Take heart! Australia is still better and fairer than most

Don’t be disheartened by recent events. Things in the Land of Oz are far from perfect, and we have our share of problems. But don’t be tempted by the thought that if America’s going to the dogs, we won’t be far behind. No, we’re holding things together much better than the Yanks are.

With the US reverting to its traditional practice of taking shots at presidents and presidential candidates, this week of all weeks is the time to say, “Only in America”. Thanks to the courage and quick thinking of John Howard after the Port Arthur massacre in 1996, our access to guns is well controlled.

Of late, it’s been tempting to think that the goal of every generation being better off than their parents has been lost. It’s not true. Not yet, anyway. And there’s still time to ensure that Gen Z – youngsters in their teens and early 20s – get a fair shake.

It’s not easy to compare generations with statistical accuracy. But lately, statisticians have made progress in linking information from the census and official surveys with banks of data held by government departments. And last week, the Productivity Commission used this advance to publish a much more authoritative study on economic mobility.

It confirms that, on average, each generation earns more than its parents did at the same age. That’s because the economy has grown almost continuously over the decades, raising material standards of living. This would be true of all the developed economies.

Of course, it’s also true that it’s easier for children born into poorer families to do better than their parents than it is for children born into well-off families.

However, living standards haven’t grown much over the past decade or so. Were this to continue for a further decade or more, it could become true that Gen Z isn’t doing better than its parents.

A different question as to whether overall living standards are continuing to rise in real terms over the years is how easy it is for people to change where they stand in the distribution of incomes as their lives progress.

How easy is it for people starting out towards the bottom of the ladder to climb to a higher rung?

This is the meaning of income mobility. Can you better yourself if you try hard enough?

Now, this is where the Americans keep telling themselves they’re the land of opportunity. Log cabin to the White House and all that. Well, it may have been true in Abraham Lincoln’s day, but it hasn’t been true for decades. As a general rule, the more unequal incomes are, the harder it is for people’s positions on the ladder to change.

America’s incomes are highly unequal, and it’s one of the countries where changing your income status is hardest.

But this is where the Productivity Commission’s research brings good news. On income inequality, Australia is in the middle of the pack of rich countries. But when it comes to income mobility, we do what Australians love to think of themselves as doing: punching above our weight.

We pride ourselves on being the land of the fair go. Or, as dear departed Scott Morrison preferred to put it: if you have a go, you get a go. Well, guess what? We now have documentary evidence that it’s still true. According to the commission’s calculations, Australia is among the most income-mobile countries, scoring better than even the fabled Scandinavians.

Two qualifications. First, people in the middle 60 per cent of the distribution enjoy the most opportunity to move. If you start in the bottom 20 per cent of personal incomes, you have less ability to improve. And if you’re already in the top 20 per cent, it’s harder to go higher.

Second, although the commission doesn’t spell this out, mobility cuts both ways. Remember, we’re talking about relative incomes, not absolute incomes. So, if it’s easier for me to pass you on the ladder, it’s easier for you to fall below me.

How do people seek to improve their earning potential? The obvious way is to get a better education. On average, people with a uni degree or higher earn 23 per cent more over their lifetime than those who only complete year 12. And those who complete high school earn significantly more than those who don’t.

Mobility is adversely affected by significant life events, such as unemployment, serious health problems and relationship breakdowns.

So far, we’ve been focusing just on income. But wealth – the assets you own – also affects your mobility. Unsurprisingly, the less wealth you have, the harder it is to move up, and the more wealth you have, the easier it is to stay up.

The rich have always been with us, but I think the inordinate rise in the cost – and value – of homes, which is already handicapping young people without access to parental help, will also make inheritance a bigger influence on people’s income mobility.

As Australians, we have a lot to be pleased about and proud of. But we have no cause for complacency.

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How to make sense of Treasury's latest intergenerational report

Our sixth intergenerational report envisages an Australia of fewer young people and more elderly, with slower improvement in living standards, climate change causing economic and social upheaval, aged and disability care becoming our fastest-growing industry, and home ownership declining, while we spend more defending ourselves from the threat of a rising China, real or imagined.

That does sound like fun, but remember this: just as I hope many of the predictions I make will be self-defeating prophecies – because people act to ensure they don’t happen – so it is with Treasury’s regular intergenerational reports.

They say, here’s the pencil sketch of the next four decades that we get when we assume present economic and demographic trends keep rolling on for 40 years, and that present government policies are never changed.

