Staggering gains of top 1% beggars more than belief

It is the political Right which should be most concerned about rising income inequality, says Tim Hazledine.

The OECD report Divided We Stand: Why Inequality Keeps Rising created a flurry of interest in New Zealand when it was published earlier this month.

Attention focused on the first figure in the document, which showed increases in income inequality in most countries over the period from around 1985 to the late 2000s, with New Zealand leading the pack.

But this is old news. The big leap in inequality in this country occurred between 1987 and 1995, as a direct consequence of the Rogernomics "reforms", which emasculated trade unions and created plenty of get-rich-quick schemes at the other end of the scale.

Since then, inequality has trended much more slowly here, while other countries, such as Australia, have caught up.

However, the net result is a world significantly more unequal - at least among the rich countries - than it was a generation ago.

What is happening here?

For some really startling data you should go to the last chapter in the 390-page OECD report.

Here the spotlight is on just 1% of the population - the highest-earning 1%.

Their share of the cake underwent a long decline over the first eight decades of the 20th century.

But then, from around 1980, there was a turnaround, especially in the English-speaking economies, where the neoliberal revolutions of Margaret Thatcher and Ronald Reagan gained the most traction.

The income share of the top 1% in the United Kingdom doubled from 7% to 14%.

In the United States, it has more than doubled, from 8% to 18% - a staggering number.

In New Zealand the trend has been more muted - from around 6% in 1980 to 9% to 10% now.

But in all cases, these are very large sums of money and they account for a good deal of the widening gap between rich and not so rich.

It has happened across the board, in private and public sectors.

In my own workplace, the University of Auckland, the vice-chancellor's current annual stipend is $640,000. A decade ago his predecessor's salary was $360,000.

That is a more than 75% increase in 10 years, or about 40% once you adjust for inflation in the consumer price index over that period.

At the same time, we, the frontline teaching and research staff of the university, have received, approximately, a 10% increase in our rates of pay, adjusted for inflation.

So, is there any objective reason why Prof Stuart McCutcheon, the present vice-chancellor, should be paid 40% more than Dr John Hood earned for doing the same job in 2001, or indeed why Dr Hood should have received an even larger premium over the salary of his distinguished predecessor, Sir Colin Maiden?

Is there any objective reason why vice-chancellors' pay should have increased in real terms four times more than pay on the shop floor?

The answer is: no; there is no objective economic reason to justify these income discrepancies.

There is no evidence that Prof McCutcheon is "worth" 40% more than Dr Hood, or six times more than a senior lecturer.

Nor is there any objective rationale - i.e., in terms of increased contribution to the economy - for the even larger pay discrepancies generated in the private sector.

Why does the New Zealand economy now need 26 chief executives to be paid more than $1 million a year, when just 11 years ago we had none?

This may seem extraordinary. How could these huge salaries not be tied somehow to value for money?

But, actually, that's precisely how they can go up so much and so fast. If there are no fundamental economic considerations involved, then the game basically becomes "pick a number".

And that's what the cosy remuneration committees of company boards, and their sycophantic "executive remuneration consultants" do.

They put a respectable gloss on the inexorable pay increases by "benchmarking" with someone paid even more somewhere else - e.g. in Australia - whose next year's salary will itself be benchmarked upwards, and so on - an endless happy upward spiral of income redistribution.

So who should care about this?

You'd think the political Left would care, and they do complain, but it was their preoccupation with identity politics and the beneficiary society that left the gates open and undefended when the warriors of privilege roared in and purloined the booty.

The political Left doesn't have much intellectual or moral credibility in this matter.

It's really the Right who should be most concerned, because the hollowing out of the earned income distribution is actually a fundamental threat to the long-run viability of the market economy.

You know, Marx and the other old critics of capitalism complained that it was all about "capital exploiting labour".

Marx would probably be as surprised as the rest of us to learn that the modern version of capitalism has the workers exploiting the capitalists!

That is, the upper echelon of workers - the top 1% and their acolytes extract profits from the largely diffused nominal owners of their businesses - the shareholders - as well as holding down the wages and salaries of middle and working class employees.

Many thoughtful right-wing politicians and business leaders - from Warren Buffet on down - are deeply worried about the consequences of unrestrained short-sighted greed.

Their worries have been heightened by the global financial crisis, which simply could not have happened (and of course did not happen) in the world economy of, say, 1980.

If I have a new year's wish for New Zealand, it is that our politicians and other leaders will at last take seriously this threat to decent society, and perhaps even find some common ground in doing something about it.

Tim Hazledine is a professor of economics at the University of Auckland.

 

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