This is a repost of a article originally published on pundit.co.nz. It’s here with permission.
Thomas Piketty has the reputation of having heavy volumes (literally and figuratively). His 2013 bestseller – 2.5 million copies – Capital in the 21st Century (Capital in the 21st century) was 696 pages. It was followed by a sequel in 2019, Capital and Ideology, of 1093 pages. The former is claimed to be the most unreadable blockbuster on Google (the latter is Stephen Hawking’s A brief history of time).
It is therefore with relief that we look to his 2021 A brief history of equality, with 274 (a fifth smaller) pages. It is consciously designed for the general reader; I found the translation smoother.
The same themes are there: statistics and history show that economic inequality is widespread. One of the strengths is Piketty’s broader perspective of not being Anglo-American. The wide range of his narrative about France shows strong parallels with Britain and the United States whose economic success depended on imperialism and slavery. (Unfortunately, he doesn’t pay enough attention to Germany.)
Piketty argues that inequality is not an inherent feature of the market economy but a political and social choice. He shows that in many Western countries, inequality fell markedly between the end of the 19th century and around 1980. He advocates a more comprehensive welfare state.
Is this true for New Zealand? I have summarized the quality data available in Chapter 50 of Not in narrow seas. Observe the “quality”; there are other data that a competent statistician would not trust.* Moreover, as the next few paragraphs show, there are different measures of economic inequality and they do not always move in the same direction.
There is no New Zealand data that I trust for the 19th century. If you want to believe that inequality was high then, so be it; I shouldn’t be surprised, provided you don’t think the inequality was comparable to, say, Britain at that time.
The oldest series of nearly reliable data is Individual income declared in the census of the market, which begin in 1926. Despite scholarly caveats, it is possible to discern three periods. From 1926 to 1961, reported personal income inequality appears to have been broadly stable. Between about 1961 and perhaps as late as 1991, personal income inequality declined. One of the main factors behind this decline has been the increase in the income share of people in the lower half of the distribution. By 1991, the decline had stopped and personal income inequality before taxes was roughly constant, about the level it had reached in 1981.
Personal income (before tax) reported for income tax assessment can only be traced back to 1937 before the personal series was tainted by business income. Because IRD data is not granular enough, it is only possible to track the highest earners. From 1937, the income share of the top 10% fell from about 35% to 25% in the 1980s. Since the 1980s, the shares have remained almost constant, although it seems that the share of the group just below the top 1% increased, but not by much, perhaps because compensation at the top of companies and government agencies was growing faster than average wages and salaries.
Combining the two series, what seems to have happened until the 1980s is that inflation reduced the value of investment income and private pensions, while the increase in participation in the paid labor force meant that many women with low or no income received large relative increases. . Maori urbanization would have had a similar effect. Unemployment was low.
The story of after-tax income is different. While market income shares have remained roughly the same, Inland Revenue data shows dramatic increases at the top after 1990. The top 1% of after-tax incomes rose from 3.4 times the average after-tax income at 5.8 times.
This change was brought about by significant reductions in the top tax rates in the late 1980s as well as the introduction of imputation tax on dividends (indeed, corporation tax is now a withholding tax).
Combining this result with reported pre-tax income, we can conclude that the increase in the after-tax share of top earners came neither from working harder nor from investing smarter. It came from the neoliberal tax breaks.
The household disposable income (after taxes and benefits) are consistent with the personal income story. The effective income of the richest 10% of households increased after 1990 by about the same 25% as the tax data show. This means those below – especially the bottom 60% – have had to take a hit. The largest percentage cuts have been those at the bottom of the scale, their relative revenue share falling by around 15% – not that they have much revenue anyway. (Children tend to be at the bottom.) Again, we can broadly conclude that it is neoliberal distributive policies that have caused the increase in inequality.
– a steady decline in market income inequality that stopped in the 1980s. Since then, it has been stable.
– since 1990, public policies have actively increased disposable income inequalities.
Piketty found a similar pattern for the rich market economies he studied: a decline in market income inequality over a long period until the 1980s, a flattening thereafter. He argued that decline happened when those who ran societies cared about having high inequalities and took steps to reduce them. The measures included not only redistribution through taxes and transfers, but also “pre-distribution”, that is, the management of the market economy to favor the reduction of inequalities.
Predistribution measures include:
– give priority to the low unemployment rate in economic management;
– provide good quality “free” public services, in particular health care and invest in the skills of young people;
– worker empowerment, including high minimum wages, collective institutions for workers and greater worker involvement in workplace management;
– pursue a vigorous policy in favor of competition, in particular by limiting monopolies.
Such a political framework is anathema to neoliberals and was abandoned when they came to power in the 1980s.
At the same time, the distributional framework was undermined, the generous New Zealand-style welfare state (aimed at enabling people to participate and belong in their society) was replaced by a minimalist welfare state at the American (with the lesser goal of enabling everyone to sustain life and health).
What is puzzling is that although Labor has been in power for about half of the three decades since the end of the neoliberal changes, it has been timid in reversing its framework in favor of the traditional framework of predistribution and redistribution. He has done some things but there is no obvious coherent vision. Explaining why is another column and a matter of public debate – unless one is wedded to the neoliberal view.
Piketty is not. He believes inequality is a matter of public will, advocating policies of predistribution and redistribution in each of his books.
* There is no long-term quality wealth series. I can shamelessly claim that my 1956 and 1966 estimates of the distribution of wealth are the best available prior to the official series which began in 2001. They are constructed by an entirely different method and I hesitate to make the comparison. That hasn’t stopped others from using unreliable data when it suits them.
*Brian Easton, independent researcher, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a repost of a article originally published on pundit.co.nz. It’s here with permission.