• Why the Poor Can’t Put Food on the Table

    The OECD revelation last week that 17.2% of New Zealanders found it difficult to afford food is a shocking and shameful statistic for any country that claims to be prosperous and developed.  It shows how far we have come from the time when it could be said that “here, there is enough for everyone.”

    Among all the issues demanding attention from government, this is surely the one that must claim pride of place – that is assuming that pride is an appropriate sentiment concerning such an indictment.

    How did we come to this?  How does a country that aims to feed the world fail to keep its own citizens well-fed?

    The answer is that such deprivation has occurred for two main reasons; one turns on the distribution of wealth in our society, while the other reflects a long-term failure to make the most of our economic opportunities.

    The sad truth is that, as we have become wealthier, the greatest proportion of that increased wealth has gone to the better-off; the disadvantaged have stood still – and are now, therefore, comparatively worse off.  For the poor, unemployment, low wages, inadequate social benefits, poor health and housing, higher rents and power prices, have all taken their toll.

    There has been a different story for the better-off.  A renewed housing inflation is in effect a giant mechanism for increasing the wealth of home-owners and penalising those who must rent because they can’t afford to buy.  The share of profits in our economy has continued to rise while the share for wages has fallen.  Top salaries have risen fast while wages for ordinary workers have been restrained by high levels of unemployment and the failure to pay a living wage.

    The untaxed capital gains from property have increased purchasing power for the well-off who have also benefited from tax changes, away from direct taxation (where top rates have in any case fallen) and towards indirect taxation which hits the poor hardest.

    It is not the case, in other words, that we have become poorer as a society – merely that the well-off have taken the lion’s share of the economic growth of the past 30 year.

    But the second factor has also played its part.  Despite all the euphoria occasioned by the long-delayed recovery from recession, the fact is that we have failed over a similarly long period of several decades to do as well as we should with the resources we have – and while the well-off can protect themselves from such failures, the poor bear the brunt.

    There can be no better illustration of our long-term failure than another piece of economic news published last week.  We were invited to celebrate the fact that record commodity prices, particularly in dairy products, had allowed us to reduce our perennial trade deficit to smaller proportions.

    What was remarkable about this was that literally no one bothered to ask why it is that we always run such a deficit.  It may sometimes be smaller and is often bigger, but it is always there.  It is the best possible evidence that, despite the constant claims of successive governments that they are prudent managers of our affairs, we have simply failed – over a very long period – to pay our way.

    We cannot, in other words, sell enough to the rest of the world to pay for the living standards that we – or at least some of us – insist on enjoying.  The consequences of this failure are far-reaching.

    The gap between what we can sell and what we insist on buying has to be financed in one way or another; the rest of the world will not allow us to enjoy something for nothing.

    We must either borrow to fill the gap, or we must sell assets.  Our solution?  Do both.

    But the problem with both solutions is that they carry with them the certainty that they will make matters worse.  If we want to borrow, that means higher interest rates, and those interest payments must be paid to foreign lenders.  That outflow adds to our current account deficit.

    So, we sell assets as well.  The problem then is that a greater volume of profit is made from the larger range of assets owned by foreign owners, and those profits must again be repatriated across the exchanges.  It is no accident that, at the same time as dairy prices reduced our current account deficit, it was being widened again by the sheer volume of profits being repatriated overseas.

    What are we doing about this?  Nothing – we simply accept it as a fact of life and continue merrily on our rake’s progress.  As the economy resumes growth, we don’t care a jot that the huge increase in bank credit-creation – something that the Bank of England, no less, has at last conceded accounts for virtually all the money and monetary growth in a developed economy* – goes to stimulate housing inflation rather than the increased investment in productive capacity that we desperately need.

    It is truly said that “those whom the gods wish to destroy they first make mad.”

    Bryan Gould.

    21 March 2014

    *Money Creation in the Modern Economy” Bank of England Quarterly Bulletin, 2014 Q1

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