Just-published ABS figures on income inequality are a good opportunity to blog on this topic, which I’ve intended to cover ever since co-blogger Chris Sheil blogged his hell in a handbasket post.
Michael Costello also focused on the ABS figures in yesterday’s Australian. The ABS stats covered the period 1994-2001. However, as a former Kim Beazley Chief of Staff, Costello naturally focused on the 4 years of the Howard government, and came up with some fairly spectacular numbers. I suspect they’d be even more spectacular if you included the last 2 years as well, because I’ve seen no recent sign of abatement of the Gordon Gekko syndrome (as witnessed by the irritating proliferation of home renovation and auction frenzy lifestyle TV shows). Costello says:
The bureau figures showed that during the four years to 2000-01, the incomes of the top 20 per cent of Australians have grown seven times faster than those of the bottom 20 per cent that’s right, seven times faster and 50 per cent faster than middle income earners. During those four years the income of that top 20 per cent went up by $109 per week and of the bottom 20 per cent by $3 per week.
On the other hand, just about everyone’s income has risen in real terms, so poverty in real terms (as opposed to Henderson Poverty Line relative ones) hasn’t increased. So is there anything to worry about? Why shouldn’t the rich get richer a hell of a lot quicker than the poor? Isn’t it just churlish envy to object? In part maybe that’s true. However, this is where those happiness studies come in, purporting to show that more money and possessions don’t make us happier. I’ve taken issue previously with the way people like Clive Hamilton deploy such research. However, there’s at least one aspect where I think they tell us something important. They indicate that the reason people (at least generally) aren’t made happier by increasing wealth is because most of us assess our material satisfaction relative to others around us. It’s the “keeping up with the Jones’s” syndrome expressed statistically, combined with “further fields are greener” dissatisfied yearnings.
If we assume the correctness of the happiness studies in that respect, then the fairly dramatically increasing inequality reflected in the latest ABS figures is leading quite directly to an increase in net unhappiness levels in society. Taken to extremes it could eventually lead to serious social divisions, tensions and even violence. A strictly utilitarian approach to government policy might suggest we should actually do something about it. On the other hand, as I observed in a post a couple of days ago, the competitive pressures of a globalised economy arguably leave very limited scope for mitigating gross inequality through the tax system. I’d prefer to see it done through a range of non-tax measures including a revamped industrial arbitration system, where the AIRC would have a renewed mandate to take a more active role in wage fixing, and be charged with looking more seriously at gross income inequality. One possible innovation might be that, in assessing employer protestations of inability to pay wage claims of ordinary employees, the AIRC would be required to look at the record of the enterprise or industry in awarding pay rises to its senior executives.
One possible innovation might be that, in assessing employer protestations of inability to pay wage claims of ordinary employees, the AIRC would be required to look at the record of the enterprise or industry in awarding pay rises to its senior executives.
Sounds like a good plan to me.
It’s interesting that the Government takes an active role in opposing modest pay increases of $10 or $20 per week for the lowest income earners, but only wags its finger at massive executive salaries and termination payouts — and it’s a half-hearted finger-wagging at that.
I’m no economist, and I’m about to prove it. Why shouldn’t the rich get richer more than the poor?
Because, with a finite amount of money, the richer the rich get, the *poorer* the poor get. Let’s face it, if I’m a multi-millionaire, I really don’t need an extra few thousand (no matter how much bitching I do about taxes… but that’s another rant). That extra few thousand can then go to someone else, maybe someone who desperately needs it (someone who, for example, has to borrow money for petrol…)
You are assuming that there is only a finite amount of money. You are forgetting about this ‘wealth creation’ thing, called ‘work’.
Scott, stop giving away all our secrets.
“It’s interesting that the Government takes an active role in opposing modest pay increases of $10 or $20 per week for the lowest income earners, but only wags its finger at massive executive salaries and termination payouts — and it’s a half-hearted finger-wagging at that.”
The difference I see here Rob, is that government opposes legislation that increases the minimum wage. This doesn’t stop employers from raising wages. It just stops them from being forced to.
It may surprise you to learn that many employees get wage rises without any government intervention at all! It’s interesting that you support both a Minimum AND Maximum wage. What sort of range are we talking here?
Yes, Scott, but work involves taking money from others. Our earnings are someone else’s expenses, and our expenses are someone else’s earnings.
If I give away 50c to a busker (on the strength of the fact that he’s the only violin-playing busker I’ve not had the urge to throttle), I haven’t suddenly lost 50c: he has earned it. And that money didn’t come out of thin air, it came from me. If that busker came home after a couple of hours with $20 in his kitty, the Australian people didn’t suddenly become $20 richer: he’s got money that other people used to have.
