Review of Fred Argy’s paper “Equality of opportunity in Australia: Myth and Reality”

Here’s a review of mine of Fred Argy’s excellent and neglected paper for the Australia Institute (pdf).

Introduction

What could offer more powerful advocacy against some iniquity than to show how it hurts us all not just its victims?

This style of argument has been the stock in trade of modern economics right from its beginning as for instance when Adam Smith wrote about slavery. Slaves’ productivity was woeful because they had no incentive to improve it the resulting benefits would simply be snatched from them, perhaps with further abuse for laziness if the slave suggested some improvement. So slavery wasn’t just unspeakably cruel, but wasteful.

The human and economic waste of contemporary poverty and social dysfunction isn’t as spectacular a case of injustice. But the central message of Fred Argy’s comprehensive new survey of “Equality of Opportunity in Australia” uses the same style of arguments as Smith used against slavery.

Argy argues that Australia is at risk of departing further from its self image as an egalitarian land of opportunity and the ‘fair go’. And through all Argy’s scholarship and implacable reasonableness one can detect a burning frustration that the growing complacency of governments and perhaps the community about inequality of opportunity is not just callous, but stupid. Social dysfunction we now have quite a few families that have known little but welfare for three generations might be worst for those caught up in it, but it costs us all.

And while we arrange ourselves into trenches to our left and right, we know enough for some consensus on policy initiatives to make us all richer whether those who ultimately funded them through their taxes did so from soft heartedness or from a more hard-headed consideration of their own hip pockets.

Formal and substantial equality of opportunity: passive versus active welfare.

Argy’s paper is a paean to what he calls substantive equality of opportunity (SEOP), something he contrasts with formal equality of opportunity (FEOP). The latter consists of three things

“¢ formal equality under the law;
“¢ a basic safety net; and
“¢ markets which provide an impersonal mechanism for adjudicating the competing demands of consumers, producers, employees and employers.

But where FEOP might ensure that the best person wins the race at any given time, SEOP involves overcoming disadvantage that is structurally ingrained and passed between generations within certain families, neighbourhoods or socio-economic groups.

Of course the state can never deliver on SEOP perfectly. But in trying it is drawn beyond the pillars of FEOP into a more extensive role underpinning basic levels of housing, education and health services for all.

Substantive equality of opportunity requires ‘passive welfare’ to be supplemented with more active services for instance training in addition to unemployment benefits. And with the help comes hassle, requiring beneficiaries of assistance to help themselves by working or training – in Mark Latham’s formulation ‘learning or earning’.

The core of Argy’s case is this. Not only is helping and hassling popular while passive welfare raises public anxieties and resentments about dole bludging. There is also a happy conjunction between economic efficiency and ‘helping and hassling’ measures required to deliver substantive equality of opportunity.

There are clear tensions between economic efficiency and passive welfare. Welfare makes a life of dependency possible where otherwise it would not be. And it is virtually impossible to make passive welfare available without impairing the relative incentives for self provision. Today most people on welfare face effective marginal tax rates of 60 per cent or more as they move from welfare to work, paying tax whilst their benefits are withdrawn.

By contrast, as Argy explains, the concern about the tension between fairness and efficiency “disappears when the focus turns from passive welfare to active measures which encourage equality of opportunity because these involve putting more emphasis on strengthening individual capabilities and requiring some structural adjustment from recipients of government assistance.”

This conjunction of economic efficiency and fairness probably goes a long way to explain why the Nordic countries combine some of the world’s most comprehensive and generous welfare arrangements with some of the most prosperous economies.

Argy occasionally overstates his case. Plenty of labour market programs both here and in Scandinavia don’t stack up in pure dollar terms, though they probably cost less than passive welfare.

Even so, as we muddle through our own skills shortages and the job opportunities now available to Australians too poorly skilled to take them up, we can ponder something Argy tells us in putting his case. The Governments of Denmark, Norway, Sweden and the Netherlands spend nearly four times more on average relative to GDP than Australia on “placement, training, employment incentives, integration of the disabled, direct job creation and start-up incentives”.

Early intervention in childhood provides by far the most compelling case. While Argy was beavering away on his survey, Nobel laureate James Heckman travelled Australia preaching the gospel to which his econometric findings have led him. As he subjected one social program after another to hard headed cost-benefit analysis many icons of the welfare state struggled to break even as purely cost beneficial experiments. They needed the helping hand of soft heartedness to get them over the line.

But his analyses of experiments in early intervention with at risk children in the 1960s shows benefit cost ratios around 8 to one with three quarters of the benefits going to society at large. As they grew up the kids were more productive, higher paid, smoked less, had better health and lower crime rates than others in similar situations who had not benefited from the programs. As I write this they’re doing a better job as parents. Over forty years on, the benefits are still compounding over time at rates Warren Buffet would be happy with.

I’ve summarise Argy’s central themes about SEOP in the following table.

