Truth is a strong word when discussing inequality …

Over at Polity Rob Salmond has promised us the truth about the gap between NZ’s rich and the rest (via Toby Manhire)!  This would be encouraging, given the complexity of the data.

I just want to say at the start I have full respect for people who want to discuss these important issues, including the use of data.  However, after reading his post I think he may have oversold his claim.  Don’t get me wrong, what he posted was interesting – if you go over to his post you will see a graph that shows aggregate taxable income for three groups – those being taxed on $150k a year, those being taxed on $100-$150k a year, and those being taxed on less than $100k.

I do not have the data sadly, but I have some reservations stemming from what I see in the post.  For some reason he is only quoted gains since 2010/11 – ignoring the whitewash for high income earners that occurred in 2009/10 due to the global financial crisis.  Furthermore, the income changes he quotes are biased (to the point that they aren’t representative of household income at all) in two ways:

Update:  Rob has re-evaluated the data and changed his interpretation of what it is saying, he has also blogged saying so – full respect for that.  His intent, of going through the data to try and figure out what is going on with policy relevant issues is admirable – and it is good that there is this blogging format where we can work through data and interpretation online.  With income inequality getting a bigger focus, there is going to be a lot more writing across New Zealand sites on this issues in the coming year.  For those who aren’t interested, the internet is a big place :)

  1. These are not per person figures – people have been moving “up” income bands, so the proportion of the population in the highest band will have gone up.  As a result, this exaggerates income growth. [Note:  I've been informed I didn't point out how significant this is - the movement in groups in the income bands is likely to be enough to explain ALL of the change, making the figures quoted in the Polity post virtually incompatible with any clear narrative for talking about per capita income.  I failed to point this out sufficiently as I thought it was self evident - but that was a stupid assumption on my part, sorry.]
  2. This ignores the explicit push since 2010/11 to improve taxation on some types of capital gains and catch tax evasion.  This will have increased estimates of “taxable income” especially at the top end – although this does imply that previous figures for the “top end” will have previously been understated (a common issue).
  3. I am not sure if the claims here are about individual or household incomes – however, we need to be careful comparing it with any “base” without defining this.

If we are interested in these ideas, why don’t we look at reports based on the Household Economic Survey data – which specifically looks at the full distribution of household and personal incomes?  Or we could even look at the decile data in the HES directly, and compare what has happened to the top 10% relative to other groups!  Why don’t we also have a little peek at the research about what has been going on?

The “truth” of the issue is that this is very complicated.  We have seen median income growth outstrip mean income growth in NZ for a long period of time, implying that static inequality has come down a little bit.  But a single inequality index cannot tell us whether what is going on is fair or just, instead we need to ask harder questions about poverty, capability, and opportunity within society.

A misleading graph (sorry but it is, as I’ve explained) titled under truth doesn’t do this.

And before you pin me down as someone on the right you ideologically shouldn’t listen too, remember that I have written in support of thinking in terms of relative income poverty, and stated that we should have a minimum income based on a land tax.  But I also realise that New Zealand is not like the United States, and trying to squeeze our data into their narrative (instead of discovering our own) will lead to bad policy.

Update:  A friend of mine pulled this graph together, showing growth in the population of people in the differing tax bands – in order to illustrate the first point I made above:

image002

This shows that the vast majority of the difference in income growth in Rob’s post is due to having more people in higher bands, not due to actual income growth for individuals/families earning high incomes.

This is why looking at the HES data tells such a different story – and for the narrative Rob was painting (discussing the income of individuals and households, with some doing well and some poorly) the HES data is the correct data, while the aggregate tax data is wrong (due to population changes in the bands).  It implies that saying high earners have been “creaming it” is factually incorrect – not as a matter of opinion, but in actual data.

We can argue about what is fair, and what is just, of course.  But let us also be careful with our data!

 

  • Rob from Polity

    Thanks for this post, Matt, and I’m glad you found my work over at Polity interesting. A couple of quick points:

    1. To the charge of having a provocative headline over the top of a post on a very complex issue, I plead gleefully guilty. My intention, as you see in the post, is to provide a fuller, more truthful assessment of the state in inequality in New Zealand than our Prime Minister provided yesterday. I think I achieved that, even if the bar was low.