Get it? Intergenerational reports are Treasury’s memo to the government of the day, saying things will have to change. The memo to you and me says: you may hate change, but unless you let our political masters make changes, this is how crappy life may become.

Every intergenerational report comes to the same bottom line: if you think you won’t be paying more tax in future you must have rocks in your head.

The media can’t stop themselves from referring to the report’s findings as “forecasts”. Nonsense. Forecasts purport to tell you what will happen. These reports are “projections”: if we make a host of key assumptions about what will happen, plug them in the machine and turn the handle 40 times, this is what comes out.

Remembering that Treasury demonstrates almost annually its inability to forecast in late April what its own budget balance will be in just two months’ time, June 30, let’s not imagine that anything it tells us today about 2063 could prove close to the truth, except by chance.

This is no attack on Treasury. No one’s forecasts are less wrong than theirs. It’s just saying don’t let the false confidence of the economics profession fool you. Only God knows what the world will look like in 2063 – and she’s not telling.

We’re all peering through a glass darkly, doing the best we can to guess what’s coming around the corner. How many pandemics in the next 40 years? Treasury’s best guess: none. How many global financial crises? Best guess: none.

We know from experience that the economy rarely moves in straight lines for long, but the nature of Treasury’s mechanical projections is that most curves stay straight for 40 years. Unexpected things are bound to happen. Some will knock us off course only briefly; some may change our direction forever. Some will be bad; some will be good.

The report’s single most important assumption is the rate at which the productivity of labour will improve. Until now, Treasury has avoided argument by assuming that the average rate of improvement over the next 40 years will be its rate over past 30 years.

The first report in 2002 assumed a rate of 1.75 per cent, but in later reports it was cut to 1.5 per cent. Now it’s been cut to the seemingly less unrealistic 20-year average of 1.2 per cent.

This shift makes a big difference. The first report had living standards – measured as real gross domestic product per person – climbing 90 per cent in 40 years. This report has them climbing by only 57 per cent in the next 40.

Since this is only the second of the six intergenerational reports produced under a Labor government, it’s only the second that takes climate change seriously. The other four looked into the coming 40 years and didn’t see any consequences of climate change worth taking into account.

Labor’s first report, in 2010, had a lot to say about climate change, but this report attempts to measure its effect on the economy and the budget. It estimates that climate change will cause the level of real GDP in 2063 to be between $135 billion and $423 billion less than it would overwise have been, in today’s dollars.

The report’s title has always been a misnomer. If it lived up to its name, it would deal with the intergenerational transfer of income and wealth from the young to the old – an issue that deserves much more attention than it gets.

It would talk about the way our treatment of housing favours the elderly, and how the tax, spending and superannuation decisions of the Howard government, in particular, shifted income from the young to the old.

But no. The real reason it’s called the intergenerational report is that its main purpose is to bang on about the huge effect the ageing of the population – the rise in the population’s average age – will have on the federal budget (while ignoring any effects on the states’ budgets).

It’s here, however, that Rafal Chomik, of the ACR Centre of Excellence in Population Ageing Research at the University of NSW, has noted this overhyped story being toned down over the six reports. In 2002, the first report projected that, by 2023, the share of the population aged 65 and over would climb from 12.5 per cent to nearly 19 per cent.

Actually, it’s only up to 17.3 per cent. And the projection for 2063 is 23.4 per cent, less than the 24.5 per cent originally projected for 2042.

Another factor on which the report was too pessimistic at the start is the effect of ageing on participation in the labour force (by having a job or actively seeking one). Whereas it was expected to dive as the Baby Boomers retired, it’s now expected just to glide down.

Participation actually reached a record high of 66.6 per cent this year – who knew our response to a pandemic would return us to full employment for the first time in 50 years? – and is now projected to have fallen only to 63.8 per cent by 2063. If so, that would be higher than it was in 2002.

Chomik says the first report projected government spending on health care to reach more than 8 per cent of GDP by 2042. Now it’s projected to reach just 6.2 per cent by 2063. But, thanks to the royal commission, the cost of aged care is now expected to grow faster, to 2.5 per cent of GDP by 2063.

Which brings us to Treasury’s bottom line, the federal budget. Treasury projects that, as a percentage of GDP, the budget deficit will decline steadily until 2049, before ageing causes it to start heading back up.

Note, however, that while government spending is projected to rise by almost 4 per cent of GDP, tax collections are assumed, as always, to be unchanged.

