Tag: New Zealand

The wealthiest 1% owns three times the wealth as the bottom 50%

“A nation will not survive morally or economically when so few have so much, while so many have so little.”

Sen. Bernie Sanders 

The wealthiest one per cent of our population today owns three times the wealth of the bottom 50%. A European New Zealander owns five times the wealth of a Maori and ten times the wealth of a Pacifica family.. Egalitarian New Zealand is no more. We wrote the obituary way back in the 1980s. Some of us own three or four houses, while many own none. Cost of renting a home could be as high as 40 or 50% of income. The median price of owning a house in Auckland is nine times of annual salary when below three years’ pay is considered affordable. The younger generation is locked out of homeownership, many consigned to be life long renters.

Economic History

New Zealand’s indigenous Maori people depended mainly on agriculture, fishing and hunting. First waves of settlers arrived from England around the time the Treaty of Waitangi in 1840, looking for a better life than crowded, class-ridden Britain. They set up colonies in Wellington, Christchurch and many other places.

Early economic activity was mainly agriculture and gold mining.  Sheep farming started in the 1850s provided a boost to the economy, wool was in high demand for the textile mills in England. In the 1880s discovery of refrigeration started export industries for meat and dairy. Pre 1914 exports were mainly these commodities and imports consisted of manufactured goods. New Zealand became a wealthy country, however, reliant on commodity prices.

The economy grew during World War 1, disruption in Europe boosting demand for agricultural exports. However, post-world war depression was traumatic for the country. The economy started to recover in the 1930s due to stabilisation of commodity prices, devaluation of the currency and boost in exports to Britain with the signing of the Ottawa Agreement, which favoured Commonwealth countries.

New Zealand also imposed heavy import controls to contain a balance of payment crisis, and this insulated economy continued until 1984. Post World War boom in the 1950s was not favourable for New Zealand as Western European countries, and Japan began subsidising their farmers and restricting agricultural imports. Our protected economy provided full employment; however, import restrictions increased costs and reduced competitiveness.

The entry of the UK into the European Common Market was a body blow to the economy and oil price shocks further rocked New Zealand. A succession of failed policies, including a failed Think Big program led to an economic crash.

The Welfare State- The Safety Net

Steve Maharey, then Minister of Social Development and Employment made a speech in Sep 2000 about our welfare state.

The original vision of social security was to grant not only freedom from poverty but also dignity and a sense of citizenship.

The depression of the 1930s heralded the modern welfare state. Labour party which came into power in 1935 introduced a five-day, 40-hour week and a minimum wage;  pensions were increased. The Social Security Act of 1938, which followed is the cornerstone of today’s social security system. The Act introduced a range of new benefits, including provisions for sickness, unemployment, orphans and emergency coverage. This placed social security on a more systematic footing and established a framework that survives to the present day.

Targeted, as opposed to the universal provision of social assistance, has long been our dominant model of social security. It operates within a framework of benefits and pensions funded from general taxation. That is, based on the principle that social security benefits bore no relationship to the amount an individual had paid in tax or the length of time in employment.

New post-war provisions such as universal family benefit to support the education and maintenance of children in 1945 were widely welcomed but added significantly to the cost of social support. During the prosperous 1950s, 60s and early 70s, this did not present significant problems. Unemployment was almost non-existent, and the concept of state-funded benefits to those in financial need was widely accepted by both major parties.

The Royal Commission of 1969 called on the government to renew and enlarge its commitment. The family benefit was doubled, and other benefit levels slightly increased. One of the most pressing concerns addressed by the Commission was the plight of sole mothers leading to the introduction of the Domestic Purposes Benefit for single parents in 1973. Social Security spending increased further in 1977 with the introduction of the National Superannuation scheme, replacing the means-tested system.

Housing

The State Advances Corporation lent 95% of the house value at an interest rate of 3% locked for 40 years, governments of both major parties believed homeownership was necessary for a healthy society. There was adequate social housing. Rent was income-based, and a maximum of a quarter of their wages.

Reforms 1984 – Rogernomics and Mother of All Budgets

“For people who don’t want the government in their lives … this [Rogernomics] has been a bonanza. For people who are disabled, limited, resourceless, uneducated, it has been a tragedy.”

David Lange, New Zealand Prime Minister (1984–89), 1996

The Labour Party came into power in 1984, in a crisis situation; with a political agenda of deregulation.

