Gareth Morgan unpicks the drivers behind the growth in wealth inequality

Gareth Morgan unpicks the drivers behind the growth in wealth inequality
If there’s to be a rising inequality argument then it’s best limited to a discussion around the lot of home owners versus non-home owners.

By Gareth Morgan

Thomas Piketty’s celebrated 2014 work suggested that in a capitalist economy wealth naturally accumulates and squeezes the share of national income that accrues to workers.

Piketty’s ideas have struck a chord with those who believe that there has been a rise in inequality of income and wealth and that governments have failed to do the right thing in stopping that.

Yet the work is not without its critics, and two criticisms in particular have stuck:

  1. That he only looked at rich countries, and would get a different result if he looked at the whole world; and
     
  2. That the main driver of wealth inequality is house price rises.

We will look at each of these issues in turn before exploring what that tells us about the real drivers of inequality, and how our tax and welfare system could solve the issue.

Globalisation has helped workers in the developing world

Firstly Piketty’s data sets fail to take account of the global impact of this period post the 1980’s financial deregulation.

Globalisation has boosted employment hugely in the developing economies as capital has been free to invest in areas with cheaper labour and land.

His work looks at the displacement of labour in more expensive economies and concludes that this has come about because of a ‘natural’ tendency for capital to capture more and more of national income.

Yet if he had taken account of the shift of employment from developed to the developing economies he would not have inferred from the data that capital was taking income from labour.

Quite the contrary in fact; it’s just that with globalisation the workers that have benefited most from investment aren’t in the developed world.

House Prices are the driver of wealth inequality

The second substantive criticism of Piketty (from Matthew Rognlie, MIT) is that even when restricting one’s study to individual developed economies in isolation, it’s been a specific type of capital that has captured a higher share of income – housing.

Excluding housing, and ensuring one looks at net investment (i.e.; gross investment less depreciation) there is no upward trend in the share of income returned to capital at all. There is no trend, there is no evidence to support the argument that capital generally is taking income from labour.

There is however evidence that housing is capturing more and more of the income cake, meaning that non-house owners are capturing a diminishing share of national income.

If there’s to be a rising inequality argument then it’s best limited to a discussion around the lot of home owners versus non-home owners.

The data fits with the anecdotal evidence that has captured headlines around the world over recent decades, that house prices have risen faster than incomes.

The drivers of this are many including the impact of agglomeration (or higher rates of urbanisation), financial deregulation which has eased access to mortgage finance for many, central bank prudential management directives to commercial banks to favour mortgage lending, tax breaks for home ownership, immigration, restrictions on high density housing from NIMBY-driven incumbent local residents, and the combined impact of all of the above which has fuelled speculative demand for property (as opposed to demand underscored by a need or demand for accommodation).

As income rises the demand for larger houses or lower occupancy rates rises as well, this has been especially acute in developing economies that have ridden the globalisation wave (like China).

So what is driving inequality?

In summary then, the increased inequality of income and even more acute increased inequality of wealth that has been evident in some developed economies, has arisen primarily because of globalisation moving jobs and income to other locations, the ICT revolution automating many jobs, and the property boom benefiting the balance sheets of property owners.

The confluence of the three phenomena has driven a wedge between into the distribution of material well-being across the population of these societies.

It is a an ambitious claim to suggest this is a ‘natural’ result of capitalism (which was Piketty’s claim) as the globalisation phenomenon and the property boom can be sheeted back to the financial deregulation of the early 1980’s, while the technological change of the online revolution has been profound but a single event (much like invention of the motor vehicle was).

What have governments done?

The more pertinent issue is the reaction or lack of reaction of governments to the rising inequality.

Unlike when the welfare state was born out of governments being determined to deliver a minimum level of income insurance, health and education services for the population at large, this latest struggle for those displaced or alienated by the aforementioned forces has generated muted policy response if any. Governments the world over have generally sat on their hands.

In New Zealand the most substantial acknowledgement of the problem has been the introduction of Working for Families (WfF), a policy that explicitly recognises that the market wage that some families are able to procure is not enough for them to live on. It is an acknowledgement that it’s not just the unemployed who are suffering undue (or socially unacceptable) hardship.

