Wednesday, July 17, 2013

Egalitarian facade hides growing inequality

One thing that makes me proud to be Australian is our tradition of egalitarianism. I love living in a country where Jack is as good as his master, where first names are so commonly used and men are more likely to address each other as "mate" than "sir".

When catching a cab overseas, I have to remind myself not to sit in the front with the driver and I love the way our government ministers - male and female - invariably sit up front in their chauffeur-driven cars, with staff members in the back seat.

It makes me proud to hear that in prisoner of war camps, the American soldiers tended to turn them into little economies and the Brits stuck rigidly to class privileges, whereas the Aussie officers and men shared all their meagre resources on the basis of need - meaning more of them survived.

And I was chastened years ago on an industrial relations junket as a guest of the German government. The Aussies in the group went out to see the sights one night in Munich. When, eventually, we decided to go back to the hotel we realised one of the group was missing.

I said I thought he was old enough and ugly enough to look after himself but an old union secretary demurred. "You blokes go back to the pub," he said quietly. "I'll have a look round for him. You never leave your mates behind."

You might think this egalitarianism would be reflected in a reasonably equal distribution of income between Australian households but that's far from the case. As the economics professor turned Labor politician Andrew Leigh reminds us in his most readable new book, Battlers and Billionaires, the latest figures show us having the ninth highest level of inequality among 34 rich countries.

It's probably not terribly well understood that, between Federation and the late 1970s, the gap between the highest and lowest incomes narrowed steadily, whereas since then, it has widened significantly.

The standard way to study the distribution of income is to compare the fortunes of the poorest fifth of households with those of the middle fifth and the top fifth. But Leigh has led the way in using income tax statistics to focus on changes in the share of total income commanded by the top 1 per cent of income earners.

He finds that, in the 1910s, the top 1 per cent (individuals who, by today's standards, enjoy pre-tax income of more than $200,000 a year) received about 12 per cent of all personal income. That is, 12 times what they'd get if incomes were distributed equally.

But this share declined steadily to reach a low of about 5 per cent of total income by 1980.

What caused this marked decline in inequality? Leigh shares the credit between the effect of the union movement (and, I'd add, our system of arbitration and conciliation) in protecting and improving wage levels, our governments' increasing reliance on income tax (with its progressively higher tax rates on higher income earners) and the development of our heavily means-tested system of welfare benefits, such as the age pension, child endowment and unemployment benefits.

He says the welfare system has twice the equalising force of the tax system.

The result was that, "under the prime ministership of Malcolm Fraser, the share of income held by the richest 1000th of Australians was only a quarter of what it had been under Billy Hughes [in the late 1910s]".

Since sometime in the late 1970s, however, this equalising trend - bringing the way the nation's income is shared more into line with our egalitarian ideals - has been reversed. The share of the top 1 per cent of income earners has recovered from 5 per cent to about 9 per cent.

Why? Leigh estimates the rise in inequality over the past generation can be attributed roughly equally to three factors, the first of which is technology and globalisation.

New technology's ability to give the best entertainers, sportspeople and even lawyers and other professionals access to a global market has hugely increased the incomes of a relative handful of individuals. Efforts to attract foreign chief executives to lead Australian companies have helped to force up the incomes of all chief executives.

Second is the decline of the union movement (including the move from collective bargaining to individual contracts), which has allowed many workers' wages to grow less strongly than other incomes.

Third is taxation, with moves to make income tax rates less progressive and rely more on indirect taxes.

My way of putting it is that, since the early 1980s, we have become more overtly materialistic in our values and political leaders have reacted by undertaking micro-economic "reforms", emphasising the primacy of economic growth and generally becoming more receptive to the demands of business.

The result is a lot more income, but also a lot less equal distribution of that income. The people urging this greater emphasis on materialism have captured most of the benefits while the rest of the community doesn't quite seem to have noticed what's going on.

I confess, I've been a winner from this process. What I'm not sure of is whether it leaves us better off as a community. Perhaps one day, the egalitarian facade will collapse and we won't like what we see.