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
Unemployment Makes Us All Poor
Last Thursday’s jobless figures – the worst in thirteen years – show that the four years since the global financial crisis plunged the world into recession have seen New Zealand unemployment get worse, not better.
And, as is always the case in a recession, the official figures inevitably understate the numbers of those seeking work. In a more buoyant economy, improved employment prospects would bring many of those currently resigned to being out of work back into the jobs market.
In the wake of the grim news about factory closures and lay-offs over recent months, the figures were only to be expected. Indeed, the warnings about a crisis in manufacturing have been coming thick and fast, and from all quarters.
There was, though, one person, it seems, who was blindsided by the bad news. The Prime Minister, we were told by the television news, was “taken by surprise”. The only explanation for this is that John Key has paid little attention to the unemployment issue over the past four years, despite its destructive impact both on individuals and their families, and on society as a whole.
Over that whole period, I and others have warned consistently that the policies currently being followed would inevitably see unemployment rise. This was entirely consistent with the low priority given by the government to the problem – apart from an ineffectual “Jobs Summit” in the government’s opening months, unemployment has been left to look after itself.
But that neglect has been anything other than benign. The government has deliberately put in place policies to restrict benefits and cut their value, and to slash wages at the bottom end of the scale, so as to force those without work back into a non-existent jobs market.
The object has been to make people compete for the few low-paid jobs available by offering to work for lower and lower wages, so that there is downward pressure on the whole wages structure. There, in a nutshell, is the government’s strategy for dealing with unemployment – don’t bother about creating more jobs by getting the economy moving again, but force down wages in the hope that people will price themselves back into work.
Even if this strategy were to work in its own limited terms, lower wages would mean less purchasing power and lower demand. How would this help to get the economy moving?
The government has reinforced its strategy by cutting public spending and throwing public servants out of work, so that they add to the competition for the dwindling number of jobs. This leaves the obvious question – where is the increased demand needed to create more jobs to come from if the government, instead of stimulating economic activity, makes its own contribution to closing the economy down?
Are they unaware that the IMF, taking fright at last at what austerity is doing in Europe, has published a new assessment of the powerful multiplier effect of cuts in government spending on the level of economic activity? Even the government’s supposed central goal – eliminating its deficit by 2014/15 – is made much more difficult if high unemployment and a flat economy generate an equally flat tax revenue.
What is really depressing, however, about our current plight is that even if by some miracle the economy were to get moving again, we would have done nothing to re-balance the economy towards saving, investment and exports and away from consumption and imports.
We are about to start another familiar and vicious circle – an overheated Auckland domestic property market, fuelled by unrestrained lending by banks whose sole concern is easy profits, leading to higher interest rates, producing an overvalued exchange rate that prices our production out of international markets and cuts our margins, so that we are forced to borrow more from overseas and sell our remaining assets to foreign owners. Little wonder that those fortunate enough to have money to spare see domestic housing as the only sensible investment and making and selling things into international markets as a game for mugs.
The chances of breaking out of this destructive cycle seem slimmer than ever. The new Governor of the Reserve Bank has wasted no time in abjuring the hints of greater flexibility issued by his predecessor and instead nailing his colours to the mast of an orthodoxy that has now been doing its destructive worst for three decades. We see not a scintilla of new thinking from either the government or the Reserve Bank; surprisingly the only hint of the need for a new approach now comes from the Treasury.
Planet Key is apparently a sunlit place of leisure and fun. The real world, at least the part of it for which John Key has some responsibility, is a much harsher place. The plight of the unemployed makes us all poorer. Without changes in policy, we face the grim prospect of national decline, despite the advantages we enjoy of political stability, an educated workforce, a supportive context in which to do business, and access to growing markets for the premium products we are uniquely expert at producing. Sadly, that is all outweighed by the mistakes that our leaders are determined to go on making.
Bryan Gould
12 November 2012
This article was published in the NZ Herald on 14 November.
Let Children Pay the Price?
As a young law don at Oxford in the early 1970s, I came to know Tony Lynes, the activist who had recently founded the Child Poverty Action Group in Britain. With his help, I set up a free legal advice centre in Oxford, and I have ever since had a particular interest in the issue of child poverty.
The report this week on child poverty in New Zealand will, I hope, stir more than a few consciences. How can a country that, despite its economic problems, is still one of the most prosperous in the world tolerate such a large and growing number of young children growing up in conditions of deprivation which threaten not only the health, well-being and life prospects of each child but also our integrity and cohesion as a society?
Even those who dismiss the growing gap between rich and poor as of no concern would surely not require blameless young children to pay the price for our society’s failings? Why then do we do nothing about it?
If we were serious about lifting children out of poverty we would address at least three fundamental issues. The most serious cause of poverty in today’s New Zealand is the high rate of unemployment. Every new lay-off or closure – and they are coming thick and fast – means more families left without adequate means to support themselves; the unemployment totals are an indictment of our lack of understanding and concern.
It is time we stopped deluding ourselves that unemployment is a lifestyle choice. People are out of work because there are not enough jobs. There are not enough jobs because the economy remains stalled in recession mode. We are still bumping along the bottom, not because of the usual excuses – the euro crisis and the Christchurch earthquake – but because we have identified different priorities, rather than getting the economy moving again.
