Bryan Gould’s speech on Income Inequality in New Zealand

Transcript of Speech by Bryan Gould delivered at a public meeting of Closing the Gap-Income Equality Aotearoa New Zealand Inc,

Tauranga 25th February 2013.

It’s always a pleasure for me to come back to Tauranga and it is in particular a pleasure to come and speak on a subject which your presence this evening proves is as near to your hearts as indeed it is to mine.

I’m not going to worry you with a whole lot of statistics. We all know that inequality in New Zealand has widened very greatly over recent decades. It is of course a global problem – it’s not just in New Zealand. And yet in some respects the problems we face pale into insignificance by comparison with the huge gaps that have arisen in a country like the United States. I think most of us really can’t even comprehend the extreme riches that some Americans are able to command. I read the other day about an owner of a company who paid himself $3billion US dollars in the course of a single year. The six heirs to the Walmart family fortune have wealth between them that is equivalent to all the wealth owned by 30% of Americans at the bottom of the income pile.

We don’t have anything like that but in some respects inequality in New Zealand is just as shocking. And I can say that with some feeling because I spent 32 years of my life living in another country, in Britain and came back to New Zealand occasionally. But it was only when I returned to New Zealand in 1994 after 32 years that I realised what a change had occurred and was in the course of occurring. When I went Britain, to Oxford to study in 1962, I’m sure I bored everybody silly because at that point it was possible to argue that New Zealand had, if not THE highest living standard in the world, perhaps one of the top 2 or 3. And we combined with that a reputation and I think the reality as one of the most egalitarian societies in the world.

By the time I got back 32 years later, as you will all know, New Zealand had changed. To me, the change was quite stark: you would have seen the changes bit by bit, day by day, perhaps not really quite grasping what was happening. To me to come back after 32 years, it was really quite startling.

We face a situation where in the past 30 years the incomes of the bottom 30% have not increased at all. The incomes of the group of people at the bottom of the top 10% have increased by 40%. We know that we now have a much greater gap as measured by the Gini coefficient and similar indices – I won’t bore you with how that’s calculated. We know that there’s a huge gap now between the richest and poorest. Fortunately we are nowhere near the extremes we see in the USA but still there are wealthy people by our standards on the one hand and a growing class of people who are condemned to poverty and worse than that – condemned to bring up their children in poverty,poverty which adversely affects their health, their education, their life chances. That is not the New Zealand that I remember, but it is increasingly the New Zealand that we currently live in.

What I want to ask first of all is how did this happen? I think there are some contextual issues that require us just to step back a little to understand why, even in New Zealand, inequality has widened so greatly. We can put the turning point more or less accurately – you may be surprised at this – I reckon to about 1980. By that time the so- called post-war consensus was formed around the notion that full employment was the main objective of economic policy; that guaranteeing public services was important for the functioning of society; that it was important to use the resources to support the disadvantaged. All of that was part of the post-war consensus, that great united effort that had enabled us all to win the 2nd World War. For reasons that I won’t go into but which are the subject of a book I’m having published in Britain later this year, we lost faith in that consensus and significant changes began to occur. One of the first indicators of those changes was the election of Margaret Thatcher in 1979 as Prime Minister of Britain. At about the same time, 1980, Ronald Reagan became president of the United States and they had offered to them agendas for change which had been prepared – not by them as neither of them were great thinkers necessarily, but by others. Right wing theorists had produced agendas for change which Margaret Thatcher and Ronald Reagan readily embraced.

