MICHAEL LAMBERT. Review of Fair Share by Stephen Bell and Michael Keating , Part 1

 The topic of economic inequality has become an area of strong research and academic interest , and Fair Share: Competing Claims and Australia’s Economic Future, by Stephen Bell and Michael Keating, published by Melbourne University Press,  adds to an illustrious group of authors who have tackled this complex subject from a range of perspectives. (These include but are not limited to British economist Anthony Atkinson; French academic Thomas Piketty;  Austrian historian Walter Scheidel;  American economist, Branko Milanovic; and Nobel prize winner, American economist  Joseph Stiglitz).

The book was launched in three separate location, Sydney,Melbourne and Brisbane by Paul Keating, John Hewson and Chris Bowen. This is Part 1 of a two part review, this part focussing on the extent, nature and causes of economic inequality while Part 2 will set out the negative impacts of rising economic equality and hence why it should be addressed and summarises the key findings of the book and its policy recommendations.   Stephen Bell is Professor of Political Economy at the University of Queenslanded while Michael Keating is the former head of three major Australian Government Departments, including Finance and Prime Minisiter and Cabinet and a visiting fellow at the ANU. Both are  fellows of the Academy of Social Sciences in Australia.

An Australian perspective on the topic is timely and provides much in the way of local background, environment, reasoning and public policy from these two authors who have combined their significant experience in economics, public administration and academic research to produce a hefty volume as a quality research piece contributing to the existing canon.

It is also fitting that the book is launched in 2018, the 200th anniversary of the birth of Karl Marx, who was inspired by the 1857 global financial crash to write Capital, his analysis of capitalism which recognised capitalism as a highly productive economic system but one that contained the potential seeds of its own destruction in the form of increasing inequality. This insight is lost from time to time but needs to be revisited if a functioning democratic capitalism is to survive. Our economy needs to perform well and inclusively to deliver for all Australians and not just the 1% or 10%.

In terms of style the book is very much in the tradition of Pikerty and Atkinson, rather than the more polemical Stiglitz, exploring the issue in great detail, providing extensive supporting data and drawing on published research and analysis to support well- constructed argument. What is particularly useful is identifying and explaining areas in which Australia has been exceptional in terms of  economic performance.

The coverage of topics is extensive. While its overall theme is exploring the mitigation of competing economic claims in a modern market economy;  it covers as well post- world war economic developments in Australia and overseas;  an analysis of the role of investment in economic growth; trends and developments in the Australian labour market; economic inequality; household debt and real estate at home and abroad; strategies for economic development and restructuring; which are all given a strong coverage . Each of these is linked to the overall theme. For example the analysis of labour markets demonstrates the significant changes in employment composition and required skills that occur over time,  driven by changes in technology and tastes. Governments need to maintain active vocational training programs to allow for the retraining of those whose employment is displaced and for the disadvantaged . Companies do not invest in broader levels of skills and training as they are not able to capture the benefits.  A similar logic applies to why Governments should invest in basic research , noting that such developments as the world wide web and the technology underlying the i-phone were based on government research.

In this review I am focussing on economic inequality which is the core of the book but the book is well worth reading for anyone with an interest in economic analysis and policy more generally.

The Nature, Extent and the Cause of Economic Inequality  

The core of the book is its exploration of the increase in economic inequality in developed economies from about 1980 onwards, identifying the causes and the consequences.  In reality periods of low economic inequality are relatively rare both under capitalism and under all proceeding economic systems. Walter Scheidel explored human history from the stone age forward and concluded that it was only in times of war and calamity that there was the prospect of some level of economic equality. For example, the plague in 14th century England led onto a period of high wages for the working class as the huge death toll made labour scarce. From the industrial revolution forward there was continuing and increasing economic inequality which was only interrupted by two world wars.

The first World War, followed by the great depression and the second world war, led onto the post- world war golden age which extended to the early 1970s and was a period of relatively low economic inequality, strong economic and productivity growth and very low unemployment (though noting the much lower employment participation in that period than today). This led onto the period of stagflation during the 1970s, initiated by the oil price hikes followed by high wage increases pursued by unions to maintain their real wages, feeding into high inflation, low growth and high unemployment.

This ushered in the era of market liberalism with Governments eschewing active macroeconomic policy to achieve and maintain full employment and instead pursuing reforms on the supply side of the economy, directed at improving the productive capacity of the economy through addressing population, labour market participation and productivity (the three Ps). This involved extensive deregulation and privatisation and the cutting back of the role of government. The view was adopted in many countries that governments could only influence the economy on the supply side, not by managing the aggregate level of demand, withdrawing from the previous Keynesian consensus that government had an active role in managing, through fiscal and monetary policy, the aggregate level of economic demand.

From the 1980s onwards, the level of economic inequality in developed economies has increased, though to varying extents and is most marked in the USA.  Indeed, it is true to say that over that period economic inequality has increased in most countries, developed, developing and poor but paradoxically the global level of income inequality as measured by the Gini coefficient has declined from about 0.6 to 0.5. This apparent paradox between the situation of individual countries and the global position is due to the enormous decline in poverty in Asia as China and other economies grew strongly.

