One way to foster growth and jobs

Things may be gloomy in other countries, and even in parts of our own economy, but there's one aspect of Australian life where everything's on the up: we're enjoying a sustained prison boom.

Consider this. Over the 66 years to 1984, Australia's rate of imprisonment per head of population rose by a paltry 13 per cent. Over just the past 30 years, however, it's more than doubled.

How's that for progress? We now have more than 36,000 people behind bars, meaning our imprisonment rate exceeds that of Canada, Britain and most of Europe.

And I'm happy to acknowledge that the Aboriginal community has made a quite disproportionate contribution to this achievement. The Indigenous imprisonment rate is now more than 45 per cent higher than it was at the time of the Royal Commission into Aboriginal Deaths in Custody.

This exciting news is brought to us by Dr Don Weatherburn, director of the NSW Bureau of Crime Statistics and Research, in a conference paper to be delivered on Thursday.

Weatherburn calculates that if we can only maintain the rate of growth we've achieved in the past five years for another three, we'll be up to more than 43,000 prisoners nationwide.

Think of the contribution to "growth and jobs". A screws-led recovery. And think of the improvement in productivity as we stuff more prisoners into our existing jails.

But that's not the best of it. We've been able to keep prison numbers growing even as rates of crime have been falling. How's that for an achievement?

How's it been done? Easy. Over the past 30 years we've pursued policies that result in more people being refused bail, more people getting a prison sentence and more people staying in prison for longer.

Truly, the prison industry and its backers could teach the commercial world a thing or two about drumming up business.

To be fair, there was a long period when rates of crime got worse and worse. According to Weatherburn, it started in the 1960s when servicemen returning from Vietnam brought heroin with them. The rate of heroin use began to climb, and with it a lot of heroin-related crime.

Between 1973 and 2001, rates of theft and robbery soared. Property crime spread from working-class suburbs such as Redfern, Footscray and Fortitude Valley to middle-class suburbs as well. By 1983, nearly one in 10 Australian households had been victims of some form of household property crime in just the past 12 months.

The public got fed up. Led by the shock jocks, the media jumped on the bandwagon and state politicians competed with each other to prove they were tougher on crime than thou.

Australians became prison-happy. Got a problem? Whack some people in jail. Problem doesn't seem to be easing? Lengthen their sentences. Still not happy? Keep getting tougher, without ever checking to see if it's working.

But now crime rates have been falling since 2000, the time when the heroin problem suddenly went away. The national robbery rate is down by two-thirds, as is the burglary rate. Motor vehicle theft is down by more than 70 per cent and all other forms of theft by more than 40 per cent.

Even the rate of assault seems at last to be coming down in NSW and Victoria.

You could, if you were of a mind to, argue that crime is down precisely because more baddies are locked up. But this ignores all the other factors that may have changed.

Careful analysis by criminologists finds that a higher rate of incarceration does reduce crime, but only to a small extent, too small to explain much of the extent of the fall.

Of course, the nigglers – economists and suchlike – would point out that all this imprisonment is costing taxpayers a lot. In the 12 years to 1994-95, national spending on corrective services almost doubled to $880 million a year.

By now it's almost trebled to $2.6 billion a year. And if it continues its present rate of growth it will be up to $3.5 billion in three years' time.

We're spending a fortune to keep people locked up for ages even though it's not a very effective – and thus a very expensive – way to reduce crime.

But what about what about all the "growth and jobs" we're generating? You won't hear this from politicians, but those niggling economists will tell you we don't need growth for growth's sake, nor even jobs for jobs sake.

The fact is that all spending – by households, businesses or governments – creates jobs, so it's not enough to say this project or that will create jobs. That's why, if we've got any sense, we'll ensure that what we spend on brings us the most of those things we most want.

To give you an idea, the $2.6 billion a year we're spending keeping so many people banged up is the same as the cost of employing about 2800 probation and parole officers for 10 years, or putting more than 100,000 students through university.

At a time when governments – federal and state – profess to have no money to spare for worthy causes, perhaps we should be looking for ways to punish offenders that are more effective in reducing crime and aren't so expensive.

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Why the very rich have got richer

Everyone knows the gap between rich and poor has been widening in most developed countries, but why is it happening? Have the rich been smarter and harder working, or have they just been craftier than the rest of us?