Getting people back to work should be our top priority. Nothing would do more to relieve family poverty and to give 270,000 deprived New Zealand children a decent start in life. Ironically, reducing the cost of unemployment, limiting the lost production that unemployment necessarily implies, and increasing the numbers who pay taxes and spend their earnings would also be the best way of meeting the government’s goal of deficit reduction.
The second essential step to reduce child poverty is to improve the living standards of those in work. The working poor are a drag on our economy as well as a continuing reproach to our society. We seem to think that keeping people in poverty is necessary if we are to compete with Australia – but the main economic consequence of holding wages down is that more and more of us cross the Tasman.
Higher wages would mean families able to support themselves and with more spending power to stimulate the economy. The most obvious means of raising low wages by a small margin would be to raise the minimum wage, but a private member’s Bill to do just that will soon be defeated in parliament. Another obvious step would be not to turn a blind eye to attempts by major employers – in areas like care of the aged or freezing works – to hold down the wages of already low-paid workers.
The third priority should be to recognise that poverty is a particular feature of families with small children because bringing up children is an expensive business. Governments, in New Zealand and elsewhere, have in the past acknowledged this obvious problem by providing special help through measures like family benefit. We have, sadly, abandoned such efforts, often on the ground that it is up to parents to provide for their own children – a sanctimoniously rigorous thesis which ensures that it is the children who must bear the burden if it proves to miss the point in practice.
This week’s report is in no doubt that if we want to address the poverty of families with children we would ensure that every family with children would have a basic level of income – one that ensures that children are not disadvantaged. But this, we are told, is resisted because it would deliver benefits to the rich as well as to the poor.
This objection to a measure primarily designed to help the poor is a little surprising when we consider the insouciance with which advantages have been delivered exclusively to the rich over recent times. But there is in any case an obvious solution to the supposed problem.
It is clear that the most effective way of getting help to those who need it is to avoid means-testing and pay the benefit to all families with young children, as we have done in the past. That payment is then easily “clawed back” through their income tax returns from those who don’t need it. Modern computerisation makes this even easier than it has been in the past – and it is surely not beyond a government that has been willing, through measures like drug-testing, to ensure that the value of beneficiaries’ entitlements is driven down. Should we not require our government to show equal zeal in tackling child poverty?
Bryan Gould
29 August 2012
This article was published in the NZ Herald on 4 September.
If Things Are So Good, Why Are They So Bad?
It is a measure of how subdued is the national mood and how modest are our current ambitions that we expect so little of our elected governments. Even nearly four years after our own home-grown recession began, we are, for example, expected to acclaim as a triumph of economic management the first signs of a patchy and fitful recovery that still leaves us well short of 2008 levels.
We might have expected much better. We were largely insulated from the direct effects of the global financial crisis. Our two major export markets remained surprisingly buoyant. And we have enjoyed record high commodity prices.
Yet, to hear our leaders tell it, even our woes are a sign of success. The soaring kiwi dollar, we are assured, shows that foreign investors see us as a “safe haven” – a claim that sits oddly alongside the repeated warnings about the risk of a credit downgrade and of the need to wind back public spending so as to reduce a rampant government deficit.
The truth is that the soaring dollar reflects a conviction on the part of overseas speculators – based on 25 years of experience – that our governments will go on paying them a premium and that the short-term demand for our currency thereby engendered will produce a capital gain as well.
This is entirely consistent with the growing evidence that, as the recovery at last manifests itself, we will use the opportunity to repeat the recurrent mistakes of the past 25 years all over again. We will continue to treat any prospect of growth as an inflationary threat, to be knocked on the head by a combination of high interest rates and an overvalued currency. We will continue to express puzzlement as to why – in this policy framework – productivity languishes and our economic performance falls behind that of our competitors.
There are occasional flickers of interest in a change of policy. Geoff Simmons, for example, points to the prospect of using tighter rules for bank lending as a counter-inflationary tool and as an alternative to high interest rates. But he also warns that the Reserve Bank – with its single focus on inflation (and it is, after all, a bank) – is unlikely to change course.
And governments, of course, particularly at this stage of the electoral cycle, may wring their hands at the high dollar, but will secretly welcome the consequently cheaper imports – a short-term advantage that helps to holds down a soaring cost of living through to election day but that is bought at a huge cost to our long-term economic performance.
It could be said that these problems are like old friends; they may be a nuisance and somewhat boring, but they are at least predictable, and it is true that there is a certain comfort to be drawn from getting what you expect. A right-of-centre government could be expected, for example, to stick closely to monetarist theory, and to pin its hopes for an improvement in economic performance on tax cuts for the well-off, asset sales, cutting government spending, taking a tough line on benefits, and seeking free-market solutions to most problems.
That is exactly of course what we have got and presumably what people voted for. In the past, after giving these measures a fair trial, they have judged that they have not worked and then voted to get rid of them. This time, the policies look like surviving for a little time yet. It is not that the policies are different – merely that the salesman is better.
