Ian McAuley. Is capitalism redeemable? Part 7: Inequality – a shameful waste

“Australia’s program to increase world growth seems to be to cut social security benefits from the poor.”

When Geraldine Doogue asked Malcolm Fraser to comment on Abbott’s G20 agenda, that was his summary of the present Government’s economic policy

Unfortunately, ministers such as Hockey and Cormann may not understand the sarcasm in his comment, because there is an economic philosophy supporting their very line: redistribute income towards the rich while disciplining the poor with hardship.

Of course that doesn’t get stated so bluntly; it’s padded in spin about a “budget emergency”, “Labor’s waste” and so on. But it shows through in the Government’s budget proposals, not only those directed at the poorest, but also in its rejection of Labor’s measures aimed at reigning in some of the undeserved privileges enjoyed by the already well-off. These reforms included changes in the tax treatment of employer-provided cars, ending the racket of hidden commissions on financial products, and modest taxes on multi-million dollar pension accounts.

Giving breaks to the already privileged is based in part on a belief that if people are rich they must be clever, and therefore their entrepreneurial virtues should be further rewarded. It’s a belief that conveniently overlooks the role of inheritance, luck, political deals and outright corruption in contributing to many people’s financial prosperity.

It’s also based on the slightly more respectable economic theory that those with higher incomes tend to save and invest, therefore creating jobs for others.

As Thomas Piketty points out, the saving and investment theory holds only up to a point. Once a financially wealthy class develops it goes on accumulating more financial wealth, and there is no certainty that its financial wealth will be invested wisely. Even if that financial wealth came about in the first instance through entrepreneurship, there is no guarantee that those entrepreneurial energies will be sustained into subsequent generations, who are likely to lead an indolent lifestyle, spending their fortunes on luxuries rather than on productive investment. And that lavish consumption does little for the local economy – it is more likely to make its way to car manufacturers in Germany, watchmakers in Switzerland and vignerons in France than the more modest consumption patterns of those of more modest means.

Also, perpetuation of privilege is often based on the well-off having first call on what economists call “positional goods”, where supply is limited – the best surgeons, the best teachers and so on. There is a strong economic case, for example, for allocating the best teachers to where they can do the most good, in endeavours such as helping kids who haven’t had the early childhood breaks enjoyed by rich kids.

The other end of that philosophy – making it hard for the poor – is so economically dumb that it is hardly worth taking the effort to refute it. When there is no demand for labour herding people into the labour force through punitive social security conditions just doesn’t work. The business cycle is an inescapable economic reality, and in an interconnected world one’s chances of finding a job are as likely to depend on decisions of the US monetary authorities or the sentiment of Chinese investors as on local business conditions or one’s own skills and motivation.

For those who, through a tough upbringing or educational disadvantage, lack skills, there just aren’t jobs available. Minimum wages would have to be brought down to absurdly low levels to make it worthwhile for business to employ unskilled labour, and if they did, there would be a huge waste of resources, because low wages provide no incentive for employers to use labour productively. The waste would be in that most valuable of all resources, people’s capabilities.

Good public policy is about investing in people’s capabilities which, through circumstances beyond people’s control, have lain dormant and undeveloped, or have been devalued by life’s experiences. Far better than denying unemployment benefits to out-of-work young people would be programs to support them in gaining new skills, and, of course, programs devoting resources to children at risk – children who are otherwise going to spend their adult lives in and out or poorly paid work, in and out of the criminal justice system, and without any stake in society.

Instead we have a suite of policies designed to sap the self-confidence and dignity from those who become unemployed, as if subjecting people to the humiliation of job rejections and having to beg from friends and charities has no negative consequences. There are consequences, however, not just for the individual but also for the community as a whole.

Another waste resulting from punitive conditions on the unemployed is that bad management is rewarded and perpetuated. Besides collective action through unions (which is becoming more difficult), one of the few ways people can knock some sense into bad employers is having the capacity to walk out of a lousy job. A workforce of people held to employment only because the alternative is unbearable is not a productive workforce. Sullen compliance with directions, like an ongoing work-to-rule campaign, is a poor substitute for enthusiasm.

Those are some of the reasons why high levels of inequality hobble a country’s economic performance: they inevitably involve a waste of resources. When Tim Costello spoke of the need for the G20 to bring up the standards of the poorest through “inclusive growth” he reminded us that good social morality and good economics have a great deal of common ground. That common ground seems to be unknown territory to Abbott and his ministers, hell-bent on replicating George Bush’s so-called “supply side” economics, an experiment that failed in the USA and would be even more likely to fail here because it is so alien to our tradition of the “fair go”.

This article has focussed on the waste of unchecked inequality and the pointlessness of economic growth that benefits only those who are already well-off. The next will outline how policies which promote inequality (intentionally or otherwise), not only waste resources. They also sap governments of the capacity to prevent widening inequality from dragging down the whole economy.

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