Sustain Episodes 9 & 10: Inclusive capitalism? Inequality and environmental degradation through an economics lens

In these episodes:

SESSION 1:

Professor Natasha Hamilton-Hart
Honourable David Parker
Professor Craig Elliffe
Dean Susan Watson
Council of Trade Unions Economist and Policy Director Craig Renney

SESSION 2:

Associate Professor Dan Hikuroa
Professor Emilson Silva
Dr Lynn Riggs
Dr David Hall
Emeritus Professor Nigel Haworth

Music: “What Goes Up” © Tim Page 2024
Production: Ben Goldson, Pauline Herbst, Tim Page

MENTIONED:

French economist Thomas Piketty
Juncture: Dialogues on Inclusive Capitalism

FURTHER READING AND RESOURCES

Books: “Capital in the Twenty-First Century,” “Capital and Ideology,” “The Economics of Inequality”
Articles and Papers: Various academic papers available through economic journals and his website.
Interviews and Talks: Piketty has given numerous interviews and talks that are available online, offering insights into his work and thought process.

Transcript Episode 9
Inclusive capitalism? Inequality and environmental degradation through an economist’s lens. Part 1

Edited recording of part 1 of a symposium on the challenges of inequality and environmental degradation. The symposium was co-hosted by Ngā Ara Whetū and Juncture: Dialogues on Inclusive Capitalism, a research centre based in the Business School at the University of Auckland.

Pauline Herbst: On the 13th of September, Ngā Ara Whetū co-hosted a symposium on the challenges of inequality and environmental degradation with the research centre Juncture: Dialogues on Inclusive Capitalism, which is based in the Business School at the University of Auckland.

The symposium was held in the Owen Glenn Building and saw experts discuss these twin challenges, drawing upon the work of French economist Thomas Piketty. Professor Natasha Hamilton-Hart of Management and International Business convened the symposium. The first half saw a keynote address by the Honourable David Parker, the former attorney general, who was followed by Professor Craig Elliffe from Law, Professor Susan Watson, Dean of the Business School and Council of Trade Unions economist and policy director Craig Renney.

Jacqueline Beggs: Kia ora everybody, and welcome to this seminar, which is hosted by Ngā Ara Whetū and Juncture. I’m Professor Jacqueline Beggs, an ecologist and co-executive director of one of the hosts Ngā Ara Whetū. Today is dear to our heart as we delve into the critical intersections between income inequality and environmental degradation, drawing on the insights of French economist Thomas Piketty’s work. These issues have far-reaching implications for social equity and environmental sustainability, and we’re excited to engage in meaningful and respectful discussions around how these dynamics shape our world. We hope today’s events spark new ideas and collaborations that contribute to a more just and sustainable future. Thanks for coming along, we really looking forward to your participation. I’ll pass over to Billie.

Billie Lythberg: Kia ora koutou. I’m Billie Lythberg, I am one of the associate directors of Juncture: Dialogues on Inclusive Capitalism, and it’s a pleasure to welcome you here to the Business School. It’s my pleasure to hand over to Natasha Hamilton-Hart who is going to chair the first session for us.

Natasha Hamilton-Hart: Welcome everybody. I’m really glad to be able to introduce this panel. It’s a really topical issue. I think I’ve counted eight articles in the news about tax in the last week. I don’t know if you orchestrated that, but obviously it’s something that we’re hugely interested in. This panel, which has a focus on Piketty and New Zealand is going to deal with multiple strands that can be drawn out of Piketty’s work as it might be applied to this country. I’m going to hand the floor to the Honourable David Parker, who is going to provide the keynote. I almost feel like this guy doesn’t need an introduction, because he is a very well-known figure in New Zealand politics over the last two decades.

NHH: Most pertinently, for today’s discussion, he is the person in the Labour Party who was associated with work in the Treasury and in the Inland Revenue Department to undertake a systematic study of the distribution of wealth and income, and tax incidence in this country, which a couple of years ago, when it came out, caused quite a bit of discussion and he’s been involved in a variety of initiatives to put tax reform on the agenda in New Zealand. Today, David Parker is going to talk about Thomas Piketty and climate change, including relevant research by the Inland Revenue Department and the Treasury under the last government into wealth, income and tax paid by high wealth individuals in New Zealand. So, David, the floor is yours.

David Parker: Tēnā koutou katoa, Natasha. Thank you for that introduction. It’s lovely to be here. It’s ironic for me to be standing here talking about Piketty and climate change and inequality because I’m standing nervously in front of professors, deans, doctors, post-doctoral fellows, when I have a couple of old bachelor’s degrees. And yeah, that’s inequality. I’ll give it a go.

DP: Conspicuous consumption amongst the super-wealthy undoubtedly shows the world that, in general, those with the most pollute the most. Private jets produce ten times as much greenhouse gas as a commercial airline. Passenger super yachts are even worse. The mega-yachts of the mega-rich are longer than football fields. Even a newly launched hydrogen-fuelled superyacht called Project 821 pumps out greenhouse gas pollution. Despite costing a whopping €600 million, it still can’t carry enough hydrogen to power its 119-metre hull across the ocean on its fuel cells, and so uses fossil fuels on voyages. Its green hydrogen fuel cells do power what are called portal functions, and it’s said that the R&D from the project will flow through to Norwegian ferries, but given we have the first hydrogen fuel cell ferries operating elsewhere, I’m not convinced the super yacht was a necessary development pathway. Perhaps the most extreme example is private space travel, and with billionaires like Elon Musk and Jeff Bezos privatising space, blasting even more frequently through the stratosphere, the effects on climate are becoming more significant.

DP: Piketty makes the more fundamental point that some of the huge amounts of wealth concentrated at the very top of wealth holders needs to be redeployed to help civilization avoid catastrophic runaway climate change. He has two main reasons for this view. One is about money. The transition to lower emissions costs more than the status quo, doesn’t always cost more, but it sometimes does. When it does, the money has to come from somewhere, a real example is the cost of a battery electric vehicle, compared with a petrol or diesel powered vehicle. The price is converging, but is still apart. Prices matter. After the clean car discount was cancelled by the incoming government, the proportion of new petrol and diesel light vehicles imported into New Zealand rose massively, from 42% in November 2023 to 60% in May 2024. The proportion of plug-ins, hybrids and battery electric vehicles plunged from 58%, more than half, to just 40%.

DP: If, for argument’s sake, the difference between the whole-of-life cost, including fuel, of a battery electric vehicle was $10,000 more than a petrol one, then the €600 million spent on that one super yacht, a billion New Zealand dollars could instead pay for that difference of 100,000 cars. One more super yacht or 100,000 fewer petrol cars, which is better for the planet? Yes, some are philanthropists, albeit on average levels that are less than even modest tax rates. And yes, some invest in the weightless economy, and others are striving to green energy systems. Nevertheless, it remains true that the consumption patterns of the very wealthy often drive higher emissions. It’s also true that globalisation has lifted a billion people out of poverty and reduced the gap between rich and other countries, but substantial inter-country disparities remain, and we know that internationally, if developing countries take a fossil fuel intensive pathway, we all fry.

DP: It’s a shame the clean development mechanism of the Kyoto Protocol did not survive, because that provided a rational way to help the world reduce emissions cost effectively. In New Zealand, our emissions trading scheme was linked to the Clean Development Mechanism until the Kyoto Protocol failed after the USA did not ratify Kyoto One and kyoto Two to proceed. While the Clean Development Mechanism had implementation flaws in early years, including corruption, those were fixable. International aid and climate finance, while very important, are an inferior alternative to reducing emissions in other countries, inferior because they don’t mobilise as much capital. Piketty’s other, perhaps more important, point is that increasing inequality in countries also undermines societal support for the changes needed to clean up the means of production, into greener consumption choices. This should not be a surprise because it’s a subset of a wider truth.