Formal and substantive equality of opportunity

Some concerns of a centrist

While I broadly agree with Argy’s motives and sympathies, I have some concerns. Dotted through the paper is a surreptitious association of growing inequality and lack of social mobility with economic reform, though other causes such as technology are also identified.

There’s a sleight iof hand involved here that is no less fallacious for its being so widely believed that it is usually simply tacitly assumed. It’s a case of guilt by association. Markets generate both wealth and inequality and governments redistribute that wealth to compensate losers. So the scaling back of government intervention in the market must exacerbate inequality right?

Well certainly the defenders of the status quo found any number of ways to associate their privileges with the protection of the weak. But most of the interventions we’ve wound down had little do with alleviating disadvantage. Regulating housing interest rates helped the middle class, not the poor. Why did we regulate shopping hours? I’m not too sure but the defenders of this regulation have been small businesses keen to prevent larger businesses offering greater convenience for their customers.

Would CEO salaries be lower if we hadn’t deregulated housing interest rates, cut tariffs and corporatised and privatised a range of government utilities? Except for the fact that profits might be slightly lower, it’s hard to see why.

Tariffs had some associations with disadvantage, at least if one thinks of their role in vouchsafing the Australian settlement in concert with the ‘living wage’. But how much were they helping the disadvantaged when they were dismantled? If we’d retained tariffs there’d be a few more jobs in factories, fewer jobs in services perhaps a lot fewer. And if the IAC is to be believed, poorer Australian families would be bearing a disproportionate share of the tariff burden.

And at least as practiced by the Hawke and Keating Governments, economic reform extended beyond deregulation to a massive expansion of social security and family payments (overwhelmingly targeted at low and middle income families and their children). Top marginal tax rates remain relatively high (though lower than they were) and the worst tax loopholes were closed though some were not. The Howard Government has left much of the changes in tact but, (after a brief period increasing tax on higher income earners via the superannuation surcharge) has opened up new tax loopholes through capital gains tax concessions and more recently superannuation changes.

Argy would concede much of this, but that’s frequently not the impression he gives for instance when writes of Australia’s remaining stable “despite accelerating economic and structural reform ¹.”

Argy also gives the impression that a major reason for supporting active and conditional welfare measures ‘helping and hassling’ is that the ‘hassle’ makes it easier to sell the ‘help’ to the Australian populace. No doubt some Australian’s anxieties about passive welfare are driven by ‘downward envy’. But those anxieties are also grounded in commonsense about the way people are and the way they react to passive welfare. Ask Noel Pearson.

If we’re bemoaning the growth of inequality and disadvantage at the bottom, shouldn’t we acknowledge that the welfare state made drug-riddled social dysfunction economically viable where once it was not? It would be odd if something which alleviated as much misery as the welfare state didn’t have large downsides with which we must deal if the welfare state is to fulfil its social potential and if it is to be kept politically and economically safe and strong.

A scholar and a gentleman

But compared with the paper’s virtues my concerns don’t loom large.

Argy is a scholar and a gentleman, which is to say two things. Firstly his research is at least to my knowledge extremely thorough. Secondly, Argy’s sense of social fairness extends to his own work he strives not just for even-handedness but is honest enough to concede the arguments against him. Argy’s empirical case that Australia is becoming more unequal and less mobile is patchy. He shows you the evidence for this and concedes that his concern is the drift of policy.

This shows another way that equity and efficiency come together. Argy’s integrity will help you work out where you disagree and where you don’t and you won’t have to read too cleverly between the lines or check his footnotes too carefully for him to help you know what the literature says.

Conclusion

Argy has laboured long and hard to show us that the idea of a happy conjunction between equity, efficiency and the equanimity, perhaps even enthusiasm of the public might not be so elusive. One might think that such a prospect would generate a buzz of excitement.

I was certainly excited when I saw Heckman deliver the message he’d boiled down to a pithy sound-bite “Skill begets skill; motivation begets motivation. Early failure begets later failure.” Since Heckman’s a card carrying Chicago school free marketeer in many respects, you’d think there’d be excitement right and left about this new load of pure policy gold which makes the world fairer whilst delivering fabulous return on investment.

Remarkably, and sadly so far there’s been no excitement. Argy’s paper has so far received very little attention. It’s a big big shame. For there is much in this paper from which one might not just build a credible program for those to the left of centre but also a challenge to build bridges with the centre and the right. For everyone worships at the altar of equality of opportunity or says they do.

As Argy shows us, there really are a range of things we can do that would make the world fairer many of which would have a good chance of making it richer at the same time. That we’ve not embraced them is both iniquitous and stupid. But at least you can’t blame Fred Argy. He’s done what he can to lift our sights.
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Thanks to Don Arthur, and Fred Argy for comments and to David Walker for excellent suggestions for improving the review.

1. emphasis added[↩]