KIBBLEWHITE CURVE FINDS LITTLE SUPPORT
Picking up again on my last article, I want to explore further whether and why on the one hand Wagner’s Law may be drooping and on the other the Kuznetz Curve may be limping on its leftward limb. In other words, is increasing public expenditure as a share of GDP still the mark of an advancing economy, and is it still inevitable that levels of inequality decline as societies increase in overall wealth?
In my last article I also made fleeting reference to the presentation that was recently made to the NZ Public Service Association by by David Hall of the Public Services International Research Unit (PSIRU) at the University of Greenwich, UK.
While I found the Hall presentation strangely surreal in some respects in barking for public enterprise (it reminded me of the work of PSIRU’s possible intellectual ancestor, the Ljubljana ‘International Center for Public Enterprises’ in the former Yugoslavia), it did provide a few correctives to the official line being spun by the NZ Treasury.
In particular, there was one graph that showed trends in Central Government Spending as a percentage of GDP that bears repeating (see graph below). And Hall also provides a table for the same measure for a range of OECD countries in 2008 and 2009 that I have augmented with data for 1960 and 1982 from Saunders and Klau (see table underneath).
So getting back to the recent presentation by NZ Treasury official Dr Andrew Kibblewhite, there is pretty weak evidence of either an inexorable tendency for public expenditure to increase at a higher rate than GDP or a tipping point at maturity beyond which expenditure tails down.
In fact the figures indicate that, for the eight countries for which direct comparisons can be made, the share of public expenditure in GDP in 2009 was lower than it was in 1982 in four countries (Canada, Denmark, Germany, and Norway) and higher in the other half of the sample (France, Switzerland, United Kingdom and USA).
WINDENING INCOME AND WEALTH INEQUALITIES
On the other hand, there is plenty of evidence that income and wealth inequalities are widening in Western Countries.
See for example:
1. The UNU-WIDER ‘World Income Inequality Database’ (WIID)
2. The Credit Suisse Research Institute “Global Wealth Report ‘(October 8, 2010).
And some previous blog posts of mine, for example:
1. ‘Adam Smith and the Inequity of Nations’, Dec 11, 2010
2. ‘Giving Our Future a Fair Go’, Mar 31, 2010.
As the diagrams at the bottom of this article illustrate, the richest 20 percent of the world’s population receive 83 percent of its income, the top 8 percent control 79.3 percent of the world’s wealth and the gap between the rich and the poor is a particular worry in the USA.
Looking across the OECD, the 2008 Report ‘Growing Unequal: Income Distribution and Poverty in the OECD Countries’ comments that:
‘With a few exceptions, the disparity between the low- and high-paid has increased rapidly since the early 1990s. Usually, this was because the high-paid did particularly well, not only relative to low earners but also to middle-earners.’
And taken overall, ‘market income inequality’ which includes wages, rent receipts and financial receipts is widening much more quickly than ‘total net income’ inequality which includes income redistribution measures (see figure below).
And the Global Economic Crisis is making things worse. As Robert H. Frank has commented with respect to the USA:
‘The share of total income going to the top 1 percent of earners, which stood at 8.9 percent in 1976, rose to 23.5 percent by 2007, but during the same period, the average inflation-adjusted hourly wage declined by more than 7 percent.
‘During the immediate post-war decades, when income distribution was relatively stable, the toil burden for meeting the rent of that median-price home actually declined slightly, from 42.5 hours a month in 1950 to 41.5 in 1970.
‘But once inequality began rising sharply, the toil burden began rising in tandem. By 2000, the median worker had to work 67.4 hours a month to put his or her family into the median home.
And it is estimated that almost half of currently buoyant job creation taking place in the USA relates to lowly paid MacJobs in the retail, hospitality and home health care sectors that barely cover the cost of fundamentals like housing, utilities, food, health care, transportation and, in the case of working parents, child care.
INEXORABLE RISE OF THE GETS
So what’s going on?
