Chapter 3 of ‘The Commercialisation of New Zealand’
Keywords: Distributional Economics;
Between 1984 and 1991 the public policy objective of equity, in any of its meanings of the 1970s, was increasingly abandoned. There was no single moment when this occurred, as happened with employment policy when the Labour government downgraded the priority of full employment in its 1987 Election Manifesto. Rather a series of incremental decisions were made, each of which reduced the priority of the equity objective until eventually it was possible to introduce policies almost obliviously of their impact on the deprived.
There was no coherent and cogent account of the nation’s concept equity in the 1970s. Here we look at three themes – the platitudes of such agencies as the New Zealand Planning Council (NZPC), the 1972 Royal Commission on Social Security (RCSS) and the theme of poverty, and the Muldoon practice of `pareto incrementalism’. These three Ps – platitude, poverty, and pareto – all played a role in the events after 1984.
There were various attempts in the decade prior to 1984 to construct some sort of consensus in social policy. It amounted to little more than waffle. For example the NZPC document Issues in Social Equity says
“For the purposes of this study, equity has been defined as social justice, or `getting a fair go’. Attitudes towards fairness depend on the individual point of view, but the sum of individual feelings influences the degree of confidence which society has in itself and its institutions. Thus, in the interests of enhancing the cohesion and well-being of society, governments should be aware of and monitor feelings about equity.
“It is necessary to make a distinction between equity and equality; they are associated but different. An over-emphasis on equality would ignore essential differences between people. Equity is therefore a more justifiable, and more feasible, goal for society.”
This is quoted at length, partly because there is an interesting echo later, but also to emphasize the primitive level of the analysis. The introduction by the NZPC chairman shrewdly describes the report as a `grievance list’, and remarks that there was a `widespread lack of consensus among New Zealanders on what represents fairness in our relations with one another.’ Indeed the report gives the impression that New Zealanders – or more precisely those involved in the project – had no coherent notion of equity, or its principles and issues, but had numerous complaints about the state of society, which could be summarized in the childish, `it isn’t fair’.
There was a second strand in the 1970s, which the Planning Council and government agencies in general tended to ignore, or at best to make passing reference to. It arose out of the deliberations of the 1972 Royal Commission on Social Security, which codified the existing social security system, offering a set of underlying principles, and provided a platform for future development. A notion the Royal Commission proposed was that:
“The aims of the system should be
(i) First to enable everyone to sustain life and health;
(ii) Second, to ensure, within limitations which may be imposed by physical or other disabilities, that everyone is able to enjoy a standard of living much like that of the rest of the community, and thus is able to feel a sense of participation in and belonging to the community.
(iii) Third, where income maintenance alone is insufficient (for example, for a physically disabled person), to improve by other means, as far as possible, the quality of life available.”
The original set of principles referred to social security system, but they became adopted in the wider context of the community as a whole. It is then not a big step to say that where the objectives of the system were not met the society was failing, and could be said to be inequitable.
The subsequent analysis evolved mainly around poverty, where it was argued that a household was `poor’ which had insufficient income and resources, so that they were unable to participate in and belong to their community. But there is a wider interpretation – someone may have sufficient income, but still not be able to adequately participate in their community: someone of homosexual inclination before the law reform; or a person with mobility limitations may not have adequate access to buildings important in their community’s life. Moreover the RCSS does not offer a complete account of equity, because it wrote little about the distribution of income above the poverty line, or the distributional principles behind the funding of support for the poor. Nevertheless while it is difficult to operationalize the notion of participation and belonging, this notion is not as platitudinous (or vague) as that the NZPC was pursuing.
We do not know to what extent the platitudes of the NZPC report, or some other equally vague concept of fairness, were important in Robert Muldoon’s thinking as minister of finance and prime minister. We do know that he was influenced by the poverty research in the family policy element of his income tax changes. Equity considerations affected his policy making in other ways.
When officials proposed a policy, Muldoon would often ask who would be made worse off by it. The officials would then be told to see whether anything could be done to prevent or ameliorate these deleterious effects. Implicit in this approach is a vision which sees the current system as fair (or equitable), and a change which makes anyone worse off is unfair or inequitable. This might be called this `pareto incrementalism’. Vilfredo Pareto was the Italian social scientist who is associated with the criteria that a change improves welfare if someone is better off, and nobody is worse off. Pareto incrementalism is the strategy that a policy initiative should not make anyone worse off.
