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

SEOP Table.gif

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 [emphasis added].”

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.
————–

Thanks to Don Arthur, and Fred Argy for comments and to David Walker for excellent suggestions for improving the review.

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Tony Harris
Tony Harris(@tony-harris)
15 years ago

Thanks Nicholas! My comment does not bear directly on the points that you have made except for the one (which you questioned) about the claim that inequality is increasing which underpins much of the rhetoric of the critics of minimal state market liberalism. Actually I am discharging frustration that build up during the debate about the Scandanavian way versus the “English-speaking way of laissez faire” exemplified by Britain and the US.

1. I suspect that the claim about increasing inequality is false but it will be very hard to settle, even with good will on both sides.

2. While it is disturbing to see extremes of wealth, as long as you are paying attention to the bottom end I don’t think inequality matters. We need to be concerned about reverse utilitatianism (minimising suffering) but we will probably always have utopians who will exploit inequalities to justify their demands for state intervention, pretty well regardless of the outcomes. In the same mindset, we will probably always have inductivists in the philosophy of science who will demand a formula for the numerical probability of a theory, regardless of the arguments against the enterprise. In each case the quest has the attraction that it will never be achieved (and it does not need to be acheved) so it will keep them busy (and hopefully employed) for ever.

3. On the case against markets that is supposed to follow from the comparison of (say) poverty in Scandanavia versus Britain and the US, what right has anyone to use Britain and the US as examples of laissez faire, given the massive incursions made by the British trade union movement and the US Government in the New Deal and other market-defying interventions? The attempted indictment of free markets on the basis of the British and US experience has no credibility.

Ken Parish
Admin
Ken Parish(@ken-parish)
15 years ago

“I suspect that the claim about increasing inequality is false but it will be very hard to settle, even with good will on both sides.”

Rafe

I’m not aware that very many centrists or even moderate social democrats attempt to argue that inequality of outcome has worsened to any significant extent in Australia in recent years. ABS and NATSEM research suggests otherwise. Fred Argy’s paper, as its title clearly indicates, is talking about equality of opportunity, not equality of outcome. Again, AFAIK no centrist and very few moderate social democrats argue that pursuing equality of outcome is a worthwhile policy goal in itself

Jc
Jc
15 years ago

I admire the anti-G20 activists for their honesty. They understand that if we want to go back to the old days when Australia was more equal we have to kill globalization dead in its tracks.

We can’t have what Fred wants with one of the most open economies in the world. It then simply becomes a question of meritocracy or the old aristocracy running things.

Those were the days when Rod Carnegie could run Rio like a badly leaking old boat and the shareholders would have to lump it because they had nowhere to go. Hugh Morgan could have turned away the US offer and not blink an eye.

We can go back to those days by just locking ourselves up and not allowing anything to get though without a government sold quota for imports.

The other way is allow inequality knowing all boats are getting lifted by the tide.

Peter Whiteford
Peter Whiteford
15 years ago

I just want to address the differences in the nature of claims about inequality trends.

In particular, there is a difference in trends in inequality “before” and after taxes and transfers. At the OECD we use data provided by the SPRC on trends in income distribution using the Household Expenditure surveys. Looking at the trends in the Gini coefficient, then between 1984 and 1999 the Gini for market income went from 0.429 to 0.480 in the mid 1990s then down slightly to 0.471 in 1999. Overall this is a fairly significant increase in market income inequality.

However, the Gini for disposable income went in the opposite direction from 0.312 in 1984 to 0.305 in 1999. Looking at other Australian data sources, you appear to get a bit more stability in disposable income inequality than with the HES (because it is based on current not annual income). Adding in non-cash benefits like health care, education and childcare is likely to reinforce the downward trend in “final” income, although indirect taxes will tend to work in the opposite direction.

Now to me the next question to ask is which trend is more important – increasing market income inequality or declining disposable income inequality? Like most other people who work in this field, my automatic answer is that disposable income – or even better “final income”- is the better measure of well being.

But perhaps not everyone sees it this way.

Widening market income distribution is largely influenced by widening wage disparities, but also by trends in unemployment and increasing reliance on benefits associated with higher lone parenthood and more people receiving disability benefits. The percentage of working age people mainly reliant on benefits has increased from around 13% to 18% between 1980 and 2004.

So someone who has lived for 20 years or more in a working class area or particularly in a public housing estate might look around and think of all the people who lost their jobs because of economic restructuring and ended up on disability pensions or think of the higher share of the population receiving lone parent benefits, and might find it hard to believe that income inequality has been stable or has even gone down. If they live in a declining country town they might also have different perceptions.