But WfF is a very crude targeted welfare measure attempting to identify and meet need.

It is restricted by a particular definition of “family” and pays little to no attention to single earners or part-earners.

In short it fails to equitably ensure all those who are unable to procure enough,sufficiently-paid work, are treated the same.

It makes judgements about numbers and the age of dependants and whether they ‘qualify’ or not for help. In short it is a patch on a needs-based social assistance model that was crude in the first place and whose inadequacies are accentuated as market wages for many occupations fall below what is required to support the earner and their dependants.

What could governments do?

In our 2011 book “The Big Kahuna” Susan Guthrie and I provided a tax and welfare reform that addresses the property-driven mania that is one of the three causes of rising inequality within the New Zealand economy; as well providing a far more equitable way to ensure those who are suffering from displacement or alienation from the modern economy can still live a dignified life.

Our policy suite had three critical elements:

  1. single rate of income tax no matter what the source of income, what the amount and what legal entity was earning the income
     
  2. removing the loophole in our income tax regime by ensuring all forms of income to capital are taxable – whether that income is received in cash or kind
     
  3. replacement of the targeted benefit system that seeks to select people as being eligible for welfare, by an Unconditional Basic Income that everybody is entitled to. This can be seen as underwriting the dignity of every New Zealander.

Impacts of the package included nobody paying tax until they earned $40,000, all forms of income having the same tax liability, all New Zealanders treated the same insofar as minimum income entitlements are concerned.

While global phenomena like the ICT revolution and globalisation cannot be avoided, an efficient and equitable tax and welfare regime can minimise the shocks these megatrends can impart.

With much of the advance of robotics, artificial intelligence and automation still ahead of us, we need a tax and welfare regime that affords citizens the best chances of adapting to these challenges.

Hanging on to an obsolete regime that requires continual patch-ups to mitigate the worst of the distortions it causes, is an opportunity lost.

--------------

This article was first published on his blog, Gareth's World. It is here with permission.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Thomas Piketty’s theories are a nonsense as are Garath's arguments in support.
There should never be a situation where it is complusory for the well-off to give their wealth to the less well-off,  by compulsory taxation or brute force or any other means .
Since time began there have been those that have done well and those who have not .
House price wealth is also illusory as any such wealth is soon lost when buying another house or when retiring through old age. In fact the more retirees have the less the State needs to support them.
It is fortunate that to date all of Gareth's ill thought out theories have all sunk without a trace, and this one will certainly follow suit.

A good dose of anarchy and privelege transferred by birthright will sort everything out, let them eat cake..................

Why is Piketty's work nonsense? Because he endorses wealth redistribution? Is that the extent of it?
 

However the poor do need to be protected against the bigger resources of the wealthy.
That is the whole purpose of civilisation (vs slavery).

Part of one difficulty with geriontrics in economics is that the old seldom have much development drive or influence with the young.  This is good that it doesn't hold us back like Africian matriarchial Elder tribes, where everything must be done how it was before because that is they way we were brought up to do it (aka mum said so).  
 But it does mean that all the systems favour the youth in power, and the old are pushed aside without regard (what my parents are actually people?)

That's one reason I'm sad about the systems that the old have, and the mature career people which make their riches from plundering young people - all the technology and computerisation, the over-specialisation.  The well developed in their careers are finally making some cash... but that their profits are coming from the young using debt contracts over longer periods (and lower interest rates).  Where is the next generation and the one after that going to get there money, and their retirement funding from?
 I believe that was the real question being answered when the existing super-scheme was considered.  It works on tax keeping individual wealth lower across the board, but providing more for the old age so they don't have to hoard as hard.   But it doesn't take into account the greed and price-settors being able to pass on their tax burden to others, allowing them to be very wealthy, while others bear the extra burden.