It is nigh on impossible to run an economic policy on such a principle. It was one of the sources of sclerosis. However Muldoon’s high inflating economy had fiscal creep, where incomes move into higher tax brackets, and so average taxes tended to rise. The additional revenue this generated (relative to the rise in inflation) gave the means by which the pareto incrementalism could be pursued. Sometimes in desperation, Muldoon would actively damage the interests of a group, preferably one which was politically weak, not a supporter of his government, or which the majority of the public might think were justifiably made worse off. But generally he avoided such measures.
Was Muldoon inherently a pareto incrementalist? He certainly liked to give the impression that he was more decisive, and willing to make enemies. But for two of his three terms, he headed a National government elected with fewer votes than the Labour opposition, and with a narrow majority in parliament. Alienating potential supporters was something he could ill afford. Moreover for much of his term in office, the real economy was growing slowly and was difficult to manage. The Muldoon we see was a child of his times.
From 1984 to 1990
The July 1984 election introduced a new style of government, which approached the equity issues in quite different ways, which may still be summarized under the previous three headings.
In 1986 the Labour Government established the Royal Commission on Social Policy (RCSP), reporting in April 1988. (Chapter 8) The RCSP offered no codification of existing practice, no grand vision of what that code meant, and no foundation on which to build. It carried out widespread consultation. The 6000 plus submissions were summarized as `Voice, Choice, and Safe Prospect’.
Voice People want to name the world, to be heard and understood, to have someone who would listen, to have their say in matters which affected them directly, to have their say in policy …
Choice People wanted to be in a position to choose freely from amongst alternatives, to have alternatives available, to value diversity, not to have majority views imposed willy-nilly …
Safe Prospect … guardianship of the people resource; guardianship of the physical resource; guardianship of the nation.
Note how the voice and choice objectives in particular are written about what individuals want from society, not what sort of society they want. There is some distance between these submissions and the RCSS objective of `participate in and belong to a community’. Had the objective been abandoned in the sixteen years between the two commissions?
The authors say their method was to `let the people speak’, but did their report reflect accurately people’s concerns? By its actions and choices, such as the contents of the series of booklets it put out to stimulate discussion, the RCSP would tend to focus the public responses in particular ways. For instance, the coded responses to submissions do not include `equity’, nor do they include `poverty’ or `social deprivation’, nor any other expression which might include these notions (e.g. `fairness’). The lowest single reported term is `entitlements’ mentioned in 17 of the submissions. It seems most unlikely that less than 17 submissions mentioned poverty.
The contents of the RCSP’s own report also suggest a deliberate avoidance, In the 4004 pages just 2 address poverty. In over 1.5 million words, the term `poverty’ was used 157 times and `poor’ 342 times (including occasions when the use was not related to social deprivation). By contrast `Maori’ was used 6278 times, and `woman’ or `women’ were used 2313 times. What is especially extraordinary is that concerns about poverty and social deprivation had been central in the history of the development of social policy, the subject of enquiry. By turning its back on poverty, the RCSP cut off itself from any intellectual roots. Instead it continued the tradition of NZPC platitudes. Not surprisingly the RCSP had little influence on the subsequent debate (as over the 1990/1991 spending cuts). In contrast the RCSS is still quoted to this day.
The study of poverty was quieter in the 1980s than in the 1970s. In the earlier period there was a great flowering of research, but there were few new innovations after 1984. The technical reason for the failure of the new research developments was that they were more expensive and the public resources were not available for original and innovative research. Such work that was done was repeating the work of the 1970s and updating it.
There was a second important reason for the lack of focus on poverty. Despite the tendency to assume that deprivation and inequality are always increasing, the evidence is that for much of the 1980s it was not. Apparently the Labour government, perhaps through some primal instinct, was still looking after some of its own supporters. For instance the real benefit level was maintained through to March 1989 – perhaps even rising a little. It was cut in 1989 and 1990 (in a period when real market incomes were falling), but even then not markedly below the level it had been set at in 1975. Again, while the Labour Relations Act (1987) was meant to reform unions and industrial relations it was not meant to undermine the protections the workers had in the past. Meanwhile the more comprehensive family support benefit (introduced as the family care benefit in 1984) lifted the incomes of some poor families.