Australia was fortunate in having strong economic reforms throughout the 1980s into the early 1990s with the Prices and Incomes Accord, the implementation of competition policy, float of the Australian dollar, an increasingly independent monetary policy targeting inflation and labour market reforms in the form of a more decentralised and flexible wages system. Michael Keating was a key participant in these reforms and it is very good to get his well considered perspective on what needs to be done in the current environment . Those reforms placed Australia in a good position to maintain economic growth, lower inflation and achieve steady productivity growth, the latter feeding into real wages growth and hence into rising living standards. Moreover, Australia was one of the very few developed western economies not to experience recession as a consequence of the Global Financial Crisis, beginning in 2008. This reflected a sound banking system, monetary policy and macroprudential policy and a quick and effective fiscal policy stimulus, assisted by the strong mining export position.  Australia has now experienced 27 consecutive years without a recession, a world record for a developed economy, surpassing the previous record holder, the Netherlands.

Taking the USA as the most economically unequal of major developed economies, the share of the total income of the top decile (i.e. the top 10% of the population of earners) has increased from 31% in the 1970s to about 50% in 2007, reflecting in part the premium paid for education and skills. The share of the top 1% was not greater than 8% in any OECD country in the 1980s, with the USA at about 8% but by 2010 it was 20% in the USA and well in excess of 10% in many developed economies. Economic theory explains labour income in terms of the compensation for the marginal productivity of labour. It is extremely difficult to accept that there could have been such a large increase in the marginal product of senior executives over that period and hence calls into question the economic theory.

What is particularly noticeable in the USA is the lack of real wages growth. As the authors point out, Stiglitz reports that between 1973 and 2014 median hourly wages grew in real terms by only 9% whereas labour productivity increased by over 72%.

The distribution of wealth and non- labour income is even more skewed. In the USA the wealthiest 1% of households own more than 33% of the nation’s wealth and 57% of income from capital, a ratio that has doubled since 1980.   In 2017 the richest 10% owned 77% of the nation’s wealth, the highest level of concentration in the nation’s history.

While Australia, in common with all developed economies, has experienced an increase in economic inequality over the period, it is significantly less than in most other countries. The book identifies a major reason for this being our system of tax and welfare transfer payments which is assessed as being one of the best targeted and effective tax and transfer systems in the OECD. Over the period 1980 to the mid -2000s the Australian tax and transfer systems was able to offset over 50% of the increased inequality of pre-tax market income. Furthermore, Australia has continued  until quite recently to experience growth in real wages broadly in line with increased labour productivity, unlike the USA.

There is an important distinction between inequality of economic outcome and inequality of opportunity. In a sense very few would support literal equality of outcomes if that were interpreted to mean that all earned the same income which would equate to a zero Gini coefficient. The issue is rather at what level does economic inequality become excessive and inimical to the interests of society.  However, what is remarkable about the USA is not just the level of economic inequality but the lack of equality of opportunity which is far less than any other developed country, including Europe, in sharp contrast to the situation in the nineteenth century. Access to quality education and healthcare are very much determined by a person’s economic position.  This reflects in a lack of intergenerational advancement with about two thirds of those in the bottom 20% having children in the bottom 40%. In contrast Australia and many European countries and particularly the Scandinavian countries have a much higher level of intergenerational advancement and flexibility.

One area of economic inequality that is not touched on in the book is that experienced by women generally.  Economic inequality is at the heart of many of the other ‘inequalties’ experienced by many women, and this goes beyond the gaps in remuneration (and therefore superannuation) by gender .  Given that women constitute rather more than 50% of the Australian population and an increasing proportion of the labour force, this is an area that warrants further analysis of the same quality and rigour applied here by Stephen Bell  and Michael Keating.

The book identifies the following factors as explaining the increase in economic inequality since 1980:

  • Technology change which has replaced labour with capital in lower skill areas of production, reducing the availability of middle and lower level skill jobs and increased the remuneration premium for those jobs requiring skills and education. An interesting point made in the book is that the premium for tertiary education is higher in the USA than in Australia which appears to reflect the relatively greater increase in the supply of tertiary educated persons in Australia which has a more egalitarian and effective funding model for universities.
  • Globalisation with the dramatic rise of Asia and Asian based trade which has reduced the demand for lower skilled work in developed economies as imports have displaced lower skilled based domestic production.
  • What the authors refer to as financialization which is the large expansion of the financial sector and the scope of financial transactions and structuring. The US financial sector’s share of national profits has increased from 15% in 1980 to a peak of over 40% in 2002. The finance sector provides higher remuneration than other sectors and this relative growth has exacerbated the level of inequality as well as financial instability.

I would add to these factors, particularly in the case of the USA, the increased level of industry concentration and the consequent lower level of competition which has produced an increase in economic rents and their capture by senior management. Reinforcing this is poor corporate governance in the USA, with non- independent chairs of corporate boards and no real role of boards in setting executive remuneration.

Part 2 will set out what are the negative impacts of rising economic inequality and also set out the key findings and policy recommendations of the book.

Michael Lambert is a former Secretary of NSW Treasury, former senior investment banker and is a non-executive director and senior adviser on health economics at the Sax Institute.

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Strange seeing this paean to ‘market reforms’ and their allegedly great success, because it was Bell’s 1997 book Ungoverning the Economy that documented the failure ever to match the post-war performance: GDP growth over 5%, inflation 3.3%, unemployment 1.3%. Those are averages.
We dodged the 2009 recession because Rudd and co, to their great credit, threw out the free market rule book, though briefly.
Much of whatever anaemic ‘success’ remains must note the huge build up of private debt and the extension of working hours since, say, 1983.