    2. On specifics:

    – The figures are from Tsy, are the latest set is here: http://www.treasury.govt.nz/government/revenue/estimatesrevenueeffects/personal . As you’ll see, the numbers are total income earned in the band, not the total income by people whose total incomes are in the band, (I’m sure I could have phrased that more elegantly…) which means the bracket creep issue you raise doesn’t really arise.
    – Base year is 2010/11 because National likes to judge its record on this issue post its Budget 2010 tax switch (see English’s Oct 23, 2013 release on this, and my reply in Jan 2014). I am just taking the debate they started on their terms.

    3. I agree with you that income inequality is enormously complex, and the empirics of measuring it are rudimentary at best. That is why there is still such a heated international debate over Gini vs 80/20 vs RHI vs all kinds of other things. Which means *any* single set of figures on inequality are potentially “misleading,” in that they convey only a partial truth. This includes both my chart and your mean / median comparison. (If the poorest 10% gave all their money to the next poorest 10%, inequality would be worse but the mean and median of the income distribution would stay steadfastly the same.)

    • http://tvhe.co.nz/ Matt Nolan

      Hi Rob,

      Fair enough – I’m a big fan of debates around these issues. The more information we can all pull together, the better the debate can be!

      I was just emailed by a friend (not in policy, so not biased) saying that the number of people in that band went up by around 45% during that period … so in per capita terms growth is a lot smaller than the numbers being implied in the post.

      That is why I was indicating it is probably a better bet to run straight from our HES data – I suspect Treasury is going to be releasing indicators that break these numbers down further over the next few years, and it is an area I’m also getting involved in, so hopefully even more stats can come out!

      On the note of inequality measurements, I will be doing a presentation on them in a couple of months, as I am writing a brief piece on the trade-offs and issues with each one. I’ll flick you a copy when it is written if you are interested in having a look!

      • Rob from Polity

        Hi Matt,

        I did some simulations on this structure of data over the last few days, and agree with you that it can be really quite misleading in some circumstances. I’ve posted about it here:

        http://polity.co.nz/content/i-made-mistake

        Thanks for pushing me on this one. Without prodding, I probably wouldn’t have gone back and double-checked it all.

        Cheers,
        Rob

        • http://tvhe.co.nz/ Matt Nolan

          Hi,

          Completely respect the position – will also pop up an update on the front of the post.

          To be honest, this was an understandable mistake, I have talked to a lot of other economists who were surprised at the magnitude to the population change. Data can be like that, as you well know!

  • Luc Hansen

    Hi Matt

    We can talk about defining inequality until the cows come home, but in the meantime real children suffer from real privation that should not exist in an advanced economy. My stance is as simple as Hone Harawira’s in the last election campaign: feed the kids. I would go further – a principal of a Northland school, commenting about iPads in schools, said that the families of four of his pupils don’t have electricity to their homes. Noting all the moral hazard arguments at work here, I just say, give the kids electricity for stoves, for heaters and for iPads in their homes. Sort out their parents by all means, as best we can, but don’t let the kids suffer needlessly.

    The 1% can afford that.

    Furthermore, the Greens policy released today – seemingly with support from Labour – covers a lot of bases. I don’t care if most kids (and our daughter is at a decile 4 school, a truly excellent school – we refuse to do the White Flight thing) don’t need it, a few kids do and rather than stigmatise the few, just give it to them all.

    The 1% can afford that.

    And I like to remind people of John Key’s remark to SCF clients, as seen on TV, that 100 million dollars is chump change, so 90 million dollars per year for the Greens policy sounds a pretty good investment to me.

    Even Greg Mankiw, in “Principles of Microeconomics (2009)”, says, regarding the issue of poverty: “Yet government action can solve this problem. Taxing the wealthy to raise the living standards of the poor can potentially make everyone better off (p. 231).”

    The 1% can afford that.

    And even if they don’t want to, the next 19% (like us) are generally happy to step up.

