◊It’s been fun watching Chris Carter implode, but it seems the show is coming to an end. His latest bout of self-immolation appears to be his last. Still, at least we will be able to criticise the troughing of gay politicians without them whining some nonsense about homophobia.

◊The latest “Frenzy du jour” at the Standard and Red Alert is the increasing wage gap between Australia and New Zealand. Interestingly, it illustrates the fundamental difference in the way Labour and National view wages. Labour clearly thinks that the wage gap can be closed by moving money from wealthy people to poorer people, thereby raising the average wage. This is the way Labour achieved the decrease in the wage gap between 2005 and 2008 – by enriching the poor at the expense of the rich. National, on the other hand, sees reducing the wage gap in terms of increasing the total wealth of the country (making the pie bigger, rather than cutting it up differently).

Although Key was being disingenuous today, it was not because he was using the 2005 wage gap figure – which is simply the 2008 figure without election bribes – it was because he failed to point out that the 2010 figure still contained the same excessive spending that the 2008 figure did. Of course, the reason why the wage gap between New Zealand and Australia has widened is not simply because “We went into recession, and Australia did not.” as Red Alert correctly, but misleadingly, claims. It is because New Zealand slipped into recession a full six months before the rest of the world, thanks to the spending policies of the previous government, that the current one largely had to promise to maintain.

What we should really be talking about is the wealth gap between our two countries. Given that the current government refuses to dig up our mineral wealth or drop taxes and given that it insists on an ETS and to continue Labour’s excessive spending, it seems that we are destined to remain our big brother’s poorer cousin…

Related posts:

1. Busy Doing Nothing
2. Big Spenders
3. Unemployment

“For you will have the poor with you always”
Jesus Christ  (Matt 26:11, NKJV)

The MacDoctor has already blogged on the book The Spirit Level, the book that contends that inequality is the cause of all social evils. As Jesus Himself points out, the poor are not going away any time soon, which means this could be a bit of a problem, if it were true. Fortunately it is not.

In a National Bureau of Economic Research working paper, Michael Haines ably demonstrates that relative inequality has remained virtually unchanged over the whole of the 20th Century in the US, and yet infant mortality has dropped markedly. Of course, this is in agreement with most of the epidemiological evidence on infant mortality, that is is heavily tied to standards of living and nutritional status. A simple comparison of low-income stats with those in upper-income brackets will always show that poorer people do worse than the wealthy.

However, it is clear from Haines’ work that inequality of income is not a good marker for a nation’s overall well-being (the main contention in The Spirit Level).  At most, inequality of income has only a slight influence on health and well-being indices, far less than economic growth and technological progress. Because of this disparity of influence, it is by no means certain that this small influence is sustainable. If reducing inequality of income also causes slow-down of economic growth, it may well be that the reduction in economic growth may eventually swallow the benefits of reduced inequality.

In the previous post I cite above, I have argued that inequality of income is merely the inevitable result of an adequate rewards system for success. If success is not rewarded, it follows that fewer will strive for it. It therefore seems logical to me that a social system that actively seeks to reduce inequality by transferring the rewards of the successful to the unsuccessful, must eventually cease to be as productive both in terms of wealth and in terms of innovation as a system that does not. Therefore, in the long term, democratic societies that are unequal will fare better than democratic societies that are not, regardless of their level of technological expertise. A truly equal society (in terms of income) would have zero reason to strive and would rapidly stagnate.

Humans do not survive very well as ant colonies.

Hat Tip: Freakonomics

Related posts:

1. Equal Blights
2. Unequal Data
3. Illness System

Following on from my previous post on the futility of government intervention in the case of obesity, the Herald obligingly provides this piece of on-topic spam:

Support high for GST trim

Political momentum for removing GST from healthy food is increasing with both the Maori and Labour parties working on the idea.

But even in the event the two parties were to put aside their differences and work together on the policy they would not have the numbers to pass the required legislation since the National Party and United Future are opposed to it.

So actually support is not “high” for the removal of GST from healthy foods. It lacks the votes needed to get it through parliament. A more correct headline would be “support still low for GST trim” but that would probably be not nearly as exciting. In fact the positions of the various parties remain unchanged. The Greens and the Maori party are supportive. Act, National and United Future are not. Labour, in true Goff tradition, remains equivocal. Apparently they are “close to adopting” a no GST on fresh fruit and vegetables stance; a move likely to be popular with their baseline constituency but not particularly welcome by retailers.

