifika for example suffer disadvantage. For a so-called advanced society like New Zealand that is shameful.

In conclusion then, our view is that there’s a lot of noise about inequality with the most common errors being people thinking it actually causes disadvantage.

Only when one is talking about inequality of opportunity is it logical to see causation of suffering being the denial of human rights or access to health and educational services.

Inequality of wealth and income are more the results of that denial than the cause of disadvantage. 


This article was first published on the blog and is re-puslished here with permission.

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Nice said Gareth (although rather long).
"It seems more credible that it’s a lack of access to the fundamental bottom-line health and education services, or similar human-rights entitlements that is trapping the poor. In the developing world at least, the general view is that lack of political enfranchisement and basic human rights plays a huge role in entrenching grinding poverty. The “locking-out” of significant portions of the population is the real issue, preventing people getting ahead"

Yes this touches on the real difficulty.

to highlight inequality.  The rich can choose to live poorly (and have wealth left over - eg to invest in the future)....The poor have no choice but to live poorly (and thus have nothing or less, to invest in the future).    This is after taking out the self-destructive types, who will forge a path to the poorhouse despite opportunity and position (like my paternal grand-grandfather).

Being poor means that one is forced to be subjected to things one would rather not.
That lack of choice *IS* the bitter pill of inequality.

Money is options.  One of the dangers of too much money in the economy is it's not worth anyone doing the horrible jobs.  Like the crisis in Turkey, no-one of worth would do manual labour or take up a trade, it's too demeaning.  So who cleans the toilets, fixes the broken things, and generally creates the lifestyle that everyone is wanting?

three of the things that people often would rather not have that affect the poor:
- Lack of education opportunities. Often this is the money to get ahead, but frequently its just the demands of a job - being poor often means working for cheap, and that means doing many hours to keep the boss happy (because that's your sale point of your labour).

- Having to work poor jobs.  Often this is smaller businesses or lower pay than the skilled labour should be paying but it also includes large corporations who frequently underpay or orphan positions/skills they know you can't afford to leave, you haven't got the skills or had the project work that will get you headhunter, so why pay more.  Also in very large corporations, your boss/bosses...boss might not be the sharpest negotiator for budget money leaving your arm of the business with stretched resources.  Being poor and overworked, it's hard to get out of that mould or to build network/contacts with worthwhile people who are in positions to help (a recent dilbert mentioned this with Asoke)

- Health and motivation.  Working hard, living hard, being poor create a tough mentality.  One which it's difficult to resonate with the surfing team that's on the top.  Having nothing left over at the end of the week/month, it's really not much point living beyond the next pay period, let alone bothering yourself about bigger pictures than do so just invites depression - and worse: alienation of your peers.

Equality of opportunity, is just as much a pipe dream as income equality.
The poor stay poor and the rich get richer.
Everybody knows, that's how it goes.

It's not quite true that the poor stay poor.  There's a fair bit of churn in New Zealand and within a few years most of the people now in the poorest deciles of society won't be there any more.  (Neither is it true that the rich get richer - there are also people who move down from the highest income deciles, but they're not a public policy concern).
Some of those who are now poor, however, will still be poor in a few years' time.  Of those, some won't have a problem with that  -  as the article says, not everybody thinks it's all about money, and if some people are happy with a life that's poor in financial terms but rich in other senses then what business is that of anybody else's. 
That leaves those who do want to get out of poverty, but can't.  How come they can't, when others can?  What is it that's holding them down?

THANK YOU GARETH , for stating the bloody obviuos .  Communism was the ultimate experiment  in the concept of human  equality , everyone equal in every repsect , and it failed dismally.

When was it equal?

Precisly Andfrewj , the communist system was in theory built on equality , it failed on every level.
It was never "equal" , becuase equality is an amorphous concept

I think that George Orwell's book " 1984 " sums up communism quite nicely ...
... as the pigs ( reading between the lines , politicians & bureaucrats ) say , all animals are equal , but some are more equal than others ...
The current dictatorship of North Korea bears this out very well .... Dom Perignon , Beluga caviar and Cuban cigars for the piggies at the top of the pile ... something a little less than that for the proletariat below them ...

1984 is not Animal Farm.
Personally I think 1984 is much much more akin to the society we live in now.
We are not at war with East Asia
Maybe you need to read it again?

