The inequality that matters now: mobility

Is the budget fair? The National party says emphatically it is. The Labour party says emphatically it is not. How can they both be so sure? Because inequality is not what inequality was.

Individuals on higher incomes get much more each from Bill English’s tax cuts than individuals on lower incomes. That’s not fair, says Labour.

But two-thirds of the total cost of the cuts goes to the 73 per cent who will now pay no more than 17.5 per cent on their top dollar. That’s fair, says National: their group gets most of the loot. Moreover, the well-off will be less able to punch holes in the system which the less-well-off, with no access to tax dodges, have had to plug.

National more compellingly argues that cutting tax on incomes is economically efficient — that is, the economy will go faster. That, it says, is the case even if the cuts are offset (or, as in this budget, nearly offset) by a rise in tax on consumption.

The better off will save some of their income tax cuts, some of that will go into productive investment which will generate jobs and, if the right investments are made, higher real incomes — including for the less-well-off and the very-much-less-well-off.

So the 73 per cent does better over time than from the immediate trade-off. That’s the theory and there is evidence for it. Tax reforms, like much policy, cannot be adequately assessed only on the initial, static, effect. There is a dynamic effect.

Also, people move in and out of the 73 per cent. What happens on day one may be reversed by day 5000. Individuals don’t stand still. Social Development Minister Paula Bennett is a prime example: a DPB made good. Many Labour MPs, including Phil Goff, are in a much higher income bracket than their parents. John Key is, too.

National’s approach assumes, in effect, that rising real incomes are a more relevant measure of fairness than inequality. It calculates that people on lower incomes are less likely to be bothered that some other people are much better off if their own circumstances improve over time or they see opportunities for their children to get better off.

In fact, English on Thursday talked of his budget giving “a better sense of opportunity” for those on low incomes.

Turn that around: English was in effect saying that it is inequality of opportunity, not inequality of income, that really matters.

Here English runs into Labour coming the other way round the circle.

A core point of the first Labour government’s heavy emphasis on education as it built social security, the forerunner of the welfare state, was that access to free education as high as a person could go expanded opportunity for those from less-well-off households.

It did. It created the “educational meritocracy” which has occupied Labour’s commanding heights since the 1960s.

But, Labour’s Annette King said, with what a bystander might have mistaken for embarrassment, at a Public Health Association/Child Poverty Action Group post-budget breakfast, Labour in government in the 2000s talked a lot less about opportunity than about fairness.

The simple point is that for a significant, and maybe rising, number of people and their children formal equality of opportunity — free schools and subsidised doctors and housing and so on — is not real equality of opportunity because for various reasons not of their own making they cannot seize those formal opportunities.

Add to these people another significant number whose standard of living has not lifted much over the past quarter-century and whose children may be trapped in such a future.

If they can’t or don’t acquire English’s “sense of opportunity”, he will get a suboptimal and therefore disappointing economic lift from his tax changes.

A picture emerges: the real economic point of “fairness” is not inequality at the top; it is inequality at the bottom.

At the core of that inequality at the bottom is socioeconomic mobility — the scope (or not) for people to move up the socioeconomic scale or have confidence their children will.

That was in part the secret of the United States’ success last century: there were large income inequalities but most believed, with cause, that they could get ahead. That enhanced economic efficiency. Mobility is high in booming China right now, as it was when the Asian “tigers” were getting rich.

That the United States is now labouring under a large debt burden, is in part due to households’ attempts to offset stagnant real incomes over the past quarter-century. Something similar has happened here. This society has become far more unequal and may be embedding that inequality — reducing mobility.

That is not economically efficient. English’s tax changes won’t do much for mobility. Nor will his whittling away at early childhood education quality. Nor will Labour’s static argument about fairness. Fair’s not fair, whichever party is talking.

In the interests of economic efficiency, both parties could start rethinking what’s really fair and what’s not.