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OPINION: Why Inequality Matters

by | 20 August, 2018 | Article

 

By Connor Harvey & Hamish Greenop-Roberts

 

“There’s class warfare alright, but it’s my class, the rich class that’s making war. And we’re winning.” – Warren Buffett

In the recent opinion piece ‘Inequality and Why It’s Misleading’, our colleague Brodie Fennell argues that the populist push against perceived inequality is misguided and damaging. He claims, and we agree, that Australia and the rest of the world are at present facing ‘grim economic prospects’. We also agree that sustained economic growth is threatened by populists on the left and right of politics. However, we take issue with his assertion that the threat stems from over-regulation and a stifling tax-and-transfer system. Above all, we think inequality is in fact a central cause of our economic malaise, not just an issue of ethical fairness. For this reason, we argue that Australia’s approach to this problem will play a large part in determining both our future economic growth and the living standards of its citizenry.

We want to first tackle the key premise of the article; namely, that it buys into economist Arthur Okun’s notion of a strict trade-off between inequality and economic efficiency. The implication of this idea is that addressing inequality can inhibit economic growth, and distracts from more relevant measures of an economy’s performance, such as GDP growth, or the absolute position of the poorest members of a society.

This notion has increasingly been challenged in recent years. In most Western economies, economic growth post-GFC has been weak, and yet, inequality has been rising rapidly. Economists have begun to reconsider Okun’s trade-off; the big change is in thinking that inequality is not just an issue of ethical fairness (as this article assumes it is) but also relevant to positive economics. Contrary to Fennell’s argument, we allege that increased inequality is not a function of Pareto improvements in western economies. Rather than bolstering, it has actually impeded economic growth.

This is first and foremost because the marginal consumption levels of the very rich are less than the middle and working classes (in other words, the rich don’t spend their money, and therefore don’t stimulate the economy). Consequently, it follows that increased inequality has stultified overall demand as ordinary households have seen their real incomes stagnate and/or fall. Sluggish aggregate demand in the economy is ultimately contributing to sluggish economic growth and inequality is one of the root causes of this so-called ‘secular stagnation’.

Furthermore, consider that in many instances, the rich have not profited via mutually beneficial transactions as Fennell’s article would have you believe. Rent seeking, cronyism, lobbying of governments, tax evasion, cartel behaviour and criminal activity are just some of the ways in which businesses have increased profits not through the creation of new wealth, but at the direct expense of workers and consumers. To take some recent examples, consider the Commonwealth Bank’s 53,000 breaches of anti-money laundering and counter-terrorism financing laws, criminal collusion between ANZ, Citigroup and Deutsche Bank, countless wage theft scandals plaguing 7-11, Domino’s Pizza, and a litany of hospitality businesses, BHP’s billion-dollar dispute with the ATO over its contentious Singapore marketing hub, and the list goes on. All these behaviours worsen economic inequality while doing nothing to increase economic growth (and in some cases, directly hindering it).

As to Fennell’s rejection of Piketty’s argument that democracy is damaged by inequality, we think a few salient points should be made. Firstly, there is, and has always been a historic tension between democracy and capitalism. Democracy implies equal political citizenship while capitalism entails inequality of wealth and incomes. This tension isn’t irreconcilable, but when economic inequality becomes particularly acute, as it is now in many Western countries, it is unsurprising, even intuitive, that this can cause political instability within a democratic system. It is not the direct influence that the wealthy have on modern democracies that is the problem per se; rather, it is the harm done by excessive economic inequality to social cohesion and political stability. Indeed, there is an undeniable link between unfettered capitalism, and the emergence of populists who inevitably seek the upheaval of the system on whose watch such social ills have gone unchecked. In fact, the causal relationship between inequality and problems such as crime is so incontrovertible that even conservative psychiatrist, Jordan Peterson—an unlikely ally for our anti-inequality argument—states that “inequality drives crime […] that’s not disputable”.

The great danger is if political polarisation and populism is now a permanent feature of Western countries – think Brexit, Trump and One Nation. The consequences of this are not just a nastier, dumbed-down political discourse – it’s far worse than that. The greatest consequence is political dysfunction, and the inability of governments to work effectively. To actually address inequality. To introduce microeconomic reforms. To promote economic growth.

Excessive inequality – and we can disagree about its true extent – strikes at the heart of the compact between the democratic state and free market. Given the remarkable success of liberal democracy, we should all hope that that compact will endure. But that’s why a debate around inequality is needed.

The final point made in Fennell’s article is that a focus on economic inequality ignores the remarkable advances in medicine, public health and living standards that people have enjoyed because of economic growth. The implication is that these are a better metric for assessing welfare than equality, and in fact, excessive regulation of the economy and higher marginal tax rate has stifled improvements in these areas. The authors agree wholeheartedly that per capita economic growth is a vital requirement for the elevation of living standards. But it is wrong to suggest that government regulation and the tax system have impeded the benefits of economic growth since the first quarter of the twentieth century. In Australia’s example, up until a few years ago, we enjoyed large and sustained increases in per capita income over a twenty-five-year period. This growth was far greater than anything in the early 1900s and was achieved in spite of today’s historically high tax-to-GDP ratio.

Moreover, while capitalism is certainly an excellent growth engine, it is foolish to deny the importance of institutional checks on inequality which ensure that the benefits of this system flow to the general population. You only need look to the disparities between the United States and Australia to see that our superior health outcomes are possible thanks only to universal healthcare in conjunction with a high GDP—not GDP alone. Further safeguarding Australian from US levels of inequality is our progressive taxation and government transfer system, the superannuation guarantee, and the trade union movement. Without these institutions holding up the distributional side of the bargain, our economic system would be unsustainable.

To sum up, we concur with Fennell that economic growth typically (though not always) improves everyone’s welfare by growing the economic pie, and agree that it is overly simplistic to judge economic performance solely on the pie’s distribution. However, we also argue that it’s a dangerous simplification to consider inequality as either a solely positive or solely normative issue. In today’s economic climate, inequality has significant implications for demand in the economy, and overall economic growth itself. It also threatens the stability of our political system and undermines the electorate’s faith in the power of free markets to ultimately improve the living standards of all.

In short, inequality matters, now more than ever.

 

Connor Harvey is a PPE student and regular contributor to the PPE magazine.

Hamish Greenop-Roberts is the Treasurer, and co-founder of the UQ PPE Society. He is an active member of the Australian Labor Party.

 

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