Tim Hazledine: Greedy warriors of privilege threaten our Decent Society

Why does the NZ economy now need 26 chief executives to be paid more than $1m a year when 11 years ago we had none? Photo / ThinkStock

The OECD report Divided We Stand: Why Inequality Keeps Rising created a flurry of interest in New Zealand when it was published this month.

Attention focused on the first figure in the document, which showed increases in income inequality in most countries from about 1985 to the late 2000s, with NZ leading the pack.

But this is old news. The big leap in inequality in this country occurred between 1987 and 1995, as a direct consequence of the Rogernomics "reforms", which emasculated trade unions and created plenty of get-rich-quick schemes at the other end of the scale.

Since then, inequality has trended much more slowly here, while other countries, such as Australia, have caught up.

However, the net result is a world significantly more unequal - at least among the rich countries - than it was a generation ago.

What is happening here? For some really startling data you should go to the last chapter in the 390-page OECD report.

Here the spotlight is on just 1 per cent of the population - the highest-earning 1 per cent. Their share of the cake underwent a long secular decline over the first eight decades of the 20th century.

But then, from around 1980, there was a turnaround, especially in the English-speaking economies, where the neo-liberal revolutions of Thatcher and Reagan gained the most traction.

The income share of the top 1 per cent in the UK doubled from 7 per cent to 14 per cent. In the United States, it has more than doubled, from 8 per cent to 18 per cent.

In New Zealand, the trend has been more muted - from about 6 per cent in 1980 to 9-10 per cent now. But in all cases, these are very large sums of money and they account for a good deal of the widening gap between rich and not so rich.

It has happened across the board, in private and public sectors.

In my own workplace, the University of Auckland, the vice-chancellor's annual stipend is $640,000. A decade ago his predecessor's salary was $360,000.

That is a more than 75 per cent increase in 10 years or about 40 per cent once you adjust for inflation.

At the same time, we, the front-line teaching and research staff of the university, have received about a 10 per cent increase in our rates of pay, adjusted for inflation.

So, is there any objective reason why Professor Stuart McCutcheon, the current vice-chancellor, should be paid 40 per cent more than Dr John Hood earned for doing the same job in 2001, or indeed why Dr Hood should have received an even larger premium over the salary of his distinguished predecessor, Sir Colin Maiden?

Is there any objective reason why vice-chancellors' pay should have increased in real terms four times more than pay on the shop-floor?

The answer is: no. No objective economic reason justifies these income discrepancies.

There is no evidence that McCutcheon is "worth" 40 per cent more than Hood, or six times more than a senior lecturer.

Nor is there any objective rationale - in terms of increased contribution to the economy - for the even larger pay discrepancies generated in the private sector. Why does the New Zealand economy now need 26 chief executives to be paid more than $1 million a year, when 11 years ago we had none?

This may seem extraordinary. How could these huge salaries not be tied somehow to value for money? But, that's precisely how they can go up so much and so quickly.

If there are no fundamental economic considerations involved, the game basically becomes "pick a number".

And that's what the cosy remuneration committees of company boards, and their sycophantic "executive remuneration consultants", do. They put a respectable gloss on the inexorable pay increases by "benchmarking" with someone paid even more somewhere else - such as in Australia - whose next year's salary will itself be benchmarked upwards and so on - an endless happy upward spiral.

So who should care about this? You'd think those on the political left would care, and they do complain, but it was their preoccupation with identity politics and the beneficiary society that left the gates open and undefended when the warriors of privilege roared in and purloined the booty.

It's really the right who should be most concerned, because the hollowing out of the earned income distribution is a fundamental threat to the long-run viability of the market economy.

Marx and the other old critics of capitalism complained that it was all about "capital exploiting labour".

Marx would probably be as surprised as the rest of us to learn that the modern version of capitalism has the workers exploiting the capitalists.

That is, the upper echelon of workers - the top 1 per cent and their acolytes - extract profits from the nominal owners of their businesses, the shareholders, as well as holding down the wages and salaries of middle and working class employees.

Many thoughtful right-wing politicians and business leaders - from Warren Buffet on down - are deeply worried about the consequences of unrestrained short-sighted greed.

Their worries have been heightened by the global financial crisis, which could not have happened in the world economy of, say, 1980.

If I have a New Year's wish for New Zealand, it is that our politicians and other leaders will take seriously this threat to the Decent Society, and perhaps even find some common ground in doing something about it.

*Tim Hazledine is a professor of economics at the University of Auckland.