New Zealand Labour: where to now?

Will they get off that wobbly fence?

Nov 19, 2023

If I could award a prize for the best political poster in NZ history, it’d go to Labour’s ‘Retain the Key to Prosperity’ (1938) for its powerful design and compelling words.

But Labour doesn’t use the word prosperity much these days. And it can, of course, mean different things to different people.

Middle-class Kiwis may nowadays associate prosperity with economic growth and wealth accumulation, so their key to prosperity would look more like John Key than the key in Labour’s 1938 poster. They may associate Labour with spending (if not wasting) the money earned by the people who really know how to prosper.

The first Labour government’s success can be boiled down to: employment, education, healthcare. Savage and Fraser’s welfare state was premised on full employment. Admittedly, in those days, that meant male breadwinner employment, but the welfare state stood for employment – not unemployment and not the 1990s notion of dependency. A job meant dignity. Social security was there when needed, and ‘benefits’ did away with the indignity of ‘charitable aid’.

Labour had a vision, the policy to back it, and convincing imagery with which to express it. Then they achieved things that met people’s needs, like building houses that people still live in.

In principle, today’s Labour Party hasn’t shifted from those basics. In a speech in August, party leader Chris Hipkins referred to some ‘common aspirations. A good job, a home, quality education for our kids, good healthcare when we’re sick, secure communities, protection in retirement.’

But, in a recent research paper I co-authored with Rob Mainwaring and Charlie Lees, the contemporary labour parties (UK, NZ and Australia) are ‘operating from a narrower base of core values’. (See details at the bottom of this post.)

Back in January when he became PM, Hipkins was saying: ‘There are people now working really, really hard, some of them might be working multiple jobs. They are contributing enormously to New Zealand and to our prosperity but they are feeling that they're not able to get ahead. We need a tax system that recognises this, that actually makes sure that those who are really striving, who are putting in the hard yards, actually feel the reward for that.’ (My italics.)

Hipkins disappointed many on the left, however, when he ruled out some tax changes that might have made the system fairer and helped provide basics such as good housing and healthcare. There’d be no capital-gains or wealth tax. The party may now reconsider this following the election defeat.

Labour’s 26.9 percent election result last month wasn’t their worst under MMP – but it wasn’t far off. Eventually they’ll get their mojo back. But how?

The caucus has chosen to retain Hipkins as leader, at least for the time being. Leadership is not Labour’s big problem at the moment. Labour’s solution (as Hipkins has hinted) depends on finding the right vision and policies.

Hipkins admitted that Labour ‘lost Auckland’. Going by a pre-election Guardian Essential poll, moreover, it appears they’d also lost younger folk and men. The modal demographic that Labour needs to win over (or win back) could be a male Aucklander under 40 (rather than a baby-boomer who’s grumpy about bilingual signage). This ‘lost voter’ is an internet-savvy person who has a lot to work and strive for, and whose mother-tongue may or may not be English. Such people may feel that prosperity is eluding them and that Labour doesn’t represent them. The Key to prosperity, as far as they can recall, was that rich National guy.

The problem for these hypothetical young workers is that not enough of the value that they produce gets represented in their bank accounts, and too much of what does appear there goes straight to the landlord.

In aggregate terms, NZ Inc is richer than ever. It’s just that the owners of capital (including houses) retain a greater proportion of the economic value produced – which works for the prosperity of some but not all. And so if the workers want to earn more, they’ll just have to work more hours. Retraining for a higher-income profession may be too costly.

The Labour Party is likely to stick to the basics: employment, education, healthcare. And building public housing. But how about grasping the key to prosperity? This isn’t post-Depression 1938, when just getting everyone a basic education was a big achievement, so a modernised approach is needed now.

While addressing prosperity for workers, then, Labour could reclaim productivity – another word that’s been controlled by the right. Rather than work longer hours or more than one job just to get by, any worker would love to be earning more per hour. That kind of productivity delivers prosperity. The extra money largely gets spent, helping to boost the wider economy.

Labour’s restructuring made an embarrassing mess of institutes of technology and polytechs, but these training organisations are critical to many people’s chances of developing their skills, earning higher incomes and achieving better standards of living. Advanced skills development is the kind of policy action that actually reduces inequality in the long term. Labour could do more to capture the public imagination around skills, productivity and prosperity.

Immigration has been relied on too heavily to fill skills gaps, by both major parties. It’s the easy path to economic growth, as one country robs another of its educated workforce.

A new low in New Zealand politics – for which Chris Hipkins bears a share of responsibility – was reached in the recent election campaign when party leaders started accusing one another of racism. No one prospers from that kind of thing, other than populists. But Labour had little else left on which to differentiate itself from National. Hipkins resorted to accusations, including a dig about Sam Uffindell’s past offence, rather than inspire people with vision.

Amid the talk of a cost-of-living crisis, ‘the key to prosperity’ was mislaid. Proposing to remove GST from fresh fruit and vegetables didn’t uncover it.

