Inequality in New Zealand is rising. This is a fact. What is not clear is why some people think it is a problem.
A recent book edited by Max Rashbrooke, Inequality; a New Zealand Crisis, portrays an alarmist view of an unfolding dystopian disaster. However, Rashbrooke and many of those concerned at rising inequality fall for the zero-sum fallacy; the idea that there is a set amount of cash in the economy.
The fallacy goes that if Bob has made an extra dollar then he must have taken it off someone else; the rich get richer and the poor get poorer.
The easiest way to dismantle this illusion is to imagine two farmers. The first is content with his lot but the second works extra hours to build himself a new cow shed, making his farm more valuable. He has become richer but not at the expense of his neighbour.
Economic growth is driven by innovative entrepreneurs adding to the total economy. They sometimes become rich by retaining some of the extra wealth they created. Equally, a surgeon who works long hours will derive a large income, but only as a result of repairing the lives of his patients; both benefit from the transaction. We can reduce inequality by restricting the amount of operations he performs, and rising income tax has that effect. However, that will not reduce poverty, it will exacerbate it. The rich will buy the reduced number of operations and the poor will miss out.