A limited exemption on fresh fruit and vegetables at least has the merit of being properly targeted and relatively uncomplicated. Of course, the problem with such an exemption is that there will be immediate lobbying from the frozen vegetable producers who will point out that their product is equally healthy. Should they win an exemption, you can just see the tinned veggie and fruit producers jumping up and down. The pre-prepared meal manufacturers will be next. Or possibly the fisheries. And each compromise will add complexity to the system and lead to more people lobbying at the margins of the regulation (fruit juicers, fruit bars and breakfast cereals with fruit, seafoods, lean meat, eggs etc ad nauseam)

Even assuming that the exemption remains on fresh fruit and vegetables alone, the 11% sudden drop in price will produce distortion in the markets. Frozen vegetable suppliers may drop prices to compete, gouging farmers from both sides (frozen and supermarkets). Farmers not making money in vegetables will be rapidly converting to dairy, sheep or cannabis. Expect sudden shortages of fresh fruit and vegetables as demand rapidly exceeds supply. Expect the price of fresh fruit and vegetables to go UP to compensate for the shortages. Expect the equilibrium finally reached to wipe out most of the price drop of GST.

Don’t you just love markets?

MacDoctor predicts that a GST exemption will:

make no difference in the long run to obesity or our national eating habits

just lead to more and more exemptions and greater and greater complexity in the GST system

Have no political pay-off for any party beyond a very minor one in the 2011 election. GST will become a major political headache

Note to that nice Mr. Key: This is one concession you definitely do NOT want to give to your Maori friends.

Related posts:

1. Spam Journalism #11
2. Spam Journalism #29
3. Spam Journalism #22

For instance, one of the major drivers of social upheaval is large-scale immigration. Winston Peters uses this fact to good effect, while ignoring all the benefits of immigration. One of those benefits is that immigrants are often prepared to start their lives in a new country in a very low-paid career. The very availability of low-wage immigrant workers holds down low wages while increasing productivity, thus increasing the apparent income gap. Large income gap; social upheaval. Must be income inequality that is causing this, right?

Another hidden driver is overall affluence. In countries such as America and Singapore, the large wage gap is driven by the fact that the wealthy are, in fact, mega-wealthy, increasing the income gap. However, a cursory glance at some of the graphs in The Spirit Level would show you that Singapore does extremely well in social metrics but the US does very badly. This should immediately suggest that there is much more to the story than income disparities.

The most obvious thing is the heterogenous nature of the nations that do badly in social metrics and the homogenous nature of those that do well. Japan (low income gap) and Singapore (high income gap) have relatively similar societies (yes, I know I have offended both countries by saying that!), but their social metrics are quite similar. Instead of income gaps, it seems much more likely that a multicultural society experiences considerably more strain on it than a monocultural one. This would seem like a self-evident and very obvious conclusion. It does not mean that multiculturalism is necessarily bad, but it does mean that the benefits of multiculturalism has a downside. And the largest downside occurs when the income gap accentuates the cultural divide. Adding racial and cultural differences to large gaps in income is a dangerous mix.

Social upheaval itself is a driver for income disparities. Large scale immigration has already been mentioned, but welfarism actually drives income disparity by maintaining a subset of the population dependent on state handouts. No government can take sufficient money away from the “wealthy” (more likely the well-off) in order to elevate the poor in this way. Such a government would normally be voted out at the next election. Lindsay Mitchell points out that counting welfare as “income” distorts the wage gap even further as this money is not earned in employment.

Some homogenous countries such as Denmark may tolerate very high tax rates which contributes to their low level of income inequality, but this is a function of the cohesive nature of their society, rather than a cause of it. Tapu Misa is looking at the problem from the wrong angle. Create a cohesive society and you may reduce the income gap. Attempting to reduce the gap in a non-cohesive society will simply cause massive resentment.

The Spirit Level attempts to argue that what is important is not growth but equality. This is a conclusion that can only be reached by a person looking at First World data. Clearly the authors are not talking about the uniform poverty of the world’s poorest nations (though they might be tempted to argue that there is massive inequality here – but this is not measurable on standard metrics such as GINI).  Unfortunately their conclusions fall down in a number of areas, even on First World data alone.