Between the end of World War II and sometime in the 1970s or '80s, the gap got progressively narrower, reducing inequality. Since then, however, the trend has reversed and the rich have got richer faster than the poor have got less poor.

That's particularly true for the English-speaking rich countries, though it hasn't happened as much in Oz as it has in Britain and, especially, the United States.

Here, real incomes have increased at the bottom, the middle and the top, though they've risen a lot faster at the top. And the respective shares haven't changed much in very recent years.

It remains true, however, that Australia's been part of the international trend to exceptionally strong growth in incomes right at the top of the distribution, say, the top 1 per cent.

In Australia's case, Professor Paul Frijters, of the University of Queensland, and Dr Gigi Foster, of the University of NSW, sought to explain this growth in top incomes in a paper published in the Australian Economic Review.

At the level of theorising, they say there are two rival potential explanations: that incomes have become more unequal as a byproduct of market forces, or as a result of political decisions.

The first explanation focuses on a shift in the "marginal productivity" of skills. Changes in technology – the obvious candidate being the information and communication revolution, aka computerisation and digitisation – have increased the value of certain highly skilled jobs relative to other, less skilled, more routine jobs.

This economists refer to as "skill-biased technological change". Some jobs are replaced by machines, others are in greater demand because of the need for people to control and maintain the new machines and to manage a more complex organisation.

In such a world, you'd expect the wealthiest people in the community to be highly technically trained and great organisers – people like Bill Gates and Warren Buffett.

A related phenomenon is what the authors call "increasing returns to superstars", but is otherwise known as the rise of "winner-takes-all" markets.

Legal and sporting contests, for example, reward people not so much because they're highly skilled but because they're more highly skilled than others.

Such rewards increase with the size of the market in which the contest occurs.

"Moving from a world where every town runs its own competition to one where a single high-stakes competition is held for a whole country, or the whole world, involves the replacement of local winners with uber-winners who enjoy far higher returns but of whom there are far fewer per type of contest, resulting in a more unequal overall income distribution," Frijters and Foster say.

"This kind of effect explains the enormous salaries earned by today's soccer stars, top artists, top financial advisers, inventors who obtain patents, and so on."

It's advances in communication technology that do most to explain the increased scale of many markets. Bigger scale means a bigger gap between people at the top of the world market and winners in the local market.

The returns to innovation are also much greater in a global market than in a local one, because you're pushing out for the whole world what economists call the "production possibility frontier" – increasing the menu of different goods and services we're able to produce.

The alternative explanation for growing inequality – especially at the very top – is the effect of political favours.

"Our democratic political process both sets the rules of economic interaction amongst market agents [participants] and allocates political favours, including taxes and subsidies. In this view, each institution within a country's bureaucracy has some discretionary power of its own," the authors say.

The political balance of power may change and lead to changed taxes and transfer (welfare) payments in ways that favour the rich and hurt the poor. This may happen by accident or by political design.
It may happen because interest groups become more effective at lobbying governments or because the rich become better at exploiting loopholes in regulations or taxes.

So much for theoretical possibilities. What hard evidence can we find to help us choose between those possibilities?

A study by Sir Anthony Atkinson, a British world expert on inequality, and Andrew Leigh, former economics professor and now federal Labor politician, found that reductions in tax rates explain between a third and half of the rise in the income share of the richest 1 per cent in five English-speaking countries.

But Frijters and Foster took the unusual approach of seeing what clues they could deduce from studying the BRW magazine's list of the richest 200 Australians in 2009. They found that the industry category producing the largest number of super-rich Aussies – 61 – was buying and selling property.

Natural resources was second with 23, then "organising financial investments" with 19. "These 103 cases account for the vast bulk of the $119 billion owned by the top 200 in 2009."

Only eight families in the top 200 held large amounts of inherited wealth and all eight were in those three industry categories. So most of the money of our super-rich was made relatively recently.

As best the authors could determine, only five people on the list invented things. Another five were top entertainers. So only 5 per cent of our super-rich could be classed as superstars or top innovators.

About half spent their efforts on activities where local political decisions determine the winners: about who gets to build which property where, who gets access to favourable mining concessions, and so on.

On the basis of this evidence – which is hardly definitive – the authors conclude that "the political favours story seems more likely than the marginal productivity story".

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