It is true that average real incomes were falling through much of Labour’s administration, and unemployment rising, which made distributional policy difficult (since government revenue was not as great as if production and employment had been rising). Overall there was a mild increase in poverty proportions over the 1980s. If in 1981/2 11.6 percent of the population were below the RCSS based Benefit Datum Line (BDL), by 1989/90 it was only 12.9 percent. This was not anywhere that numbers that pessimists expected, and while there was anecdote to demonstrate there were poor people, the numbers were not rising rapidly.
Pareto incrementalism, the rule that there should be no change other than one in which everybody was better off, made the Muldoon regime sclerotic. But consider removing all the interventions at once. Then everyone will be worse off from the loss of the few interventions that benefitted them, and better off from the removal of all the remainder. Suppose everybody (or almost everybody) is better off as a result, or that there is sufficient improvement in welfare so that those (or most of those) who are worse off can be compensated. The analysis can be further refined by arguing that the main beneficiaries of many of the interventions were not entitled to the gain, and so theirs could be abolished without an injustice. The example most frequently cited was holders of import licences who took a toll on every import for which a licence was used, although they did nothing other than possess the licence. The Labour government talked about the sweeping away such `privilege’.
Practically, it is not possible to do everything at once, but there evolved the `blitzkrieg’ approach, described in Chapter 5, where the new policies were imposed quickly – a far cry from Muldoon’s incrementalism. But how can we be sure that the conditions for the underlying overall improvement in public welfare apply?
Recall the economic theory which says that under certain assumptions an economy which has no interventions in the market will have a higher GDP than one in which there are interventions. (Chapter 2) More strictly, it demonstrates that under these assumptions, an unintervened market economy is pareto efficient (the situation where it is only possible to make one person better off by making another person worse off), while one where there is interventions is not. By removing all the interventions the resulting economy will be better off, in that those who are better off can compensate those who are worse off.
What was assumed then, was that removal of the interventions would generate economic growth, which would generate jobs (so the unemployed and redeployed would be better off), and additional fiscal revenue which could be used to give tax cuts to low income people and raise benefits. Unfortunately economic growth did not happen. While the rest of the world grew in the late 1980s, the New Zealand economy stagnated. (Chapter 8) Thus there was nothing to compensate those who unjustly suffered from the change. So the reforms pressed on with a slightly, and easier to understand, analysis. They were it, was said, to seek `efficiency’.
Now the term `efficiency’ is not a simple one in economics, involving a variety of notions not all of which are mutually compatible. The easiest to understand is production efficiency (sometimes called `technical efficiency’), which means that no resources are being wasted in the production process. A factory which had unutilized buildings or plant would be inefficient in that it can make the same output without having to use those resources. For an economy to be pareto efficient it has to be production efficient. Otherwise the under-utilised (and mis-utilised) resources could be deployed elsewhere, with the extra production making some people better off. On the other hand production efficiency may not mean necessarily pareto efficiency. Suppose a factory made only left-footed shoes, albeit efficiently. Switch it to half its time making right-footed shoes, and everyone with right feet would be better off.
However there is a third form of `efficiency’, which reduces to an increase in real GDP, or potential real GDP, irrespective of the distributional consequences. This notion of uncompensated efficiency comes from the economist Nicholas Kaldor, and relies on there being a potential pareto efficiency, that is those who are worse off from the greater GDP, could be compensated out of the gain. But it does not require the compensation to happen, as the following example illustrates. Suppose a tax reduction gave the richest man in the country an extra $1,000,001, while was funded by taking a $1 off each of a million poor, the remaining dollar coming from the savings in the tax department from having to collect less revenue. That would be an increase in real GDP by $1, and hence an increase in uncompensated efficiency, even though there was a deterioration in equity. Thus this focus on uncompensated efficiency suppresses equity considerations altogether. This focus increasingly underpinned policy, although the notion was rarely expounded, so that the public was confused in its mind with the two previous notions.