DP: Increasing inequality takes societies backwards, not forwards. Before diving into some of the details, I’m going to put up two general slides. The first, simply to show that New Zealand taxes are average compared with OECD countries. Taxes affect the shape of the economy. Gross inequality also impacts both the shape of the economy and many social outcomes. The economic effects include more speculation rather than productive investment. It’s one of many factors behind asset price inflation for land-based assets. Paintings and rare cars are another example where eye-watering prices are paid by the super rich as they outbid each other. Get the shape of taxes wrong and productive investment drops. Look at this graph for new capital formation in New Zealand over time as a case in point. I’m not going to describe it, but it paints a sad picture. The anti-social effects of high inequality is clearer still. I don’t have time to rehearse the voluminous evidence in support of this, many have,

DP: I’ll mention two. The Spirit Level by Kate Pickett and Richard Wilkinson describes how more equal societies almost always do better. It presents data showing that once a country escapes absolute poverty, relative inequality within a country drives physical ill-health, mental illness, obesity, violence, drug abuse, prison populations, lower homeownership and distrust. Tony Judt’s Ill Fares the Land, it’s title was drawn from a poem penned by Oliver Goldsmith in the 1700s: Ill fares the land to hastening ills of prey where wealth accumulates and men decay.

DP: I know the language is old-fashioned and that man means men and women, but a decade and half after Judt critiqued the paradoxical resurgence of unfettered capitalism after the GFC, that sentence still sends a chill down my spine. Ill fares the land to hastening ills of prey where wealth accumulates and men decay. It captures a raw emotional truth and I lament that, since that book was written, inequality within countries has gotten worse. Lower-income people in New Zealand, and elsewhere, have long lived close to the edge. What has changed is that the middle has become ever more pressured, and over the last decade attention has moved from income inequality to resultant wealth disparities. Wealth inequalities pile up year upon year. Just as the investments of the super wealthy compound in value, so does wealth inequality. Donald Trump may not have drained the swamp, but he did speak to a disaffected middle class. This is deeply ironic, given that he features in Peter Goodman’s Davos Man: How the Billionaires Devoured the Planet. That book describes tax data, leaked in the USA, and I quote: the details affirmed the audacity of the undertaking. In both 2007 and 2011, Jeff Bezos paid zero in federal taxes.

DP: Others who achieved that distinction included Elon Musk, George Soros and Michael Bloomberg. In this age of misinformation, allied with the disproportionate influence of the wealthy like Rupert Murdoch, it can be hard to move the dial. Surrogate organisations describe tax as theft, unless it’s paid by someone else to protect their property rights. Equality of opportunity is redefined to exclude social mobility, and when it comes to sharing the fruits of our economy, inherited privilege dominates over working and saving. I’m talking about hundreds of millions, even billions of dollars. It’s easy to drop into the cynicism prevalent in the phrase some attribute to Mark Twain: Lies, damned lies and statistics. And so it can be hard to break through the power of the status quo. But occasionally, someone does break through. In my view, the accolade deservedly goes to Thomas Piketty. What a treasure to read, Romantic literature, the Belle Époque, the Great Depression, the effect of wars and postwar policies that made a difference, and their demise and the consequences we now bear witness to, the sweep of history, augmented by recent data. Genius, in my view. He proved the math and people know that maths does not lie. R is greater than G, and I’m going to come back to that. In New Zealand, we tested the validity of Piketty’s findings for New Zealand with a detailed study based on actual data, not models based on population-wide surveys, which are necessarily simplistic. If they’re not simple, most people can’t fill them out. If they’re simple enough for most people to fill them out then they actually don’t capture the complex financial affairs of people at the top end. Actual data, this was born of limitations in the household economics survey, which is the main survey carried out by Stats New Zealand at the top end.

DP: Until we did the study, there had only ever been one person found in that survey with net wealth more than $10 million, and that person, I think, had assets of $20 or $30 million, in a country of billionaires. It shows you how flawed that survey is for an assessment of wealth, income and tax at the top end. Now, since then, they’ve had, I think, in the subsequent four years or so, they’ve found one other person, but again, nowhere near the top. So how do we change this? Well, we changed the law to allow the Commissioner of Inland Revenue to collect information for policy purposes. Until then, it was argued that they could only do it for tax administration purposes, and tax intermediaries could say you’re just fishing, you’re not entitled to that information. We modelled it on a UK law and we made it compulsory for that information to be provided. We allocated $5 million, it’s a very complex study, for the work and data was sought for 350 high wealth individuals. This is essentially the main person, their life partner, dependent children. I think this data is important, so the information gathered could only be used for the study, not tax enforcement. And we had high levels of compliance. The study covered the high wealth individual, their life partner, their dependant children, and trusts where they controlled distribution or the appointment of trustees, which does the same thing.

DP: In practice, the information ordinarily came from their tax intermediary, accountants and lawyers, an expert reference panel, and OECD advice-guided analysis. The data collected enabled the network of legal entities that each high-wealth individual invests through to be identified. This is often very, very complex, involving multiple trusts, partnerships and hundreds of public and private companies. Now, the IRD had in-depth information for just about all of these. So the complexity rose from putting the public puzzle together, which net assets and income and tax should be attributed to whom. Those in the study had net assets, a median of $106 million each and an average of $276 million net of all liabilities, massive. What are their sources of income? Of course, high-wealth individuals are the most successful investors in New Zealand. They can buy the best of advice. They’re long-term professional investors. They’re well-connected, they can invest in projects unavailable to others. They have the ability to leverage assets, to spread risk and to minimise tax. You see on this that essentially for this sector of our population, 93% of income is investment returns.

DP: Before I come back to what the results of the study were, I’ll cover companion work carried out by the Treasury on the 90% plus of the population that the government already have good information on from the Household Economic Survey and other data. This too was a big piece of work and it was carried out by the Treasury, and it’s published in a number of working papers. It showed that New Zealand’s got a progressive tax rate, and it also gathered other data. So this here shows the difference between marginal tax rates, which is shown in the red line. And the average that that implies as you go up the income scale, if you look at the blue line, if your income was $180,000, your average income tax on your taxable income, not all income, your taxable income would be a bit more than 25%. We’ve got a progressive tax system which applies to what is defined as taxable income. A lot of people who talk about tax focus on this, and it’s important, but it’s only part of the story. GST is a very big part of the New Zealand tax system, and therefore a big part of the tax that most Kiwis pay.

DP: The slice changes a bit over time. But in every year, New Zealand’s GST as a proportion of the total is about the highest in the OECD. Our GST is very broad. It covers just about all goods and services groceries, electricity, clothes, appliances, repairs, etcetera. Doesn’t include rent, your mortgage or your savings, they’re just about the only things that it doesn’t cover. Most people spend about two-thirds of their income on GST-inclusive goods and services. GST is 15%. Two-thirds of your income is being spent on that. Your effective GST rate as a proportion of your incomes is around two-thirds. That’s shown on this graph, which goes from deciles two to nine. Decile one is excluded because the data’s a bit distorted by loss-making ventures. If you extrapolate that line out for people who really are in decile one, their effective GST rate is about 11%. You go up to decile one and it’s dropped to about 7.5%, there’s a big tax wedge difference in that and the progressive system on that alone, the system is also why you can’t put decile ten up there, because the average is highly misleading. This is the average in the top decile, 6.4%, this is the project population. Their GST consumption expenditure as a proportion of their income is under 1%. Now, going back to the general population, the income system is augmented by transfer payments, benefits and the like, ACC payments, accommodation supplements, superannuation. So the statutory definition and the statutory definition of taxable income also excludes a lot of capital income, including for people who are not in the high-wealth group. All of these aspects were included in a study by the Treasury to provide a fair comparison.