... aha , so someone was watching my ...ahhhh.... deliberate blooper ... yup , that's it ...
Ahem , cough cough ... ( exits left , head bowed ) ....

Equality of opportunity to unearned income is what Gareth what gareth is really talking about. So yes in this system having full equality is impossible as it would mean the equivalent of every single person owning a rental property.
The real core of the matter is the role of finance, or in particular interest on the money supply, which causes a compounding redistribution of wealth.The thing with that system is that the quantity of those with access to this form of unearned income has to shrink over time.  There are plenty of people not yet showing up in the (unemployment) statistics that previously had access to this unearned income, but are finding the doors shutting behind them.

So there is this guy, who nobody ever heard of, who is lucky enough to be father to one of the very few people who actually stumbled upon a great idea for the internet as well as having the contacts to make it successful.  This guy gets a huge windfall in the form of a reverse inheritence. Then uses his wealth and newfound contacts that come with it, to tap into a government guaranteed income stream.  He now has wealth and power, and a makes himself heard.
His primary public concern is of course how to make NZ a better place.  He proceedes to pontificate endlessly about economic matters and in the tradition of many famous economists proclaims 'I am the only one who is right'.  Another crusade he has taken on, is of course to tell everyone how bad the NZ dairy industry is, being unable to swim in rivers is of course evidence of how bad dairy farming is, (though I have not seen the data that backs this up). 
How does such a lucky man act?  Well he gets together with his rich buddies, and they use their massive wealth to attempt to destroy the NZ dairy industry. The first part is of course the media campaign of dirty dairy, thats cheap and easy.  The big bucks come in when he starts building dairy farms in the lowest labour cost country he can find.  Thats where their money goes.  Instead of deploying his capital in NZ where it may do some good, either by developing a better dairy system, or investing somehow in NZ, he sends his money overseas where it gives no benefit to NZ, and actively competes with our main industry, upon which countless people depend.
So naturally he is going to make a point of saying there is no disadvantage to him being rich and you being poor (relatively speaking of course) thats neither here nor there.  Whats important is that it's the governments fault for not implementing his plan. 

everything you mention in your video NZ has. we have free education, we have near free health care, we have weekly benefit, we have state housing, no one in NZ needs to be hungry....anyone that wants too can retrain new skills...the issue is not that we dont create opportunities for people, the issue is people live in small poor communities and are fed complete bullsh*t from the left that the rich have it better and there is no chance for you...pick up a hammer, learn how to use a computer and then maybe you can build a garage for your kids to use...what on earth is this guy on about???

but we have to pay for our "free education"
and I certain had to pay not inconsequential sums for my last doctors visit.
The weekly benefit, only available to a few, can easily be denied to those in need. (personal experience of this).

State housing, if you're one of the lucky few.

And some people in NZ do not have income and do go hungry.  Some students are clear examples of this.

Any on that wants too can retrain new skills.... ok, now I'm sure. You're either reading from an advertising brochure or talking out your a... hole in your head.

Pick up that hammer.... I have.  Are YOU qualified in any Licensed Building Work?  Hammerhand is now a extinct position as the cost of hire (traditional just over minimum wage) is more than the work is worth to the builder.  The price of a nailgun has also contributed to the extinction of the position.

Learn how to use a computer....And compete with all those other cowboys out there.  First up what skills are you going to learn?  Where are you going to sell them?

Build a garage...Single car? kids to use? that's LBP for the free standing structure, money for the plans to give to the council, so you can pay the council for a permit, about 5k minimum for materials alone. If you have a concrete floor, don't forget the 150mm (from memory) minimum height above cleared ground level.  I take it you're digging those foundations by hand?  renting a thumper to make sure the gravel bed is uniform compression?  Don't forget the polythene moisture barrier and if you're putting kids into there for any  length of time you better put some form of insulation in the floor.  Putting power to that garage? That's a sub meter board, trenching, registered sparkies, underground cable, patching into your main meter board, for several thousand dollars.  fortunately you can do the waste water removal by yourself in most areas, just make sure the fall is right as you don't want your house or the street draining back into the section.
 All up, "pick up a hammer" will set you back 10-12k.  so please...please learn what you're talking about BEFORE you say that stuff...before you VOTE.


read a bit more:
"In researching for our upcoming book on the future of the Treaty of Waitangi, we discovered that there is an ethnic bias in both social and economic disadvantage – that when we correct for age and income, we still find that Maori and Pasifika for example suffer disadvantage. For a so-called advanced society like New Zealand that is shameful."