The trick is that once the mind is locked on to uncompensated efficiency, underpinned by a theory that a commercialist strategy generates the highest level of uncompensated efficiency, then any justification for intervention for reasons of equity may be ignored, since it was argued they would reduce uncompensated efficiency. The obscuration was furthered by shifting from judging policies by their `outcome’ (in distributional terms who were better and worse off) and instead arguing the case for `process’ – especially commercial processes after 1984. Thus more-market economic mechanisms were deemed right per se, irrespective of their outcomes – an advantageous position for the reformers since they did not have to look at the – often disastrous – consequences of their policies. As a result the Rogernomics debate became a curious non-dialogue with one side saying `we put the right policies in place’, and the other saying `look at the consequences’.
The 1988 Tax Reform
This is illustrated by the flat-tax proposal in the December 1987 package, and the subsequent tax reform. The advocates said low tax rates on rich people were good things, irrespective of the distributional consequences. In fact the flat-tax proposal – that there would be a uniform rate of income tax on all incomes – was abandoned in part because there were going to be large numbers of low income people who would be worse off. The subsequent tax reform, after the flat-tax proposal got dumped by Prime Minister Lange, reduced income tax levels substantially for those on high incomes – from 48 percent at the top to 33 percent. The result was a substantial increase in the incomes of those on high incomes. Typically those in the top tenth of income recipients were about 25 percent better off. Their good fortune was offset by the reductions in the share of the bottom four-fifths, as various tax concessions (proportionally more valuable to the poor), were withdrawn.
However the withdrawn tax concessions were insufficient to fund all the reductions. The fiscal trick had been that the concessions had been withdrawn over the whole of the 1988/9 year, but the income tax cuts applied for only half of it. This left a long term fiscal deficit, only partly covered by the GST hike from 10 to 12.5 percent in the subsequent year, and the small real benefit cuts from changing from twice yearly to once yearly indexation. Other short term measures such as the sale of public assets hid the deficit temporarily. Labour left office in 1990 with an underlying structural budget deficit.
The 1990 and 1991 package
After the election the new National Government was confronted by a budget deficit (which they exaggerated by adding in any new policies promised by Labour). Given that it wanted to address this deficit the government had two options: to revoke some of the tax cuts or to cut government spending. National chose the second.
Almost all social security benefits for adults were cut, usually to well below the RCSS poverty line. Entitlement conditions were also cut. Not unexpectedly, the benefit cuts caused widespread distress among those who depended upon them, a distress which was compounded by the sharp rise in unemployment which occurred at the time. The proportion below the poverty line rose from 12.9 percent in 1989/90 to 16.3 percent in 1992/93, an increase of over a quarter. The distress was so great that there was a concerted outcry by from the general public, led by the churches and community welfare organizations, and backed by survey and anecdotal evidence.
Such was the public outcry, and the visible evidence of hardship, that there was a perceptible change in government policies. In line with public surveys, the government announced it would pay more attention to increased funding (especially of education and health) rather than cutting taxes. Surreptitiously it eased the stringent tests on entitlements, adding special needs grants. The National Government was not able to resurrect the central role of `belonging to and participating in’, and instead introduced the objective of `social cohesion’. Recall the Issues in Social Equity’s `in the interests of enhancing the cohesion and well-being of society, governments should be aware of and monitor feelings about equity’. However, whatever its goal, the government appeared to have little idea as to how to implement it.
Thus there has been a substantial downgrading, if not abandoning, of equity considerations in public policy, nicely illustrated in the appendix to chapter 5, where Treasury advises on the labour market, and does not discuss its distributional and social welfare roles, nor any adverse effects on the poor by the measures it was advocating. The consequences of its policies were deemed irrelevant.
1. Koopman-Boyden (1983:3).
2. RCSS (1972:65), original’s italics.
3. Easton, Pragmatism and Progress (1980)
4. RCSP (1988:II:453-454). Omitted from the quotation are the Maori terms for the concepts.
5. RCSP (1988I:214-5).
6. Easton “Distribution” (1996).
7. Easton, `Poverty in New Zealand: 1981-1993′, (1995).
8. Measured by equivalent disposable income.
9. Easton (1995)