Our wero - where BAU comes unstuck
The case for economic transformation - part II
While our world has always been changing, the rapidity of that change is accelerating. And so business-as-usual (BAU) is no longer fit for purpose.
New Zealand, like the globe, sits on several burning platforms. Depending on one’s perspectives, there are many pressing issues that threaten our way of life and our traditional models of analysis.
Part II of my initial thoughts informing a project on transformation - written in late-2019, but with typos corrected and narrative tidied - is published below. Part I is located here, while Parts III and IV (as signalled in Part I) will follow in due course.
Burning platforms that are inescapable
Some will prefer to ignore these issues, but at the very least most will admit they have the potential to take us well outside our comfort zones. Some have been around for a while (for example: climate change; demographic upheaval), while others are relatively new (for example: gig economy; crypto currency). While our world has always been changing, the rapidity of that change is accelerating. Combined with the multiplicity of issues, the pace and breadth of change may seem overwhelming to some.
However, the intensity of the flames do vary. Further, some (if not many) believe that New Zealand can escape the most damaging flames due to our remoteness, well-respected government and community institutions, and relatively high levels of social cohesion. These advantages do mean that New Zealand is well-placed (relative to other parts of the globe) to tackle these challenges and transform our models consistent with a more sustainable economy built on inclusive communities. Nevertheless, the level of global integration does reinforce the urgency of these challenges.
From an economic perspective, the pressing challenges facing Aotearoa can be grouped as:
inequality of opportunity that risks increasingly disconnected and disenfranchised communities
a fragile environment depleted through activity focused on extraction and exploitation of natural resources
a market model of jobs and incomes that is unable to sustain household, family, and whānau.
2024 postscript: I was tempted to update the data presented below, but that risks blurring the message, as some (many) remain under the impression that COVID-19 was responsible for all our problems. Consequently, I decided to leave alone; and reinforce that these challenges were with us well before the pandemic.
Disconnected and disenfranchised
The distribution of household income across New Zealand has remained relatively stable since the 1990s. However, this followed a significant reduction in the incomes of those reliant on social security benefits. The disparity between those reliant on benefit income and those employed has progressively widened as the rates of payments for main benefits were adjusted according to price inflation, as opposed to wage rate changes. The 2019 report of the Welfare Expert Advisory Group Whakamana Tāngata: Restoring Dignity to Social Security in New Zealand assessed that an increase of the order of $100 per week in main benefits would be required to bring incomes to a level that would be “adequate to participate in community”.
However, a range of Working for Families tax credits has assisted those in employment to maintain income levels. As a result, the distribution of income has remained relatively stable over the past three decades.
Using latest available (2017) data, the distribution of household income sees 50 percent of New Zealand’s households receiving only 20 percent of the nation’s total household income (as illustrated above)1. Conversely, the other 50 percent of households together receive 80 percent of the nation’s household income. Whether this distribution of income is ‘equal’ for some or ‘too unequal’ for others is a judgement that each can make based on their value set.
The impact of this level of embedded distribution, however, is reflected in the distribution of financial wealth across the households of Aotearoa. Financial wealth is significant in that it enables a level of resilience to uncertain events, as well as connections to community and economy – whether it be through the ability
to engage in voluntary work
to establish businesses
to facilitate education and training opportunities for younger members of the household/family
to save for ‘the rainy day’ and for retirement.
Figures for 2018 (as illustrated above) indicate 50 percent of households possess approximately 10 percent of the nation’s total household financial wealth2. Conversely, the other 50 percent of households possess close to 90 percent.
Arguably, of most concern is the first 20-to-25 percent of households that are effectively ‘under water’ on this chart3. With less than zero financial wealth these households will be living in rental properties, have no opportunity to enter into business, will have difficulty funding future training or education for their younger generation, may well be in significant debt to high-cost lenders (commonly known as loan sharks), and for which savings will be a dream. This applies, more or less, to more than one in five households across New Zealand.
This impacts of this situation, which are embedded in future generations, is exacerbated when looking at details by particular groups in the community. For example, the median net wealth for all individuals aged 15 years and over in 2018 was $92,000 (as illustrated above). However, for Māori this figure was $29,000 and even lower for Pasifika; while it was 138,000 for those identifying as of European ethnicity. Admittedly, some of this discrepancy is explained by the younger-age structure of the Māori and Pasifika populations, as all those aged under 35 had wealth below the nation-wide average $92,000. Nevertheless, this disparity is far wider than can be explained by the different age composition of the populations.
Noting that net wealth is clearly linked to higher educational qualifications (as illustrated above), education and training opportunities today are clearly critical to future financial security. Interestingly, both trades and academic training (Levels 4, 5-6, 8, and 9-10) record mean wealth well above the overall average. Also, noticeably, individuals with Level 7 quals (i.e. university bachelor degree level) record a mean net wealth similar to the overall average. However, there is a clear observation that high school qualifications alone (Level 1-3) leaves one trailing.