    We just need to vote for those with the will to try, maybe to fail, but to try again, rather than channelling yet more dollars into the pockets of already high income earners – principals and “expert teachers” – who (assuming an 8hr day and zero travelling time) get to spend 1.6 hrs per week per school telling low decile schools how to perform like high decile schools.

    I won’t hold my breath on that one!

    Cheers.

    • Kimble

      You are so generous with other peoples money. You seem to have a lot of opinions on what the 1% can afford and, from there, how they should be spending their money, but give the other 1% a free pass on how THEY are spending their money. I get it though. It is much easier, practically and philosophically, to demand action from the top 1% than it is from the other. It gives people a much nicer feeling inside to browbeat rich people than to place expectations on poor people. It is much easier to extract taxes from the rich than cooperation from the poor. (And I bet admonishing poor people for their decisions just feels ‘racist’ doesnt it, Luc?)

      Lets not bother looking what you could afford, should you elect to live the life of a monk and give all the savings to the poor. Which would involve reflecting upon how much you are revealed to actually “care” about “just feeding the kids”.

      Lets instead consider all the payments that are already being made to ensure children are fed and well-housed. I am sure you wouldnt mind offsetting the cost of your pet projects by reducing the benefit paid to the parents of children who are doing without? And then taxing the parents free-riding on the free-lunches to cover their unnecessary use of the program?

      There is NO excuse for a child going hungry in NZ. None. If a child goes to school hungry (or stays away from school hungry) then their parents arent fit for the role and the child should be removed from their custody. THAT would be a much more cost-effective and effective policy than nationalising the feeding of all children from schools in poor areas.

      • http://tvhe.co.nz/ Matt Nolan

        You raise a key point here about the type of benefit – if we are providing the material choice to households to feed and clothe their children etc etc, and they aren’t, does it make sense to throw more money directly at them?

        When it is put this way, suddenly the issue looks different. It is a story of disadvantage due to bad parents, how do you redistribute that? In truth a lot of the loss of opportunity is to do with social and community issues directly – and sending cash and pretending the issue is gone would be naive.

        Having grown up in a small town I have a lot of sympathy for the way communities can undermine the development of children, often in well meaning ways that inadvertently keep them on a path of lower opportunity. But focusing on the way different communities treat education, health, and children and trying to determine whether the observed income inequality is then a bad thing or good thing (which we have to do before interfering – and which can be good if they are supporting each other in “in-kind ways”) makes the issue too difficult for sound bites on the news and rally slogans :P

      • Luc Hansen

        I guess I asked for that Kimble, so fair enough. Of course we don’t agree, and, indeed, you could be right, but a cursory reading of 19th century history would seem to contradict that possibility.

        • Kimble

          I might bother to conduct a cursory reading of 19th century history, but only after you explain how the world of the 19th century is in any way similar to 21st century NZ. There is enough social welfare and support in NZ that the only reason a child to goes hungry is through neglect. Perhaps you want to profile the parents of hungry children and then tell me that the kids are better off in their care?

          “Doing something” doesn’t require political courage, despite what the politicians would have you believe. How much political courage are the Greens showing with this policy? “Doing something” is the only thing politicians talk about, Green politicians especially.

          • Luc Hansen

            So, first, you are the one promoting widespread removal of children from their “undeserving poor” parents. That’s the similarity with the 19th century.

            Second, the issue is much wider than simply one of hunger. Children need a lot more from their childhood than just food.

            So, a couple of links for you to consider:

            http://www.stuff.co.nz/dominion-post/news/local-papers/wairarapa-news/opinion/5658674/Why-is-there-an-undeserving-poor

            http://nzier.org.nz/publications/is-working-for-families-working-for-families-nzier-insight-27

            Both of these items, particularly the second, deserve close reading because they both contain little gems of wisdom that should give you cause to rethink your approach, which is unhelpfully punitive, in my view.

            Finally, my advocacy of ‘do something’ is qualified by the recommendation of seeing what works elsewhere i.e similar jurisdictions with lower rates of child poverty. I doubt ripping kids away from their parents is a favoured policy, except in extreme circumstances, such as when obvious abuse is occurring.

            Cheers.