But there is one consequence of current policy that even the most brilliant salesmanship cannot so easily sell to the public. The now unmistakable evidence of rising poverty, with children as the most vulnerable victims, is the inevitable result of widening inequality, higher unemployment, falling real incomes for the poor, less effective public services, and rapidly rising living costs.
The myth that families choose poverty as a lifestyle option can only be sustained in a society that is divided – where the well-off are comfortably shielded from the realities of life for the worse-off.
One of the advantages of being well-off is that it is possible to buy your way into a better neighbourhood, to go to better schools, to mix with better-off work colleagues and friends.
You do not then need to venture into the poorer neighbourhoods, to sit around the table to share inadequate and poor-quality food or to feel the cold and damp in overcrowded bedrooms. You do not feel the humiliation of being rejected for job after job or having to present yourself for close questioning as the condition for receiving a weekly benefit which – in a well-off family – might be entirely spent on a single meal for family and friends at a good restaurant.
Individual instances of hungry children might be dismissed as cases of fecklessness and inadequate parenting. But a rising tide of such children, whose health, education and very lives are threatened by hunger, is a social phenomenon with widespread social and economic causes. It might be – indeed, is – a predictable consequence of current policies, but that, surely, does not make it acceptable? Predictability in this case should not produce resignation but rather a clarion call for action.
If things are so good, why – for so many of us – are things so bad?
Bryan Gould
27 July 2011
This article was published in the NZ Herald on 2 August.
The Undeserving Poor
Some things never change. The rich have always claimed that their good fortune is a recognition of and reward for their superior virtue – with the inevitable corollary that the poor have no one to blame but themselves.
The myth of the undeserving poor has a long and discreditable history. It has underpinned social policy over long periods in both the UK and New Zealand, from the workhouses of early industrial England to the present day. It is heard even more insistently in a society like New Zealand which has recently and rapidly become much more unequal – where, sadly, some people have incomes two or three hundred times those of others.
The frequently told story that poverty is a lifestyle choice – promulgated as it is by the rich and powerful – commands more attention in the media than other (perhaps more credible) accounts of how and why inequality in our society has widened. An enhanced access to the media is, after all, an important aspect of privilege.
It is not that those telling the story deliberately invent it. They are no doubt quite genuine in believing it to be true. The capacity to protect oneself from an unwelcome reality is, after all, one of the privileges that the rich enjoy.
This is because an inevitable feature of an unequal society is that the privileged, without even trying, insulate themselves from the less fortunate – and the wider the gap, the more substantial the insulation. They use their wealth to live in a separate part of town, to send their children to exclusive schools, to pursue expensive leisure interests and travel to different destinations – in short, they live quite different and separate lives.
Exclusivity then becomes an end in itself. The rich feel that belonging to an elite, distinct from the common herd, is a valuable and legitimate element in the enjoyment of their wealth. Their ignorance of the lives of the poor becomes a badge of status.
It is then all too easy to believe what one chooses about those whom one rarely comes across in the flesh. It is on this flimsy basis that common sense flies out the window, that unthinking judgments are made – even by Prime Ministers, and that issues of social justice are disregarded.The consequences are of course damaging to our society. The social cohesion – that sense that we are all in this together – that was such a marked characteristic of New Zealand society in the past is gravely weakened. And the evidence that widening inequality leads inexorably to social ills – crime, drug abuse, prostitution, gambling – is now established beyond real doubt in The Spirit Level, the hugely authoritative study by British social scientists, Kate Pickett and Richard Wilkinson.
But the price we pay for the ignorance of the rich concerning what it means to be poor may extend well beyond social factors. It may be that we – including the rich – suffer not just in terms of a fractured society but in economic terms as well.
The notion that the rich, even in hard times, should be generously treated, so that their well-being improves even while the less fortunate lose ground, has been given an extended trial over recent decades. We see recent instances in the tax cuts for the well-off while the poor bear the burdens of unemployment and GST increases. We see it too in the self-serving doctrine that international competition requires that, while wage rates for ordinary workers are held down, top earners’ salaries must go up so that “the best talent” can be attracted.
The theory is that the increased wealth will “trickle down” and that it will therefore – over a period – benefit everyone. The evidence, however, offers no support for this comforting view.
The increased resources of the rich – whether as individuals or as corporations – do not “trickle down”. They stay firmly in the hands of those who control them, doing little to benefit the economy as a whole. The big corporations who were bailed out by the taxpayer after the global financial crisis used the billions they were given to rebuild their balance sheets and to go on paying themselves huge bonuses.
And increased individual wealth is typically used to reinforce privilege. The barriers that separate the privileged from the rest of us are built higher. The insulation from the reality of the lives of ordinary people, and of the poor in particular, is made more complete. And our economy is not stimulated but stultified.
Isn’t it time that we rejected “trickle down” for what it is – a piece of special pleading by those who already have much more than their fair share? What about an economic policy based on “bubble up” – an approach that would put more spending power in the hands of the less well-off, in the confident assurance that they would spend it immediately on real goods and services, providing a direct stimulus to economic activity and wealth-creation for all of us and a hopeful way out of a recession that will otherwise be around for a long time to come.
Bryan Gould
18 February 2011