DP: They ran lots of different examples by ventile, top 5%. Now, I’m not going to go through this, obviously, but you can see if you look at this, you can see that we’ve actually got a progressive system, including transfer payments up to about $100,000, which is when Working For Families and the like phases out, depending on the number of children you have. But you can see here for a middle-class, median income earner that’s outside the benefit system, their average effective tax rate, excluding GST, is about 20%. So 20-25%. This was done before the 38 cent rate, so this would be higher for people who are on high salaries that are at the top. There were a myriad of examples at the time. But you can see that, for the middle class, really 22-25%, plus the GST that I showed you, about 8 or 9% at that level. So a total of low-30s. In comparison, what did the high wealth individuals pay? Bearing in mind that the middle are paying a total tax on all of their income of 30-34%, for those in the group, their income tax was under 10%, actually under 9%, GST averaged under 1%. So their total tax as the proportion of their income was under 10%, a third of the rate paid by the middle class, and less than half the rate that is paid by a low-income single person. The other interesting discovery from the study; the larger the proportion of a company owned by a high-wealth individual, the lower the ostensible rate of taxable income and profit. How can that be right? These are the best investors in the country. Strong evidence of the structuring of investment portfolios for tax minimization purposes. Nothing illegal going on. Sensitivity analysis was done to compare the last economic cycle with early ones. The view of the officials was that it wouldn’t make much difference. So, we’ve already got proof that most of the income for high-wealth individuals is reinvested, because their fortunes are so large and their incomes are so large they can’t spend them on consumption.

DP: That’s proven by the GST figure that I’ve already given you. They’re careful with money, and in truth, it is hard to spend that much money. Once you’ve got a house and a holiday home and a few cars and a boat, imagine trying to spend 20k a week in the subsequent years. You’d have to be full time on the supermarket trolley and do overtime at the mall. Even then, you’d only be spending $1 million a year. So, if your income is $10 million and you were spending that million a year, you’re spending a 10th of your income on GST-inclusive goods and services, and your GST is 1.5% of your income, not the 8 or 9% it is for the middle class. If your income is $100 million, your GST would be 0.15% of your income. Remember, for most it’s about 9%. So, if you’re not spending most of your income, well, what are you doing with it? It’s reinvested, either by way of retained earnings or investments in other entities Which brings me back to R is greater than G. Piketty was right. R is greater than G. What does this mean and why is it important? R is the rate of return on large pools of capital after inflation and tax. G is the economic growth rate within countries. Those returns on large pools of capital are largely reinvested rather than spent. And Piketty was right about what this means when R, the rate of return on large pools of capital is greater than G, the growth in the economy, the share of the wealth at the top grows ever larger and the share of the wealth held by the rest of society decreases. Ditto the income from that wealth, the same thing happens. The transfer of wealth to the top is compounding. The maths are irrefutable. The conclusion is grounded in data, not general surveys or models, actual data. More and more of this is sitting in trusts for the first time. We’ve got decent data on this because we changed the law to require trust disclosures as well.

DP: Over $450 billion plus is now sitting in trusts, inter-generational asset holding vehicles. Piketty’s work leads to what we now know as a result of the IRD and Treasury work. Treasury was able to better calculate the share of wealth sitting at the top end. Turns out this was a lot more than was previously thought; the top 5% of households own 40% of all wealth, the top 1% own 20% of all wealth in New Zealand, and it’s compounding. Officials told me that they believe the 20% is likely to be an undercalculation rather than overestimate If that 20% keeps going up, whose share is going down? There is only 100% going around, and the contrast is stark. The bottom 50% of households now hold just 6% of wealth, and although there’s an age stage of life component here, the overall position is clear. That 6% can’t go down much. As the saying goes, you can’t get blood out of a stone Increasingly, it comes at the expense of the middle, most of the people in this room. Piketty’s work has enabled the world to better understand and highlight the raging inequality we have at the top, which is why I was pleased to accept this invitation to your forum on Piketty and climate change. Inequality is a serious problem. So is climate change. They’re linked and both must be addressed. Thank you.

Natasha Hamilton-Hart: Thank you David, you’ve already given us a lot to think about and put a number of balls in the air. We all care about the issue of inequality and fairness, the issue of addressing poverty and material deficits, underlying which we also have the problem of maintaining economic growth, and then the enormous investments in decarbonizing our economy if we are going to address the challenge of climate change. The work that is being done on some New Zealand data on the figures for wealth distribution is incredibly important. Of course, what we don’t know yet, because this is only a one-off exercise, is what the trend looks like.

NHH: Although other people have worked with New Zealand data over time, so the question of whether the intuitive model, that returns to wealth compound, and therefore you have it exacerbating wealth inequality over time. It is not clear where that trend lies. So that will be one of the things that would be really interesting to address either today or in another forum. But we also have perennial questions about what is fair and what is feasible in the area of taxation and the steering of society’s investments towards more productive and less greenhouse polluting technologies. The rest of our panel, and I’ll take them in the order that they’re on the program, the first speaker will be Professor Craig Elliffe, who specialises in taxation in the law faculty here. And before becoming a professor of law, and tax law in particular, he worked in the industry with two of our major tax and law firms. So he’s written very well-regarded books on international taxation and the topic that you all want to know about, dividend imputation.

NHH: We also will hear from Professor Suzanne Watson, who is the Dean of the faculty of Business and Economics, who is my boss. She is an expert in corporate law and corporate governance, and has recently written a terrific book on the evolution of the corporate form and function over centuries, which intersects a little bit with my own interests in the East Asian trading companies of previous centuries. She is going to share some of her recent work in this area. Last but not least, we have Craig Rennie, who is an economist and director of policy for the New Zealand Council of Trade Unions. He is well-known as having had a long and close connection with the Labour Party in policy development and the development of its tax policy and budgets over the years and other related instruments such as Fair Pay Agreements. So it’ll be very interesting to hear your perspective as well.

Craig Elliffe: Tēnā koutou katoa. I have five points, so I’ve got a note for each of them. The first is just to agree with and accept the points on the social impact of inequality. Can I add to David’s analysis, which I totally agree with, a question of social mobility, because that is quite a big thing in the New Zealand demographic. We used to be a country where people could become more capable through education, through opportunities that were accorded to them. And social mobility is one factor that has declined as a direct consequence of inequality. The second is to comment on the excellent work that was done by Inland Revenue and to give credit to David, there aren’t many international studies done on the rate of tax. There was a similar study in the US, actually leading to almost identical results. But they are few and far between, and they are not as authoritative as the New Zealand study. Interestingly, David, you might like to add to your narrative on GST that the very wealthy don’t pay GST on overseas travel, which is a reasonably significant component of their spend. But of course, investment rather than consumption is the story for them. The other point to note is that that effective rate of tax includes unrealised gains.

CE: So if you look at the income figure there, which includes unrealised gains now, it’s unrealistic to be honest. I’m not not trying to torpedo those results, but no one, apart from our New Zealand FIF rule, taxes unrealised gains around the world. So in terms of unrealized capital gains, the Italians tried briefly, unsuccessfully, for about a year to tax unrealized capital gains. So there is an issue there to the extent to which that economic number of income represents both realised and unrealised gains. Now, that’s material for the discussion on whether we should have a wealth tax or whether we should have a capital gains tax, I’ll phrase it that way. Of course, there is a third alternative, which is that we shouldn’t have either of those two things, which is the stance of the current government. So the third point is to paint you the picture of fiscal sustainability for this country under the existing tax settings. The short answer is the OECD, the IMF, the departing Secretary of the Treasury have all said that it doesn’t add up. It will not work. The reason for that, largely, is because of our ageing demographic.

CE: Very simply expressed, when you have a huge reliance on earned income from PAYE or salary, and you have a declining working force and an ageing population and that ageing population has increased health care spending and increased superannuation spending, you need actually to maintain the existing arrangements. You need a higher percentage of tax to GDP than is the current setting. Quite clearly, the current trends are that we are actually in a position of a budget deficit and the borrowing is increasing rather than decreasing, unless there is a change. When you think about the effect of the pure economic on a balance sheet perspective, we are going to have to borrow more, tax more to fund the existing arrangements. Now other people will say, well, okay, we’ll just simply spend less. We are trying that right at the moment. We see an example where there is a lot of spending less going on, and I can’t listen to the radio in the morning without hearing the latest health dynamic in crisis. What’s it going to be like in ten years time, or twenty years under these existing settings, I think the situation is dire now.