Get the (unchanged) commercial message from Treasury? Taxes will have to rise.

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Starving the unemployed shames us all

I wouldn’t want to be Treasurer Jim Chalmers, as he puts the finishing touches to next week’s budget. Everywhere he looks he sees problems – problems that need solving by spending more taxpayers’ money. But the budget deficit must be kept low if we’re to get inflation down without even more rises in interest rates. Which raises what is, for any politician, a horrifying thought: perhaps we should be paying more tax, not less.

However, to any person with a shred of conscience, any belief in decent treatment of the less-fortunate, any care about maintaining Australia’s pride in being the land of the fair go, one issue towers above all others: our shameful treatment of the unemployed.

For years, we’ve gone on allowing the unemployment benefit – these days called the JobSeeker payment – to fall further and further below what the rest of us get, and further below the poverty line.

Get that? Since the mid-1990s, we’ve had – not as an unfortunate oversight, but as a conscious choice – a policy of starving the unemployed. Keeping them on a payment so low that, by the time they’ve paid rent and other inescapable costs, they often have to skip meals.

Late last year, the independent senator for the ACT, David Pocock, forced the Albanese government to introduce the biggest budget reform in ages. It had to set up a committee of experts to review the adequacy of welfare benefits, which would report its findings to the government every year, no less than two weeks before the annual budget.

The government released the Economic Inclusion Advisory Committee’s first report about two weeks ago. It made 37 recommendations, but stressed that one recommendation trumped all the others: that the government commit to a “substantial increase” in the base rate of the JobSeeker payment.

Specifically, it wanted the JobSeeker payment raised from 70 per cent of the age pension rate to 90 per cent.

Some unemployed people told their stories to the committee. “You can buy a tray of sausages and bag them up in the freezer for the fortnight,” one person said. “But yeah, you rarely get to have any meat. Fruit and vegetables are absolutely shocking. You can’t afford to eat healthily, that’s for sure. So, they’re killing us, basically.”

Another said, “I needed to manage my budget strictly. This included going for cheaper items in the supermarket, having smaller meals (i.e. an orange for lunch, soup at dinner time), only filling up petrol when I really needed to, using public transport or walking where I could to save on the cost of fuel, managing health appointments around how much money I had left in the bank that week.”

Think of it. Every year, just before the budget, this committee will pop up to remind us what a mean-spirited people we are, and how much worse it’s become since last year – until we do something to get it off our conscience.

But here’s what sticks in my gullet: when the government released the committee’s report, its spin doctors did all they could to play down the report and stress the absurd notion that the government could possibly afford to do anything about it when times were so tough.

They made 37 recommendations, which would cost $34 billion. Are you kidding? Where could we find that kind of money? And what about the report of the Women’s Economic Equality Taskforce (which the government just happened to release at the same time) and all its expensive recommendations?

Get real. We can’t do everything. So, what’s it to be – the unemployed or the women? (Never mind that half the people on JobSeeker are female, including the sole parents who got pushed off the parenting payment onto the dole.) And, some helpful journos have relayed, just between you and me, there’s no votes in increasing unemployment benefits.

I fear that’s true. It may even cost a few votes. There’s a lot of “downward envy” among Labor’s working-class voters. And both sides of politics are well aware of the electoral benefits of pandering to the worst side of the Australian character – resentment of boat people and supposed dole bludgers.

It’s easy to exaggerate the cost of raising the dole. As former Treasury secretary Dr Ken Henry points out, the annual cost of the committee’s proposal is $6 billion, less than 1 per cent of total government spending. “No more than an adjustment at the margin,” he says.

Among rich countries, we have the third-lowest unemployment benefits. If, as usual, you set the poverty line at half the median disposable income, the single JobSeeker payment has fallen from 14 per cent below the poverty line in 2000 to 68 per cent below in 2022.

Is that a record we’re happy to live with? Is Anthony Albanese, who’s always telling us how hard he and his pensioner mother did it, willing to let the jobless continue to suffer because there are no votes in doing the right thing? Is that all modern Labor stands for?

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In politics and the economy, Christianity is increasingly suspect

A question for Easter Monday: would Australia be better governed if our political leaders were practising Christians? Would the economy work any better?

One thing that’s changed since last Easter is that we’re no longer led by a prime minister happy to let his Christian faith be known. By contrast, I wouldn’t know what Anthony Albanese’s religious views are, if any.