I agree with most of what u say Gareth...
The one big thing I disagree with is the idea that House prices are to blame for wealth inequality.
I think it is more complex than that...   The deflationary forces of Globalization has lead to cheaper products and lower levels of CPI growth ( A  part of that lower CPI growth has been the deflationary forces of globalization on wages rates in the developed world) ..This has unleashed the financial sector .... Money supply growth has been massive ... central Banks have/had opened the floodgates and allowed massive credit growth.... in the face of low CPI growth.
NZ had M3 money of $85 billion in the mid 1980s' ... now it is over $250 billion.
The declining purchasing power of money, as a result of  massive increases in the quantity of it, is not really measured by the CPI ( especially so, in globalization)....  and yet that is how we measure inflation.... that is what Central Banks use to manage money supply....  Maybe the CPI is a measure that belongs yo a bygone age in regards to Monetary policy..???
Maybe a better measure of declining purchasing power  might be house prices...????   ..in that regard, in real terms ( money supply growth being the deflator, for the sake of my argument ), there has been less Capital Gains than u think.
If Money supply is growing at 6% yoy ( last 30 yrs).... and house prices are growing at 6%yoy..... and wages are growing at 3%yoy.....  what does that mean to you..???   
 
It is the nature of exponents that it is only over a longer period of time that the impact of the different rates of growth become really problematic.....  ie.. after 30 yrs of wages lagging behind money supply growth rates we are starting to see the dramatic impacts .... people struggling to make ends meet... 
Some of the most expensive real estate is in China...   which has been the primary beneficiary of globalization.

yup.

Roelof, I think you are close to the core of this argument.
With fiat currencies and fractional banking there will always be an endless increase in the supply of money. Gareth and many economists are sometimes side tracked by the symptoms of the issue. 
A housing bubble, a stock market bubble, ineguality, yes these are the symptomes but guess what, there is nothing else unless we are willing to abandon the whole concept of money and banking. This is very difficult and I can also guarantee that the replacement will have a different set of issues. 
 

Nope, CPI has its use, though to set the OCR "core" would be better, indeed esential as energy is taken out. 
Housing is a bubble that will pop and revert to the historic mean eventually.  My purchasing power has not decreased btw, in fact its improved a bit in the last 2 years as telecoms has gotten a lot cheaper.  How can you consider using housing as a yardstick when it has a significant amount of [foreign] gambling going on and arguably a false constraint on availability as its controls to set the OCR? On top of that much of NZ has not seen a house price "explosion" only some areas in Auckland, are you really saying base the OCR on what a few well off gambling Aucklanders are prepared to pay for houses?  that just strikes me as nutty.
 

In fact a timely piece,  http://krugman.blogs.nytimes.com//2015/04/08/bb-and-the-permahawks/    In fact a graph shows the difference between core and "CPI" nicely ie core is more stable a number to set the OCR with.

Wealth re-distribution is a great idea until someone taps you on the shoulder and says it's your
wealth that has to be re-distributed.
Any attempt to take my ''wealth' will be stopped where my wallet starts.

especially if you hav manage to only get a small bit of wealthy started.
Old story: soldiers hired by big money in the castles beat up the peasants for the small amount they have for "taxes owed"

Things will change.  Northland by-election shows a swing in the mindset of kiwis.  You don't have to look far to see cases of hardship on one side and lambourghinis and ridiculous wealth on the other.  All enabled by our neo-liberal government.
 
Any attempt to take your so called "wealth" will be determined by the people.  And it will start and stop with the law.  Better start spending Ollie...

If Gareth Morgan thinks we should all be paying more tax then he can lead the way.
Does he ring the IRD and say "Don't think I'm paying enough tax at the moment so here's a bit more"?
 

Does anyone know if he paid tax on his share of the $70M he got for the sale of Trademe?

I was very surprised to lear he gave it all away to charity.

you are allowed to make charitiable donations.  it does happen.

.......he's not about more tax, it's about how we pay it. And his way would likely mean less, due to lower ird overheads and potential elimination of social welfare dept.  Have a read of the book.

Indeed.
 

When I issue an invoice for $100 about $13 goes to GST and $29 to income tax leaving me $58 (setting aside my expenses for arguments sake). I then take that $58 and spend it on personal items which I pay GST on so minus another $7.50. In effect, of the $100 revenue I have generated through my toil practically 50% has gone to the tax man. That is plenty in my view. The government needs to do a better job with what they recieve, not tax us further.

depending on what you just bought, some of that payment (wages and interest portion, will also go in GST), and 30% of their margin is also lost to the taxman.
Same for all levies and duty.