CE: The fourth point I’m going to make is that there are, in fact, some theoretical solutions to this, because we’ve diagnosed the problem, which is one of inequality, and can we justify the taxation of capital or wealth? The answer is yes. From a theoretical perspective, not only are people who are wealthy getting more from society, therefore they have a higher benefit and therefore they should pay more tax. So under the benefit theory, that’s justified, but also, under the ability to pay theory, which is the ability for someone which justifies progressive taxation. So then we deal with my last point, the practical solutions. It seems clear to me that, in terms of our tax base, we do need some form of tax on capital. But the big question is whether that should be a wealth tax or a capital gains tax, at least in my simple mind. Now we can either go down the route of heresy or orthodoxy, and I’m afraid to say that those people who think a wealth tax is a really good idea, in my view, it’s a heretical idea. And the reason for that is because whilst theoretically it works, it’s going to be a major issue from a practical perspective. What is the unit you’re going to tax? Liquidity. How are you actually, are you going to force people to sell their assets in order to pay the tax, which is not an issue with a realised capital gains tax?

CE: They actually have money. Thirdly, there’s a valuation issue. Are you going to require a valuation of the assets every single year? Thats an enormous cost and a big drain on the economic success of the country. And lastly, and most importantly, it’s a question of capital flight. At the minute, there are only three sensible countries, excluding South American countries, there are two of them. There are five countries in the world that have a wealth tax. This has been a marked decline since the 1990s, when there were 12. So people can go anywhere to escape this, and the obvious place they will go to is Australia, because New Zealand citizens have an automatic right to live there. So if we think we’re going to collect the level of income that might be projected under the wealth tax without a dramatic economic consequence, then in my view, you’re dreaming.

Natasha Hamilton-Hart: Thank you very much for putting some of the trade-offs on the table. Professor Suzanne Watson is next.

Suzanne Watson: Thank you. Piketty demonstrates to us that wealth always concentrates in the hands of a few over time. but the cause may not be people, or at least that human beings in general are in many ways victims of inequality and deprivation, rather than its primary cause. We may not live in the anthropocene age, but in the capitalist-cene. The wealthiest persons in the world are not human beings, they are corporations.

SW: Fortune Global 500 companies amount to half the world’s global economy, and that doesn’t include all the other corporations and companies that exist in the world. It staggers me how often the important role that corporations play in the distribution of global wealth and the exercise of power is not seen. Corporations own the data, corporations have advantages that natural persons do not have because they can be eternal. So the R will be greater than G for corporations over time more than humans. Because when people die, their assets generally are distributed, and corporations are weightless, they can go anywhere. But of course, even though they can go anywhere, they have an impact where they go, and the economic and political power and influence that big corps wield make it challenging for states to regulate and tax appropriately. The impact of the primary form of capitalism, the business corporation, on the increasing concentration of wealth and power cannot be overstated. Now, Piketty touches on the role of corporations in shaping inequality. He argues that the rise of corporate power and the concentration of capital has had significant implications for inequality. He does that in his most well-known book Capital in the 21st Century, but builds on it in his more recent book, Capital and Ideology.

SW: And in that book, he expands his historical analysis to provide a broader perspective on how societies have structured their economies and corporate systems over time. He traces the development of property rights in feudal systems to modern capitalist economies, arguing the way that societies define and protect property rights, including corporate ownership, have a profound effect on inequality. Piketty also analyses, through his studies, periods of relatively low inequality in many western countries through the 1950s to the 1980s, attributing this in part to policies that constrained corporate power and promoted worker interests. Piketty also explores alternative corporate structures such as cooperatives and state-owned enterprises, and their impacts on inequality. Throughout his historical analysis, Piketty pays attention to the evolving ideological justifications for different corporate structures and their relationship to inequality, arguing that those justifications often serve to maintain existing power structures. By providing this historical perspective, Piketty aims to demonstrate that the current corporate structures and their relationship to inequality are not inevitable or natural, but rather they are the result of specific policy choices and historical developments. He argues that understanding this history is critical for imagining, and implementing alternative systems that could reduce inequality.

SW: This helps us understand that corporate forms and level of inequality brought about through the corporate forms are not unchangeable and inevitable. Certainly, shareholder primacy, which Piketty does not favour, facilitates most effectively the growth of financial value in the corporate form. But the corporation remains therefore the form that attracts investment capital. But incorporation, the benefits it brings are not a God-given, no-strings-attached, right through states. Through the corporations, states bestow incorporation benefits, most particularly that they are separate legal entities which allows them to exist forever. The status of legal personhood, and essentially what is a fund of capital contributed by shareholders. The benefits indirectly contribute to inequality because the owners and controllers, the shareholders and corporate executives benefit. But I would say they benefit almost indirectly because of the corporation itself. So we must bear in mind that existing capital will not favour legal forms that do not grow value over time, other choices remain available, but we should not ignore the impact the corporations have on our planet, as Piketty highlights. Societies and states do have the capacity to reshape economic institutions, including corporate structures, to promote greater equality.

Natasha Hamitlon-Hart: Thank you, Susan, for reminding us that property rights and the distribution of property rights are a political choice. Over to you Craig.

Craig Rennie: Kia ora koutou, ko craig rennie aho. I’m the economist and director of policy at the Council of Trade Unions. Thank you very much for inviting me here. Thank you, David Parker, for your presentation and I’m actually really pleased that R is greater than G is on the screen, super helpful to me.

CR: I just want to start with a small story, if I may, politicians, a minister’s office, they have fabulous shelves that have glass doors so you can see the books behind, so ministers can show off their reading. They can show you how intellectual they are. And I won’t tell you which ministers have books that they haven’t read on the shelves behind them, but Minister Parker, when he was Minister of Revenue, had lots of books on a shelf, but he had one book on his desk, and that book was Piketty’s Capital. And I can tell you, not only had he read it, on every second page he had a post-it note attached to it telling you what was inside the book. So I can guarantee if one of us understands Piketty’s Capital, it’s the Honourable David Parker. 

CR: 1991 was not a vintage year in New Zealand. And as my colleague Bill Rosenberg showed, if we draw a line between 1932 and 1991, we can see the share of the economy that goes to workers and the share of the economy that goes to capital, it’s basically a straight line. Since 1991, the share of the economy going to capital goes up, the share of the economy going to workers in the form of wages and salaries declines every year. It doesn’t close. It’s like a crocodile’s jaw, it just keeps going wider and wider. Why is that important? Because R is greater than G, it is showing that R is greater than G, because every year the portion of the economy going to the workers is less and less and less. Why is that important? There are 136,000 children in New Zealand who live in material poverty. That means they don’t have a winter coat. They don’t have two pairs of shoes. They don’t get fed two hot meals, They live in cold, mouldy houses. Their families don’t go and visit a doctor or the dentists because they can’t afford to. 61% of the children in that group, their parents are in work.

CR: If we look at unemployment, unemployment is due to rise by 43,000 this year. If we look at the forecast, it will rise even further, 50% of 15-to-19 year olds who were in work two years ago are no longer in work. We reopened the borders after Covid, and employers stopped using 15 and 17 year olds as spare labour, we’ve just closed the Just Transition and the Equitable Transitions units. I don’t know why we have a Just Transition and an Equitable Transitions unit when they’re both the same thing. So we’re not delivering the climate change solutions. We’re not delivering the work that we were supposed to be delivering, and we’ve got 7,000 fewer public servants, and we’ve just spent $4.1 million on a Treaty Principles Bill that’s already doomed to fail. At the same time, we just stopped the work on the Taxation Principles Reporting Act, so we can’t find out the information anymore that we were able to find. All of these things are driven by R is greater than G, because who benefits from those decisions? It appeals to me tremendously that I can say that I agree with Craig, I don’t often get to say that. But I agree with Craig that this is a consequence of the fact that we have tremendously short-term thinking in government and particularly around the economy. We have particularly short-term thinking about how much money we need to invest in health and education and housing, in the welfare state, in child poverty, and that’s the consequence of the fact that we don’t have a good idea about what a good economy looks like.

