The French economists Thomas Piketty recently published a long-prepared book on the growth of inequality in the Western World over the last few centuries. His main contention, as I see it, is that wealth inequality is rising rapidly again and that we are returning to 19th century levels of inherited inequality, complete with ‘upper class’ behaviour and dismissive attitudes towards the poor. His work finds an echo in this recent book by Andrew Leigh on Australian inequality that similarly notes the increase in inequality over the last few decades.
From a research point of view, the main questions Piketty’s views raise for Australian economic scholars who are worried about inequality, are:
- How do the super-rich in Australia actually make their money? Did they make it ‘on merit’ by inventing new techniques, or did they make their money by ‘grabbing it’ from the public purse by means of political patronage? The easiest way to answer this question is to go over the list of wealthiest Australians and look how they made their fortunes: by being innovative geniuses or by cosying up to political power and thus get away with stuff others did not. Pikketty very much points to the second source of wealth as a key mechanism for the explosion in the pay of super-managers, like bank-managers, whose pay is not truly linked to ‘performance’ but much more to what they manage to grab from their heavily-subsidised institutions. The same goes for CEOs in many major companies: they often did not build them up or add much to their productive value, but are in the position to grab the wealth created by these organisations anyway, no matter how incompetent they might be. In Australia there is an argument to be made for run-away ‘political rent-seeking’ as the prime cause of increasing inequality, but more extensive data on this point is needed.
- What institutions and tax arrangements would actually work to reduce the importance of political patronage if that is indeed the main cause of the rising inequality? Australia, like much of the Western world, already has quite a few institutions dedicated to fight the abuse of (market) power, such as the ACCC and the many public utilities regulators, but it might be the case that we are nevertheless in a period of reduced vigilance because the nature of the economic system has changed. The ‘old institutions’ that worried about abuse of power in manufacturing and public utilities might not be so relevant for an economy in which over 70% is service based, meaning one needs to think about what institutions are appropriate for the more murky world of property development, education, and financial services, in which government regulation is both inevitable and creates tremendous opportunities for rent-seeking. The recent proposal in Queensland to prevent the Crime and Misconduct Commission from looking into political misconduct, undoing the key part of the Fitzgerald reforms following an earlier period of rampant political corruption in Queensland, is in that sense a clear move backwards.
- How detrimental is inequality based on patronage for the wellbeing of the vast majority of Australian? Does it lead to a culture of compliant acceptance of the majority with a low station in life and low opportunities for their children too; or does it not matter much because even the poorest still get a pretty decent life? Can Australia as a small country ignore the World-wide effects and opportunistically base its economy on catering for the whims of the super-rich within the Asia-Pacific region, effectively making a world-wide change work for us? Those of us who are not super-rich themselves then can be their educators, cleaners, plumbers, gardeners, nail polishers, call-girls, security guards, and superannuation consultants. Somewhat our current trajectory.
I merely have strong suspicions on these research questions, no evidence that would convince a reasonable skeptic. Anyone who already thinks they have an educated answer to these questions should thus share their wisdom in the comment thread!
There’s a whole lot of questions there, but on the simplest one I agree that dismantling the Crime and Misconduct Commission is crazy. These sorts of institutions really helped even in far more laissez-faire places like HK, where they went from especially corrupt to not so bad anymore because of them.
I just have one comment here:
“How detrimental is inequality based on patronage for the wellbeing of the vast majority of Australian? Does it lead to a culture of compliant acceptance of the majority with a low station in life and low opportunities for their children too; or does it not matter much because even the poorest still get a pretty decent life?”
I think you need to define the time scale. On short time scales, it might not be too bad if things like unemployment benefits are not so low or dismantled too much that they create crime and general low-level chaos, but once you look across generations, it really makes a difference because you get endemically poor groups.
Once these groups get too big, they not only cause themselves problems (which people can generally live with), but they cause other people problems too, and getting them out of this cycle is hard and expensive. The obvious example is in the US where you have 1% of the population in jail at any given time which is hugely expensive if nothing else, but some places in Euroland have similar sorts of examples (obviously Australia has a few smaller groups as well as the indigenous groups — but the latter of these generally live in places where they are out of mind and out of sight to most people and are relatively small in number). So you not only pay for it directly, but you pay for it indirectly via policing, jails, insurance, crime, and the general paranoia that goes with it.
Having a reasonable percentage of your population not really participating in things that make your country rich in the long term (science etc.) is also a loss even without those things, but is hard to measure. I also wonder whether even the middle-class groups act differently in high inequality places out of fear — for example do they take less risks and settle for an average life? Maybe, in which case surely that must decrease risk taking (and hence real wealth generation via new businesses etc.) in the long term.
There are cultural interactions here too. In some countries where inequality is too high and life too tough (lots of Asia, some Eurozone countries), people just don’t have children for fear of going down the left side of the distribution and not being able to look after them. In other countries, the poor people have more children who then tend to be more poorly educated, more unemployed etc. like their parents, and so you are left with the harder problem of controlling inequality because the target is moving even if otherwise the conditions were the same. It’s hard to see either of these creating a great long-term outcome, even for the general population.