Christopher Luxon hasn’t handled government-formation negotiations well, by most accounts. But Labour has little to gain from smirking at Luxon’s three-party government and hoping it’ll fail. After all, which party formed an equally dubious arrangement back in 2017?

Labour’s nightmare for this next three years would be Luxon pulling things off quite well, National polling over 40 and then forming a majority coalition with ACT once NZ First gets dumped again in 2026. That could happen, after all, and then three years in opposition stretch out into six, if not nine.

Planning to be ‘a formidable opposition’ is an admission of defeat. The trick is to imagine what it will mean to be a great government.

Find that key to prosperity again, Labour. Reduce inequality by improving workers’ skills and productivity.

Government-formation negotiations are ongoing as I write. Rather than add to the speculation, I’ll write about the agreements once they’re finalised and published – possibly in a special mid-week newsletter, depending on timing.

Germany, which also uses MMP, has come up in comparison with NZ, courtesy of Winston, so here’s a note about the most recent German federal election. That election was held on 26 September 2021, and coalition agreements were finalised on 23 November – almost two months later. The coalition government comprised the Social Democratic (SPD), Free Democrat and Green parties. In NZ terms, that’s not unlike Labour, ACT and the Greens. The SPD had won 25.7 percent.

Inequality

[For those who are up for a longer read, here’s an extract from my forthcoming book.]

The degree of economic inequality presently in the world is morally repugnant and politically divisive, and higher inequality correlates with lower trust in government. Although economic inequality between countries declined at the outset of the twenty-first century (pre-Covid 19) due to economic growth in China and elsewhere, inequalities within countries increased, including in China and the United States. In 2015 the OECD reported that the gap between rich and poor was the greatest it had been in 30 years within most developed countries. Middle and lower-middle classes were ‘squeezed’, as the dividends of growth were captured by super-rich households and manufacturing jobs went to lower-paid workforces in emerging markets.[1] The growing disadvantages faced by low-income households in rich countries included greater barriers to high-quality education and training, and hence wasted human potential and reduced social mobility. The rise of non-standard or precarious employment became a significant driver of inequality. Women were 16 percent less likely to be in employment and (when employed) earned on average 15 percent less than men. The OECD pointed out that economic inequality is not only bad for social cohesion; it also reduces long-term economic growth, especially by discouraging investment in education and training.[2] These three factors (education, employment conditions and gender equality) are matters that call for effective government and law. And it’s in the interests of the rich as well as the poor to control economic inequality by improving the opportunities and living standards of the worst-off households. The Covid-19 pandemic, however, exacerbated economic inequalities between and within countries. There was a global economic shutdown in 2020, but the rich tended to do well, as asset prices increased, and higher-paid workers maintained their incomes by using digital media to work from home. Emerging markets and developing countries experienced worse economic outcomes from the pandemic due to job and income losses, fewer digital resources, much lower vaccination rates, rising inflation and the burden of debt repayments.[3]

Surveys indicate that four-fifths of people across the OECD believe that income inequalities are too great in their country. They may not have a sophisticated statistical grasp of it, but people’s perceptions are more or less in line with reality, and their level of concern about inequality grows as the problem and their understanding of it increase. Opinions tend to be more polarised, however, about the causes of income inequality and the role of government.[4] How much inequality is too much? To what degree is poverty the result of personal choices? To what extent do redistributive policies fix the root causes of inequality? After three decades of neoliberal policies, even in the face of rising inequality in developed countries, it’s become harder for social-democratic parties to propose raising taxes on the highest incomes and boosting public services.

Walter Scheidel’s historical analysis reveals, moreover, that inequality tends to rise in times of peace and prosperity as elites take command of greater shares of income and assets; whereas equalisation has tended to be an unplanned outcome of large-scale violence, system collapse or pandemics. The Black Death of the fourteenth century wiped out large proportions of populations, leading to labour shortages and hence higher wages. The ‘great compression’ of the twentieth century between roughly 1914 and 1945 (which saw a decline of inequality within most wealthy countries) was an outcome of catastrophic world wars, communist revolutions and a global economic depression. On both sides of the wars, and regardless of types of political systems, ‘mass mobilization for the purpose of mass violence was the engine of a transnational transformation of the distribution of income and wealth’.[5] As a result of wartime spending and mobilisation, higher top marginal tax-rates (maximum rates that apply to the highest incomes) were normalised in industrialised countries, and hence, following World War II, we saw expansions of public services and social security, better wages and reduced inequality in incomes. The need to conscript able-bodied soldiers and to compete ideologically with communism, however, lurked beneath the humanitarian surface of social security policies in capitalist countries. After the Soviet Union collapsed in 1991, welfare was reduced to poverty-level safety-nets, and renewed global economic competition put pressure on for lower taxes to attract foreign investors. There’s little evidence that peacefully and democratically negotiated redistribution produced the equalisation that occurred during the twentieth century; it appears instead that wars, revolutions and economic collapse were the catalysts. If millions of deaths and widespread losses and suffering were the price paid for conditions conducive to reducing inequality, then we need to think carefully about how governments could effectively make the necessary changes voluntarily in future. A pessimistic conclusion would be that the relatively low levels of income inequality in most developed countries during the three decades following World War II were historically exceptional, rather than norms to which we could expect to return. We needn’t bow to this pessimism, however, nor give up on reducing inequality. It’s now widely accepted that high inequality can retard economic growth, that the benefits of growth don’t just ‘trickle down’, and that there’s a role for governments to correct inequality. International agencies take rising inequality seriously, and the discipline of economics is increasingly concerned with distributional differences between groups and not just aggregate output or statistical averages.[1] But there’s a shortage of political consensus and will in the OECD countries to make the policy changes that would help.[4] In the meantime, inequality has been used as a grievance by disruptive populists.