CR: So when David Parker produces the high net wealth individuals, I was there in a room very much like this in Victoria University with the journalists and the look on their faces. They were horrified to discover anything that anyone with eyes or ears and who’d looked outside could see. The lessons from Piketty to me are really quite straightforward. It’s to take a long-term view. It’s actually the value of economic history as a study, and the lessons from 1991 onwards in New Zealand is that something needs to change. The status quo isn’t cost free. It’s not working right now. It’s enriching a few to the disadvantage of everybody else. It’s created a country which is the best country in the world, according to the world bank, to be in business. I want to live in a country where this is the best country in the world to be a worker, because if we deliver that, there’s a great community. Everything that we do in the economy is a choice. Everything that we do here is something that we choose to do. It’s not natural, it’s not evolution. We get to make these decisions. Taxation is a decision and we need to make different decisions about taxation, because if we don’t, we’re going to continue the path that we’ve been on since 1991. And I wouldn’t be here if I couldn’t drop one political point. We need to have a better conversation about the economy in New Zealand. We have to have a better conversation about taxation in New Zealand. There are 779 days until the next election. We need to have that better conversation because I don’t want New Zealand to be the UK, thank you.

Pauline Herbst: That brings us to the end of part one. If you’d like to hear more, please make sure to tune into Part Two on Apple or Spotify.

The ideas expressed in this podcast reflect the speaker’s views and are not necessarily the views of Ngā Ara Whetū.

Music: “What Goes Up” © Tim Page 2024; Production: Ben Goldson, Pauline Herbst, Tim Page; Webpage: Pauline Herbst & Ben Goldson.

Transcript Episode 10
Inclusive capitalism? Inequality and environmental degradation through an economist’s lens. Part 2

Edited recording of part 2 of a symposium on the challenges of inequality and environmental degradation. The symposium was co-hosted by Ngā Ara Whetū and Juncture: Dialogues on Inclusive Capitalism, a research centre based in the Business School at the University of Auckland.

Pauline Herbst: Hello, and welcome to part two on the challenges of inequality and environmental degradation. The second half of the symposium was chaired by Associate Professor Dan Hikuroa of Māori Studies, with the second panel comprising of Professor Emilson Silva from the Business School, Dr Lynn Riggs of Motu Research and Dr David Hall of Social Sciences and Humanities.

Dan Hikuroa: It’s my honour and privilege to introduce our next session. I have a confession to make, I’m not an economist. I know very little about tax other than I have to pay it. My background is actually in science, but I work a lot in the environment space, I work a lot in the sustainability space, and I work a lot within and for communities. I’m going to introduce some alternative ideas, or maybe reintroduce some ideas that have been forgotten, or maybe have been suppressed, for a time. In the interests of adding to the debate and adding to the dialogue.

DH: The first thing I’ll challenge is the assumption that capitalism is the way forward. I’ll just put that out for you initially, remembering that there were other ideas of economies that existed before the capitalist approach that we bring. I will also introduce some ideas that come from an indigenous worldview and indigenous approach, specifically from a Māori one, not in an effort to say we need to go back to that or we need to reintroduce it. But just to say there are ideas which are very ancient that appear to have been forgotten or kind of marginalised or put to the side that maybe we could reintroduce into this dialogue. In some of the work I’ve done with indigenous peoples around the world, we try to come to a collective understanding about what the indigenous experience was, and what what it means, and what some of the aspirations and the things that drove decision-makers in indigenous leadership roles were. We landed on this idea of being a good ancestor, and to be very clear, that’s not inconsistent with some of the messages that we heard in our panel this morning.

DH: But what it does is very significantly shift the time frame around the decisions we think of. Another aspect of the indigenous experience is that we see ourselves as part of the environment, not separate from it, and if we draw back from some other economists, and I’m in danger here of knowing one or two, and I know there’s very learned folks in the room, but Herman Daly, who was the World Bank Economist who said that the economy is entirely the subsidiary of the environment, and so if the environment is not in good shape, then anything else that’s reliant upon that is therefore probably not going to be in good shape either. Now, we do recognize that there’s a lag effect that we’ve enjoyed for some time, but that’s really beginning to come home. Climate change is a direct result of a mindset, a capitalist mindset of resource use and consumption based on the premise that we are separate from nature, and from that comes a set of accepted norms and understandings about what we can, and should or indeed, are encouraged to do by taxation and the legal settings, and by the understandings of what’s good or what’s desirable.

DH: If we instead think about what some of the leadership qualities of Māori leaders are, they were to ensure that the health and well-being of the environment and the people, the political units for which you are in charge of making decisions for, were taken care of. I also need to be crystal clear that it wasn’t that Māori or indigenous peoples did not extract from the environment, every society and culture has done that, but it’s the rules by which they did that and engaged with that which are very, very different. When you see the river as your ancestor and you see the mountain as your ancestor and you seek to derive user privileges from that, rather than ownership rights that can be commodified and sold as tradable markets near and sunder, are some of the differences. So once the well-being of the people and the environment of which humans are part of was taken care of in traditional Māori society, the way in which you operated was that you didn’t accumulate wealth, you distributed wealth, and I’ll introduce here, this idea of mana.

DH: I’m sure it’s a term that many of you will at least have heard of, but maybe not as many of you have dived deep into. In this building I was very privileged to have some amazing discussions and there’s been some amazing research that’s coming up around ideas of economies of mana I note that there’s an author on an amazing paper that came out in 2018, which I’m going to read a little bit of from the abstract, breaking all of the best teaching pedagogy rules. But it’s important for me to just get this right. It says that writings on traditional Māori economies have highlighted the value system that philosophically underpins them in the relational nature of trading interactions. Further, the significance of mana in sustaining economic relationships has been emphasised, leading to the concept of an economy of mana. In the paper they explored traditional Māori economies, the concept of mana, and the limited exploration of an economy of mana in order to propose future research directions for Māori economic research. I think we can broaden that to say, what can the rest of us learn from that approach? It’s the contention that enhancing our understanding of where we want to go will ultimately support the development of alternative economies that will better provide for Māori aspirations and cultural, social and economic realms. Without wanting to simplify, I have no doubt that those will flow out to the rest of Aotearoa New Zealand.

DH: Just to share some examples of what that looks like, they propose ten principles and I’ll maybe share a link afterwards and those of you that are interested in this can pick this up. Principle one is under the framing of how people make decisions, recognising that this has already come up. In panel one this morning, principle one is we increase the collective good. The point there being the collective good. We’ve already noted in really great detail how the collective good is really not being emphasised at the moment. Principle two, the intergenerational long-term outlooks, bringing in that idea of being a good ancestor. Principle three, mandated and authorised by the people. It also picks up on ideas that have come forward, there’s nothing allergic happening at all here. And principle four, guided by mana-enhancing behaviours. Now that takes a little bit more unpacking. We won’t have time to do that now. Because I really want to privilege our speakers, but I’ll just run through the last few principles. And this one relates to the theme of how people interact. It’s already been appealed from Craig and others that we actually need a better conversational space. I don’t think anyone disagrees with that. They propose that you can relate through shared experiences and there’s a desire to maintain a sense of belonging and connection with each other.

DH: Then under the theme of how the economy works as a whole, I think that underpins many of the other discussion points, that we interact with the four well-beings, and these are listed here spiritual, ecological, kinship and economic. So not the four well-beings of the RMA but four different well-beings. There’s a focus on wealth distribution as opportunity as opposed to wealth accumulation. The world provides abundance as opposed to scarcity and competition. The entire world is a kinship network of all living things. And just to give us a bit of a backdrop for why some of those ideas might have been minimised and suppressed, we need to think right back to some of some of the early politicians. Christopher William Richmond, the first minister of native affairs, complained of the social equality among Māori tribes, describing their communal ties as the beastly communism of the natives. He wanted to destroy what he called that by introducing private property and land, so we could argue that it’s those very steps, and as we’ve already noticed here, if land is part of that accumulation of wealth, we can stem it right back. There’s a point in time we can bring it to and as was also mentioned by others this morning, the economy is entirely a choice we make or choices we choose to not make. I’m simply arguing for, is capitalism the best way forward? Maybe what I’m describing is perhaps what’s being described as inclusive capitalism, bringing in ideas of mana, as we work in and alongside this vision of Aotearoa New Zealand that we so desperately wish for, and in fact, we need.

