Why bother about economic inequality?

Economic inequality matters. It has significant consequences for economic efficiency, social justice and environmental sustainability. Its sources are properly a central concern for political economic analysis. Its reduction is properly a concern for public policy.

That these points even have to be argued is symptomatic of the recent influence of what is known variously as economic rationalism, economic fundamentalism and neoliberalism. It is a viewpoint that has subordinated the concern with economic inequality to narrower concerns with efficiency and growth, even ignoring the ways in which egalitarian policies can contribute to efficiency and growth. John Howard seems to have stopped using the term ‘incentivation’ to justify the abandonment of an egalitarian commitment in public policy, perhaps because no justification is now deemed necessary.

It was not ever thus. In the nineteenth century the distinguished liberal political economist John Stuart Mill argued that the pattern of income distribution was essentially a political choice, not determined by any economic ‘laws’ of the sort that shaped the production of economic wealth. In the twentieth century, economists as diverse as John Hobson, J. M. Keynes, Gunnar Myrdal, Armatya Sen and J. K. Galbraith have been proponents of economic policies with egalitarian intentions. Fabian socialists have rubbed shoulders with small ‘l’ liberals in seeking to develop taxation structures and welfare state provisions to give practical effect to those intentions.

Of course, the extent to which the capitalist economy has been tempered by any such egalitarian principles and policies has varied considerably from country to country. One useful comparative measure of economic inequalities is the ratio of the income of the top 10 per cent of households to the poorest 10 per cent of households. According to the latest United Nations figures, this ratio is 12.5:1 for Australia. In other words, the wealthiest 10 per cent of households enjoy incomes on average 12.5 times higher than the poorest 10 per cent of households. This is a below the US ratio of 17:1 but above the UK figure of 10:1. For all the Scandinavian nations the ratio is in the range from 5:1 to 6:1. At the other extreme, the ratio is 42:1 for South Africa and 49:1 for Brazil. So, even within the contours of capitalism, all sorts of distributional patterns exist.

From an Australian perspective, there are some particular concerns, made more striking because of the evidence that the economic inequalities are widening. The rich have been doing very nicely. Their income derives principally from the ownership of capital and land, from professional fees and from the enormously inflated remuneration packages that senior business executives have enjoyed in recent years. At the other extreme, poverty is persistent, to say the least, although successive governments have attempted to target welfare expenditures more narrowly on the ‘deserving’ poor. Many waged workers are doing it tough, a growing proportion of them having become dependent on casual and irregular employment in the ‘secondary labour market’. Economist Bob Gregory’s research at the ANU shows evidence of a ‘shrinking middle’ of people getting regular, adequate and secure income from labour.

This tendency to increased economic inequality has diverse consequences – economic, social, environmental, and political. Economically, the danger is that growing inequality undermines the potential for economic cooperation between capital and labour. More generally, it vitiates cooperation among all whose contribution to the creation of social wealth depends on the perception of ‘fair shares’ in the outcome. If so, that undermines the necessary conditions for economic efficiency within the private or public sectors. In effect, violating equity endangers efficiency. The much-touted ‘efficiency-equity trade off’ is a myth, as American political scientist Robert Kuttner’s research on analyses of cross-country comparisons shows. At the macroeconomic scale ‘incentivation’ does not work.

Socially, growing economic inequality has strong connections with an increased incidence of crime and ill-health. As the latest UN Human Development report notes, differences in income inequality across countries are closely associated with differences in rates of crime and violence. On the health issue some particularly interesting epidemiological evidence compiled by R. G. Wilkinson shows that ill-health is not just correlated with poverty, but also with international differences in economic inequality. Relative deprivation matters, and it shows up in ill-health as a social problem and economic cost. More generally, of course, economic inequality undermines social cohesion. The situation of US cities, where the rich take refuge from the ‘underclass’ by living in security-patrolled gated communities, is already being reproduced down under. It is not a scenario conducive to society as a whole feeling relaxed and comfortable.

From an environmental perspective, economic inequality is one of the many impediments to the achievement of ecological sustainability. It is only when people perceive that they are ‘all in the same boat’ and have to incur reasonable equality of sacrifice for the common good that they will be willing to accept the policies needed to rein in the excessive levels of production and consumption that lie behind this latent crisis. Otherwise, access to ‘environmental goods’ – ultimately to life itself – becomes increasingly a matter of ability to pay.

Politically, economic inequality is also of concern because it undermines the potential for the full realisation of the democratic ideal. The principle of ‘one person one vote’ in the political sphere sits uncomfortably with the principle of ‘one dollar one vote’ in the economic sphere. Moreover, as the liberal economist Arthur Okun has noted, money can buy services that produce, in effect, more or better rights. These are circumstances where the formal equality of rights before the law has an uneasy relationship, to say the least, with the existence of pervasive economic inequalities. The posited connection between capitalism and democracy, which ideologues on the political right assert, looks ever more shaky in circumstances of growing economic inequality.

Such concerns have international as well as national dimensions. Within individual nations, a growing proportion of our economic resources, individually and collectively, is being allocated to spending on security measures designed to cope with the social fall-out of an increasingly unequal society. Especially in the wake of the catastrophic events of September 11, 2002, we are all aware that a similar tendency is now operating worldwide. An unequal society is an insecure society and the cost of coping with that is onerous – economically, politically and psychologically.

Redress of economic inequalities, nationally and internationally, is clearly imperative in these circumstances. There are numerous policy instruments available to nation states if there is the political will to use them – more progressive taxes on income and wealth, taxes on property and land ownership which capture the unearned incomes arising from inflationary processes, and inheritance taxes which capture some part of these unearned incomes which perpetuate inequality intergenerationally. Incomes policies can also seek to tackle the distribution of incomes at source.

How far to go with policies for greater equality is a difficult political judgement. My own view is that there should be ceilings as well as floors in relation to income distribution, but we could reasonably debate whether the ratio of ceiling to floor should be 3:1, 10:1 or whatever.

Ultimately we have to question what is the point of further affluence for the already affluent. There is growing evidence that the relationship between income and happiness is generally non-linear. Rising out of poverty reliably enhances personal happiness. However, in an affluent society, further increases in incomes produce no similarly dependable improvements in subjective well-being. Indeed, it is pertinent to recall the argument of the conservative economist A. C. Pigou, who noted that the principle of diminishing marginal utility implies that taking a dollar from a rich person and giving it to a poor person will normally reduce the former’s welfare by less than it adds to the latter’s. Ergo, a more egalitarian distribution of a given total income enhances economic welfare.

Getting the redress of economic inequality as a central feature of the political agenda is increasingly important and urgent. However, in the current political environment it is not easy to achieve. These are circumstances in which it is appropriate to recall the words of the social theorist Richard Tawney:

‘The individual differences of which so much is made … will always survive, and they are to be welcomed, not regretted. But their existence is no reason for not seeking to establish the largest possible measure of equality of environment, and circumstances, and opportunity … And a society which is convinced that inequality is an evil need not be alarmed because the evil is one which cannot wholly be subdued. In recognising the poison it will have armed itself with an antidote. It will have deprived inequality of its sting by stripping it of its esteem’.