‘Towns full of weeping women’ an article in Stuff, April 2017 by Philip Matthews talked about the reforms. Roger Douglas, Finance Minister, chief architect of the reform program argued “Speed was enormously important to the change, are government departments necessary? Are they doing the job? Can they be trimmed? Be ruthless with the answers.” It was ideology and trend of the time that drove the reforms rather than pragmatism. Reaganomics and Thatcherite neoliberal economics promoted heavily by a few prominent economists like Milton Friedman as the right cure.

The purpose of the 1987 State-Owned Enterprises Act was a radical transformation “To strip government trading departments of their social objectives. Turn them into profit-making businesses,” as an online history of the State Services Commission puts it. 

It was a blitzkrieg.

The government is pouring money “straight down the drain” by subsidising State Coal Mines, Douglas claimed in an interview to the Waikato Times that every mine employee cost the country $122,000 a year. 

John Patterson was one of the victims of the restructuring when the department of Lands and Survey vanished into history. He finished on March 31, 1987, and started with the Social Impact Unit on April 1. The unit’s role was to monitor the effects of restructuring on communities and individuals and to identify needs.

He would knock on doors across Southland. First stop: the mining communities of Ohai and Nightcaps. State Coal Mines had turned into Coal Corp overnight  “They started by closing two mines and sacking the men who worked there.” The last union meeting was finishing, and the miners were signing on to the unemployment benefit. All the men were there, but where were the women? The district nurse told Patterson that they were at home crying. 

Where were the women? The district nurse told Patterson that they were at home crying. 

Unemployment was not high nationally, but in smaller towns like Tuatapere, it was around 80 per cent. In South Auckland, it was between 40% and 50%.  Revolution was permanent. Tens of thousands were laid off.

Patterson became “the expert on unemployment” across the south. “Restructuring department after department kept going month after month and lives were shattered, for a while,” he says. “In one way or another, they started getting their lives back, and life went on. What got me, looking back on it, was the way people rallied around each other.”

Deregulation in 1984 led to a rush to invest in the stock market, what appeared to be a way to get a decent return. The stock market crash in 1987, came just six months after the initial wave of redundancies, many people invested and lost, their redundancy money, their superannuation.

Many people invested in the stock market and lost, their redundancy money, their superannuation.

While there was a cruelty in laying off so many people at once, assistance was offered. The Social Impact Unit was one example. Paterson has positive memories of the Community Employment Group created by the Department of Labour. It funded community organisations and took the kinds of risks that seem, 30 years later, to have been relatively daring.

Ruth Richardson, who became the Finance Minister of the National government which came into power in 1990, was even more ruthless.

Mother of all Budgets is still f*cking us today

Laura O’Connell Rapira wrote on Spinoff on September 2019 in an article titled “How Ruth Richardson’s Mother of all Budgets is still f*cking us today”. Ruth believed jobs would miraculously appear for people if she cut their income support. She ruthlessly slashed the unemployment, families and the sickness benefits. Benefits were reduced by 20% and stayed at those rates until 2016. Unchanged through periods of a booming economy and governments of both major parties.

It’s a strange ideology that believes in cutting support to sick people, solo parents and working-class families. It makes no sense when a government makes thousands unemployed and cuts their benefits at the same time and reduces taxes for the wealthiest 20%. Top tax rates were cut from 66% to 33%. GST of 10% introduced affected those on lower-income disproportionately and applied on almost everything, including food and medicine.

A strange ideology…. that cuts support to sick people, solo parents and working-class…. and reduces taxes for the wealthiest 20%.

The average income on welfare benefits dropped from 72% of median annual wage to 58%, in just three years of Ruth Richardson from 1990 to 1993, the damage done was lasting.

Bernard Hickey, in his article on ‘Interest’, contends that there was a clearcut worsening of wealth, health outcomes for people born after 1984, which he calls the ‘Baby Bust’ generation.

Those born in the 60s and 70s took advantage of the housing boom, starting in the 1990s. Many owned their houses, making it easy for them to purchase additional houses to rent, using the equity in their homes as collateral. They received tax rebates for any rental losses while reaping benefits from the increases in house values. House values rose further with an influx of migrants from Hongkong and opening the property market for overseas buyers. House values increased from 3 times median annual wage to 6 times nationally, 9 times in Auckland.

Baby Busters were effectively locked out of the housing market.

Economic Reforms Australia 1980s and 1990s – The Hawke Keating effect

Paul Kelly, a political journalist and author who later became the editor in chief at the prominent newspaper ‘Australian’, made an address at a journalist conference in 2000 about the Australian economic reforms of the 1980s and 90s.

The 1980s saw the globalisation of the Australian economy. The 1990s saw the contest between globalists and anti-globalists. A series of events saw an economic liberalisation and triggered a transformation of the Australian economy. Keys to our success in the 1990s is due to decision-makers retaining best policies from the 1980s and discarding the worst. A new framework to underwrite a more neo-liberal and open economy was not constructed in the 1990s.