DH: Places like this gives us a place to dream and to dare to dream just a little, and I encourage us to do that, but we also need the mission that goes with it. Because if we’re just dreaming, we’re just up in the clouds, and if we’re just about mission, we’re running around with our heads cut off. But if we can weave those two together, we might get into a really amazing space. And just to bring out one example that’s already been mentioned this morning, and I appreciate your comments Honourable David Parker on the ETS, saying, It was an attempt. It’s imperfect, it could do with an improvement. Because what we’re actually seeing is that it’s privileged certain species at the cost of other types of forestry, and we’re seeing those profound negative effects. So do we throw out the idea of that? Probably not. But do we need to refine and tweak and adjust what we actually value, and maybe some of the data and information that leads into that. Hopefully I’ve done my job of really bending your minds just a little bit, and I’ve created a fertile garden for which our panellists this morning can plant their ideas into and then we might get to some great discussion coming up.

Emilson Silva: Thank you very much, Dan. I am an economics professor so I will present the topic from an economic perspective. I will focus on some principles; efficiency, equity. I will discuss that, give a little bit of detail, I am a professor after all. Then I’m going to start with some basics, and then I will build on that by looking at one example where, in practice, we have redistributive pricing, that’s going to be for the United States in energy. Then I’ll look at some dynamic effects.

ES: So how does the economic growth affect inequality, so looking at the Kuznets curve and then I’ll talk about the environmental Kuznets curve, how does that affect the environment? Then I’ll close with a recent paper that I have in which we have well-intended policies, but that also have some unintended consequences. So basic economics principles, using mainstream economics, the orthodox is based, first on an efficiency and equity benchmark that we have under some assumptions. Every competitive market is very Pareto efficient, this is what we call the first fundamental welfare theorem. It’s a remarkable achievement given, what, what we have there. But then it’s a representation of Adam Smith’s invisible hand.

ES: What is Pareto efficiency? An allocation of resources is pareto efficient if it is not possible to do an individual better off without making another individual worse off, given the resources that we have available. First welfare theorem assumptions, what are those? First are a complete set of markets, so it rules out externalities, public goods and asymmetry of information. Externalities is something that we should particularly care about because that involves the environmental degradation issues. Households and firms are price-takes, so they cannot influence price. It rules out market power. When we go and analyse this, then we have to confront ourselves with two types of economic views, or perspectives. One is normative, it’s normative economics, and analysis is normative when it is based on value judgments involving pre-established criteria and positive economics, which is why markets and institutions have evolved as they have and how they work. So when we talk about social efficiency, we are thinking in terms of a society, how can we aggregate all these members of society in order to express the views of society? That is a concept that is basically normative. There are competing ways in which we can look at that particular application. So our pareto efficient competitively driven market, even under those assumptions which are not realistic, which I will refer to. Even though it may be efficient, it may not be socially efficient. Why? Because society may disagree about how resources are distributed.

ES: So the competitively driven outcome may not be socially acceptable. It would be necessary then to let student debt, the resources, wealth, income among households to implement the socially efficient allocation. How can that be done? That could be done in principle with transfers that would be non-distortionary. But that’s very difficult to do. So we can then implement a set of taxes that are distortionary, in terms of distorting the behaviour of the individuals. We should try to have a look at, what is the tax that causes the least amount of distortion? The reality check. First we have an incomplete set of markets, existence of externalities, environmental degradation. We have public goods, for example; abatement of greenhouse gases. That’s one key example. Do we observe income levels? Do we observe pollution levels? I would say no, not perfectly. Market power in various markets, actually, that seems to be the rule rather than the exception. We have an existence of a social planner, even though we may have a social objective, but we don’t have anyone with the power to actually dictate what should be done. So instead, what we have are political economy choices, we have voting mechanisms, we have voting choices, and we must not neglect dynamic drivers. What are the dynamic drivers? Entrepreneurship, which is key in the system, so ideas. If we have inventive ideas, innovation, that’s how the system actually grows. We have these incentives for people to innovate. We should not try to inhibit those. We should actually motivate these type of activities.

ES: We have population changes. We have mobility across different regions, we have also changes demographic changes like the greying of the population, which I would say is one of the key types of problems that we should address nowadays, in addition to the climate change issue, the greying of the population to social security is also key. And we have the evolution of labour skills, given the evolution of technologies. So the first one is an example of redistributive electricity pricing in the United States. Here is an example where using mainstream economics, you can actually design a set of policies or prices that would account for inequality. That’s what we have done in this paper. Silva is myself and Levison is a coauthor of mine. So we actually look at the theory and then put that into the practice, using data from the United States to see whether the regulators in the United States effectively accounted for income inequalities within their particular jurisdictions. And the answer to that question is, yes, they do. Yes, that is taken into account. However, electricity pricing contributes little to reduce inequality because of information issues. So instead of focusing on income, the systems are focused on what is the observed consumption of electricity, and there is a weak correlation between consumption of electricity and income. Now let’s talk about some dynamic drivers. The first one which is key to this whole issue over here that we are discussing is, how does economic growth affect the distribution of income in a particular society. How does that affect income inequality?

ES: The first claim was done by Kuznets, he said that in a particular society, in the period of economic growth, the income inequality first, of course it gets worse, but then eventually it gets better. So it increases, but then it falls as the economy grows. So that has been put to the test. Recent data demonstrates, especially for developed countries, that in fact that is only part of the story. So let me just say one paper that I recommend, a recent study for Canada, Canada is, among the OECD nations, the one that is seen to be the one that has the greatest amount of income inequality, especially if you look out across different types of regions. So in this paper, they look at regional data and then they try to evaluate this question. What did they find? They find out first, population is an important factor. So that there is a correlation between, say income inequality and population density, in particular in large cities.

ES: Second, the common trend appears to be a sideways X. Think of a picture over here where in the output over here, and then in a graph. We have income per capita over here, and then we have the Gini coefficient, which is a measure of how unfair distribution of income is. So what they find is that first, there is an inverted U, which is the Kuznets inverted U. But then what we have seen more recently is that that’s followed by a U-shape, which means that as the economy grows, income becomes more unevenly distributed. So the top is getting a greater share of the overall income than the bottom. So this study, what do they attribute to this phenomenon? A lot of this study is that they have observed the manufacturing shifting away from mass produced consumer goods towards more advanced in technology, technological intensive sectors where a disproportionately large share of workers are among the top income earners. So we have seen in many of the developed countries through the process of development, where we have outsourcing, the manufacturing sector has been outsourced to developing countries, but now the concentration of R&D and other types of activities which are more inventive have their headquarters in large countries like the United States, for example.

ES: What about the environment? So for the environment, there is, in the same line for the Kuznets curve there is the inverted-U environmental Kuznets curve. So is it true that first, the environment deteriorates for some level of income and then the quality actually improves afterwards. So then we have the inverted U in terms of that. So pollution goes down. So that is a claim that was initially made by two economists in the United States in the 1990s. But then the same phenomenon happened here. The other type of assertion is that more recent works have refuted that particular type of observation However, more recent work using more recent data seem to reaffirm this particular type of relationship. In particular this paper in 2023, using European and U.S data for a large number of observations. What did they find? So they look at air pollution. Therefore they are looking at SO2 emissions. They are looking at other types of pollutants out there, which are air pollutants. And what did they find? They find that population and income are important factors.

ES: What they find is that, if you look at population intensity, their higher the population density, then the phenomenon happens over there. So then you have essentially that shape, the inverted U. And also for income, they also find this type of relationship. Now this relationship according to all the other papers, does not seem to be true for CO2 emissions. There is a key difference between CO2 and other types of pollutants. These are the types that affect the population regionally. So they care about ambient quality, CO2 emission. We have a free riding effect because it affects everybody in in the globe. Can we connect this with this? I think that there is a very interesting connection over here. So if we look at who benefited from the most recent types of economic growth, the top income earners, who would be among the population who have the highest demand for environmental quality, the top income earners. So they would be the ones who would be pressing the government to implement regulations in order to have a cleaner environment, clean air.