            • Kimble

              “Undeserving poor” parents? There you go again, wishfully thinking the best of people who allow their kids to go to school hungry and shoe-less. Funny how you are crafting a narrative that supports your pre-determined solution. The parents of kids going hungry are actually good people, really, but they just arent getting enough support. Give the parents more money!

              Children need a lot more in their childhood than food? But if they arent getting food then what are the chances they are getting anything else? Zilch.

              NZ already has a substantial social welfare safety net designed to allow people with children to feed and clothe them. If that isnt happening now, then more redistribution isnt going to get it done. More money may, in fact, mean more children going hungry in the long run as an unintended consequence.

              If a child is hungry in this country it is because the parents are neglecting them. And yet you say you would only remove a child from an environment of obvious abuse, but not neglect? Go on, I am sure the 1% can afford that.

    • http://tvhe.co.nz/ Matt Nolan

      Ummm, my post was so much about arguing a definition of inequality – as saying that the figures quoted were not a measure at all. Given the difference in changes was predominantly due to population growth it was like mixing up GDP and GDP per capita when talking about individual income.

      Also you seem to be saying “lets not define equality because their is poverty”. In that case, shouldn’t we all be talking about poverty instead of inequality in the first place? That has been my point since this debate started – but if we are going to discuss inequality instead I want us to be damned clear about what we mean ;)

      I haven’t seen the Green policy yet, as I am largely away from the internet during this week. I will try to give it a look tomorrow.

    • http://tvhe.co.nz/ Matt Nolan

      Just one broader point. If we really care about an issue, then making sure we define it clearly (and why it matters) is important – saying something is really important, and then just “doing something” without clear knowledge is so tempting, but so very dangerous.

      One other broad point. I am not a fan on picking on groups of people – and whenever it is pointed out that the “1%” in New Zealand are predominantly doctors and lawyers people get a bit confused. We transfer resources to give people a chance, and a minimum standard. We do it as we have a shared community, shared land, shared public investment that helped to create wealth (education, roads, etc) and an acceptance that there is a coordination and fairness problem for not doing it. This is an argument that gets buy in – arguments that bully a group, no matter how fortunate that group is, are also dangerous.

      • Luc Hansen

        Fair comment, Matt, rhetorical flourishes are such fun, but they do tend to fall flat on the net, I admit.

        As for the do something bit, the issue of the long tail in education has been around for a long time, spans several governments, and is correlated with ethnicity, which itself is correlated with decile levels. There are lessons to be learned from other successful jurisdictions, and the type of policy, and limited intervention. the Greens advocate seem to be effective in those jurisdictions, with allowance for our specific circumstances.

        And just note on your other reply, I wasn’t intending to come across as arguing with you on this – we are on the same page. It was meant just as a general point for others, really. But sure, I think poverty is the problem, even of the relative kind, in the short run, at least, and the resolution must involve redistribution, by definition. But a major intervention such as a UBI, while a worthwhile long term goal that we both advocate (and not funded out of income taxes, so the Treasury report misses the mark, for me), is simply not on the cards.

        Anyway, it’s good to see the political parties bringing such stuff into the open, and not just in New Zealand, and it will require political courage to “do something”, so the next few years could be interesting.

        • http://tvhe.co.nz/ Matt Nolan

          Indeed, I think we agree on a lot of substance here – especially with regards to opportunity and education being key.

          It is partially for that reason that I am concerned with a blind inequality focus – as I feel like it takes away from the focus on poverty and opportunity which we should have :)

          This post was solely on the fact that some data being shown and interpreted was being interpreted in a way that was wrong – this concerned me, as we should be trying to be open and transparent about our egalitarian preferences. I am glad that parties in NZ are becoming more willing to do this!

  • jahed

    I agree with you that income inequality is enormously complex, and the
    empirics of measuring it are rudimentary at best. That is why there is
    still such a heated international debate over Gini vs 80/20 vs RHI vs
    all kinds of other things. Which means *any* single set of figures on
    inequality are potentially “misleading,” in that they convey only a
    partial truth. This includes both my chart and your mean / median
    comparison. (If the poorest 10% gave all their money to the next poorest
    10%, inequality would be worse but the mean and median of the income
    distribution would stay steadfastly the same.

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