Economics of Contentment Part 05 – First published on the Sydney Opera House Ideas website.
John Treadgold looks at egalitarianism: its place in Australia’s past, and whether it will continue to have a place in our future.
Australia has a proud history of egalitarianism. There’s always been a belief that everyone gets a fair-go, and that we lack the defined class boundaries of England. But with newfound wealth are we seeing a polarization of our society?
It’s a cumbersome term, “egalitarian.” The Department of Foreign Affairs defines it as meaning we have “no formal or entrenched class distinctions… with hard work and commitment, people without high-level connections or influential patrons can realize their ambitions.”
In other words, no matter who you are, you get the same opportunities as everyone else. This ideal is based around a certain level of equality. Some folks are always going to be richer than others, but if the gap grows too wide then it becomes impossible for those at the bottom to pull themselves up, like rungs on a ladder.
In the post-war years policies put a lot of emphasis on reducing inequality. We saw a focus on education, increases in the top tax rates, strong unions, and closed economies. Conspicuous consumption was avoided; the wealthy didn’t want to distance themselves from the workers. At the start of the 80’s, the richest 1% of Australians had only 5% of the country’s income.
But this is where things changed. We saw the rise of the magnate as Kerry Packer, Alan Bond and Rupert Murdoch made the most of economic and political changes. At the start of the new millennium we saw a 70% increase in Porsche sales, a five-fold increase in Maserati sales and an increase in the cut- off of the Australian rich list from $180 million to $215 million.
These stats were part of a speech by Labor politician Andrew Leigh. Leigh is all-for growth in production and in wealth, but he emphasises that excessive inequality is inefficient. He suggests that in the 1980’s half the workforce was unionised while today it’s down to just one-fifth. The top income tax rate has also fallen from 69% in 1970 to 47% by 1990. These changes were driven by concerted policy choices and while they had clear structural benefits to the economy, there is a trade-off from the increase in inequality.
Leigh includes a quote from Tony Abbot c. 2003 when he was Workplace Relations Minister: “in the end we have to be a productive and competitive society, and greater inequality might be inevitable.”
Inequality breeds a class divide between the wealthy and the poor. It’s an unavoidable part of the capitalist system, and it wouldn’t be such a problem if the poor could, at some stage in their lives, improve their situation and become rich. This is where social mobility comes in, and unfortunately the trend is that wealth is becoming increasingly indentured.
Studies investigating Australia’s intergenerational mobility suggest that moving up the wealth scales is about as easy here as it is in England. While we still offer more economic mobility than the US, we’re far behind many Scandinavian countries, where hard work and commitment are more readily rewarded regardless of background.
Education is a key tool in leveling the playing field. The Gonski report was geared towards reducing inequality, but was lambasted with the oft-heard cries of class warfare. Means testing and progressive taxes suffer the same accusations. This is not socialism, this is economic policy based on increasing welfare as opposed to focusing on incomes.
Andrew Leigh put it best, “Australia is a stronger nation when we act together than when we pull apart.”
So are we pulling apart? Recent figures in the World Wealth Report from Capgemini and RBC Wealth Management suggest that the number of Australian’s with High Net Worth (those with $1 million or more in investable assets) increased by 15.1% last year. – a massive jump that has had a clear impact on growth. But as GDP increased, so has inequality.
Some argue that we need the potential for this vast inequality to incentivise the highest performers; that without it, Steve Jobs might not have brought the iPhone to market or Steven Spielberg may not have bothered to make his blockbusters. These are the dubious examples used by the highly regarded conservative economist Greg Mankiw in his essay, Defending the One percent. It is focused on the US economy and it makes for interesting reading, but Paul Krugman and The Economist magazine both took him to task wasting no time debunking its short sightedness.
The Economist suggests: “If the government were to, for example, return top marginal tax rates to the levels that prevailed in the 1990s or the 1970s in order to compensate for the superstar effect, there is no reason to believe that the top one percent would produce any less value for society than they do now.”
In the essay Mankiw says that “there is no scientific way to establish whether the marginal dollar consumed by one person produces more or less utility than the marginal dollar consumed by a neighbor.” I would argue that you don’t need to be an economist to infer that one extra dollar will benefit someone earning $30,000 a year far more than someone earning a couple of million.
Mankiwgoes on to say that: “…the educational and career opportunities available to children of the top 1 percent are, I believe, not very different from those available to the middle class. My view here is shaped by personal experience.” This is an astounding claim when we consider that he is talking about the US, a country where social mobility is lower than in Australia.
Even egalitarianism has it downsides. The tall-poppy syndrome is a common Aussie affliction that sees the best performers cut-down for over-achieving. This perverse reaction stifles motivation and threatens to mire our country in the status quo of mediocrity. Striving for excellence should be commended; working hard to earn a million bucks is vital if our economy is to grow; but at the same time we need to ensure that the tools needed for these efforts are made available to everyone.