Likewise, if I made a million dollars tomorrow, that’s a million dollars that someone — or some people — used to have.
And then, in week 3 of year 11 economics class, we introduce the concepts of savings, investment, imports and exports. In week 4: Government!
Stay tuned.
Yobbo,
Don’t get me wrong. I certainly don’t endorse Mark’s points. I accept much though not all of the Austrian and Chicago (neo-liberal) economic stuff, and I certainly accept the desirability of global free trade (albeit with common core environmental and safety standards required of everyone). However, we must add to that mix a range of policies designed to inhibit the progressive extreme concentration of wealth that is a feature of unregulated capitalism, without stifling entrepreneurial initiative with excessive regulation or taxation. It requires careful thought and light-handed reform, but it also requires us not to fall for the simplistic ideological prescriptions of either the left or right. We need to adapt the best of both worlds. The future belongs to the smart centre! Armadillos rule, OK.
It’s all very well to say that these studies suggest that greater equality = greater happiness, but would people conciously take the choice implied (ie give up the chance of self-advancement for a guarantee that no-one else would advance, either)?
If the answer is (as I believe) a resounding “no”, what does that mean about the results of the happiness studies. That people don’t know what’s good for them?
I don’t think the studies show that equality causes happiness: more like, equality, with oneself as the loser, causes unhappiness. I have my doubts as to the never-ending grief of Bill Gates, for example.
Looking around and seeing that you have less than others is going to make you want to earn more, right? If it’s attainable, you’ll be working harder than normal and maybe (or maybe not) less happy as a result. If it’s not attainable, with Mr Jones forever thumbing his nose at you as he wanders out to an SUV twice the size of yours, you might become rather depressed. Mr Jones, on the other hand, laughs all the way to the bank, occasionally pausing to pull his pants back up after the weight of all those gold coins caused his belt to temporarily fail its duties.
Even in a utopia where everyone had everything they wanted (that is, you and Jonesy each had SUVs of such unimaginable size, ugliness and destructive power that you could want for no other SUV), people would still find inequalities to bitch about. Perhaps Mrs You finds the Jones’s car sparkles slightly more than yours, and wants you to do something about it, pronto. Or perhaps we degenerate to the point of being jealous that ballet dancers can do ballet, while you end up in traction for a month for even contemplating doing the splits. Or perhaps all those smart gits who don’t need calculators when working with double-figures have been flaunting their innate, unfair abilities (who says they deserve them more than us? No fair!) a little too much, and it’s time to teach them a lesson. At which point the inequality created by comparisons between your physical strength and theirs may well conspire to create a nice little patch of unhappiness for those smug brainiacs.
Sort of thing. The answer isn’t to make society completely equal. That’s the pipe dream of Communists who’ve forgotten to take human nature into account. However, the way it’s currently done — with only a small percentage of people holding in their tight little fists more money than the rest of the world will likely ever see — just isn’t going to work, at least, not in a way of which any but the already-rich, aspiring-rich and ideological Libertarians can approve.
Do you have any evidence to back up your assertion that it “isn’t going to work”?
Sam,
One of the main points of my original post was to suggest that the rapidly increasing inequality we see at present isn’t sustainable in the long run.
What evidence is there? At the moment, only history, and as Jason Soon said in a slightly different context, libertarians draw different lessons and conclusions than social democrats from the same historical data.
For me, it’s obvious that re-creating 19th century unregulated robber baron capitalism (which is what I think we’re currently doing) will ultimately lead to violence and extreme counter-reaction. The 19th century version of laissez-faire eventually led to communism and all the bloodshed and suffering that flowed from it.
The challenge of communism helped to civilise capitalism, and forced it to confront and counter its tendency to lead to extreme concentration of wealth and poverty, by implementing welfare liberalism starting with Roosevelt’s New Deal. I think it’s no coincidence that robber baron aggressively laissez faire ideologies attained dominance again only as communism crumbled in the early 1980s. It was as if the big end of town gave a collective sigh of relief and shouted “You beauty! Now we can get back to gouging without having to worry about the commos.” Trouble is, another decade or two of unchecked “greed is good” will trigger a violent reaction every bit as severe as the 19th century. Will we be smart enough to learn from history? I suspect not, but discussing it in a forum like this can only help.
Re Mark’s original point:
This comes down to us from Alfred marshall’s successor in the Cambridge chair, Artie Pigou, who noticed that the principle of diminishing marginal utility that supplies the first prable of neoclassical economics implies that taking a dollar from a rich person and giving it to a poor person will normally reduce the former’s welfare by less than it adds to the latter’s. Everything else being equal, it follows that a more egalitarian distribution of a given total income enhances social welfare.
That is, the first parable of …