Picking a bone with Paul

I probably should know better than to keep rising to the bait of Paul Watson’s repetitive “baby boomers are bastards” theme, but I can’t help myself. Anyway, one of his more recent rants gives me a pretext for making some points I’ve had on my mind for some time. Paul cites a recent NATSEM report (November 2003):

Research from the National Centre for Social and Economic Modelling at the University of Canberra showed that by 2003, 40 to 54-year-olds held an estimated 38 per cent of total household wealth, up from 33 per cent in 1986. In contrast, the share of total wealth held by 25 to 39-year-olds declined from 27 to 19 per cent over the same period.

Predictably, Paul uses these stats to launch into his standard Boomer/GenX diatribe:

The stats are old news, of course, and at first I was mystified what they were doing in the article anyway. Wouldn’t it have been better for Gettler to state boomer wealth/disposable-income/whatever in “$X billion” terms, rather than to remind GenX that boomers are not, in large part, wealthier because they are older, but they are wealthier because GenX is poorer.

Unfortunately, Paul’s kneejerk reaction blinded him to some other important facts and statistics in that NATSEM report, probably because they aren’t consistent with the spin Paul wants to impart:

• Although the proportionate share of national wealth held by those between 40 and 54 (Babyboomers) had increased somewhat in percentage terms, the proportion held by those between 55 and 64 years old (many of whom are also ‘Boomers) remained static (at 20%);
• The proportion of wealth held by people over 65 (i.e. not Babyboomers) also increased, albeit not by quite as much as the 40-54 Babyboomers. One suspects that this is because the ‘Boomers benefited both from the accumulation of their occupational superannuation benefits and from the boom in housing prices in metropolitan south-east Australia, whereas the over 65 brigade benefited only from the latter phenomenon;
• Although GenX proportionate share of wealth as a whole slipped a bit in percentage terms, it is simply false to claim (as Paul did) that “GenX is poorer”. In fact Australia’s total wealth increased greatly in rela terms between 1986 and 2003 (the period covered by the NATSEM report). That is, the cake got much bigger. While GenX may have a slightly smaller proportion of the national cake, their slice is actually bigger too (though not by as much as the Babyboomers).
• Although many Babyboomers became richer relative to other cohorts (although not at their expense), many still don’t have enough occupational superannuation to support them in their retirement (as to which see below)
• This whole phenomenon is driven by the government policy of compulsory occupational superannuation implemented more than a decade ago. That is, Babyboomers have more wealth because government policy compelled them to save in order to be able to support themselves during retirement. There isn’t much point in castigating ‘Boomers (as Paul does) when all they’ve done is precisely what government policy (wisely) forced them to do.

In fact another even more recent NATSEM report puts all this in a much clearer context:

The Australian government has become increasingly concerned about the challenges that population ageing will impose on our society. An early policy response was the introduction of compulsory superannuation in the 1992, with employers currently contributing nine per cent of earnings into the superannuation accounts of their employees. Gallagher and Preston estimated that these contributions would be sufficient to provide a gross superannuation income stream of around 40% of final salary on retirement at age 65 after around 40 years’ contributory service (1993). In other words, provided a person is employed for 40 years mostly on a full-time basis, the Superannuation Guarantee will ensure they have an adequate retirement income.

Unfortunately the assumed 40 years of contributions will not apply to all Australians and some may not have sufficient retirement savings even under the SG. The oldest baby boomers will be 60 years old in just two years time and the majority have only been contributing to superannuation for 12-15 years. This short accumulation time and the opportunity to withdraw the funds from age 55 will see most baby boomers arriving at age 65 with meagre superannuation balances. For many of the boomers the Superannuation Guarantee is too little and too late in their working lives to make a significant difference.

