Thursday, 11 December 2014

Inequality? It’s education, not redistribution, stupid [updated]

So the OECD working paper1 trumpeted in the last few days about “inequality” in New Zealand – reported as saying "income inequality stunts NZ growth" – turns out to say something subtly different, says NBR’s Nevil Gibson.

The four-page summary report … has been seized on by the media the opposition as a “failure of trickle down economics” and a case for higher taxes on the rich and more redistribution to the poor.
    In fact, this is not the case. The main reason is the dated nature of statistical material, while the policy suggestions carry a heavy caveat that “Redistribution policies that are poorly targeted and do not focus on the most effective tools can lead to a waste of resources and generate inefficiencies.”

The “dated nature” of the evidence for growing inequality presents almost a case of two halves.

The figures that show New Zealand’s … increased income inequality are based on the period 1990-2010… [Since then] New Zealand disposable incomes among the top 10% fell 2.2% (OECD average 0.7%) while those in the bottom 10% fell the least, 0.5%.

So the report says “the gap” was rising before the Global Banking Crisis, and is now not rising. And drilling down produces the news that the biggest gap was not between poor and very rich, but between poor and “lower middle class.”  In other words, from 1990 to  2010, the formerly poor were becoming less poor as a “class,” while the very poor weren’t.

Not so great for those remaining (or becoming) very poor, but not so bad for those “lower middle class” who improved their lot – and very little really about which to carp, and maybe something even to celebrate.

So what about how this alleged inequality causing an alleged ten percent loss of growth? What’s the working paper’s mechanism for that?

“A lack of investment in education by the poor is the main factor behind inequality hurting growth,” the report says. [Specifically]: “…by hindering human capital accumulation income inequality undermines education opportunities for disadvantaged individuals, lowering social mobility and hampering skills development.”

And by so lowering them, lowering productivity thereby.

So the working paper is not saying inequality per se causes lower growth. It is saying that if more of “the poor” were better educated then more of “the poor” would become less poor, and we’d all be better off for the increased productivity.

Which is pretty much a truism that anyone could state without any specific research whatsoever – which describes how much research went into this specific point, which most commentators have chosen to ignore.

Perhaps because so many are so little concerned when reports emerge of the functionally illiterate and innumerate pouring forth from our state’s factory schools.2

Still, take this with some of the working paper’s other specific comments – “not all redistributive measures are equally good for growth,” for example – and the working paper offers less support for Green and Labour-style redistribution, about which any number of commentators have already held forth, and much more for ACT’s policy of school choice – about which, if you listen carefully, you can just about hear crickets.

Perhaps because for most of the commentariat, when weighed in the balance redistribution and state control of education comes out way, way, way ahead of their hopes and dreams for the poor.


UPDATE 1: As always, he’s not totally on the right path (you and I have no involuntary “responsibility” to others other than leaving them alone – and I’m not sure about the “we”), but Milton Friedman makes the point very entertainingly that the report barely makes at all – or that it makes only indirectly:

"We have constructed a governmental welfare machine which has been a machine for producing poor people. We have induced people to come under control of welfare. I'm not blaming the people; don't misunderstand me. It's our fault for constructing so perverse and so ill-shaped a monster as the whole set of welfare programmes..."

[Hat tip Libertarian Girl]

1. Just so you know, “OECD Working Papers should not be reported as representing the official views of the OECD,” says the OECD. Got that?
2. "…the literacy level of about 800,000 workers [said a report only two elections ago] is such that they might struggle to transfer printed information to an order form - a deficiency cited as a factor stifling the country's economic growth."


  1. Love that cartoon.

    I also quoted some of the paper that wasn't reported:

    (I made the silly assumption that a report published by the OECD represented their "official" views.)

  2. @Lindsay: Indeed: the commentariat read what they wanted to read, and missed the calls for education and welfare reform. Which, to be fair, the report made very poorly.

  3. The analysis of the OECD published overnight depends crucially upon how greater inequality reduces the ability of the lower income families to invest in human capital.

    The OECD theory of inequality and lower growth is there is a financing constraint because of inequality that reduces economic growth because of less human capital accumulation by lower income families.

    This is interesting because in 2002, with Pedro Carneiro, James Heckman showed that lack of credit is not a major constraint on the ability of young Americans to attend college.

    Higher education has been free for the low income families for several generations. Student loans are readily available.

    It is hard to believe that such a readily solvable problem is a major source of inequality and lower growth.

    They found that credit constraints prevent, at most, 4% of the U.S. population from attending. Credit constraints is weakening as a rationale for a lack of an accumulation of human capital, and can be easily solved.


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