ES: Because as an economist, what we observe is quality of the environment, what we call a normal grid. So as income increases, the demand for that particular commodity increases. More recently with another co-author we have looked at the relationship, trying to answer this question, does the energy transition affect food prices and agricultural production? Production in OECD nations? And what we have found is that, yes, it does. What we have found is that the energy transition increases food prices. Why is that? There are some potentials over here. There might be some competition for land use. There might be other types of phenomenon as well, in terms of, looking at the energy transition, electrification may actually lead to increases in the cost of living. So the paper shows that the impact varies depending on the stage of the energy transition. It’s higher in countries further along in the transition. That’s unintended consequence of a well-intended policy, that we should incentivize electrification in order to reduce pollution emissions of CO2. One would have to take that into account. Now addressing the last question over there. So if not taxation, what should be included in the policy mix? Given the results that we have learned in education reform, we should not leave the kids behind.

ES: So if the top income earners are the ones who are benefiting from the economic growth, what are the types of skills that they actually possess? Those should be taught in universities, social security reform, the greying of the population, retired populations. They are on fixed incomes. So if a fraction of the population is having rising incomes, naturally we’re going to have disparities, fixed and rising. So then the income disparities would increase. But a greying population in the social security system, who is going to finance the Social security, the productive individuals in society? If we tax them very heavily, what’s going to happen? They go away. So one, we have to take into account that particular phenomenon. Third, the form of electrification of the economy. So what will we form? Well, if you take into account the potential trade-offs that I just mentioned, there is also another potential trade-off, when we think in terms of electrification. We are not necessarily considering, say, what are the impacts upstream, like in the mining of these critical minerals. So if we take a look at what happens over there, there’s a lot of pollution, water pollution, CO2 emissions. That has to be taken into account. If we want to think in terms of policy, we have to take into account the trade-offs, climate change versus regional types of communities. Fourth, this is in principle, I’ve done a lot of work, theoretical work, in trying to align incentives of nations that may participate in a global agreement towards reducing CO2 emissions. What might be effective? Well, there might be transfers necessary from rich countries to poor countries, but how can they be implemented?

ES: There are some mechanisms that are being discussed right now. Some of them might be like climate clubs. That may involve questions of trade versus questions of environmental concern. But the key issue is that transfers, if implemented, should be conditional. So you make a transfer but then you require action. And that’s what I have to say. Thank you very much.

Billie Lythberg: So some of my work is done on distributional impacts, both of carbon policies but of other types of policies. And so just to set the stage a little bit, a couple of the common arguments against carbon policies are that they put a greater burden on lower income households and they are expected to have negative effects on jobs, businesses and GDP. However, previous research has shown that these policies can be progressive, especially if you have additional measures that offset those negative effects.

BL: Research also showed that the net employment effects are generally small. Most job loss, not all job loss, but most job loss is usually due to less hiring, and not due to separations. There’s also evidence to show that broader policies can have fewer net effects than more targeted policies, which seems counterintuitive, but it is because if you have broader policies that are effective for aspects of the economy that gives workers who are being hired in areas of negative effects places to go with positive effects. It allows for that transition of workers, which has a cost. But it gives more positive effects that they can move into. There’s a report by the High Level Commission on Carbon Pricing and Competitiveness that says that research has shown that well-designed carbon policies can be consistent with growth, development and poverty reduction. If you haven’t seen that report, it’s also known as in the Stern-Stiglitz report. I would highly recommend you take a look at that.

BL: They talk about carbon prices as being integral in these types of policies, but they also talk about the need to have non-price interventions as well. Another aspect that’s often not included in some of these analyses is some of the health benefits, for example, that can come from having less pollution. So one evaluation of fuel taxes in the U.S found that the taxes were actually cost savings when you included health benefits, than if you didn’t. It’s about looking at that whole package. You look at all of the costs, and all of the benefits, when you look at the effects of these policies. Joseph Stiglitz, who is one of the coauthors of the Stern-Stiglitz report and also a Nobel Prize laureate, he says that this more nuanced policy approach, while important, requires a greater understanding of the structure of the economy and of those distributive effects of these policies than an approach localised simply on carbon taxes. It’s really important that, when you implement these types of policies, you not only consider those distributional impacts, but you understand the structure of the economy and how it’s likely to respond. Otherwise, you end up having some of those unintended consequences, and even in some of the policy effects, there is a lot of nuance, and it can be very confusing for people when listening to these kinds of discussions. In general, in developed countries, it’s pretty much regarded that the carbon tax burden from domestic energy consumption, tends to be regressive. However, taxes on electricity are generally more regressive than taxes on heating fuels and transport fuel taxes are generally not regressive. They tend to be either neutral or progressive, depending on the situation.

BL: Taking into account all of those different aspects of what’s being taxed and how it’s being taxed is really important to understand how that’s going to play out. In terms of household budgets, and business budgets, it’s really, really important to think about all of these different aspects. So, for example, in New Zealand, lower income households are more likely to live in rentals which tend to be colder, damper and mouldier, less energy efficient. And so, that adds to their options. So they often have less ability to not only absorb those increases in the prices, but they also have less resources to respond to them. That’s where some of those redistributional aspects come in. So what can be done? One of the big things that is talked about in the literature is combining policies that complement the carbon pricing or carbon taxes. Stiglitz argues, in a follow-up paper that he does after the Stern-Stiglitz report, that simple regulations to induce a shift to preferred technologies can actually be faster, more efficient, less uncertain, and have fewer distributional effects than carbon pricing.

BL: So we often think of carbon pricing as being the most efficient, and this is right. But there’s this other negative aspect that you have to take into account when you’re thinking about implementing these types of policies. The Stern-Stiglitz report talks about ways to recycle revenues from carbon taxes that can be reinvested, you can do in-kind or in-cash transfers, you can invest in social safety, net education, health. You can do wage subsidies in growth sectors to help absorb some of those workers that are losing their jobs in declining sectors. You can have R&D and innovation. You can have infrastructure investments to accelerate growth in certain industries or regions that are the most negatively impacted. These are those offsetting measures that can help reduce the negative distributional impacts that we see with some of these policies. And I just wanted to add, in my distributional impacts hat, it’s not limited to climate policy. I did an evaluation of supply shocks, it has some different employment effects. But those effects ripple throughout the economy. So even the specific sectors may be hit by a specific shock.

BL: Eventually those changes have to get absorbed in the rest of the economy and we have to think about that. So we really need to consider all of the costs and all of the benefits of these different types of policies and with my research hat, we really want to build on our previous research. But as we do that, we have to think about how that really applies to the New Zealand situation. We can’t just look at the U.S paper and think that it’s necessarily going to apply here, especially when low-income households here tend to be much more dependent on electricity for heating, for example. There’s also ways that policy design can help impact those distributional outcomes, and it’s really important, I think, for policymakers to get that public support for policy. If I had someone tell me, well, politicians just need to do the right thing, it really helps if the public sees the benefits. And one thing that worries me is just misinformation and disinformation in this space. I think it’s really important to fight that effect and go back to some of what the research says and try to show the public why these policies are so critical to the future. Thank you.

David Hall: Kia ora tatou, my name is David Hall, and my affiliation, has been identified as AUT, which is not wrong. I teach a course over there on climate action, which integrates the social sciences of climate action. But that’s all I do there really now, and I’m going to talk about my other roles, first as a co-founder of Rewiring Aotearoa, and second, as a policy director with the Toha Network, and this is me stepping into, not just theorising about climate action, but doing climate action. Through all of that, through the theory and practise one thing that stays with me, I think, is just transitions.

DHall: It’s sad that that concept has become politicised because I think it is a universal challenge. Every party’s constituency faces pressures and sources of tension around transitions, and all of those parties are going to have to be sensitive to those stressors in their own electorates and constituencies. I think it’s helpful to distinguish just transitions from climate justice. Climate justice is much more taking those concepts of justice and applying them to the impacts of climate change, where are the impacts being distributed, what parts of the world face harsher impacts than others?