Three changes occurred in the field of economic policy which I think were significant. First Mrs Thatcher and her government took away all controls on banks; they were no longer required to maintain any particular reserves of capital in relation to lending and so on. The only thing that was going to control them was the price of money. If there was a market out there for borrowing money the banks were free to meet that market. The second change was the adoption of an economic policy called monetarism. The great thing about monetarism was that it got governments out of the way. You handed over to bankers, in our case eventually, the central bank and they made the only decision that mattered in managing the economy. They had just one task, which was to control inflation and they had one instrument which was interest rates. And there was one person who decided when the interest rates should go up or down and that was that. Governments withdrew. As for the third change, I think even Margaret Thatcher and Ronald Reagan themselves didn’t fully understand quite how significant it was. They decided to remove exchange controls.  Not many of you in this room will probably remember the days when you couldn’t take money overseas, not easily anyway. Now it was decided to “let it rip” – capital could be moved anywhere across the globe. “Yippee” people said, “this is wonderful! There are no longer any restrictions”! The biggest “yippee” however, you and I didn’t hear. The biggest “yippee” came from those who had already accumulated vast sums of capital and wanted to be able to move it anywhere on the globe, to wherever the lowest costs of production were. And what was then discovered was that the freedom to do that and the dependence of individual countries on that investment capital, meant that suddenly democratic governments didn’t count for a row of beans because the big international investors could simply say to a government (as Warner Brothers said to John key quite recently – it’s still happening) “either give us what we want or we’ll go somewhere else!” And one by one even the most powerful of governments and countries succumbed to the ability of international capital simply to sidetrack, to sideline democratic governments.

So suddenly there was a single global market and, by definition, if there was just a single market then you couldn’t have government intervention because that would change one part of that market in respect of another. If there was to be a single market all governments had to comply with the same rules and one of the rules was that you paid the top people an enormous amount of money. Just before the global financial crisis I remember the Economist magazine commenting on the huge salary of millions of US dollars being paid to the chief executive of a corporation. They said that you, us, ordinary people, you really think this is a bit excessive but the market says that’s what this person is worth. The market not the government or society became sole arbiter of what people should be paid.  And just to make sure that the top people got paid huge sums, they settled each other’s salaries. If you look at the boards of the major international corporations there’s an enormous amount of cross fertilisation. The boards pay their chief executives huge sums and the top executives turn a blind eye when the boards pay themselves huge sums. So that’s how the new global economy started to operate. Anything would go as long as it could be said to be the market that decided what something was worth.

The problem was that when you came to look at ordinary people, the global market worked rather differently. In that context, ordinary people were just another cost. Labour was a commodity. What you did – because the global economy demanded it, was to drive down the cost of labour. If you wanted to make a profit to justify the huge salaries you were paying to all the top people, then you had to reduce costs in order to boost profits. And we see that happening today, all the time. So, by an amazingly convenient paradox if you like, the global economy meant big salaries and big rewards, not just in the form of salaries but also as share issues and bonuses and all kinds of privileges and perks for an increasingly small number of people. One of the effects of all this was that they started gobbling each other up and forming bigger and bigger conglomerates. We saw big salaries and rewards for top people but constant pressure to drive down labour costs – the salaries and incomes of ordinary people. And we see that even today in New Zealand.  We see first of all tolerance of unemployment. The government says it’s worried about unemployment but it doesn’t do anything about it. It’s not on top of its agenda. It’s much more concerned with about getting the public deficit down even if that means throwing more people out of work – that’s just a bit too bad. Beneficiaries are required to toe the line and take drug tests. If you are a beneficiary who cheats (and there is a small proportion in that tiny fringe), this attracts a lot of attention of course. And if you are the partner of a beneficiary who cheats you also can be sent to prison. And the point of making life tough for beneficiaries is to make them go back into the jobs market – not because there are any jobs there but to compete for the lower paid jobs that other people have. And the point of that is to drive down the bottom of the floor of the wages market so that the whole worth of the wages market falls. No surprise is it that the share of wages in the New Zealand economy has fallen sharply over the last couple of decades? The share of profits by the few has gone up and that is true in most Western countries. What I’m describing in New Zealand is not unique to us. It is what has happened in every part of the global economy.

The monetarism that I mentioned, which is the doctrine that all you really need to do is control the money supply and that will make the economy tick over well, has inbuilt prejudicial defects whichcan be very damaging to ordinary people. If you restrict the supply of money then people with existing financial assets find that those assets go up in value. It’s just like anything else – if there’s a shortage then the price goes up. The demand goes up and the price goes up. Because monetarism is designed solely to focus on inflation even the merest sign of inflation is enough for the reserve bank to push up interest rates – not so much to deal with inflation but to make sure that we don’t get anywhere near full employment when workers might be able to then demand a bit of an increase in wages.

