Where inequality begins

Workplaces are where much of our growing inequality occurs, according to Professor Robert Wade, a contributor to the recently-launched book Inequality: A New Zealand Crisis. Max Rashbrooke, the book’s editor, spells out the implications of that message.

Inequality book coverInequality has widened sharply in New Zealand in the last thirty years. Incomes at the lower end – and even in the middle – have been stagnant, while those at the top have doubled.

The problems this causes were brought to light in the recent visit of Robert Wade, a New Zealand-born professor of political economy at the London School of Economics. In a series of lectures supported by the J. R. McKenzie Trust, he highlighted the economic, health and political costs of growing inequality.

Income concentration at the top helped cause the global financial crisis, as middle and lower earners borrowed from an increasingly wealthy 1 per cent to make up for incomes that were no longer enough to get by on.

Income gaps also made for a more stressful, divided and less trustful society. That in turn has led to worse health – as measured by stress, rates of heart attacks, and so on – in more unequal countries.

In very unequal countries, Robert Wade explained, the top 1 per cent can use their wealth to influence politics in a way that benefits their interests rather than those of the wider country.

While income concentration at the top is sometimes dismissed as irrelevant to the task of tackling poverty, the two issues are in fact intimately connected. Just as a matter of simple maths, the increasing share of income taken by New Zealand’s top 1 per cent – up from less than 5 per cent in the 1980s to 8-9 per cent in the 2000s – leaves less income for everyone else to share.


Pressing problem

To counter these problems, Robert Wade outlined what he called “a progressive agenda”, insisting that making capitalism work for everyone, not just the wealthy, “is one of our most pressing problems”.

Some some level of inequality is inevitable and necessary, but only at Scandinavian levels, where the top 10 percent earns about five times as much (on average) as the lowest 10 percent.

Inequality at New Zealand’s level – where that ratio is more like nine times – is clearly not necessary for economic growth, because some more equal countries have better economies than ours.

Often, the debate about inequality is focused on the welfare state, and whether taxes and benefits should be higher, he said. But people should look more at what he calls “pre-distribution” – the way that wages and salaries are decided before government action kicks in.

This is where most inequality is created, and the welfare state only reduces that inequality by around 20 percent.

People also need to look more closely at “the many laws, regulations and policies [that] have the effect of sluicing income up towards the top”. These create what the American economist Dean Baker called “a conservative nanny state”, in which government action favours big business rather than the ordinary people it supposedly serves.

In New Zealand, the policies most contributing to this “sluicing up” effect might include corporate governance law, which puts few limits on the salaries of chief executives and senior management.  


Employment rights

Also important are employment law, collective bargaining coverage and the right of unions to organise in workplaces.

Intellectual property law can also concentrate income at the top by protecting inventions for unnecessarily long periods, while an overvalued exchange rate holds back sectors like manufacturing that could generate large numbers of well-paid jobs.

Robert Wade also urged the need to “see the potential for the state as an entrepreneurial complement to entrepreneurs in the private sector”.

This agenda has been spelled out by economist Marianna Mazzucato. In The Entrepreneurial State, he shows how many of the world’s great innovations – including the internet and much of Apple’s product lines – were founded on research carried out by governments around the world.

The power of big money to shape policies to their liking through lobbying and financing parties and candidates is most apparent in the United States. Wall Street lobbyists met with government officials over 1,200 times to influence a piece of financial regulation called the Dodd-Frank Act – against 240 times for public interest groups – which resulted in the law being “eviscerated”.

In the New Zealand context, Robert Wade pointed out that Nicky Hager’s book The Hollow Men had shown us just how much influence the top 1 per cent could have on political parties. 

Without action on all these fronts, developed countries would see their top 1 per cent increasingly free of constraints or obligations towards wider society, he said.

“If western societies do not reduce income concentration, we will continue to transit from ‘democratic market capitalism’ towards ‘oligarchic impunity capitalism’, with high and rising economic, social, health and political costs.

“Surging income disparity is almost as serious a threat to the future of democratic market capitalism as climate change and human aging.”


This article is from the September 2013 issue of the PSA Journal. You can read back issues of the Journal by clicking here.