Another thing that’s changing is the decline of adherence to Christianity in its many denominations. This is partly the immigration of many people of other religions, but mainly the growing indifference of many from formerly churchgoing families. And, perhaps, the growing number of university graduates.

According to the 2021 census, the proportion of people identifying as Christian has fallen from 61 per cent to 44 per cent in a decade, with those reporting “no religion” rising from 22 per cent to 39 per cent.

So, it’s no exaggeration to say we now live in a post-Christian society. Nor that a growing number of people have a low opinion of those who profess to be Christians. They’ve said or done something bad – well, what would you expect?

Actually, that’s a good question: what do we expect of Christians? How differently would a professing prime minister behave to one who kept their religious opinions to themselves?

I think the main expectation of most people – certainly, most young people – would be for Christians to be always on about their opposition to abortion, same-sex marriage and gender-changing.

Plus, their God-given right to discriminate against those in their churches, schools or hospitals who don’t conform to these views.

Is this the view of themselves and their mission – and their God - that Christians and their leaders are happy to convey to the rest of the nation? That Christ died on the cross to preserve a narrow view of sexual morality?

To be fair, it’s only when clergy speak on such controversial matters that the media take much notice of what they say. An archbishop preaching a sermon on Love One Another gets a headline only on Good Friday.

But I suspect it’s only on matters of (their view of) sexual morality that the churches go out of their way to attract media publicity. By default, this is the churches’ burning message to the nation.

If that’s all Christianity has left – if it now sees itself as an oppressed minority fighting to protect its right to discriminate on religious grounds – then whether our prime minister is an out-of-the-closet Christian is of little consequence for the governance of the nation and the health of the economy.

As we saw with Scott Morrison, such a prime minister won’t prevail against the weight of the nation’s support for sexual freedom and opposition to discrimination on sexual or religious grounds.

The worst we could expect is feet-dragging on the goal of increasing women’s role in politics and the paid workforce.

But this is not the Christianity I grew up with, nor does it fit with the values and behaviour of the many Christians I still mix with. Everything I know about the church and its Saviour tells me sex is just a small part of its definition of what it means to live a “moral” life.

The imitation of Christ is about loving your neighbour as yourself – and defining “neighbour” very broadly. It’s about honesty and meticulous truth-telling, about justice tempered by mercy, about forgiveness and fairness.

And, from what I read in the New Testament, it’s about Jesus’ preoccupation with the poor and strictures on the rich: “Sell everything you have and give it to the poor.”

When I heard a secret recording of Morrison speaking at a prayer meeting, the sentiments and phrases reminded me of my parents and all the prayer meetings I had attended.

But in watching Morrison’s words and actions as prime minister, my recurring feeling over the four years was that nothing about them reminded me of Jesus.

He was not the only prime minister to pander to, and play on, the worst features of the Australian character. Punishing boat people who arrive without an invitation. Telling the underprivileged that “those who have a go, get a go”.

Ignoring the law to use robo-debt to falsely accuse people the mean-spirited regard as dole bludgers. And insisting on keeping unemployment benefits well below the poverty line.

If we could get a prime minister who acted in a less un-Christian way, it wouldn’t matter much who or what he believed in. The economy would be fairer, and we could all enjoy our prosperity with a clearer conscience.

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Handle with care: Productivity Commission's advice on getting richer

If you accept the Productivity Commission’s assumption that getting richer – “advancing prosperity” – is pretty much the only thing that matters, then the five priority areas it nominates in its five-yearly review of our productivity performance make a lot of sense.

But when you examine the things it says we should do to fix those five areas, you find too much of its same old, same old, preference for neoclassical ideology over empirical evidence.

And you find no acknowledgement that part of our claimed failure to improve the productivity of the “government-funded non-market services sector” has occurred because, over recent decades, governments have acted on the commission’s advice to keep the public sector small and taxes low by outsourcing the provision of human services to profit-motivated businesses.

Which, if anything, has made matters worse rather than better. As witness: the mess we’ve made of aged care and vocational education and training, and the ever-growing cost of the National Disability Insurance Scheme.

The report is quick to explain that improving productivity does not mean getting people to work harder. Perfectly true. It’s supposed to mean making workers more productive by giving them better training and better machines to work with.

