Why the Big Kahuna

The Big Kahuna recognises a long forgotten truth about modern market-based economies – they produce an ever-growing abundance of stuff but if left to their own devices lead to fewer and fewer people owning more and more of it – a growing ‘concentration’ of resources in the hands of a few. A growing concentration of wealth can bring wide-ranging economic, political and social problems.

If, as is the case in New Zealand at present, considerable wealth is only lightly taxed (or not taxed at all), this natural tendency is accentuated (and overall output is less than it could have been).

While Adam Smith is often quoted by economists keen to justify leaving markets to themselves, the truth is that Smith, the 18th century original architect of economics, was aware of this aspect of modern economic systems and keen to address it. He proposed policies that directly redistributed wealth.

The impression we get today is that economic policy addresses something very different – short term ups and downs in output and prices. Economists (and the politicians they advise) have become obsessive demand managers and, watching them, we’ve all been tricked into thinking that growing GDP is all we should be concerned about. That’s on par with focusing on driving the truck, but forgetting to maintain it. We’ve completely lost sight of the more fundamental purpose of economic policy – to ensure the economic system delivers improvements in well being. And the irony is that in missing this, we’ve created the conditions that have put the economy at risk, making growth more elusive and the economy more unstable than it needed to be.

The politicians and their bureaucrats may have missed the point, but there are plenty of high profile economists (Nobel prize winners among them) who have not. Most recently The International Monetary Fund has put the view that increasing inequality has contributed to the global financial crisis:

Restoring equality by redistributing income from the rich to the poor would not only please the Robin Hoods of the world, but could also help save the global economy from another major crisis. [i]

The Big Kahuna directly addresses a key objective of economic policy – to redistribute effectively from those with wealth and high incomes to the rest of society. It addresses the very issue that concerned Adam Smith. It does this by taxing wealth comprehensively and providing a basic income to all in society.

At the same time the Big Kahuna corrects for distortions in our tax and transfer system which have not only allowed those with wealth not to pay much tax, but has led to capital and labour being wasted – something which has hampered New Zealand’s growth record and made the economy more unstable (more vulnerable to asset price bubbles for example) than it had to be.

[i] Kumhof, Michael and Romain Ranciere (2010) ‘Leveraging Inequality” , Finance and Development December 2010 Volume 47 Number 4. Pg 31