MICHAEL KEATING. Equality: What is it and Why is it important?

Jan 25, 2019

Inequality has risen in most of the advanced economies, including Australia. It is damaging both the fabric of our society and economic growth. The Government appears to acknowledge that it should pursue equality of opportunity, but not outcomes. However, the Government has done little that would improve the equality of opportunity, especially relative to the magnitude of this challenge today and in the future.  

In a major speech this week, the Treasurer, Josh Frydenberg, maintained that one of the Coalition’s core beliefs is:

‘That fairness is achieved through equality of opportunity, not equality of outcomes.’

Frydenberg then went on to berate the Labor Party for its ‘pursuit of class warfare’, claiming that ‘Labor’s tax and redistribution agenda is one of the most radical, aggressive and dangerous that Australia has ever seen’.

Most people would probably agree that perfect equality of outcomes is an unrealistic objective. Furthermore, pursuit of perfect equality might do positive harm to incentives, and thus reduce the amount available to be shared in the first place. But seriously, no-one (and certainly not Josh Frydenberg) has produced any evidence that we are anywhere near risking such a loss of incentives. Indeed, the assistance available to unemployed people is falling further and further behind community norms, and present rates of income taxation are far lower than in the past.

On the other hand, there is plenty of evidence that Australia (like most other advanced economies) has become more unequal over the last three decades. This increase in inequality is morally repugnant to many of us, but it is also risking the cohesiveness of our society, and even the future of capitalism itself. Thus, it is no accident that Trump in his efforts to disrupt the open rules-based global system draws his principal support from those white American males who feel that they have lost most from the changes in the distribution of American incomes.

Indeed, if Frydenberg was seriously pursuing economic growth – as he claims – he would have recognised what the Governor of the Reserve Bank has been saying:

‘The crisis is in real wage growth’

This is because the evidence shows that far from there being a trade-off between equality and economic growth, economic growth is instead dependent on the growth of aggregate demand, and the growth of aggregate demand is in turn dependent on reducing the present inequality of income growth.

At present the Australian Government, like President Trump, likes to cite the number of jobs that have been created on their watch, but what they don’t boast about is the very low rates of growth in productivity. For example, the growth of US labour productivity in the decade since the Global Financial Crisis has been less than half its previous rate. Similarly, in the last three years, it seems that productivity growth in Australia has also stagnated, increasing at an average annual rate of only ½ per cent – much less than the previous norm of around 1½ per cent.

Unfortunately, this low growth of productivity is a direct consequence of the economy adjusting to low wage and therefore low demand growth. This deceleration in productivity growth can occur in two distinct ways:

  1. The lower investment in response to low demand can reduce the rate of increase in capital per worker, and also reduces the increases in productivity which normally occur through increased economies of scale.
  2. Lower wage growth tends to reduce the rate of labour-saving technological progress, encouraging the retention of older vintages of capital.

The conclusion is that the Australian economy needs a faster rate of wage increase. But what has the Government done? It has deliberately presided over a system that is designed to hold wages down. Indeed, where the Government is directly responsible – its own public service – many of its employees have not had a pay rise for as many as four years, and the Government’s system of enterprise bargaining for the Australian Public Service is fundamentally dysfunctional.

Turning to consider equality of opportunity – which Frydenberg endorses – we also find that government policies are falling short. In fairness it should be acknowledged that the Government did attempt to introduce a “needs-based” system of funding for school education, and this is of critical importance if we are to seriously pursue equality of opportunity. However, as readers of this blog, will know, the compromises made with vested interests, means that we are some way from achieving a needs-based funding system for schools.

In addition, the impact of technological change on the labour market, means that if we are to maintain equality of opportunity, far more spending on vocational education and training, and active labour market programs is needed, and less useless harassment of job seekers who can’t find a job.

Most importantly, spatial inequality is growing in Australia, and this is most damaging to the preservation of equality of opportunity. In fact, where you live is of critical importance in determining your opportunities. And, while the Government is spending billions on transport infrastructure, again as readers of this blog know, there has been no evaluation of this expenditure which shows how that is likely to reduce spatial inequality and promote equality of opportunity.

In sum, achieving equality of opportunity will require more government intervention and more public expenditure. This intervention doesn’t need to damage the market-economy. Rather it can enhance the rate of technological change, and increase productivity and economic growth. But raising the necessary finance will be a challenge, and the best way to start is to plug unfair loop-holes in the present tax system as Labor has proposed.

Michael Keating is a former Head of the Departments of Prime Minister & Cabinet, Finance, and Employment & Industrial Relations. He is presently a Visiting Fellow at the Australian National University..

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