Keys to our success ….. due to decision-makers retaining best policies from the 1980s and discarding the worst.

First, there was a pervasive sense of national stagnation and decline symbolised by the economic recession of the 1980s. Second, there was a new Labour government, which believed a new approach was essential. The Hawke-Keating government was both free from political dogma and old fashioned economic orthodoxy which undermined and destroyed previous governments.

Third, there was a set of new ideas waiting for the new government to seize upon, with broad support from government agencies such as the Treasury and the Reserve Bank, the Parliament, and Media. Freer trade, smaller government, deregulation of markets, lower tax rates within a fairer system, a more flexible labour market, low inflation, an attack on rent-seekers and a more market-oriented economy.

Fourth the government had a social contract with the trade union movement. The Accord represented a choice by the unions to give priority to economic growth rather than seek to increase wages by industrial might. Fifth, the government’s reformism would be based on gradualism and a search for consensus. The changes were negotiated more than imposed. The Hawke- Keating government shunned a “big bang” approach.

Reformism would be based on gradualism and a search for consensus…changes were negotiated more than imposed.

Sixth for the Hawke government social and economic equity was vital in the transition to economic liberalism. Equity was an essential part of the economic agenda, and aim in its own right. The tax-transfer system was highly effective in nullifying most of the income inequity arising from the market-oriented financial system. The two neighbouring countries, New Zealand and Australia’s, approach to the economic reforms differed significantly. (Inequality in Australia has grown since then with mainly conservative governments in power.)

Poverty Impacts

Child poverty in New Zealand has doubled since the 1980s. Food can be short; children go to school hungry unable to focus on learning. Schools in our decile one schools often lack in facilities, limited with access to technology, low in participation in sports and other activities due to lack of funding for gear. Houses can be cold and draughty, causing health problems.  Our poor tend to live far from urban centres, work in less secure jobs, often working part-time and pay a high cost for transport. We rank 24^th out of 33 countries in the developed world for inequality.

We rank 24^th out of 33 countries in the developed world for inequality.

We have a real problem with poverty and inequality in the developed world today. People in many countries feel the prevailing system has not served them well, that the mainstream parties on both sides of the spectrum, right and left, have failed them. That politicians looked after the rich and powerful, at the expense of the poor and weak.

Populous movements woo the people as the alternative who can deliver a more equitable system. Populists already lead countries like the United States, the United Kingdom, Brazil, Poland, Hungary, Austria, Turkey, India. Populous movements are increasing their popularity in countries like France and Italy, even Germany. Many have no intention of helping the poor, more interested in looking after themselves and their cronies. They seek undemocratic means of staying in power than rely on the ballot box. They resort to classic ploys like attacking immigrants to distract the attention of the populace.

The Nordic Model

Chuck Collins posted an article on the website Institute for Policy Studies in July 2016, ‘We should take a lesson from Nordic countries’. Reviewing the book ‘Viking Economics’ by George Lakey.

The Nordic countries – Norway, Sweden, Denmark, and Finland – typically have considerably less income and wealth inequality, thanks to both robust social safety nets and progressive taxation. They also top indexes of industrialised countries measuring the quality of life indicators such as longevity, health, work-life balance, and vacations.

Norwegians a century ago didn’t like the results of a wealth gap: the hunger and poverty, crime, elderly friends left in isolation, young people without hope of a good job. Norwegians also didn’t like the attitudes that went with inequality; an inclination toward arrogance among higher-income people and the feeling among lower-income people that they were losers defeated by the system.

The decades-long transition was brought about in several of the Nordic countries through strong popular movements of workers and social reformers that campaigned and won political power. When out of power, they pressured governments through mass protests, including nonviolent direct action when the system was unresponsive.

The Nordic model is a “universal services state” that focuses on poverty alleviation, a robust social safety net, and full employment. But, with a commitment to work as a central part of their anti-poverty strategy for those able.

The quality of life for workers is much higher, and the work-life balance is considerably healthier than in the United States. The average number of hours worked in a year is more than three hundred hours less than in the USA (and New Zealand). Social mobility is increasing in the Nordic countries and declining in the US. The Nordic model focuses on economic security, efficiency, and productivity and believes they are connected.

Their success undermines the view that the ideal capitalist economy is one where markets are unrestrained. Lakey contests the misconception that high taxes and regulation in the Nordic countries stifle business and entrepreneurship. Productivity is considerably higher, even with a shorter workweek. The rate of start-up companies in Norway and Denmark is substantially higher than in the US.  Researchers found Nordic entrepreneurs greater risk-takers because they don’t need to worry about the education debt, retirement, unemployment and medical care.

