The No Man’s Land of Studying Distributional Economics

Economists and policy analysts have paid insufficient attention to the distributional consequences of change. Hence the rise of the angries.

In order to get to this column’s conclusion I am going to recall a little of my scholarly journey.

When I came back from England in 1970, I looked around for a research area. Distributional economics had begun to develop in Britain (under the leadership of Tony Atkinson) and there were lots of research opportunities in New Zealand. At the time I did not appreciate that it was a no man’s land to be avoided by most economists. Indeed, my status as an economist was diminished with the sneer of my being a ‘social economist’; I recall that those who made it spent more time in pubs than I did.

I suppose my work in establishing the foundations of today’s New Zealand statistical base for distributional studies, including poverty studies, is reasonably well known, but what is not always appreciated is that while the social statistician measures, the economist looks for explanations. That took me back into the trenches of the economic debate.

For instance, I found that the terms of trade (the price of exports relative to the price of imports) affected the income distribution because farmers’ incomes shifted up and down in the distribution as it changed. It is clear that the state of the labour market also affected the income distribution. I needed to think about investment returns to get from the wealth distribution to the income distribution (although I have been surprised at the general lack of interest in the profit rate).

That led to me back to macroeconomics but with a distinctive perspective. In particular I could not follow the macroeconomic behaviour I was interested in by ignoring the operating surplus, by pretending that the economy could be described by a single commodity, or by treating all workers as the same. (How to handle the inflow of mothers into the earning labour market was not a trivial issue.)

The same applied when I began to look at policy issues. I saw distributional impacts as fundamental and quite naturally assumed that the policy community did too. They generally do not.

Let me give a simple example which was critical to my thinking. An economist estimated the impact of a limited free trade arrangement with Australia. He found that there would be a very small (but positive) gain in GDP but a substantial reduction in wages. I did not trust the estimate but it drew my attention to the way small gains from trade could be associated with very large distributional shifts.

The paper was not alert to this effect; it was a part of the no man’s land that most economists stayed clear of. I became increasingly aware that policies were frequently advocated without attention to their distributional consequences.

You will not be surprised that the advocates of policy changes were often its beneficiaries. When I was able to measure the impact of a policy change, I found that the beneficiaries were far better off than the national gains they promised, which meant that others were markedly worse off, as the example illustrates.

Indeed one became aware that the economic debate in New Zealand was said to be about improving economic efficiency, but more often the equity (or distributional) effects were far greater. That is another no man’s land, isn’t it? Saying that the advocates of a policy were really seeking their own interests even if their rhetoric was in terms of the national interest does not get one invited to many cocktail parties. (We were told that ‘the task was to make the cake larger, not to share it out’, while the sloganeers jostled for a bigger share of the cake.)

The advocacy field is not flat. Some groups are far more vocal and better funded than others. I leave you to work out which – but there is a certain bias among the advocates which may be summarised by calling them the ‘elite’, although the elite often argues within itself over policies which amount to shifting the income distribution among the various groups within it.

What that means is that chunks of the polity not only get left out of the debates but that they are often made worse off. For instance, the austerity policies which occurred in Europe imposed on those with low and middle incomes while protecting the well-off. Remind me why one should cut government spending – say on health care – rather than raise taxes on the rich?

I became aware of the asymmetry thirty odd years ago, when the Rogernomics elite deliberately switched incomes in their favour, funding the switch by reducing the incomes of those lower in the distribution. The polity revolted in 1990 by voting out the Labour Government and again in 1993 by slashing the vote for the National Government after it followed even more repressive policies. (Because the polity did not yet trust Labour, it left National clinging to power by its fingernails.) But it also voted in MMP, which has sensitised the political process to many of those it had previously left out – not perfectly, but a whole lot more than in the decades before MMP. (Recall how the elite, including most MPs, fought against MMP.)

Elsewhere there is the same story but played out differently. Austerity is causing havoc to the political stability of Europe. In Britain the Brexit referendum gave disenchanted angries the chance to show their displeasure. (I am reminded of the story of the little old lady who after an election was told there was a ‘hung’ parliament. She responded that she did not know what that meant, but it sounded like a good idea. A lot of the angries do not know what they are voting for, but they know what they are voting against.)

The American story is complicated by the corrupted (in the sense of ‘distorted’) electoral system. Trump promised to save the angries from Washington, but he is in the hands of a Republican Party which dominates the place. Many of those who voted for him are going to be bitterly disappointed.

The message here is that distributional economics may be a no man’s land for most economists but we are being ineluctably sucked into it. There exists much economic analysis which is useful for finding your way around it with which most economists and policy analysts are not familiar. Neither are their critics. (If you are in doubt ask them what the Scitovsky criterion is about.)

As for those of us already holed up there, it may lower our professional standing, but we sure get a different view of the trenches from it.