Feel free to add in student loans, and child support for when the missus left with the kids...

now tell me how I'm supposed to save some KS for retirement?

What a rubbish argument.  This is assuming this is earned over the $48k threshold, and why on earth would you put expenses aside??  Clearly you're not very adept in business.
 
We need to tax your capital gain, just like every other western nation.  Get used to the idea, it's going to happen one day.

How many wealthy people do you know earning under $48,000?

 

Sorry for not producing a full P&L statement but very close to 50% of the money that comes into my business bank account goes to the tax man one way or another. This is my point.

 

If the rules are changed and my capital gains are taxed that's fine by me. But that's not the way it is today in this world. Based on your response to my lack of business acumen I think you'd have a seizure if you saw my untaxed capital gains! I didn't write the rules my friend. I'm just playing along. What are you doing?

How many have good accountants?

Machiavelli.While i sympathise with your sentiment im not sure your figures hold up.
in your example the $13gst was never yours to start with (you only did $87 worth of work)
if you are on the average wage then of the $87 then $16 is income tax(about 19%) so you get to keep$71.
if you spend it all then sure you paygst($10.65) so out of the original $87 you have$60 left at
a tax rate of30%total  which is still plenty of tax paid in my book anyway.

Does the Universal Basic Income count as being "earned" for the purpose of the statement "nobody paying tax until they earned $40,000"?
 
Thus, suppose the UBI is $20,000 and I have a job that pays me $70,000 gross.   Do I pay tax on  $30k ($70k minus $40k), receiving the $20k on top of that, or on $50k ($20k + $70k = $90k, minus $40k)?  Or am I actually paying tax on the whole of the $70k, or even on the whole of the $70k+$20k, since I'm earning over $40k?
 
Whichever it is, it's not clear to me that this arrangement would result in greater equality.  Unless the UBI was unaffordably generous, it would be likely to result in lower income for people currently in receipt of a lot of benefits.  And unless the single income tax rate was unelectably high, ie much higher than low earners are paying at present, it would be likely to result in a lower tax rate for high income earners.
 
And even if it did mean poor people's wealth increasing and/or rich people's reducing, what's fair about that?  I'm reminded of the Sowell question.  What do you think is your fair share of the wealth that somebody else has worked to create?

"Wealth" in monetary trms is hardly ever 'created' by one person. It is usually the work of many, that one person (or a small group) ended up claiming credit for, and the credit of.
.
Most of today's 'wealth' will have had an adverse effect on either the environment (e.g. mining, logging, oil drilling (spills), etc), or will have had an adverse effect on people directly (slavery, whether historic or modern, dangerous working conditions, extremely low pay (not a liveable wage).
.
As such, a price for this 'wealth' has been paid/borne by many, and therefore I do not think it is fair that one person or a small group of people are the only ones who should enjoy the pleasure of this wealth.
.
If your wealth, or the source of your wealth, harms, or has harmed, others and/or the environment, then I do not think it is justified.
.
So yes, let's re-distribute.

even if the wealth is created by one person, it adds to the whole, so others will build on that.  that's the beauty of wealth creation.   Three homes might be built be three independent people, but the town is greater than the three houses that were build, and the wealth of a town can support a school - where three houses won't support one third of a school.   This is real wealth creation, and which we have to be careful that fiscal policy and government costs don't strip mine.

In theory it should be redistributed through fair market wages.  But as the need for minimum wage activity shows that doesn't happen- those with certain skills or influence can demand, and get, a big share of the wages pie.  How can, and how much should, that influence be countermanded by taxation, especially against small businesses whom often have more flat wage structures.

Certainly, some wealth has been, and some wealth still is, created at the expense of other desirables, such as the environment or worker safety.  "Most" is I think highly doubtful, but by all means provide links to the evidence if you have it.  Nor do I believe that "usually" one or a small number of people gets all of the benefit from the work of many.  Unless there is literal slavery involved, all of those "many" will have been paid for their work at a rate that they were willing to accept.
 
Nevertheless, accepting that some wealth creation entails collateral damage to the environment or to people.  Do you really think the most effective way of addressing that is to take that wealth away afterwards and give it to somebody else?  As opposed, for example, to action to prevent the damage to the environment or to people's health from happening in the first place?
 