If you look at the growth of nations over time, you will clearly see that growth improves social metrics in nearly all areas. In those areas, such as mental health, where growth appears to make the metric worse, this is usually a function of new interventions available, rather than a direct effect (in the case of mental health, it is because we are better able to diagnose and treat, rather than an actual increase in disease). In addition, a simple examination of standards of living over time will show that, regardless of the size of the income gap, the poor are far better off today than they were 30 years ago. For a clincher argument, simply compare the standard of living available to a person in New Zealand on the average New Zealand wage to the standard of living available to an person in the US on the American average wage. Prosperity has its perks.

To advocate equality over growth is to say that the pie is static and must be divided equally. This is to ignore everything that we have learned over the past century or so about how to make the pie bigger. It is to call Adam Smith a liar when his theory (most of it anyway) has been demonstrated empirically on thousands of occasions. It also flies in the face of sensible thought.

I am a doctor. I studied hard for seven years, forgoing income and racking up debt, to become one. I then had to gain experience, working 70-80 hour weeks for many years before I was ready to start my own practice. To suggest that I do not deserve my high income is, frankly, insulting. To suggest that my high income is somehow an exploitation of the poor and is damaging to the fabric of society is purest drivel. Income disparity is how we mark achievement and  scarcity value. Without it we have nothing to strive for and no reason to excel.

Mediocrity will be our epitaph.

Related posts:

1. Equals Zero
2. Unequal Data
3. Equal Rates

OK rant over. GST may annoy me, but it doesn’t deserve the daft nonsense that Shrill Phil (Goff) is talking about it. Labour is trying to make out that the GST rise will destroy all the tax benefits in the current budget for low-income people. This is simply not true. It is very possible that the large increase in tobacco tax will destroy these benefit and it is likely that the ETS will eventually make us all poorer, but a small rise in GST is unlikely to make more that a momentary light impact.This is Labour’s own experience when they raised GST last time.

Of course, Phil the Thrill can’t complain too loudly about the effects of Tobacco tax and the ETS. No one would believe for a moment that Labour would not have imposed those two bits of legislation. In fact, we all know that the financial impact of Labour’s version of the ETS would have been far worse. It is therefore unsurprising that Phil continues to harp on about GST, despite the fact that he won’t commit to reducing it in 2011, in the unlikely event that he became prime minister. He really does not have much alternative than to rabbit on about GST and inflation, despite the simple fact that nobody except die-hard Labour supporters are buying it. Unlike, Danyl at Dim-Post who wishes to make fertiliser out of Goff’s advisors, I don’t think they have a great deal of other options (but great comment anyway, Danyl!).

So let’s briefly look at Goff’s arguments:

1. GST will increase inflation – Paul Walker at Anti-Dismal correctly points out that GST is an instantaneous price rise and therefore not part of inflation. Admittedly, this point is a bit meaningless to non-economists as it still means that you will be paying more for goods.
2. Inflation will rise by an extra 2.2% – It is by no means certain that a 2.5% rise in GST (which is a 2.2% rise in overall prices) will actually cause a 2.2% increase. Some retailers will almost certainly absorb the increase, particularly those in higher-value transactions.  I have heard that treasury is proposing a 2.02% increase, but it may well turn out to be less than that.
3. Tax Cuts will be eaten by 5.9% inflation – This is an absurd argument. 2.7% of that inflation is inflation that is already going to happen, regardless of GST. You cannot add that to the effects of your tax cuts, because it would have happened anyway and is compensated for by normal wage increases. Therefore, it is only the increase cause by GST alone that should be offset by tax cuts. Labour’s own figures demonstrate this perfectly, when they add in wage increases – nobody is worse off (albeit not as well-off in the first year due to the one-off increase in GST). Thereafter, everyone is exactly as well-off as National are saying (from 2012 onwards – unless the Mayans drown us…)
4. The guys at the top are still getting a windfall – This will be the “guys at the top” who create jobs in the economy (you know, Phil, real jobs that produce things and don’t require state subsidies). And this is somehow a bad thing? Most small businessmen I know will be using this “windfall” to pay down debt and strengthen their currently rickety financial positions. Consequently you should see fewer small businesses going under (and jobs preserved). As the economy recovers fully, the smaller tax burden will also allow faster expansion. Surely even a socialist economist should know this?

I find it very hard to give much credence to Goff’s assertions that this budget will be hard on the poor when they will be manifestly better off than if the budget had not happened. Of course, ditching the ridiculous ETS would make everybody better off still, but I’m not holding my breath…

Related posts:

1. Shrill Phil
2. The Thrill of Phil
3. The Invisible Man Speaks