Wednesday, June 5, 2013

We can be fairer and more efficient at the same time

Humans are a pattern-seeking animal but also a categorising animal. We're forever trying to get a handle on how the world works by sorting things into different boxes. When we can slap a label on something or someone, we think we've understood them.

It's fashionable among our business people to divide the world into "wealth creators" (them) and "wealth distributors" (everyone else but particularly governments). Wealth creators are the source of all prosperity; wealth distributors are essentially parasitic.

Economists' favourite boxes are similar, but not quite so crude. They divide policy objectives into "efficiency" (promoting economic growth) and "equity" (ensuring a reasonably fair distribution of the fruits of that growth).

For the most part, economists see efficiency and equity as in conflict. They care deeply about promoting efficiency but often leave it to others to worry about equity - unless they fear some equity measure would lead to inefficiency.

But sometimes our habitual ways of categorising things can be a hindrance to understanding and progress. Sometimes the labels on boxes don't adequately describe their contents, which can have more in common than we realise. Sometimes we "frame" problems in ways that conceal their solutions.

A new book, Inclusive Growth in Australia, proposes just such a new way of thinking about equity and efficiency. It's edited by Professor Paul Smyth, of Melbourne University and the Brotherhood of St Laurence, and Professor John Buchanan, of the workplace research centre at Sydney University.

A lot of economists and business people are worried about a fall in the rate at which the economy's productivity is improving. Productivity measures the efficiency with which we take inputs of land, labour and capital and turn them into outputs of goods and services. It normally improves by a per cent or two a year but it's been weak for about a decade.

It's our improving productivity - brought about by advances in technology, improvements in public infrastructure and a better educated and more skilled workforce - that causes our material standard of living to keep improving. It also helps to have a higher proportion of the population participating in the workforce.

To date, the deterioration in our productivity performance has been concealed by the resources boom, with its higher prices for our exports and hugely increased construction of new mines. But, the economists worry, now the boom is passing its peak, people will really feel the absence of ever-rising incomes.

So what's the Gillard government doing about it? Ignoring wealth creation and worrying about perfecting the way it's distributed. It's going to the election with two policy changes in pride of place: a disability insurance scheme and the Gonski changes to school funding.

All very worthy, no doubt, but talk about fiddling while Rome burns. But here's where the proponents of "inclusive growth" have a useful perspective. They say that far from being an irrelevance or an indulgence, social policy can, if you do it right, constitute an investment in improving the economy's performance.

As it happens, both the disability scheme and the Gonski reforms are good examples. Many physically and mentally disabled people - and their voluntary carers - would dearly love to make a greater contribution to the paid workforce, if they were enabled to.

And intervention to assist the disabled can be strategic: do it the right way at the right time and much subsequent expense - not to mention personal anguish - can be avoided. No more soft-headed authority than the Productivity Commission attests to the ability of the disability scheme to add to national income.

Similarly, it doesn't take too much thought to realise changing the basis for federal grants to public and private schools to one that gives more to schools with disadvantaged students can been seen either as a move to greater fairness - improving their equality of opportunity - or a move to greater efficiency.

We have no trouble seeing the benefit of doing more to assist the education and training of our brightest and best but much trouble realising the same applies at the bottom end. If, by giving them greater and more timely assistance, we could reduce the number of kids who drop out of school - or make it through with inadequate levels of literacy and numeracy - we'd be making them more productive workers.

The main lesson to be learnt from the league tables showing how our students' educational attainment compares with those in other countries is not that our best students aren't keeping up but that there's a widening gap between our best and our worst.

Another theme of the inclusive growth advocates is "flexicurity" - improving unemployment benefits and assistance to the jobless so as to reduce resistance to the unceasing change in the structure of our economy as the poor countries develop and the digital revolution proceeds.

I think the search for ways to kill two birds with one stone is a good one - just as long as it doesn't devolve into a miser-like attitude that economic efficiency is all that matters and we help people only to the extent we can see a buck in it.

We are - and will stay - a rich country. We can afford to educate ourselves well because to be educated is one of the joys of life, a benefit from being rich. And we should need no better reason for sharing our wealth fairly than that it's right thing to do.