The disparity in education and training opportunity and achievement across different population groups is well recorded.
Noting the demographic changes ahead (in particular, changes in the age and ethnicity composition), the relationship between income for various population groups and the ability to accumulate a degree of financial security to access business, and education and training opportunities for future generations will be even more pressing.
Extracted and exploited environment
Despite the climate change challenge having been with us for three (if not more) decades now, it has become even more pressing given an increasing number of extreme climate events around the globe. However, international agreements remain marginal, with numerous years for targets to be reached and sectors/countries agreeing a range of opt-out clauses to minimise the effect on them.
For New Zealand, debate appears to focus on farming practices especially given the significant growth in dairy cattle numbers since the turn of the millennium. This goes beyond concerns about emissions to include nutrient run-offs, water use, quality of waterways, and land management practices. There are also though, a large level of emissions from the transport sector – with a significant proportion occurring directly from households and their use of private motor vehicles.
Unfortunately, and unhelpfully, this issue has been viewed as an urban versus rural argument – with many claiming that the burden of adjustment is falling disproportionately on them and not on others. The most relevant perspective is for all to recognise that the required adjustments to behaviour, including production methods and consumption tastes (and consequential lifestyles) will be large (and potentially costly) for all. Further, the window of opportunity to make such adjustments pro-actively in a measured and informed manner is fast closing. Thereafter, adjustments will undoubtedly be forced upon us.
Reluctance to address the economic transformation required – similar to the long-sought-after shift to value over volume – is a textbook example of a short-term versus long-term conundrum. Debate over whether the long-germ gains are greater the short-term losses have tended to take a back seat given the distant horizon when such gains were expected to occur. This reflects the inherent short-term bias in market mechanisms, as well as in policy decision frameworks such as benefit-cost models that discount4 future benefits.
At the same time, there is the standard textbook issue of how to handle externalities. That is, how to capture the costs of production and/or consumption that are not incurred directly by those undertaking the production and/or consumption. The use of price signals via the Emission Trading Scheme has been undermined by a ceiling on the price for carbon emissions, as well as the ongoing exclusion of agriculture from the scheme.
The impact of increasingly prevalent extreme climate events increases the costs of rectifying damage, as well as imposing higher costs to replace infrastructure with that that is more resilient. In addition, for several New Zealand communities the prospect of pre-emptive (or forced) retreat from coastal properties opens further questions as to who bears the burden of this dislocation.
Increasingly precarious jobs and incomes
As noted earlier, the disparity between employed income and those reliant on the social security safety net has widened in recent years. Additionally, the increasing prevalence of casual and contract employment arrangements have not only compromised working conditions, they have considerably reduced the certainty and security of individuals expected income.
In addition to the growing insecurity of income, the levels of income have become increasingly inadequate to enable access to the home ownership ladder. As illustrated, the median house price was around 3-to-4 times the annual median household income during the 1990s. This ratio has risen to now (2017-18) be over 6. Participation in the home ownership ladder plays a critical role in access to economic opportunities in New Zealand. Being ‘on’ the home ownership ladder enables and/or opens business opportunities, as well as more stable belonging and sense of community inclusion, for individuals, family, and whānau.
In such a context, the presence of the one’s own safety net (i.e. savings) alongside the community’s social security safety net becomes critically important. For those that have had little opportunity to build their own safety net (for example, the young and/or those who have inherited little), the community’s social security net is the lonely backstop.
However, the stigma associated with being a beneficiary is debilitating for many, which is reinforced by restrictive conditions, barriers, obstacles and delays to receiving assistance. This can work to undermine any sense of respect an individual may have and, rather, fosters exclusion from activities and community.
The ready availability of a social security safety net is likely to become more prominent as technological changes and robotics are being introduced across more sectors and activities. The need for workers and businesses to transition to (or obtain) new skills and be resilient and flexible in the face of rapid changes will only grow.
An increasing number of workers are vulnerable to changes over which they have little control. Insufficient financial savings along with insecure employment does little to contribute to individual, family, or whānau wellbeing or to connections to and engagement with community.
If economists are genuine about the importance of cohesive communities and social capital to a well-functioning economy delivering improved productivity and profits alongside wellbeing outcomes, then the vulnerable and least resilient should not be left to bear a disproportionate burden of our wero.
Indicated in the chart as the yellow line reaching 50% across the horizontal axis, while at the same time reaching 20% up the vertical axis.
Indicated in the chart as the red/brown line reaching 50% across the horizontal axis, while at the same time reaching (approximately) 10% up the vertical axis.
Indicated by the red/brown line not appearing above the horizontal axis until well past the 20% mark.
That is, future benefits are enter the benefit-cost model of analysis at a reduced (discounted) number as they are deemed to be of less ‘value’ than those benefits enjoyed immediately.