Tuesday 30 August 2016

Broad-based growth?

If everyone is better off, the sum total has to increase. But the total also grows if a few are much better off. Increasingly, it's the latter kind of economic growth New Zealand has experienced.

Further, broad economic measures by definition aggregate individual experiences. But can mask significant underlying differences across regions, ethnicities or family background.

Our economy has grown significantly over the last three decades, but some measures of income and wealth distribution show compelling evidence that trickle down has not worked.

Income inequality, as published by the Ministry of Social Development, has not improved since the early 1990s after a significant worsening in the 1980s.
The reader might be forgiven for drawing the inference that incomes at the bottom haven't risen much since the early 1990s.

Here's Brian Perry's most recent statistics. I highlighted the relevant row.

Over the 20 years from 1994 to 2014, real household income for the bottom ten percent increased 44%.* For the 30th through 80th percentiles, it increased around 53%. And it increased 64% at the top. Incomes went up across the board.

If we take the period from 1982 through to 2014, incomes at the bottom rose by less; they dropped during the the late 1980s. But we still have real income growth ranging from 15% at the bottom to 64% at the top. Real income growth for the equivalised household at the fiftieth percentile is 28%.

After housing costs is far less pretty a picture, with real decline in the bottom decile. There are real problems caused by excessively expensive housing, which need to be addressed through appropriate changes to zoning and to council incentives to let more housing be built.

If we're looking at household incomes though:

  • There was decline almost across the board from the late 80s through early 90s. Pain was concentrated in the bottom four deciles, which saw substantial real declines in equivalised household income. There were tiny gains at the very top. None of this is a problem of "growth benefiting the rich", rather, it's a story of the costs of substantial economic restructuring.
  • Income growth since 1994 has been stronger and broadly shared. Incomes at the bottom are up 44% on where they were in 1994; incomes at the top are up 64% on where they were in 1994.  
It's hard to see evidence in there of New Zealand's having increasingly experienced growth that only benefits the top. If we look at the most recent years there available, 2011 through 2014, incomes at the bottom are up 8% while incomes were flat for the 95th percentile. 

I agree with Shamubeel that GDP is hardly a general measure of good stuff. We noted a few of the problems with GDP in our Case for Economic Growth two years ago. But we also noted that rather a lot of good stuff does correlate with GDP.

It's good to have lots of different measures of good stuff. But it's better to properly price in things like negative environmental externalities than to throw out GDP and give up on economic growth. New Zealand has really rather poor overall economic growth figures. Stronger growth from solving some of the barriers to productivity growth lets us afford all kinds of good things, including better environmental amenities.

* Here and elsewhere, though, always be sceptical of the numbers for earnings in the bottom decile.

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