For the generations following the baby boomers, many will have adequate retirement incomes but others face a different issue. They will have a working life of 40 years and the preservation age has been increased to 60 for this age group but the changing labour force patterns may impact on their superannuation. Recent labour force trends show growth in part-time, contract and casual employment and little growth in full-time employment. These trends could see future Generation X and Y workers spending more time in positions where superannuation contributions are not compulsory. The lower levels of SG contributions may reduce their superannuation savings.

As best I can deduce from reading Paul’s repetitive whinges, his main gripe seems to be the adverse impact of labour market practices like casualisation, downsizing and outsourcing on GenXers like himself. He seems to assert (or rather assume) that these labour market changes are the fault of the Babyboomers, and that GenX is the main victim of them. But neither assumption is correct. Although I’m sure GenXers (including Paul) are prominent victims of casualisation, Babyboomers are probably greater victims of downsizing and outsourcing. Workers over 40 (i.e. Babyboomers) have been downsized and outsourced in large numbers over the last decade, and many of them have Buckley’s Chance of ever working again. Employers prefer to replace them with younger workers, often GenXers, mostly on casual work conditions and at lower rates of pay. Who are the “real” victims? The ‘Boomers who lose their jobs completely, or the GenXers who replace them albeit on exploitative terms?

Doesn’t this give Paul a clue that he’s operating on a false premise? The labour market phenomena that afflict Paul’s life can’t sensibly be sheeted home to ‘Boomers, any more than they’re the fault of Aborigines or Asian refugees (the favoured scapegoats of One Nation-type losers who are less educated than Paul but equally deluded). In fact these phenomena flow from the general push for economic deregulation that started in the early 1980s; globalisation of trade under GATT and the WTO; and the rise of low wage powerhouse nations (most recently China and India) who receive much of the benefit of business investments fleeing from the higher cost-structure economies of the developed west. Casualisation, downsizing and outsourcing are corporate responses to the competition from cheap labour third world countries. They’re able to respond in that way partly because of the labour oversupply generated by the post-WWII baby boom, and partly by the fact that the fall of communism means capitalism no longer needs to outbid a competing ideology for the “affections” of workers. Note that none of these causative factors can sensibly be sheeted home to “Babyboomers”.

Casualisation etc. has resulted in increasing inequality in Australia, but despite that increase the vast majority are somewhat richer in real terms than they were a decade ago, because Australia’s economy has grown strongly in real terms. Unlike doctrinaire neoliberals, I don’t accept that continuing strong economic growth is contingent on maintenance of extreme non-interventionist, small government policies, although I do accept that governments’ real world policy options are much more restricted than many lefties like to think, because of the mobility of global capital.

Another factor worth keeping in mind is that, although inequality (but not poverty in real terms) is increasing in Australia, both poverty and inequality are falling, albeit only marginally, in the third world. That is a direct result of the very economic forces I outlined above: China and India, the two most populous nations in the world, have embraced global free trade policies and capitalised successfully on their abundant cheap labour. As a result, their economies have grown spectacularly, and both poverty and inequality have been reduced, as various studies have recently found. One is by Javier Sala-i-Martin:

When economist Xavier Sala-i-Martin of Columbia University, USA waded past the gloom and doom chorus and looked at global poverty numbers he found much to cheer. The picture wasn’t as grim as the mourners had it. Because of globalisation, poverty had actually fallen and inequality had tended to lessen. …

His novel analytical methods are turning conventional wisdom on poverty and inequality on its head. On what basis does a serious voice as Noam Chomsky’s assert thus: “With regard to incomes, inequality is soaring through the globalization period within countries and across countries. And that’s expected to continue.”

Sala-i-Martin traced the assertion to the Human Development Reports ¹ published by the United Nations Development programme ². Since 1990, HDRs have been regularly published and have created a welcome awareness about the need for equity in development. They have very high brand value. In 1999 the HDR intoned thus: “Most obviously, poverty and inequality have grown alongside the expansion of globalization. In a world of disturbing contrasts, the gap between rich and poor countries, and between rich and poor people, continues to widen.” Harvard’s Lant Pritchett famously dubbed this conclusion, “Divergence, Big Time”. Media and opinion makers like Chomsky chimed in and the causerati massed up in their thousands.