Gareth...knock off the racist sh..stuff please.
There are plenty of disadvantaged people of all cultures, ethinicities and races, it's about income-to-cost, it's about income-to-opportunity, it's about attitude towards wealth. Get any of those wrong, and disadvantage happens.   Advantage takes generations to build and has no dependance on genetics.

Ignoring those who are disadvantaged and not Maori and Pasifika is minoritising them even futher.

I hate this type of article, I mean I lothe reading them, they make assumptions that are false and in turn use them to justify support for the status quo with a small tweek.

  For a start was the USSR really a socialist state that failed?


 The battle is between Freedom and Equality.  People with wealth want freedom, the disadvantaged want equality, without balance democracy won't survive.


 "The men who can manage men manage the men who can manage only things, but the men who manage money manage all men"


In the 2012 edition of Occupy Money released last week, Professor Margrit Kennedy writes that a stunning 35% to 40% of everything we buy goes to interest. This interest goes to bankers, financiers, and bondholders, who take a 35% to 40% cut of our GDP. That helps explain how wealth is systematically transferred from Main Street to Wall Street. The rich get progressively richer at the expense of the poor, not just because of “Wall Street greed” but because of the inexorable mathematics of our private banking system.






The contradictions in capitalism.


Marx argued that at first capitalism released great progressive developments, especially large increases in production and therefore in the material wealth of people in general. However as time passed the forces of production and the social relations of production came increasingly into conflict, contradictions surfaced and the social relations of production began to thwart the full application of technology and productive potential to social needs. These internal contradictions will continue to increase in severity over time and ultimately they will result in the destruction of the capitalist system.


The central conflicts built into the structure of capitalism concern the process whereby capitalists accumulate profits. Capitalists are involved in savage competition with each other and therefore there is great pressure to develop more efficient production and better technology. There is a tendency over time for capitalists to increase the percentage of their capital investment that goes into machinery ("fixed capital") and to decrease the percentage put into buying labour. In other words there is a tendency for what Marx called the "organic composition" of capital to change. Consequently workers in general take home less pay and increasing "immiseration" of the proletariat accompanies the capitalist's increasing accumulation of wealth. Consequently workers have less purchasing power and because they therefore cannot buy all the goods that the capitalists' factories can produce there is a tendency for capitalists profits to fall in the long run. These two consequences of the essential contradiction built into the nature of capitalism will result in its eventual destruction. Both the workers' situation and the capitalist’s profits will deteriorate to the point where revolution will occur.



 To highlight the craziness of the 'market', is the sale of our power generation.

 In Quebec there  is a State generator that can sell electricity retail at .8c a Kwh and still make money.



 Also in Tennessee



The reality is that politicians attempts to save the monied class will probably destroy us all.


Outspoken non-status-quo thinker Reserve Bank of India Governor Raghuram Rajan may be set to have his central banker card revoked... for telling too much truth (here in 2012here in 2013, and most recently here). Having previously noted that "international monetary cooperation has broken down," the WSJ reports that Rajan warned Wednesday that the global economy bears an increasing resemblance to its condition in the 1930s, with advanced economies trying to pull out of the Great Recession at each other’s expense. Simply put, he concludes, "we are taking a greater chance of having another crash at a time when the world is less capable of bearing the cost."
As The Wall Street Journal reports, Rajan explains the difference between now and 1930 is:



competitive monetary policy easing has now taken the place of competitive currency devaluations as the favored tool for playing a zero-sum game that is bound to end in disaster.
Now, as then, “demand shifting” has taken the place of “demand creation,” the Indian policymaker said.


Re: USSR yes it was socialist communiosm and it failed. several times.  Hence the different Communist Conventions.  I think they're up to Convention 4 or 5 now.  It simply does not work, and cannot work.

