Democrats: What Distribution Of Wealth?
Thursday, 5 August 2004
In response to the newly formed New Zealand Institute’s stated intention to seek input from a variety of sources, the New Zealand Democratic Party offers the following contribution by a member of the Party Executive, Mr. Lowell Manning.
By Lowell Manning
The David Skilling and Arati Waldegrave paper "The Wealth of a Nation" gets the latest high-powered think tank, The New Zealand Institute, and its international corporate-dominated membership off to a shaky start.
Leaving aside the unfortunate errors on Figure 1 and accompanying text, the paper fails to address the reasons for the uneven distribution of wealth in New Zealand. It talks about the symptoms of unequal wealth distribution instead of its causes.
Those causes rest squarely with the privately owned and operated interest-bearing debt mechanism by which all ‘money’ is borrowed into existence for profit.
The reasons put forward in the paper, "rising house prices and declining home ownership, student loan debt, and an emerging debt culture" together with the absence of compulsory superannuation, lack of tax concessions on savings and mortgage interest deductibility merely reflect the worldwide phenomenon of a rapidly widening gap between the haves and the have-nots. They do not create it.
Comparing New Zealand against the worldwide destruction of stakeholder equity in society does nothing to answer the underlying issue. Why is it that worldwide, the rich are getting richer and the poor poorer?
Debating whether New Zealand is a few points behind or ahead of some other country fails to accept there is a far more fundamental issue at stake.
The Level and Distribution of Wealth in New Zealand:
The authors acknowledge (page 8) that "The distribution of wealth in New Zealand is highly concentrated with over half the population having effectively no ownership stake in the New Zealand economy." They record the obvious: the younger you are and the less you earn the less wealthy you are likely to be. They then claim average wealth rises under compulsory and employer subsidised savings schemes and implicitly condemn the trend towards some people choosing to live for today rather than tomorrow.
Paper inference 1.
Accumulating wealth is "good" while enjoying life is "bad".
Wealth is defined (page 3) as the value of physical and financial assets less debts; that is, net worth in accounting terms. It takes no account of quality of life, personal wellbeing, environment, resource depletion or the social fabric of society.
Thus the paper continues the discredited money-oriented worldview where the "value" of net assets is the only gauge of human success.
In New Zealand there is more money in cars than in shares. Financial wealth has declined in recent years compared with disposable income "partly because households have been borrowing more in the form of mortgages, as house prices increase". Equity has been used to finance consumption (page 16) whereas in other countries "The greater emphasis on private provision of retirement income ….has led to higher holdings of financial assets" (page 18).
Paper inference 2
Financial assets are "good" other assets are "less good" and no assets are "bad".
If inflation is measured as the increase in prices, then nearly all prices must be inflation. The value of assets therefore reflects, in the main, accumulated inflation.
Real wealth rests in the ownership of assets. Their "value" only has meaning as a claim on the accumulated wealth of society when they are sold. If too many people choose to sell at the same time during a market crash the pre-crash "value" of assets, particularly financial assets like equities becomes meaningless.
There is a public perception that property is a relatively safe investment because it is more useful to human wellbeing than company profit.
New Zealand’s wealth in disposable income terms is lower than other countries. The authors acknowledge (page 12) there is an income threshold below which savings are difficult while household debt has risen substantially "with very little increase in holdings of financial assets by households". (page 20).
"New Zealand has low and declining household savings rates, has run large and persistent current account deficits for the past three decades, and has accumulated one of the largest stocks of external debt in the OECD in the process" (page 21).
Paper inference 3
Income levels and household and external debt are important to savings and wealth distribution
The paper fails to discuss incomes, taxation and expenditure patterns and completely ignores the fundamental relationships between debt and wealth.
Wealth is a reflection of the paper or investment economy. It is a monetary phenomenon. Most bank deposits other than transaction money (M1) eventually form an investment pool.
When the pool is growing (as total debt and its corresponding deposits increase in the private debt system), more money is transferred to the investment economy. If the investment pool grows faster than new physical assets are added, the "value" of existing assets will inflate; the well known "wealth effect".
The prices of assets rise because there is more money to exchange what comes onto the investment market. The rising market price also gives value to unsold assets creating boom and bust cycles in the debt economy.
In the private interest-bearing debt system, there is a corresponding debt for every deposit. The investment pool cannot grow unless total debt also grows. Accumulating wealth as asset "value" thus necessarily means somebody getting richer and somebody poorer.
Worse still, there is a multiplier at work. If the investment pool is, say, one third the total "value" of the stock of assets, every dollar increase in the pool will add perhaps three dollars to the "value" of the asset stock.