Except that when you see the commission recommending a move to “modern, fit-for-purpose labour market regulation” – including, no doubt, getting rid of weekend penalty pay rates – you realise the commission has learnt nothing from the failure of John Howard’s Work Choices, nor from the failure of the reduction in Sunday penalty payments to lead to any increase in weekend employment, as had been confidently predicted.

So, what the commission is really advocating is that the balance of power in wage bargaining be shifted further in favour of employers and away from workers and their unions. Which probably would lead to people working harder for little or no increase in pay.

What the commission should have said, but didn’t, is that workers would be more co-operative with bosses’ efforts to improve the productivity of their firms if they were more confident they’d get their fair share of the benefits.

At present, they have good reason to doubt that they would.

What’s conspicuously absent from all the bemoaning of the slowdown in our rate of productivity improvement, is any acknowledgement that there’s also been a huge fall in the rate of the flow-through to real wages of what improvement we are achieving.

Until that’s fixed – until the capitalist system goes back to keeping its promise that the workers will get their fair share of the benefits of capitalism – Australia’s households have no rational reason to give a stuff about what’s happening to productivity.

Back to the point. Productivity improves when you produce the same things with fewer inputs of labour or capital, or produce more – either more quantity or better quality – with the same inputs.

And the report is exactly right to say that steadily improving our productivity is the key to improving the nation’s material standard of living. The rich world has more than two centuries of proof of that truth.

The first of the report’s five priority areas is achieving a “highly skilled and adaptable workforce”. Dead right. This is economics 101. Economists have known for yonks that investing in “human capital” is the obvious way to increase productivity.

(And it’s the better-educated and trained workers who can most easily adapt to the changing demand for labour that the digital revolution and other technological advance will bring.)

But the commission long ago stopped pointing this out, while state and federal governments put their efforts into quite different objectives. The Howard government, for instance, spent hugely on expanding parents’ choice of private school.

“I’m a Callithumpian, and I’d like to send my kid to a Callithumpian school, where they won’t have to mix with sinners.” Next, we had the limited success of the Gonski-inspired push to fund schools based on student need rather than entrenched privilege and religion.

And then we wonder why school results have got worse and so many kids leave school with inadequate numeracy and literacy. How they’ll be advancing our prosperity in an ever-changing world I hate to think.

Which raises a recent “learning” by economists, that doesn’t seem to have reached the commission: if you ignore what your “reforms” are doing to the distribution of income between the top and the bottom, don’t be surprised if your productivity goes off.

For some inexplicable reason, growth in the number of the downtrodden makes the average look worse.

Meanwhile, with universities, the highest priority of successive federal governments – Labor and Liberal – over the past 30 years has just been to get them off the budget.

The feds have made them hugely dependent on attracting overseas students and charging them full freight. One way they’ve coped is by making university teaching by the younger staff part of the gig economy.

Apart from putting the public unis (but not the few private unis) on a starvation diet during the lockdowns, the Morrison government’s last effort to punish what it saw as a hotbed of socialism was a hare-brained scheme to encourage students to choose courses that made them “job-ready” by, among other things, doubling the tuition fees for a BA.

Fortunately, this failed to discourage the students, but did make the humanities a far more profitable product for the unis to push.

To be fair, another recent “learning” does seem to have got through to the commission. It’s third priority for attention is “creating a more dynamic and competitive economy”.

Research by Treasury has found strong empirical evidence that our economy has become less dynamic – less able to change and improve over time. Fewer new firms are being created, and fewer workers are being induced to change their jobs pursuing higher pay.

Our industries have become more oligopolised – allowed by our permissive takeover laws - and, not surprisingly, their profit margins (“markups,” in econospeak) have been creeping up.

No official will admit it, but it seems pretty clear that the reason the Reserve Bank has been raising interest rates so far and so fast – despite falling real wages – is the part that oligopolistic pricing power is playing in our high inflation rate.

And now further Treasury research has confirmed that our high degree of industry concentration (markets dominated by a few huge firms) has given employers greater power to limit the rise in wages.

All this makes it unsurprising that our rate of productivity improvement has weakened. It also helps explain why, over the past decade, virtually none of what improvement in the productivity of labour we have achieved has been passed on to real wages.

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Stuck with crappy aged care because Morrison won’t ask us to pay

I’m sorry to be so pessimistic but I fear that, in just its first week, the likelihood of the aged care royal commission’s report leading to much better treatment of our elderly has faded.