Some of the redistribution that has occurred in Australia over the past 20 years or more has been completely genuine in the sense that it has undoubtedly made poor people better-off – for example, basic rates of age pension are much higher in real terms than they were around 1980 and even higher relative to what they were before the late 1960s. I would also argue that increased assistance for families with children has helped low income working families and also families reliant on benefits.

In a sense, using redistribution through the tax-transfer system to offset some of the negative effects of economic change – however this came about – is an important part of making economic reform broadly acceptable, and is one way of compensating the losers. But unemployed people receiving more generous unemployment payments than their predecessors 20 years ago or even more generous disability pensions may not perceive themselves as being fully compensated for the consequences of economic change.

In a sense when we look at trends in disposable income inequality, and note that inequality has been stable or declining, we are implicitly saying that the improved situation of age pensioners makes up for the fact that there are fewer men of working age employed and more receiving benefits.

Of course, the trends over the last 10 years look more promising. This is because the people that lost their jobs in the early 1980s recession are probably now over retirement age – so we have a cohort effect “removing” some of the losers from economic change from the working age population. It also seems to me that younger workers are more used to the more competitive environment.

Patrick
Patrick
15 years ago

But unemployed people receiving more generous unemployment payments than their predecessors 20 years ago or even more generous disability pensions may not perceive themselves as being fully compensated for the consequences of economic change.

Except as you grudgingly admit a paragraph later this is not actually the case against any baseline more recent than when you were at uni, and I bet no-one here actually wants to go back to then! Of course that raises the question of why…

…may not perceive themselves as being fully compensated for the consequences of economic change.

Except that no more than five of them would take a job if they had to give up their TVs DVDs PS2s V6s McDos – so they are perhaps reconciling themselves to thei invidious effects of economic change after all.

I liked the first half of your post better!

Patrick
Patrick
15 years ago

But to encourage Fred et al, from today’s Figaro:

Or la mixit

Fred Argy
Fred Argy
15 years ago

My thanks to Nicholas and Don for the review and for all the interesting contributions it stimulated. The discussion has convinced me that my views on equity and efficiency need to be clearly spelt out. Without even trying to argue my case fully here, let me summarise what I am on about.

In my recent writings (e.g. Argy 2006 and forthcoming Argy 2007) I put three key propositions to my fellow-economists.

The first is that while many liberal economic reforms are effective in boosting employment and productivity and some (such as reduced tariff protection on goods widely consumed by low income households) are also good for the poor, they clearly tend to increase MARKET income inequality. This is particularly true of reforms involving labour market and welfare changes. So, without some redistribution, these reforms will tend to have regressive effects on final income distribution.

My second proposition is that, while the use of ‘passive’ redistribution would pose serious risks for economic efficiency (possibly nullifying most of the economic benefits of the economic reform), redistribution through active social investment would have positive effects on the economy and, on the evidence, these would outweigh the negative economic effects of higher taxation in the long term. When such forms of redistribution are used, there is no SUSTAINED conflict between economic efficiency and distributional equity.

Thirdly, while economic reform with active social investment provides a win/win for efficiency and equity, it creates another policy conflict

backroom girl
backroom girl
15 years ago

Fred – I’m a little confused about how welfare changes contribute to market income inequality. Can you please explain what you mean by that?

Fred Argy
Fred Argy
15 years ago

Very good question, backroom girl. I suppose I should have amplified – but this can go on forever. Still, I will answer your question.

Labour market deregulation weakens the policy umbrella of workers protection (through awards, unfair dismissals legislation, trade unions and restrictions on short term immigration) available to vulnerable workers. Removing this protection clearly increases earnings (market) inequality. The evidence on that is overwhelming.

As to measures which toughen welfare access, they tend to reinforce the effect of labour market deregulation on earnings inequality because vulnerable workers have less ability to refuse undesirable jobs.

But, you may well ask, don’t these liberal labour market and welfare measures reduce joblessness (active or inactive) amongst the disadvantaged and doesn’t that reduce market inequality? Per se lower joblessness does indeed reduce market inequality but the evidence suggests that this effect is likely to be offset by the regressive effect on earning inequality of labour market deregulation and welfare reform.

More importantly, the point I stress in my writings is that one can achieve the same reduction in disadvantaged joblessness through a mix of less radical liberal reform and more social investment. This liberal-interventionist strategy (the one adopted by the Nordics and many smaller Europeans) produces the same employment outcomes but with less market inequality and less final income inequality than the pure neo-liberal strategy.

As I stressed in my earlier piece, however, equality is not the only dimension of ‘equity’. Andplease don’t ask me to elaborate on that. I need 20 pages.