Nordic businesses compete in the global economy, but they are discouraged, through laws and social contracts, from cutting wages as part of their competitive strategy.

Nordic businesses are discouraged..from cutting wages as part of their competitive strategy.

Their understanding of who the job creators are is not limited to the entrepreneurial class and investors. Although Nordics value the vision, risk and innovation contributed by entrepreneurs, they think the workers do a large share of the egg-laying. Which is why they invest so heavily in human capital and get higher productivity than many countries. Their track record with cooperatives, state-owned and municipal-owned enterprises gives them a positive perception of other sources of egg-laying.

Residents in Nordic countries don’t complain about their higher taxes because they clearly benefit from the expenditures. “For their high taxes the Norwegians have gotten overall affluence, stability, opportunity, a high level of services that make life easier and more secure,” writes Lakey.

From renewable energy policy and valuing racial differences to restorative criminal justice and responding to radical Islam, Nordic countries have valuable lessons for the rest of the world.

In most Nordic countries, the transition from youth to adulthood follows a different path than our focus on college and high-paying jobs. First, there is a deep culture of lifelong learning, folk schools, debt-free vocational training, and support for work transitions and parents. Working-class jobs are valued and well-compensated in the Nordic countries. In contrast, Lakey observes that a “Cruelty visited upon young people in high inequality countries is to induce star-struck dreams. But refuse to fund pathways to achieving satisfying life choices, including high-wage working-class jobs.”

“Cruelty visited upon young people..is to induce star-struck dreams..But refuse to fund them”

“Movements need organisers, communicators, advocates, funders, nurturers, researchers, trainers, musicians and artists, nonviolent warriors, and ‘foot soldiers’ as well as visionary designers,” he writes. “All those were present in the Nordic movements that challenged a thousand years of poverty and oppression, took the offensive, and built democracy.”

The Nordic model can serve as both an inspiring model and a reminder of the many ingredients required for social transformation.

Solutions

Dutch historian Rutger Bregman called for ‘Taxes, taxes, taxes’ at the World Economic Forum (he was not invited again). He called for a top tax rate of 70%. The question was asked, which prosperous country has a tax rate of 70% – the answer that came back, the United States until the 1980s (New Zealand had a top tax rate of 66%). ‘End this, Winners take all economy’ said Anand Giridharadas, a reformed Mckinsey consultant in his best selling book.

The present Labour government has taken a few steps to address inequality. More state housing. Healthier, better insulated rental housing. A winter heating allowance for beneficiaries and superannuitants. Fees free for year one of tertiary education. Lifting minimum hourly wage and indexing to median salary.

Perhaps the largest problem we face today is our polarised political system. The right-leaning National Party, when it is in power, increases inequality by pandering to those on higher incomes and businesses. The left-leaning Labour Party is hesitant to undertake significant reforms, as these will be politicised by the National Party.

The largest problem we face today is our polarised political system

Inequality.org.nz a website run by Max Rashbrooke, who has written an excellent book ‘ Inequality – A New Zealand Crisis’ argues for action on three major fronts.

A fairer tax system

Higher taxes are essential for improving benefits for the poor and the middle class. High tax countries like Sweden, Denmark, Finland, none of them resource-rich, all have GDP per capita at least 24% higher than New Zealand. Our GDP per capita, in real terms, has been stagnant, despite repeated tax reductions for the wealthy and corporations.

Max calls for a higher top tax rate, wealth taxes, capital gains tax and a financial transaction tax. We need to close loopholes in our tax legislation and crackdown on tax evasion. IRD reported that more than half of ultra-rich, with over $50Mn in assets, declared incomes of less than $70,000 per annum. Just a 1% return would be $500,000! The wealthy invest in many asset classes and earn more than 5%, in the long run. (This is the reason that Bill Gates gives away billions of dollars a year, and still has a wealth of over $100 Bn).

Raising taxes is politically unappealing. We can also reduce taxes that impact those on a low income. Reduce GST rate or exempt essentials like food. Introduce a tax credit for those on the lowest income tax slab.

Higher wages for those on low income

A living wage. Invest in providing jobs that pay higher wages. A limit on high incomes. We can improve education in low decile areas by increasing funding and widen the free lunch program. Widen free tertiary education, perhaps starting with polytechnics. Make the apprentice support program permanent.