Within a day or two, Scott Morrison and his Treasurer, Josh Frydenberg, made it known they had “little appetite” for the commission’s plan to use an “aged care improvement levy” of 1 per cent of taxable income to cover the considerable cost of the reforms it proposed.

Morrison wants to be seen as delivering lower – not higher – taxes. I suspect the pair have realised that announcing an increase in tax on all income earners wouldn’t fit well with the costly third stage of their tax cuts, due in 2024, which will go mainly to high income-earners (like my good self).

Rather, the pair are murmuring about making the elderly contribute more from their own retirement savings towards the cost of their care by tightening the means-testing of aged care benefits. Maybe there’d be more and bigger “refundable accommodation deposits”.

Making the better-off old cover more of their own costs – including by taking account of the much-increased value of their homes – would be very fair. Too fair, you’d have thought, for the Liberal Party and its heartland.

Remember how the party’s “base” revolted against Malcolm Turnbull’s measures to restrict tax concessions to just the first $1.6 million of superannuation balances? Remember how hard well-off retirees fought against Labor’s plan to limit dividend franking credits at the last election, with the Libs egging them on?

Can you imagine how keen Morrison would be to have the tables turned in the coming election? He’d be the one seeking support for what Labor would quickly label his “retirement tax”.

Implementing the commission’s report would cost a minimum of $10 billion a year and probably a lot more. It’s impossible to imagine this government having the courage to raise anything like that much by tightening the means-testing of its own well-off supporters.

The commission’s report has been pushed aside before we’ve had time to understand what it’s proposing and why it would be so expensive. Whereas the present Aged Care Act was designed to help the government limit its spending, the report goes the opposite way, proposing a new act which enshrined every person’s statutory right to aged care of decent quality, with reasonable choice.

This would remove the government’s ability to limit the number of people receiving care, making access to free aged care “universal” – just as access to free public schooling has long been universal and, since Medicare, access to free care in public hospitals is universal.

In this context, “free” means the cost is covered by general taxation, not by user charges or means-tested charges. (Note that the freedom from direct charging would apply only to aged care proper. People’s food and accommodation costs would be means-tested. But refundable accommodation deposits would probably go.)

The report found that the root cause of the (often literally) crappy treatment of people in age care was the inadequate number, training and pathetic pay of aged care workers (almost all of them women). Properly done, almost all the increased cost of aged care would end up in the hands of these women.

In principle, it would be perfectly fair to cover the cost of better, universal aged care with a tax levy paid by all income-earners. We’d be paying for aged care the way we’ve always paid for the age pension and much else – by a “generational bargain”.

It’s fair to ask the present generation to pay for the retirement costs of the older generation because the present generation will be old themselves soon enough. When they are, their retirement costs will be paid for by the generation coming behind them. In the end, every generation pays and every generation benefits.

But that’s just in principle. In practice, the Grattan Institute has shown that successive governments – particularly the Howard government – have reneged on the intergenerational bargain by changing the tax and welfare system in ways that favour the old and penalise the young.

Tax concessions on super are now so generous that few retirees pay any income tax, no matter how well-off. As my colleague Jessica Irvine has shown, tax and welfare concessions to existing home owners have made homes such a desirable investment that a growing proportion of the young will never be able to afford to join the charmed circle.

The young bear the brunt of our willingness to live with high unemployment and underemployment and our unwillingness to regulate the gig economy. And the young pay far more for their higher education than earlier generations (and now those with the temerity to do an arts degree pay double).

In the face of this unfairness, the Grattan Institute’s Brendan Coates has sensibly proposed that the cost of fixing aged care be covered by reducing super concessions to higher income-earners, but I doubt Morrison’s game to try that one on his base – or the voters.

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THE (ECONOMIC) CASE FOR A MORE EQUITABLE AUSTRALIA

Gavin Mooney Memorial Oration (with Rev Tim Costello), Melbourne University, Wednesday, August 7, 2013

I didn’t know Gavin Mooney, but I do know that, unusually for an economist, he had a deep concern for fairness or, as economists call it, ‘equity’. So it’s highly appropriate that, in this the inaugural Gavin Mooney Memorial Oration, we address ‘the case for a more equitable Australia’. I want to talk about the economic case for a more equitable Australia. But before I do I want to enter a major caveat.