So that’s how and why it’s worked. It’s a very simplified picture I’m painting but that’s essentially why this disparity, the increasing gap between rich and poor, has occurred. That’s how the cookie crumbled. That’s how the resources are allocated. There is then the question of tax. Right across the board taxes have been switched from direct taxes to indirect tax – which is much tougher for ordinary people who spend so much of their incomes on actual goods rather than squirreling it away:  so they get hit by an increase in GST.  Top rates for tax are brought down. Corporation tax is brought down. Taxes on wealth in New Zealand are non-existent. You can be as wealthy as you choose; you can own huge assets and you’ll pay nothing. In fact the IRD shows quite conclusively that in the period 2009-2011, of the 250 New Zealanders with wealth of more than 50 million dollars, half of them paid tax at a lower rate than you and I would pay if we were earning $70,000 a year.

So there is a huge industry out there that is designed to allow the wealthy to escape and avoid taxation. A recent survey showed that the very richest people in the world (and I’m not saying that there are any Kiwis in this group) have squirreled away in tax havens like the Cayman Islands and Switzerland, $32 trillion US dollars. That is as much as the GDP of the USA and Japan combined. And that is money just hidden away to escape the tax man by very, very wealthy people. Little wonder then that when Leona Helmsley, the famously arrogant wife of a very wealthy man, was eventually tracked down and accused of tax fraud, she said to the court “Tax fraud? Taxes are for the little people”. Does it matter that all this takes place? Surely we can all get along perfectly happily, without worrying too much about these things? Yes, it does matter!

Let’s look at the economy. The most usual defence of those who want to maintain that what I’ve just described is perfectly acceptable is: “Oh it’s a pity but it’s the price you pay for the economic success. If you don’t give these huge rewards people won’t work hard and then we’ll all be worse off”. It’s the wonderful trickle-down theory which many of you will have heard of.  If only you load the rich with yet more riches, somehow they will spend it and it’ll all trickle down and we’ll all be much better off.  There is absolutely no evidence whatsoever that that has ever happened. And no serious economist would now advance such a theory. But it nevertheless animates a great deal of policy. In any case, it stands to reason that if people already have a thousand times more than they could ever conceivably spend, they’re not going to make very good use of it – they’re going to spend it arbitrarily and capriciously. If they do put it to economic use they won’t put it to use in order to create new production and new wealth. Rather, they will use it to earn what Joseph Stiglitz in his excellent book The Price of Inequality calls, rent income.  That is they’ve simply used the wealth to earn more money.  They sit there and buy assets that will generate more income for them. To a smaller degree we see that happening as a consequence of all the forces I’ve described in the property market. Those who own properly in Auckland will be delighted no doubt (certainly at least in principle) as the value of their houses goes up. But the wealth of the country is not going up. So where is that increase in wealth coming from? It is coming in terms of the development value of land in Auckland which the rest of the community have invested in through providing electricity, water, roads and lighting. That well known radical and conservative prime minister of Britain, Winston Churchill, said in 1909: “The landlord does nothing but sit there and wait to collect the wealth that other people have created for him”.