Beginning in the late 1970s, neoliberal policy reform exacerbated inequalities, or at least failed to hold them in check. Central bank independence meant a narrow focus on controlling inflation and hence pressure on governments to borrow and spend less (‘fiscal discipline’) in order to keep pressure off interest rates.[6] Tax cuts and fiscal constraints were called for by neoliberal policymakers, thus limiting governments’ options for addressing poverty and inequality. Greater cross-border mobility of capital intensified international competition and created demand for investor-friendly policies with light regulation, ‘flexible’ labour markets, low wages and low corporate tax-rates. Regressive tax cuts handed the rich higher disposable incomes. In short, rising economic inequality within the prosperous developed countries (from the 1980s) was at least partly due to things governments had done. If governments can do things that increase inequality, then it seems logical that different policies could control or even reduce it. Indeed, many practical policy remedies have been suggested. Here’s a list of some of them:

Make income-tax rates more progressive, especially by raising the top marginal rate.
Raise social security entitlements, including child-related tax credits.
Subsidise basic food commodities such as fruit, milk and bread.
Raise the legal minimum wage.
Improve legal protections for job security and programmes for retraining.
Invest in good-quality public housing with income-related rents.
Raise capital gains and inheritance taxes.
Crack down on corruption, tax evasion, offshore tax havens and money laundering.
Give companies incentives to reward employees with shares.
Mandate and guarantee workers’ savings and investments.
Invest more in public education and relieve student debt.
Invest more in universal public health care, including dentistry.
Impose limits and transparency on political campaign donations.
Make it easier for people to vote.

But it’s not clear how far public policy can reduce inequality in future, and there may be limited public support (or political courage) for policies such as the above. Even though OECD economies have grown, ideas about scarcity have persuaded many people that a fairer society is somehow ‘unaffordable’. Moreover, some of the above policies may have undesirable side-effects (for example, raising tax rates encourages tax avoidance) and some may require international cooperation that can be hard to achieve (as is the case with controlling money laundering and offshore accounts). Despite such reservations about reducing inequality, and the fact that it has largely increased in recent times, we now have extensive statistics and knowledge about the problem, and there are positive ideas about what governments can do about it. No sane person would suggest starting another world war to maximise demand for labour, destroy capital assets, raise taxes and hence equalise incomes again. But international agencies do express concern about growing inequality and there is some consensus about measures that governments can take to control or reduce it, especially through education and training – even though the qualifications divide can also create inequality.

Notes

[1] Milanovic, Branko. 2016. Global Inequality: A New Approach for the Age of Globalization. Cambridge, MA: Harvard University Press.

[2] OECD. 2015. In It Together: Why Less Inequality Benefits All. Paris: OECD Publishing, URL: https://doi.org/10.1787/9789264235120-en (accessed 14 September 2022).

[3] World Bank. 2022. Global Economic Prospects, URL: https://openknowledge.worldbank.org/bitstream/handle/10986/36519/9781464817601.pdf (accessed 13 January 2022).

[4] OECD. 2021. Does Inequality Matter? How People Perceive Economic Disparities and Social Mobility. Paris: OECD Publishing. URL: https://doi.org/10.1787/3023ed40-en (accessed 14 September 2022).

[5] Scheidel, Walter. 2017. The Great Leveler: Violence and the History of Inequality. Princeton: Princeton University Press. See p. 165. Thomas Piketty agrees that ‘the reduction of inequality that took place in most developed countries between 1910 and 1950 was above all a consequence of war and of policies adopted to cope with the shocks of war’. Piketty, Thomas. 2014. Capital in the Twenty-First Century. Cambridge, MA: Belknap Press. See p. 20.

[6] Aklin, Michaël, Andreas Kern & Mario Negre. 2021. ‘Does Central Bank Independence Increase Inequality?’ Policy Research Working Paper, no. 9522. Washington, DC: World Bank, URL https://openknowledge.worldbank.org/handle/10986/35069 (accessed 25 October 2022).

New Zealand Labour: where to now?

Will they get off that wobbly fence?

Inequality

[For those who are up for a longer read, here’s an extract from my forthcoming book.]

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