Why should we seek a more equitable Australia in which income and wealth and opportunity are shared more fairly between the top and the bottom? For no better reason than that it’s the ethical, moral, right thing to do. If it’s the moral thing to do - the thing that, for Christians, Jesus wants us to do, and most other religions and humanist ethical codes tell us we should do - we don’t need any supporting arguments. I’ve often heard the ethicist Simon Longstaff say that if you’re ethical in your business practices because you believe it’s good for business, you’re not being ethical at all. Ethics as a profit-making strategy isn’t ethics. One of the things I’ve learnt from my reading of psychology is that it’s always better to do things from intrinsic rather than extrinsic motives. It’s better to do things for their own sake - because you enjoy doing them or believe it’s your duty to do them - than because doing them brings you some sort of external reward - money, power, fame or status.

I’m often sorry when I hear people in noble occupations defending what they do with instrumental arguments. I’d like to hear more vice chancellors say they believe in increasing and spreading knowledge for its own sake, that a rich country like ours can afford to spend a far bit of its wealth on satisfying our insatiable human curiosity, that the better educated people are the more they can get out of life, even if they never put that education to use in the workforce, rather than arguing that investing in education is good for the economy. I’m sorry when I hear people in the arts arguing that the arts create many jobs. When we do this we’re giving in to the hyper-materialism of our age.

But having said that, I have to acknowledge that Tim is more qualified than me to make the moral case for a more equitable Australia - and he’s just done that - and as an economic journalist it’s more appropriate for me to make the economic case. So it may seem that I’m about to do what I just said other people shouldn’t do: argue that we should be more equitable because this would make the community better off materially. I actually believe that to be true - just as it’s true that spending more on education would make us all better off materially - but actually I’m going to make the mirror image argument: that making Australia more equitable wouldn't make us worse off.

Why am I mounting such a negative argument? Because there’s a widespread belief among economists and their fellow travellers that making Australia more equitable would leave the community worse off materially, that it would come at the cost of a lower material standard of living overall.

The longstanding conventional wisdom among mainstream economists is that ‘equity’ is in conflict with ‘efficiency’ - that is, the efficient allocation of resources so as to maximise the community’s material standard of living and foster economic growth. Economists are comfortable with objectives being in conflict because a key part of their expertise is knowing how such conflicts are resolved: by trading off one unit of equity for one for one unit of efficiency (or vice versa) and continuing to do this until you’ve achieved the particular combination of equity and efficiency that gives you maximum satisfaction overall. Once you’ve achieved that ideal trade-off you’ve achieved economic nirvana: equilibrium.

In practice, however, it’s worse than that. Economists specialise in efficiency, but not in equity. Their contribution to society is to explain to the community how to organise the economy in ways that maximise our utility or satisfaction from the production and consumption of goods and services, and how to keep our material standard of living improving every year. If you believe that efficiency and equity are always in conflict, so anything you do to improve equity will always be at the expense of efficiency, but you, as an economist, happen to specialise in efficiency, it’s easy to decide to focus on efficiency and ignore equity. After all, we live in an age of ever-increasing specialisation - which is actually a primary source of productivity improvement and thus our ever-rising material affluence. So you focus on efficiency and growth, and leave equity for others to worry about.

You bolster this decision by observing that, whereas efficiency is objective and measurable, equity is highly subjective; fairness is in the eye of the beholder. So you tell yourself - and anyone who asks - that you stick to the science and leave the value judgments to those more qualified, such as the politicians. (This would be fair enough, were it not for the fact that, in proffering their advice, economists rarely attach product warnings. Though the advertisers of patent medicines warn people to see a doctor ‘if problems persist’, economists don’t warn politicians to check with sociologists or prelates before they act on the economists’ advice.)

The problem is, if it’s not true that efficiency and equity are in conflict - or not always true - then the economists will be failing to advise politicians of cases where equity can be improved without any loss of efficiency - that is, failing to advise the community when there’s a free lunch to be had. And if, because of their lack of interest in equity as an objective, economists fail to draw attention to those cases where improving equity can lead also to improved efficiency, then economists are failing in their own specified role to maximise efficiency and failing to point out cases where we can kill two birds with one stone.

I’m sure there are plenty of cases where equity and efficiency really are in conflict. But I’m equally sure there are many cases - far more than we realise - where they aren’t; that there are delicious free lunches going begging and opportunities to increase efficiency that the efficiency experts themselves haven’t noticed because of this kink in their thinking.