When Sala-i-Martin pored over poverty numbers, country by country, and studied UNDP’s analysis of them he began to see a series of flaws. Current exchange rates were being used instead of purchasing power parity ³. It is PPP that adjusts for the fact that a dollar in Zaire buys a lot more than in the USA. Then for some reason the ‘one-1985-dollar’ that had been the agreed threshold for determining poverty had mysteriously been raised to $2 and even $4, thus throwing up wild and non-comparable statistics. Elsewhere –in a comparison exercise– only 19 of the 29 industrialised countries had been cited, thus worsening poverty and inequality figures.

But most glaring of all the errors was considering each country as a data point without regard to its population or its unique within-country poverty dynamics. For example all of Africa’s 35 countries ⁴ do not exceed half the population of China ⁵. Yet China is an equal at count time with the 35. Sala-i-Martin says that you must unbundle countries, pool their population and sort them to create world-wide income groups. Then, people –rid of their country badges– tell a different story. …

Most of this good news is because of China and India opening their doors. In 1970, 11% of the world’s poor were in Africa and 76% in Asia. In 1998, Africa had 66% of them and Asia, 15%. Sad though this may seem for Africa, worldwide head-count of the poor has fallen by 400 million people – and falling. Most of the benefit has of course accrued to Asia, largely because of their integration with world trade.

The trend is clear: inequality is closing and poverty falling even if the rate is infinitissimal.

Now, I wouldn’t be at all surprised if other economists have challenged Sala-i-Martin’s methodology and results. No doubt John Quiggin will be able to tell us. But indisputably China and India have benefited substantially from embracing (with variations) the global trade capitalist growth recipe, and it’s reasonable to suggest that Africa and the Middle East would do just as well if they could somehow put aside the tribalism and religious funamentalism that are holding them back.

Moreover, a very recent World Bank draft study by Humberto Lopez makes some even more positive general findings:

At the policy level, on the one hand we find that improvements in education and infrastructure and lower inflation levels would reduce inequality levels. This is quite compelling since the estimates of the coefficients for these variables have always the expected sign and are highly significant from a statistical point of view. Thus these would be policies whose impact on growth and inequality push in the same direction when one has a poverty reduction objective in mind.

On the other hand, we find that financial development, trade openness, and decreases in the size of the government would be associated with increases in inequality. Thus, these would be policies whose impact on growth and inequality present some conflict. To the extent that the positive impact on growth attributed to progress on this front offsets the negative impact on inequality, these pro growth policies would also be pro poor (in the sense that an associated poverty measure of interest falls as a result of the implementation of the policy). …

All in all, the findings of this paper suggest that pro growth policies, regardless of their impact on inequality, are likely to be pro poor in the long run. In other words, the positive impact that policies have on growth should be enough to eventually offset the potential negative effects they may have on inequality. However, there is also a need to face the possibility and associated implications that some reform policies are conductive to temporary increases in poverty. This is especially the case given that in this framework “temporary” may span several years. We take these results paper as an indication of the need to encourage growth policies but in a context that: (i) expands the use of poverty
and social impact analysis techniques at a country level and beyond the average results inherent to cross country regressions; (ii) takes into account the political economy risks that might be associated to a reform program that could temporarily increase poverty; and (iii) ensures that liberalization programs are complemented by pro poor interventions that minimize the damage caused by the short run deterioration in income distribution.

In other words, it may be that the existence of some economic casualties is the price we have to pay for extending the benefits of first world prosperity across the globe, and that the way to deal with them is by “pro poor interventions” and not by trying to find convenient scapegoats, whether Jews, Aborigines, Asian refugees or babyboomers!!!

1. HDR[↩]
2. UNDP[↩]
3. PPP[↩]
4. where the world’s poorest live and progress is slow[↩]
5. where poverty is rapidly falling[↩]