So, economically, it simply doesn’t make sense to allow so much wealth to pass into so few hands. That’s not where it’s going to do the most good. If you look at the other side of the equation of course, what you see is high unemployment. Does that make economic sense? Does it really make sense to keep people out of productive work – a drain on the economy requiring benefits however low to support them and their family? Does it make sense to cut the services on which they depend for decent health and education? Does it make sense to have a workforce that isn’t fit, that isn’t properly educated and not skilled, that needs support, whose children require extra health care because they’re sick? Is that sensible economics? Of course not! Never let anybody tell you that you have to choose between a successful economy and equality. The two things are not opposites; they go together. It’s not just economics either is it? It’s values. We now live in a society where the only thing that matters is wealth. Wealth equals virtue. Wealth, the bottom line, trumps everything else: wealth and celebrity. You can remain famous even if you’re a criminal provided you are a wealthy celebrity. You might remember Martha Graham who went to jail for tax evasions – still a wonderful star of American television doing her cooking. It didn’t matter did it because she’s wealthy. Occasionally such people come unstuck: Bernie Madoff probablyisn’t going to ever get out of jail.  Never -the- less, our current values state that everything has a price. The only thing that matters is what the market says. If you want to defend the environment but you can make a buck by selling off your drilling rights, you sell the drilling rights. If you want to save people’s health by saving them from gambling, no – give that up if you can get a convention centre paid for by Sky Television. The only thing in our society today is the bottom line and the market producing the profits – so it seems. What this means is that for those who miss out, they are puzzled, they see on their television screens all these people being eulogised, admired and emulated and they say: “How do they do it? We are working hard, we’re trying our best, we can’t find a job and if we can get a job it’s paid peanuts. How do they do it?” And in their minds they think there’s some kind of lottery going on here but they don’t have tickets. And so, not surprisingly, you find an increase in gambling, crime is an option, prostitution, drug taking becomes a form of escape. As a Member of Parliament in Britain I saw young women with no prospects and unable to even contemplate owning their own home getting pregnant in order to force the hands of the public authorities. That’s what you get, and that’s where you get the social ills that are detailed in The Spirit Level. For those of you who have read The Spirit Level you will not need me to tell you what’s there. For those who don’t know about it, it’s a book by two British sociologists backed by what I think is impeccable methodology – although it’s been criticised in some quarters.  There is always criticism to be made where correlations are made between two apparently unrelated factors. But what the authors did was to look at the fifty most wealthy countries in the world discounting those that did’nt have reliable data or had a population of less than 3 million. They ended up with a list of 23 countries including New Zealand. They were able to show that there was a correlation between the degree of income inequality and a range of health and social problems including life expectancy, literacy, infant mortality, homicides, imprisonment, teenage births, obesity, and mental illness including drug and alcohol addiction.

The plight of the disadvantaged is often hidden from those who are better off. When I was the MP in Southampton, a constituency with  some leafy suburbs and others that were not so prosperous, I used to think as I travelled across the constituency that those who were comfortably off, and who drove through the less well-off parts only occasionally, would have little idea of what life was like for the poor, behind their front doors.  Even if the better off knew  that the gap is increasing, they might not be too distressed, because some at least  will enjoy that there advantage is growing.

There are many New Zealanders today who are doing very well, and in fact, in many ways they like the current situation because their sense of superiority is growing all the time, they’re doing well. They read about and they hear about the unemployed and the beneficiaries and they think well, as such people have always thought, the feckless poor, those people won’t even get off their butts and won’t do a decent day’s work: they’ve got no-one to blame but themselves. You’ve heard it. That’s the kind of society that we live in today. But if we look forward another 10 years, another 20 years of current policy, that gap, that divide between haves and have-nots will be even deeper and wider. And the danger for this country is that it will also be a gap that will largely be defined on ethnic grounds. That is a dangerous future for us to face. And even more than that, it’s a gap that will put half of our population at risk of a much greater disadvantage than the other half because gender inequality remains, I believe, a very real issue for us.

So what I’m saying is this – does it matter? It matters hugely! Don’t let anybody tell you, as I’ve said, that you have to choose between a whole, healthy and integrated society or on the other hand a successful economy. A healthy society is the way – that’s the route, the course you must take to achieve a successful economy. They are the two sides of the same coin, you don’t have to choose. We can demand better on all grounds – economic, social, values, the integration of our society. So we must get out there, small meetings of this kind, closing the gap, Peter’s initiative. These are the first stirrings I believe, of a campaign to re-establish a New Zealand that we can be proud of.  Because I believe that an unequal New Zealand is not true of our great traditions.

Thank you very much.

Bryan Gould