Let’s start by looking at the limited case: where is the evidence that greater equity damages efficiency? The opponents of government intervention have been searching for years for cross-country or other evidence that developed economies with a bigger public sector (and thus a more redistributive tax and transfer system) have inferior records on economic growth. They haven’t found it. Nor have they found evidence that countries with a less unequal distribution of income between households have inferior economic growth. In his book, The Price of Inequality, the Nobel Prize- winning economist Joe Stiglitz observes that various European countries enjoy a standard of living much the same as America’s while doing much more to reduce income inequality than America does. So there’s little evidence we have to accept a highly unequal society to preserve an efficient, growing economy. Studies show the US has surprisingly low social mobility: few people with poor parents go on to have high incomes and, conversely, few people suffer a decline in income between generations. If you can stay rich in America without trying, and stay poor despite trying, it’s hard to believe this won’t lead to a long-term decline in the dynamism of the US economy.

So let’s move on to the evidence for the more positive case: that equity and efficiency can pull together, that reduced inequality can actually enhance efficiency and growth. There’s a growing amount of such evidence. But before we get to it I need to acknowledge the contribution of Gavin Mooney. One of his great research interests was in what health economists and public health medicos call ‘the social gradient’ or ‘the social determinants of health’. There is much evidence that the health of people with low socio-economic status is much worse than that of people with high socio-economic status. The obvious response to this evidence is to say that measures to improve the health of people on the bottom ought to lead to a very real improvement in their wellbeing. That’s the equity objective. But health, like education, is one of those things that are both a means and an end in themselves, an instrument as well as an objective. The better educated a population is, the more its labour is worth and the richer we can expect it to be. Similarly, the healthier a population is the more able it is to work and the richer we can expect it to be. So the more we do to improve the health of the bottom half, the more efficient the economy should be and the faster it should grow.

Stiglitz cites an IMF study finding that the less unequal a country’s income distribution is, the further apart its recessions are likely to be - that is, the less macroeconomic instability it’s likely to suffer. His book contains much similar evidence and arguments, but I want to refer to the work of one other American Nobel laureate, James Heckman, before I move my argument closer to home. Heckman’s work demonstrates the almost magical power that attending to the early childhood development of at-risk children has in reducing the likelihood of them getting into trouble with the police, dropping out of school, being in and out of employment and in and out of jail. It’s obvious that the success of such a program would do much to improve equality of opportunity, and it’s not hard to see it would also greatly improve the beneficiaries’ contribution to the paid labour force (not to mention the pressure on government spending).

The most obvious case of increasing equity also increasing efficiency is unemployment. We think it’s unfair to have people who want to work unable to find a job, not just because it leaves them with less to spend but also because we know the unemployed are particularly unhappy. Sure. But it’s also glaringly inefficient to have people who’re able to work lying around idle and not contributing to national production. Finding ways to get those people back to work would often make a far greater contribution to efficiency than many of the micro-economic reforms economists hanker after.

Two prominent - and now apparently bipartisan - policies in this campaign are seen as primarily about equity, but nonetheless should bring significant efficiency benefits. The first is the Gonski reforms to school funding, which are intended to increase the assistance able to be given to students suffering one form of disadvantage or another regardless of which school system they’re in. If this results in more young people gaining a better education, the value of their labour is increased as well as their degree of participation in the labour force. It’s a similar situation with the national disability insurance scheme. It can be expected to increase workforce participation and the acquisition of skills. And where unpaid carers with high skills are able to return to the workforce after being replaced by paid carers with lesser skills there’s obviously some increase in the skills of the workforce. According to the estimates of no less an authority than the Productivity Commission, the disability scheme could be expected to lead to an annual increase in real GDP reaching 1 percentage point by 2050.

Finally, in an issue that’s dear to my heart, there is growing evidence that organising work in the workplace in ways designed to increase the satisfaction workers derive from their work - by making sure you put round pegs in round holes, or having them work in teams, or giving them greater personal autonomy or a say in the way things are run - leads them to make a better contribution to the success of the firm. Since most of us are doomed to spend 40 hours a week working for most of our lives, it amazes me the populous hasn’t long ago insisted that work be made as satisfying as possible. The growing evidence that doing so would also increase efficiency makes it even more amazing.

The case for greater equity in Australia is fundamentally a moral one: we should do it because it’s the right thing to do. But the economic efficiency case for not making Australia more equitable is weaker than many economists assume. There is evidence we can increase equity in ways that don’t reduce efficiency. And if we look for them there are many ways we can reduce inequality and increase efficiency at the same time. Let’s do it.

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