If the Poor Are Worse Off, We’re All Worse Off

The Herald-DigiPoll last week cast an interesting light on the political debate as the election season approaches.  The poll showed that no fewer than 74% of New Zealanders thought that inequality had widened over the past six years – that, in other words, the rich had got richer and the poor comparatively poorer.

On the face of it, this would seem to be good news for those trying to replace the current government with one that, it is presumably hoped, would have more of a social conscience.  And the poll comes, of course, on top of the rising tide of concern about the increasingly manifest impact of poverty on so many of our young children – an impact that blights prospects and stunts lives.

It is certainly reassuring that Kiwis have not lost their traditional concern for the disadvantaged in our society.  Whereas in some other western countries, the fact of poverty is simply denied or ignored, the polling shows that, in our country at least, inequality and its corollary – poverty, have registered in people’s minds as issues that warrant attention.

Yet the polls on voter intentions continue to show substantial support for the current government.  What this quite clearly tells us is that, while the reality of inequality is recognised, it is not rated by many voters as important enough to determine the way they vote.

Inequality and poverty are, in other words, to be noted but need not be addressed.  As long as it does not impact directly on people’s own lives, it can be treated as someone else’s problem.  When it comes to polling day, the salience of inequality as an issue will have dropped well down the list, way behind the more pressing immediate problems of managing one’s own budget and prospects.

We get an insight into this kind of thinking from the Herald’s own poll of its readers following the publication of the Herald-DigiPoll.  What the poll showed was that, while many respondents were concerned about widening inequality, many others were less concerned and just over a third were prepared to accept it as the necessary price to be paid for economic success.

The notion that inequality and economic success go hand in hand is, of course, well entrenched in the minds of those who embrace the modern doctrine that the market is infallible and must not be challenged; and it is a safe assumption that echoes of this view explain why, even for those who acknowledge the personal and social cost of poverty and inequality on both individuals and society, the need to do something about it tends to dim as polling day approaches.

Yet there is actually no evidence to support a belief that is cherished by so many.  International comparisons of advanced western economies show conclusively that widening inequality is in no sense a corollary, let alone a pre-condition, of improved economic performance.  Indeed, the opposite is the case.

The statistical evidence shows that countries with lower levels of inequality – such as the Scandinavian countries and Germany – have performed better than those countries, such as the UK, the US and, sadly, New Zealand, where high and widening levels of inequality have accompanied relatively poor economic performance over recent decades.

This compelling evidence should come as no surprise.  A wide gap between rich and poor in an economy is inimical to economic success for reasons that apply at both ends of the scale.

If wealth is concentrated in a few hands at the top end of the scale, the result is a significant degree of economic inefficiency.  The evidence shows that the rich have a greater propensity to “hoard” – that is to accumulate large cash reserves which remain unspent for long periods of time.  They are therefore not available to stimulate activity in the rest of the economy and the Keynesian multiplier effect is thereby much reduced.  And when they do spend, it is often on arbitrary and capricious purposes that do little for economic activity as a whole.  “Trickle down” is not supported by any evidence.

At the other end of the scale, there is nothing economically efficient about depriving the economy of the productive capacity of a large chunk of the population.  Can it possibly make economic sense to relegate those potentially productive people to unemployment and minimum wages when they could be both working and spending to the benefit of the economy as a whole?

Can it make sense to consign them to a future where poor education, skills and health – all consequences of poverty – mean that their productive contribution is limited for no good reason and they are more likely to become burdens rather than contributors?

The conclusions are clear.  If the poor are worse off, we are all worse off.  Those who lament growing inequality and poverty but reconcile themselves to it on the ground that it is a price worth paying are quite mistaken.  Economic efficiency and greater equality are, together, the hallmarks not only of a successful economy, but of an integrated and happy society that is more at ease with itself.

Bryan Gould

3 April 2014