As for the damage that has already taken place - Do you seriously think it possible for the Government to distinguish between presently existing wealth that was in the past created by "good" means - individual or collective hard work and creativity - and that which was created by "bad" means - damage to  the environment or abusive exploitation of others?  How far back do you think that ought to go?  How confident are you that none of your great-great-great-great grandfathers ever had anything to do with the slave trade, never killed an elephant for its ivory or a whale for its blubber, never cut down a kauri tree?  

Let's do a thought experiment (the safest kind...).
Take GM at face value - he argues for a differently constructed tax regime based on a UBI, perfectly flat tax on Income, plus a deemed income on 'assets'.
 
T'devil's in t'details, so here's my list.

  • Easy to value real property (houses, commercial premises, cars, boats, planes and plant).. It's a well-established business model.  But:  how often???  What basis (historic cost, current market, depreciated replacement value, optimised deprival value, adjacent comparable sales)  And how to achieve national consistency?
  • How to get at the dark economy (around 20% of all activity, so I'm told).  No paper trail, no records, no visibility (that's Why it's called 'Dark').
  • How to value intangibles:  goodwill, software (which can be replicated endlessly at practically zero cost), IP in general.  Xero is a classic case.....
  • How to deal with assets (real, intangible) held or owned offshore, or otherwise unreachable/visible.  
  • How to stop the valuers (who would have to value all of the above), lawyers and accountants (who always re-describe to the lowest-tax-attracting category where possible), and the hangers-on, from turning this into a nice little earner (economic deadweight, needless to say).
  • How to stop Gubmints (central, local and regional) from distorting the nice tidy schema with all manner of exemptions, thresholds, ceilings, and other perversions of the One Tax Regime to Rule 'Em All.

Common taters, have at 'em!

asked several times before and never answered

It's all on your financial statements, and if you cook the books you will have a big tax bill when you sell.  Ultimately the true value is only found when you sell, I've sold some capital assets that were marked well down on my depreciation schedule, for more then book value and had the difference added to income, and vice versa.  The year to year valuations can never be that accurate.

Bzzzt - nah.
 
Most physical assets (plant, equipment, vehicles, buildings, fit-outs) are stated at depreciated historic cost.
 
Most financial assets are valued at something approaching mark-to-market.
 
Most IP, goodwill, etc is valued every so often, and in a way which minimises tax exposure while remaining legal.  Remember that there is an entire cottage industry of accountants, lawyers and valuers, involved in making these very judgements.  None of them work for IRD.
 
Only the financial assets bear the faintest resemblance to 'real' value, however That is defined.
 
So financial statements will routinely understate 'wealth' and hence a tax base.  My SWAG is by a factor of 2-10.....

Gareth, the issue of house ownership seldom addresses the problems associated with market manipulation by government demand.  In some nations housing is very cheap and rudimentry (Africa, Hong Kong, Korea) 
By altering the market to force "better" housing it forces house costs up.

This captures more wealth
especially to the newcomers.  the older folk can have cheap housing which inflates with their growing wealth but to latecomers they are FORCED to enter a mature market.  Mature markets are categorised by declining value, low return on opportunities, and higher buying prices (vs Start-up / Emergence stages when prices and rules were much less).

This is not such a big difficulty for those who quickly get into high paying secure jobs (or their partners).  Sadly being paid to give governments financial or economic or housing advice tends to fall into such overpaid success groups , and overpaid at the forceful collection of revenue via taxation !  (as opposed to free market choices of the customers).

However your article about how the workers are the ones better off is the first time I've heard of people forced to buy into a mature market as their advantage....

 

There are now two very distinct economic and social classes within NZ: Those who will inherit property, and those who won't.

I don't believe it, things will turn around, prices will come back to affordable, it's not like there is a shortage of examples to look at.  The world is full of burst property bubbles.  Even today you buy a home in Kaikohe for 6 months work.  They have already had their boom and bust, every dog has its day.

Mate good luck with that. Our economy will be so wrecked when the housing bubble bursts that the have nots now still won't be able to buy a house because they'll probably be unemployed along with everyone else.
 