The explanation for the continued rise in inequality – almost regardless of the level of public expenditure – appears to be the increasing dominance of the Gone-tomorrow Elite Transnationals (GETs) under globalization. The GETs class includes bankers, financiers and other undesirables but it also includes more popular and possibly more worthy professionals like international film makers, recording artists and successful sports stars.
As their name suggests, they are happy more or less anywhere that they can access good hotels, good restaurants and fine houses in scenic spots – and sometimes they don’t even have to catch a plane to shift some financial muscle abroad through speculation and comment.
Often they are wanderers who follow the breaks, and observers who don’t get involved.
In each country there is a smallish but very powerful enclave economy of GETs that thrive in the Tradable Sector - and that, in turn, either benefit from or ignore the grunts who work in the Non-Tradable Sectors of each economy like the public service, domestic industries and personal services.
In tandem with associated property and business interests, these Indigenous Elite and Expat GETs are getting steadily better off as a class in comparison to the locals who share their city spaces.
Now if this is starting to sound a bit like socialist rhetoric of the envy variety, I hasten to add that I have spent some of my life as a GET.
In particular, I spent 7 years living in Manila, Philippines working for the Asian Development Bank and living in the archetypical ‘gated communities’ of Forbes (Taglish: ‘Forbess’) Park and Dasmarinas Village in Makati. In fact, I remember being tempted by an invitation to join the Manila Polo Club at one point, though I pulled back eventually fearing it was too swanky.
So if it is a moral issue, I am not well qualified to arbitrate on it.
But as an economist, who is something of a pragmatist like Adam Smith himself, I do worry that the continued selfishness and fickleness of the GETs is in danger of toppling over our societies.
Particularly, where GETs have undue influence on national politics through the media and direct infiltration (as in the case of our New Zealand Prime Minister John Key who is a former Merrill Lynch head of Asian foreign currency dealing in Singapore and who sacked dozens later for his firm in London, where he was known as the ‘Smiling Assassin’).
It is hardly surprising then that consumption-based value added taxes like GST are the favoured tax mode and that attempts to introduce land taxes, capital gains taxes and wealth taxes are robustly rebuffed – even though as I have commented on a previous occasion it is extremely unlikely that, for example, Peter Jackson the film impresario actually pays his full income tax obligation on the $38 million or so per year that he earns.
Or that the GETs and their allies resent income redistribution measures and feel that many of the features of a Welfare State are irrelevant to them – and returning to our theme, that they seek to restrain public expenditure.
Of course, things are infinitely worse in countries like Ireland which have been brought to their knees by the Global Economic Crisis and its GET progenitors. Here Paul Krugman has drawn an analogy between the financial and fiscal loads being born by the ordinary Irish to the problems faced by the Irish peasantry in the 18th century.
But while Jonathan Swift could mock the Anglo-Irish Protestant Ascendancy landlords about ‘eating the Irish’ at least the aristocrats lived among their retainers. Nowadays, the new rulers of Irish destiny are more likely to be dining on pate de foie gras in Frankfurt – and the devil take Limerick.
So are there any answers?
Well perhaps it is time, for starters, to think about tax systems that recoup the full social costs of enclave communities and that have a truly international dimension – with New Zealand starting by collaborating with Australia on initiatives of this type.
While I am happy enough, for example, that Canadian international songstress Shania Twain and her husband Mutt were able to buy a 33-year lease on 61,000 acres of pristine South Island wilderness for $17.5m, I think that they should contribute a little more to New Zealand than a new public hiking trail. After all, they bought the place in part because they value the relative peace, stability and ‘gatedness’ of New Zealand.
And an international tax on financial transactions is worth considering, as is a universal surcharge on First and Business Class travel – perhaps linked to the achievement of environmental objectives.
After all, as H.G. Wells divined, in the absence of new thinking on appropriate policy solutions, the elegant and leisured Eloi / GETs of the future, who are nevertheless ‘hampered by their lack of curiosity or discipline’, may eventually face revolt and even the threat of cannibalism from the brutish, downtrodden Morlocks who inhabit the lower strata of the economy.