As the paper notes (page 28) in relation to housing, "In some senses this [wealth effect for existing home owners] represents a transfer of wealth from prospective home owners to existing home owners". Those who already have assets gain disproportionately while those who don’t must seek to transfer debt to somebody else when they participate in the investment economy.
If wealth is to increase so must total debt. Deposits relating to external accumulated current account debt reside offshore and do not add to wealth. That external debt has been used for consumption, debt servicing and repatriation of profit.
Increased wealth is therefore primarily based on increases in domestic debt. It isn’t possible to have one without the other. Thus it is a fallacy to blame increased debt for relatively low levels of wealth. In fact, exactly the opposite is true. The markets crash and wealth is lost when the rate of increase in debt falls below what is needed to sustain the costs (interest payments and inflation) of the private interest-bearing debt system.
Financial wealth has declined because financial liabilities (debt) have increased while financial assets have remained static as a proportion of disposable income. The authors claim: "[T]he existence of broad savings policies in other Anglo countries and their absence in New Zealand seems to provide a key reason for the lower level of overall household wealth and household financial income in New Zealand".
Paper inference 4
Lower levels of wealth result from the lack of broad savings policies
No attempt is made to address the nature of savings or what owning wealth means in a debt-based financial system where one person’s wealth is derived from someone else’s debt.
In the private debt system, savings represent deferment of consumption. Discretionary net income remains unspent and consumption is correspondingly reduced. While some savings are directed to new production, most is directed to the investment sector.
Investment sector growth represents a serious leakage point in the traditional circular flow diagram of the economy which postulates "savings=investment", because traditional economics fails to separate the productive economy from the speculative economy.
Speculative investment may add to wealth as it is measured, but it doesn’t add anything at all to production. Without increased production, increases in wealth are illusory, unless they are cashed up, merely inflating the value of existing assets. This makes it harder for those without wealth to begin accumulating it, and inherently concentrates what wealth there is into fewer and fewer hands.
Capitalism thus becomes an exercise to "capture" the deposits in the banking system while leaving as much of the corresponding debt to others as possible. The game is zero based. For every winner in the debt system there is at least one, and usually many, losers.
One person’s saving means someone else somewhere must be carrying more debt, while debt repayment merely cancels deposits and reduces the money supply. In aggregate in the present financial system, it is neither possible to reduce debt without deflation nor increase savings without either slowing the productive economy or increasing debt.
Essentially the paper blames three trends for the wealth problem: declining home ownership and lower affordability due to price rises; growing student debt accounting for declining home ownership and lower ability to accumulate wealth; and changing attitudes towards debt, consumption and saving thanks to banking deregulation and greater household borrowing.
These "make it likely that many young New Zealanders will accumulate much less wealth than previous generations", "and wealth may become increasingly concentrated". (page 36). The paper suggests the prognosis is bleak without institutional support for household wealth accumulation. This would be provided implicitly through compulsory superannuation, tax deductibility for mortgages and tax breaks for savings.
The paper concludes with the assertion "Policy settings can be changed in New Zealand to encourage wealth accumulation and to assist New Zealanders to get ahead financially even in a more challenging environment."(page 38).
Paper inference 5
That the distribution of wealth can be corrected by government policy
No effort is made to relate changes in borrowing to low incomes, to say why student and credit card debt has become so prevalent, or to address the wider tax issues.
Many people intuitively understand the fundamental dilemma between debt and wealth. They opt not to save, preferring quality of life to chasing a mirage of asset wealth.
Until the private interest bearing debt foundation of the financial system is replaced by one based on interest-free ‘public’ funding the "institutional" policies proposed in the paper cannot possibly work. They can’t even be made to look as though they work without substantial enforced wealth redistribution through higher taxation and wealth taxes, both of which the paper strenuously avoids mentioning.
A system built on an interest free foundation will reduce the flow of money into speculative investment and reverse the winner takes all transfer of wealth through the investment sector. Achieving a fair distribution of wealth demands increased real personal disposable incomes and reduced personal debt.
These are all but impossible for most people in the present debt system. That’s why so many people have so little wealth. In the meantime the only way to maintain consumption in the skill deficient, low wage, debt-ridden economy New Zealand has become, is through more debt.
Student loans and credit card debt are but the tip of the rapidly growing debt iceberg. Any debt will do! Up to $15 billion per year now passes to the investment sector in the form of interest on New Zealand’s domestic debt alone, before counting the ongoing cost to the economy of the country’s huge foreign debt.
Fundamental change to the debt-based foundation of the financial system is needed to enable progress to be made. The NZI approach would simply accentuate the relative transfer of wealth from the poor to the rich and speed up New Zealand’s economic decline.
Lowell Manning 28/7/04
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Leader: Stephnie de Ruyter President: John Pemberton