Raise welfare benefits

Raise welfare benefits to the same level as NZ Super. More state housing and income-related rents.We also need affordable housing for the middle class and essential workers like the nurses, teachers, police. We need Kiwibuild, not more housing for landlords.Improve health services and accessibility for those on low incomes.Many of these services require an upfront investment but generate an economic return over the long term.

Not everything requires money. Let’s stop the payday lenders with their cash trucks, charging over 500% interest, a limit of double the loan amount doesn’t go far enough. (Australia caps the maximum rate at 4% per month). Let’s reduce the pokie machines taking poor people’s money, paying out a few cents on the dollar. Let’s make our criminal justice system focus on rehabilitation, not punishment. Eliminate the Bail Bond Act, which breeds more criminals. Let’s get our social workers to show more compassion. A sugar tax, prominent signage, taking sugary products off school cafeteria, cost nothing and have been shown to have a real impact on obesity and related health issues like diabetes and heart disease. Rezoning land has no cost, except for infrastructure.

Let’s stop the payday lenders with their cash trucks, charging over 500% interest,

There is a lot to do, some of these are expensive, upset armchair experts with a distaste for welfare support. Is there an alternative? Not unless you want to risk radical change, a populous leader or worse.

Change happens slowly in politics, which is not a bad thing. Gradual changes in the right direction, building consensus, is a much better option than changing right and left. What we can’t do is stand still or follow the same policies which led to this place we are now. Keep a system that works for the rich and powerful, and not for the poor, the middle class, the younger generation, the Maori and Pacific communities.

Now is the right time to rebalance the system, lift citizens left behind by globalisation. We need politicians from left and right together working for the good of the country, rather than sniping for political gains. Reducing inequality is not only the right path for the economy, but it is also the right path morally.

It is what our national anthem calls for ‘Let our cause be just and right’.

My paternal grandfather lived in a rambling old house. Families tended to be large those days, 7 to 8 person households were typical. Our home, set in a large garden, dotted with coconut trees and plenty of space for outdoor activities like cricket and football was idyllic.

My father had a few tales that he used to tell us often. One of these was about his education, how he passed the entrance exam for secondary school at a young age. He was keen to continue his education, but jealous brothers persuaded his grandfather not to support it. He started work as a clerk in a government department. Public sector wage scales were low in those days. A tiff with grandfather left him out of any property inheritance.

Maternal great grandfather was a successful businessman, owned a string of retail shops and an extensive property portfolio. Grandfather was a lawyer and a politician, in the days that politicians were honest. They regarded their work as a service to the community, financed their political campaigns primarily out of their own money.

He was also a gambler, another expensive pastime. The main form of gambling was British horse racing. Every suburb in Colombo had a few betting shops, and we had one down our street. Mainstream newspapers carried results from previous day’s races. My grandfather gambled away a fortune. My grandmother owned the properties; however, it was not difficult to get her to sign on the dotted lines to sell them. After all, he was a lawyer. When grandma realised what was happening, only the house they were living in was left.

There we were, my mother with little money and father with a lower middle -class income in a developing country, a large family to support. He tried to study and be a professional accountant, which would have increased his salary. He talked about getting up pre-dawn, drinking coffee and soaking his feet in a cold water bath to avoid falling asleep. Marriage, children and a full- time job proved too much of an obstacle in the end.

We were living pay-check to pay-check, sufficient money to put food on the table, not much left for anything else. Most companies paid a ‘bonus’, an extra month’s pay, on special occasions like Christmas or the local New Year. That paid for any ‘extras’, like clothing and text-books for school.

Often though, the money ran out before we could buy shoes, one of the more expensive pieces of attire. The adage ‘you can tell a gentleman by his shoes’ was apt back then. Shoes became tight and scuffed, bit into my toes, scraping the skin before we could afford to replace them. Toes retreated inwards and upwards; a cycle repeated many times. My toes had become permanently deformed. We could only buy shoes with a high front end, to avoid painful toes and torn skin.

Poverty was a lack of cash. My parents spent very little on alcohol, perhaps on a special occasion or when we had visitors. There were no takeaways or restaurant dining or vacations. The only thing you could call exorbitant was the sky-high interest on payday loans, sometimes the only option to put food on the table.

My toes are still deformed.

Scars of child poverty are often lifelong. Poverty itself is often permanent, sometimes intergenerational. Effect of poverty-related issues like poor health and lack of education are often lifelong. Work opportunities are usually at the low end of the wage scale, jobs precarious and work, hard physical.

Eradicating child poverty is necessary and beneficial to society. If you want to have lower healthcare cost, a more productive workforce, a happier community, we need to spend more money upfront, early in a child’s life.

A stitch in time saves nine.