The main problem is not so much the State and equality but the split that occurs from decision making, resource investment and skills on the ground.   
In better systems those making the judgement calls are those who are taking the risk, and have developed skills to recognise SWOT (as a simple example).  Properly done they become the ones at risk from their actions, so evolutionary effect occurs - those who make good calls increase their resources and productivity, those who fail wean themselves out.
  USSR style operation the decisions were made by experts, trained and educated experts, and eventually they always get their Waterloo (from the Napoleonic side...)

further failure is guaranteed by the social currencies.  Take away money, set up alloted and adjustable resource management, and you'll still always end up with people with more influence, and people willing to curry favour to get the ear of the king.   Try to setup controls to fight such happenings and you'll just end up with a secret police that become the tool of one of the kingmakers.
Also for wealth equality we would need near uniform population distribution.

More Authoritarian.
 You only have to read about the invasion of Finland to understand the totalitarianism of the state.
An official in the party or government bureaucracy could not advance in the nomenklatura without the assistance of a patron. In return for this assistance in promoting his career, the client carried out the policies of the patron. Patron–client relations thus help to explain the ability of party leaders to generate widespread support for their policies. The presence of patron–client relations between party officials and officials in other bureaucracies also helped to account for the large-scale control the party exercised over the Soviet society. All of the 2 million members of the nomenklatura system understood that they held their positions only as a result of a favor bestowed on them by a superior official in the party and that they could easily be replaced if they manifested disloyalty to their patron. Self-interest dictated that members of the nomenklatura submit to the control of their patrons in the party.


Coles, Woolworths and the price we pay for their domination

Well spotted and well worth the read. Offers a case study as to what happens when the supply chain is run by someone else.
and add to what we saw last year with regard to Fonterra brands/ - eg. Mainland:
Last year Coles dropped Fonterra’s Mainland cheese brand after the processor declined to supply a private label product. “There’s been an increase in the private label focus from the retailers and there’s been a consolidation of brands. The shelf space has been consolidated,” Mr Mason said.
Fonterra has already reduced the number of products (or SKUs) it sells by 250 and more cuts are planned, while some brands are likely to be merged or axed to lessen marketing costs.
To a degree we see it as a result of "price deregulation", 40 to 50 years ago, when manufacturers and producer groups were stopped from setting the retail price of their products.
Note: when this was in operation, the supermarkets then charged sales cost back to the producer (as the producer set the retail price). Whats happened is the the retailers now set the retail price, and still charge back sales costs to the producers. Producers have the worst of both worlds.
And the future seems to be orange cheese....

Thanks, yes.
Well some here are raising the floor of the pit, so the young fella's legs are now too long anyway.

.... the Greens have partially solved the " inequality " problem for you , Gareth , by means of the Robin Hood approach to politics ...
Raise the top marginal tax rate on rich fellows alike your good self  to 40 % ( incomes above $NZ 140 000 p.a. ) ... and distribute the goodies to " the poor " via a raft of government bureaucracies ...
.... robbing from the rich , via the hoods at the IRD ...
Leaves you green with envy at the simplicity of it , doesn't it .... cough up , Morgan .... c'mon , hand over the loot , buddy ....

What we wont be taxing you to the hilt?

... at four feet nine , I'm too short to actually have a hilt ... Sorry !

Note to moderator.

I don't see any, can you enlarge your criticism.
 I've  alraedy been kicked of the whale oil blog, but then they have gone crazy like a cornered rabid dog.

You got kicked off Whale Oil?   Massive respect

They didn't like being called a sociopaths.
 They appear to be banning an enormous amount of commenters to give the impression that they still have support as the comments are all positive, they have lost.

I must admit Ive never bothered registering cant see the point for one post...

... are you for real ? ... I can't spot any personal attack upon Mr Morgan ... the overwhelming majority of the posts are well thought out , eloquently written , debates upon the issues our dear Gareth raises ...
Except mine of course , as you can see above , I launch into a tirade of abuse at the Cat-Man ...
Get real , Real !

Over all this is a great article as it stimulates debate, irrespective of whether it is right or wrong. it is however Gareths view.
Lenin tried to create a Marxist state with true equality as the ideal, however he forgot human nature as those in power tend to look after themselves first, before anyone else. this is true of any system including our own. The Soviet Union was never equal as the powered elite in Socialism sought to keep the populace dependant on them. A trait common with most left wing parties today.
I NZ i suggest that most poverty begins with choice. Gareth hints at this as irrespective of how much we earn, most of us have a choice as to how we dispose of it. This is the root of most Child povery in NZ I believe.
Re-training is not always the answer as you still need a job after the training and other factors can drive the success of that.