The other countries mostly had foreign earnings to fall back on. Look at Japan for instance with cars and electronics etc as exports. What does NZ have - dairy? You think that will prop up our economy when the main part of it is collapsing?
 
BH said the NZ economy is "houses and then whatever is left over" and it's true. Take away houses and we have almost nothing left.

"Take away houses and we have almost nothing less".
 
Give any statistic that supports that statement.

Give any that don't.
 
Add up everything else -- agriculture, manufacturing, finance, all the rest -- and it is utterly dwarfed by what is tied up in unproductive residential property.
 
Yes, I know, such knowledge makes you uncomfortable and you prefer ignorance, but it is what it is.
 
If -- when -- NZ's insanely overinflated residential property ponzi scheme bubble finally bursts, there will be no saving the economy. At least not without some international fairygodmother intervention.
 
Anybody who thinks China owns too much of NZ now is in for one helluva shock once that country has bought  title to the nation.

Wealth redistribution goes something like this...  5 blokes go to the pub every Friday, they decide the fairest way to pay for the $100 worth of beers and fixed costs is to split it evenly $20 each.  But one day they get talking about incomes and they realise that one of them earns twice what any one of the rest of them does.  "That's not fair' they cry, "you should pay more because you can afford to".  The 'rich' one conceeds to keep the peace; "OK" he says I'll pay $40 and you 4 pay $15 each.  So the next Friday they go to the pub the other 4 are emboldened, they say "rich guy... you're still not paying enough, you have to pay $80 and we only pay $5 each".  This seems hopelessly unfair to the 'rich guy' who grudgingly pays, while the other 4 celebrate their 'success'.  Next Friday rolls around and the 4 blokes go to the pub ready to only pay $5 for their drinking but low and behold, 'rich guy' isn't there, he's gone to another pub where people are treated equally.  And the 4 bullies find themselves splitting the $100 fixed costs of the outing between only the 4 of them and paying more than ever! 
 
 
Moral of the story, if you punish the wealth creators they'll leave and you'll still have to cover the cost of running the country without us. 

Yeah... Only, no. By "wealth creators" you in fact really mean "wealth inheritors" in the vast majority of cases. People who believe they're entitled to wealth, as if -- haha, yes, I know how funny this sounds -- as if they've somehow earned it.

I think a more accurate story would be.... 5 guys go to the pub to buy $100 of beer. When they get there some baby boomers have bought all the beer. It now is available for $300. 1 guy may buy a drink. The other 4 probably have to go to another pub.
 

What annoys me is wealthy people distributing their money into trusts so that when they go into a resthome my taxes pay for their keep and a person earning near minimum wage has the horrible task of keeping their bums clean.

I think you will find that is getting harder to do ng. The Government has tightened up in that area. The funny thing is that my late mother who only had $500k of assets paid her own way in her resthome and her capital hardly went backwards. If you have a million dollars of assets you certainly do not need to worry about trusts for avoiding resthome costs.

Op-Ed Decries the Idea of the 'Triumph of the City'

Alarmingly, everything everyone one thinks they know about urbanization and cities is mistaken, absolutely and entirely. Contrary to the heavily promoted narrative, people are not cheerfully and enthusiastically moving to cities. Most of the world’s population have been forced to, or left with no other alternative but to attempt to make a life in a city.

http://www.citymetric.com/skylines/everything-you-thought-you-knew-about...

If Auckland gets bigger successfully, there will be benefits. The New Zealand Institute of Economic Research's John Ballingall says there's economic advantages to so many people in one place, while the American economist Edward Glaeser's work argues city-dwellers are healthier, greener, and have better prospects.

"An Auckland of three million could have a much more efficient economy and still be the world's most liveable city, I really believe that," says Bogunovich.

"I'll be a little bit provocative," concludes Hulse.

"We actually need to stop being frightened of growth. If New Zealand is going to go ahead, whether the rest of New Zealand like it or not, I am afraid Auckland does need to be a powerhouse. Growth can fuel that. Growth is neither good nor bad, it's what you do with it. That's why we need to get it right."

http://www.stuff.co.nz/dominion-post/news/8025280/Optimal-size-for-New-Z...

Glaeser is the author of Triumph of the City