Of course you might ask how much inequality is too much and how little is too little? It seems to me that in places like the US it is too high, and if it was lower it would solve some of the problems they seem to try and forget (shitty education outcomes etc.), but you can go fairly low and not seem too badly off (e.g., many countries in Northern Europe), which suggests that even in places with fairly high redistribution, people won’t stop trying hard to do the things they do best. So shooting too low is better than shooting too high.
Paul, they haven’t prevented the CMC from looking at official corruption, and they haven’t as your commenter suggests, dismantled it either. They’ve set it up to shift its focus away from low level crimes and misdemeanours, such as if a university employee has misused university funds – surely something universities and the police can deal with – to major crime.
I’m a third of the way through Piketty’s book and so far he hasn’t made a very good case at all – lots of graphs and correlations, but no reason to suppose that any particular level of inequality brings good or bad results. Perhaps he brings this together in the next two-thirds, but at this stage I’m not too worried if we have the same level of inequality as we had in the 20s.
I disagree with you on the CMC. The ‘biky laws’ affair does not fill me with confidence that the reduced focus on misconduct by public organisations and politicians is well-thought through. The excuse for the proposed changes – that the resources of the CMC should be oriented towards organised crime, sounds hollow indeed.
James Packer has the answer already: Australia is to become Asia’s high roller casino.
You want an economist to tell you precisely when a certain level of inequality becomes problematic?
I would have thought that the matter is a question answered by an application of morality and common sense, not by a graph.
the simple answer to your question “how do the super rich make their money?” is to have the good fortune to be born to very rich parents – but I guess you really mean how do the first in the line of the very rich families with inherited advantage make their initial pot of money. Looking back over history very much confirms the rent seeking argument. In colonial days most wealth was based on grants of land (which Andrew Leigh argued in his McKell lecture was stolen from indigenous Australians in the first place). This enabled wool growers in particular, but other farmers, to become extraordinarily wealthy in the period 1800-1914. The allocation of squatting rights, land grants, and leases were heavily influenced by patronage and ones chances were greatly helped by skills in flattery and working the system (much like the work of some lobbyists today).
The other early influence on generation of large fortunes was the granting of mining licences in the gold rush – although you could argue that really was not rent-seeking but a government run lottery (some struck it rich, others didn’t). And given that there was more money on average to be gained from supplying goods and services to miners (including banking and loans) a fair bit of super wealth was generated in gold mining days from real effort rather than rent seeking.
I’d agree that much wealth today arises from rent seeking. Current banking and financial services regulatory regimes could be cited as examples (noting that the complexities involved make it very hard to sort out rent seeking from eg consumer protection or prudential supervision).
The regulations on which rent seekers base their fortunes do tend to get reformed from time to time. Prime example being removal of high tariff regimes. Australia used to have a two airline agreement, a government regulated duopoly that benefited Ansett shareholders considerably (but also noting all airline companies worldwide try to take every regulatory advantage they can).
Also, there have been periods when rent seeking behaviour has been disrupted by bursts of real innovation – eg the influence of post-war refugee and other migrants in injecting entrepreneurial insights into previously sclerotic parts of the economy.
“What institutions … would actually work to reduce the importance of political patronage…?”
Patronage is proportional to political power—a dictator would have unlimited patronage—so one way to reduce it would be to reduce the amount of power the politicians have. The required institution is called democracy.
We give people—pollies, CEOs—power and then set up regulatory institutions to keep them from abusing it. If they didn’t have the power in the first place we wouldn’t have to bother with the regulatory institutions.
If a minister has discretionary power, there will be an industry lobbyist trying to get it used in the industry’s favour. There are so many examples of this use and abuse in recent years that it has become almost boring.
Privatisation probably means more, not less, regulation. For example, a minister ran the PMG but with Telstra, Optus, etc we have a mountain of regulations. An industry privatised is an industry opened up to clever actions by innovative people and the staid regulator has a problem trying to keep up. Since the regulator has to do as his political bosses instruct, it will have trouble keeping up if the pollies are being suborned by industry.
The CMC in Qld and ICAC in NSW are supposed to check politicians’ power abuses. But in Qld the government can defang the CMC simply by passing a law. In NSW the govt doesn’t have that power because there is an upper house. Here is a clear institutional measure that would reduce the abuse.
Whatever institution reduces the politicians’ power must reduce their abuse but if the power which is taken is given to private enterprise, then private enterprise will do the abusing. The lesson about the upper house is that it depowers the government but does not favour private enterprise—it favours the people. That is, it advances democracy.
The more the democracy, the less the abuse. In our direct heritage, this is the lesson from Runnymede and it has been confirmed countless times ever since. The world is full of clever people (such as the writers and readers on this blog) who see the problems and suggest targeted answers. But if there were more democracy many of the problems would vanish.
I agree with all of this, Mike. A first, I think! Clearly we should stay on this topic! :-)
Yes!
Ditto. I’m not sure I’ve ever so wholeheartedly agreed with Mike either!
Not a word out of place..thanks, Paul Frijters.