DHall: Just transitions is much more around thinking about justice in terms of action and transitions, the doing, and recognising that that doing can also present and trigger tensions and forms of unfairness, forms of injustice. It’s crucial to recognize that, because when people feel that unfair and unjust things are being done to them, they fight back, they push back, there’s a backlash. That means that the transition starts facing headwinds, and the transition that you’re trying to precipitate slows down or won’t happen or might even go backwards. You get a backfire effect. There’s multiple dimensions to a just transition. Recognition is an important justice-related concept. Recognizing that different groups will face different effects from these transitions. If you’re disabled, then the shift from private vehicles to public transport may raise different sorts of challenges, getting access onto busses and trains in a wheelchair and so on. So keeping these considerations front of mind. Another dimension is representation. Do people feel that their own perspectives and their own ideas are contributing to the decisions around the design of the transition? How it’s being undertaken. Are they being allowed to participate in relevant decision making?

DHall: But the theme today is, is really distributional impacts. What are the costs and benefits of undertaking that transition, where are those costs and benefits falling, are they exacerbating and intensifying existing inequalities, are they justice-aligned in the way that we’re using the transition to deal with historical inequities? You know, using that as an opportunity to address those, these are the sorts of considerations we need to think about. Let me turn to Rewiring Aotearoa. So as I said, I’m a co-founder of that and a policy advisor, and our mission is to electrify nearly everything, recognising that there’s some industrial processes and long haul aviation and so on, which are unlikely to be electrified. But recognising that most other things could be electrified. A major focus for us is the electrification of homes, farms, small businesses, private vehicles, and so on. And, if you actually think about our total emissions, and especially our domestic and domestic emissions, where we have, as consumers and as citizens, the greatest decision power, especially those decisions being made at the dinner table about whether to install rooftop solar. Whether to get a home battery, whether it’s a switch from a fossil car to an electric car. These are all decisions being made at the dinner table. Those decisions actually account for about 31% of our domestic emissions, not including those emissions that we’re exporting overseas, especially agricultural emissions. So there’s a significant amount of relatively low-hanging fruit in this sector. If we can transition homes and private vehicles to the electric equivalents, Lynn touched a bit on this when she was mentioning the work by Joseph Stiglitz and Nicholas Stern, that what one of the things is which makes this area quite enjoyable is that technology changes are such that an incredibly positive economic story is emerging, where it’s not just about reducing emissions, it’s about also reducing cost of living, reducing expenditure in different ways.

DHall: Rewiring Aotearoa did some calculations around what people are spending on their energy in homes and vehicles. The average cost of energy from electricity from the grid is in the region of $0.30 per kilowatt hour. But if you have rooftop solar, you’re kind of getting that electricity for around $0.11 per kilowatt hour on average. That’s going to obviously vary depending on the circumstances of the house. So it’s much cheaper electricity. If you’re combining that with the battery and combining that with an electric vehicle, you’re driving some serious cost savings. The costs of petrol are some of the highest energy-related household costs that people bear. In our most recent reports, we calculated that New Zealanders are spending, all up, around $20 million a year on fossil fuels. And a large portion of that annual expenditure can be avoided through electrification. If we just focus on homes and private vehicles, then we could feasibly, and have an ambitious electrification transition, we could potentially avoid the fossil fuel costs of about $10 billion a year by the late 2030s. That’s not even to include the opportunities to switch off fossil fuels through industrial transitions and the adoption of new technologies in those sectors. We could drive down that annual expenditure quite significantly, and therefore decouple ourselves from geopolitical dependencies and the volatility of international markets, which also have challenges, as we all know. There is a potentially positive story here, where some of the financial stress that many homes face today could be alleviated. Lynn also mentioned the cost of air pollution. We don’t consider all of these costs, but one study done in New Zealand estimated that, in 2016, the health related costs of air pollution, mostly from nitrogen oxide from fuel emissions, costs about $15.6 billion that year.

DHall: These calculations are always questionable but it gives you a sense of the impact from respiratory disorders, time away from work, lost economic productivity, the health burden that is associated with that. So there’s multiple benefits. The challenge of course is that many of the households who would benefit most from that alleviation of financial stress are in the worse position to be able to afford all of the kit, the rooftop solar, the battery, the electric vehicle. And so technology is such that a lot of this is being market-driven. and, the cost of this technology will come down. But as it stands, if we just leave that transition to happen through these innovation and market processes, it will be wealthy and well-to-do households that electrify and low-income households will be left to face those volatilities of fossil fuel, those ongoing costs of fossil fuels, the price volatility that’s associated with them, and the increasing price that may eventuate as a result of policy, including the Emissions Trading Scheme, which in principle should increase the price of those fossil fuels. So, we need a policy mix. We clearly don’t have the right one currently. Around Auckland, I think it’s about 2% of households that have rooftop solar. And if you look at Melbourne, same latitude, similar sunshine hours, Western Melbourne suburbs have solar penetration of about 40%, and about 30% across Victoria. Quite a difference. They began with subsidies. So that obviously has made a big impact, and that’s also driven down the cost of installation and created the economies of scale, which has a self-perpetuating momentum. We don’t have that here yet. The costs of installation are high, the risks of not having a good job done. are also high, as I found out anecdotally.

DHall: There’s significant work to do, and I think there’s a real risk that the way that this transition may play out, if we don’t take a more deliberate and intentional approach to it, it’s going to put pressure on the people who are least able to respond. And let me turn now to Toha. There’s a similar challenge there, just transition related challenge, as farmers and other landowners face different sorts of pressures. Some of them are regulatory. And you hear complaints about the new burden of regulation and collecting information and so on to meet different regulatory standards. That’s also increasingly coming through markets. It’s not just a problem coming from governments. Big businesses, big international companies which buy produce are expecting to know what their scope 3 emissions are through their supply chains and to get a sense of the climate impact across their value chain. And they’re also increasingly under the expectation to disclose climate and nature related impacts, risks and opportunities in their value chains and to incorporate that data in their financial disclosures. Here, we have a regulatory regime for climate risk related disclosures. And this voluntary regime around nature related risk disclosures is following up. This also has challenged the idea of this transition in agriculture and the land use sector towards better sustainability outcomes. But for the people on the ground, the farmers, the foresters and so on, it’s putting an enormous amount of pressure on them to collect data for large companies and to send that back upstream.

DHall: Another burden which is being put on the people who often have the least capabilities, the least time, the least resources to be able to deliver that. So, what Toha is doing is developing digital public infrastructure to join up that supply and demand for this data. The companies have the demand, people at the front line have the supply of nature-positive impacts. They’ve got the capacity to go out there and make their landscapes more resilient. Make them more biodiverse, and our infrastructure enables that supply and demand to find one another. We have new forms of measurement. We have a measurement platform that enables farmers and other landowners to track changes on farm and on site. We have a data-sharing network which enables them to send the data up the supply chains. And because we are a Māori-led organisation, that data sharing has been designed taking indigenous data sovereignty into consideration, so that that data is treated with due respect for the mana that the data carries, from the ecosystems and species which it represents. We also have a digital payment system, we’re using digital currencies to enable those companies to pay back down the supply chain for the data that they need to make their financial disclosures. And in that regard, creating that circle, that virtuous circle. Again, we are Māori-led company. And so the design of our system has been informed by Māori economic concepts, which Dan was alluding to earlier, ideas of the economy of mana, Tauututu, an economy of reciprocity, understanding that there’s a need for benefit-sharing. If these large companies are expecting this data, they ought to be investing downstream, to enable that to happen.

DHall: Our first pilot for the system, we will, hopefully, be announcing next week, a Māori land block at the very tip of the East Cape, Te Kautuku. It fulfils a recommendation, which we were named in, in the ministerial inquiry into land use. Recommendations to deliver a co-investment pilot in that region, for whenua Māori to also help whānau, hapū, to overcome some of the financial barriers that they face for getting access to capital, for developing whenua Māori. So, that’s how we’re using this digital public infrastructure, enabling a more just and fair way for people to respond to the challenges that we face around both climate change. and biodiversity loss.

Pauline Herbst:  If you missed part one of this symposium, you can find this on the Ngā Ara Whetū channels on Spotify, Apple or YouTube.

The ideas expressed in this podcast reflect the speaker’s views and are not necessarily the views of Ngā Ara Whetū.

Music: “What Goes Up” © Tim Page 2024; Production: Ben Goldson, Pauline Herbst, Tim Page; Webpage: Pauline Herbst & Ben Goldson.