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Q+A: Susan Wood interviews Robert Wade on inequality

Published: 4:41PM Sunday July 14, 2013 Source: Q+A

SUSAN WOOD Joining me now from Wellington is Kiwi political economist Professor Robert Wade from the London School of Economics. A very good morning to you.

ROBERT WADE Morning.

SUSAN How has a country like New Zealand, based on such egalitarian principles, become so unequal?

ROBERT Well, I think that many countries in the developed countries have become more unequal, especially in terms of concentration of income up at the top. Concentration of income up at the top means that incomes lower down are stagnant or even falling. So this is a widespread phenomenon. That's point number one. But point number two is that New Zealand is up towards the top in terms of how fast inequality has increased. There are countries in north-west Europe - Scandinavian countries, for example; Germany, Belgium, Holland - where they are much more prosperous than New Zealand but income concentration at the top has increased much less than it has in New Zealand. So the point is that from that example of the north-west European countries, you don't need to have the New Zealand or American or British degree of inequality in order to have a very prosperous economy.

SUSAN Why has it sped up so much in this country?

ROBERT Well, as I said, it's not just in this country. It's sped up in America, it's sped up in-

SUSAN But we've become unequal very quickly over the past 20 or 30 years. The inequality gap has grown dramatically.

ROBERT Yeah, that's right, but also the same thing has happened to an even greater extent in the United States and also in Britain, and some of the causes are sort of impersonal causes like globalisation and technological change which is biased in favour of people with high skills. But another very important set of reasons has to do with the way in which over the past two decades or so, economic policy in the US, the UK and New Zealand has increasingly been set by the top 1% or so for the top 1%. In other words, a whole range of government regulations, government laws, government policies - monetary policy, for example - has been set in a way which sort of pushes or sluices income up towards the top and the other side of that is the difficult position of people in the bottom half of the income distribution. And so-

SUSAN And yet the numbers out from our minister of finance this week - the top 12% of taxpayers in this country pay 76% of the tax. So they would argue they're paying more than their share of tax.

ROBERT Yeah, but they're getting a very large proportion of nation income as well, so it's entirely right that they're paying a higher portion of tax than people lower down. It is the case that people up towards the top of New Zealand income distribution have been doing very well, even since the financial crisis of 2008. And, I mean, it is I think quite outrageous that in New Zealand there's no capital gains tax. That's a really major area that more political attention should be given to. But of course if you have a situation where economic policy is being made by the top 1% for the top 1%, then the last thing you're going to get is political movement towards a capital gains tax.

SUSAN So how do you make this more equal? You've mentioned capital gains tax. What else should happen in a country like New Zealand to try to close that equality gap?

ROBERT I think people who are concerned about rising inequality should be paying relatively less attention to issues of tax and public spending. Of course that's important. But there's a whole other area where very little attention has been given to, and it could be called pre-distribution. That is, examining the way in which government laws, regulations, policies have the effect of making market income - that's before taxes and transfers - more and more unequal. Just to take a case in point, this monetary policy called quantitative easing, where the government makes a lot of liquidity available in the hope that this will stimulate spending. What it's actually doing is blowing up a bubble in the stock market, because most households who are trying to pay down debt are not buying and therefore investors are not investing in things to sell to households, and so all this money is going into banks, financial firms and pension funds-

SUSAN But we didn't have that.

ROBERT …and private individuals.

SUSAN We didn't have QE in this country. We didn't have quantitative easing, despite the fact that the Greens - the most left of the parties - actually wanted it. What sort of impact does all this have on the middle classes, though, Professor?

ROBERT Just a second. Just let me explain that point, because the point is that quantitative easing is presented as a general sort of technical matter to stimulate the whole economy. What is being ignored in the United States and Britain is the way that this measure of stimulating the whole economy is actually redistributing income upwards through the effect in blowing up the stock market bubble and the housing bubble.

SUSAN But in this country, and we're talking to the minister of finance next, other than a capital gains tax, what can we do to try to close that gap?

ROBERT Well, capital gains tax is certainly important, but the point I'm making is you should look across the board at government laws, regulations, policies to see how they are impacting on income distribution - for example, corporate governance law. Corporate governance law has a very strong impact on income distribution. Why? Because the law allows senior executives of corporations to appoint the boards of directors, number one, and number two the boards of directors set the salaries of senior management. And so there is a "scratch my back, I'll scratch your back" kind of ethic that evolves and the result is a spiralling upwards of the salaries of senior management. So you need to change corporate governance law. You need to change trade union law so as to strengthen the rights of trade unions to bargain over matters of salary and other things. These are examples of laws that seem to be unrelated to income distribution that actually have a very big effect on income distribution.

SUSAN Thank you very much for your time this morning, Professor Robert Wade.

ROBERT Thanks.

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