How concerned should we be about trends in income distribution?

At the end of my last post I suggested that the evidence on changing income redistribution – in the OECDs recent publication ‘Divided We Stand’ - poses some serious questions to those of us who are inclined to argue that governments can create widespread opportunities by just getting out of the way. I stick by that, but I don’t see much that is of particular concern in trends in income distribution in OECD countries since the mid-1980s.

In his discussion of Wayne Swan’s recent ravings about income distribution, Henry Ergas agreed with Swan that it is possible to avoid a rising gap between income growth of those at the top of the income distribution and those at the bottom. He noted, however, that ‘the four countries that from the mid-1980s on, most conspicuously did so’ were ‘Portugal, Ireland, Greece and Spain, usually known as the PIGS. In those countries, the bottom 10 percent’s incomes increased by about 1.7 percent more a year than those of the 10 percent at the top’.

I had missed this point when I first looked at the ‘Overview’ of ‘Divided We Stand’. When I looked at the relevant table, it seemed like a good idea to graph the data. The result is shown below.

The PIGS certainly stand out for their success in achieving relatively high rates of growth for those in the bottom 10% of the income distribution. As expected, the growth in average incomes of those at the bottom of the income distribution in the United States was substantially lower than for those at the top – but the same is also true of Sweden. This presumably reflects substantial economic reforms undertaken in Sweden since the mid-1980s.

The growth in incomes for those in the lowest 10% of the income distribution in Australia looks fairly good by comparison with most other countries, and the income growth that occurred is hopefully more likely to be sustained that for the PIGS.

The overall picture shown in the graph suggests a fairly loose relationship between the growth in incomes at the top and bottom of the income distribution. Is the relationship any closer between growth in incomes at the top and in the middle of the distribution?

The second graph suggests that there has been a fairly close relationship between growth in incomes at the top of the income distribution and those in the middle. Given all the talk about rising income inequality in the United States, I was surprised to see that the US does not stand out in terms of incomes at the top rising much more rapidly than those in the middle. What is all the fuss about? Are the researchers who view rising inequality in the US as something exceptional looking at more recent trends? Or are they jumping at shadows?

Postscript:

After some further reading, I am inclined to answer my questions as follows:

1.         Most of the fuss has been about increases in incomes of the top 1% in the US. The increase in share of the top 1% was relatively large by comparison with most other OECD countries. See Figure 12 of the ‘Overview’ of ‘Divided We Stand’.

2.        Growth in incomes of the top 1% has been highly volatile in the US. See Figure 2, of the Congressional Budget Office report: ‘Trendsin the Distribution of household Income Between 1979 and 2007’.

3.      The issue is whether the increase in the incomes of the top 1% is at the expense of the rest of the population. Various explanations have been given for the rapid increase in incomes at the very top of the distribution, but I don’t think a convincing case has been made that there has been systemic market failure. With the benefit of hindsight some remuneration experiments could be counted as failures, but it would be unreasonable to expect all market experiments to succeed. Failure of particular remuneration experiments doesn’t mean that the 99% would benefit from regulation of the remuneration of the 1%, or from higher taxation of the income of the 1%.  

Is Australia's 'fair go' ethos under threat?

In his recent essay about the rising influence of ‘vested interests’ in Australia, Wayne Swan, the treasurer, notes that we Australians ‘always prided ourselves on being a nation that’s more equal than most – a place where if you work hard, you can create a better life for yourself and your family’ (‘The Monthly’ March 2012). He argues that this ‘fair go’ ethic is ‘under threat’ from ‘the rising power of vested interests’. He was not referring to the union movement, which has exercised extraordinary influence under the Gillard government. He was referring to wealthy people who have campaigned in recent years against a new resource rent tax and carbon taxes.

 Swan claims:

‘A handful of vested interests that have pocketed a disproportionate share of the nation’s economic success now feel they have a right to shape Australia’s future to satisfy their own self interest’.

An editorial in the Australian Financial Review (AFR, 3-4 March) contrasted the tone of Wayne Swan’s essay with that of an essay by Bob Carr, former premier of New South Wales, which was published in the AFR on the preceding day. The AFR noted:

‘Mr Carr’s thoughtful musings on the crisis of democratic socialism and the need for Labor to embrace the reform era of the Hawke-Keating era stand in stark contrast to Mr Swan’s belligerent swipe against private enterprise’.

Carr’s comments about the reforms of the Hawke-Keating era are worth quoting:

‘The best bet for Australian Labor might be to embrace and not shy away from the bold economic reform of the Hawke-Keating era. British Labor will sound absolutely inauthentic if it repudiates Blairism. In a similar spirit, Australian Labor cannot walk away from its legacy and is entitled to define itself as the party of economic liberalism, open markets and rising living standards’.

Bob Carr’s article was written before he knew that he was about to become Australia’s foreign minister. Unfortunately, it is not likely that he will be able to continue to write sensibly about Labor politics while in his new position.

The AFR editorial went on to suggest that Swan ‘is wedded to an outdated ideology’ and to claim that ‘Mr Swan is arguably the most left-wing treasurer since Jim Cairns’. (Jim Cairns was federal treasurer for a brief period in the 1970s.)

I rarely read newspaper editorials, let alone quote them, but that one seemed to me to be exceptionally good. There are, however, a couple of points that I would like to add.

My first point is that it is particularly obnoxious for a government representative to criticize people for trying to defend their wealth against confiscatory taxation. There may be a strong case for governments (state rather than federal) to obtain a larger share of resource rents on behalf of citizens, but it was outrageous for the federal government to seek to do this by changing the rules applying to existing mining projects. When an investment has been made on the basis that governments will take a share of rents according to a particular set of rules it is extreme opportunism (if not theft) to announce a sudden change in the rules which enable the government to take a larger slice of rents. In my view the miners are entitled to argue that such behaviour is contrary to Australia’s ‘fair go’ ethos.

My second point is that the tone Wayne Swan has adopted is counter-productive if his aim is to promote serious consideration of the issues associated with changes in income distribution. Swan refers to the recent OECD publication, ‘Divided We Stand: Why Inequality KeepsRising’. This report suggests that income inequality is likely to rise in countries like Australia in the absence of ongoing government involvement in extensive income redistribution.

The evidence on changing income redistribution poses some serious questions to those of us who are inclined to argue that governments can create widespread opportunities by just getting out of the way. It also poses the serious question for advocates of redistribution of how they propose to build widespread community support for removal of disincentives in the tax-welfare system. In that regard, Wayne Swan’s performance could only be described as abysmal.

Do comparative statements about 'national happiness' imply views about the characteristics of a good society?

Yes! I explain why in the draft of Chapter 5 of the book I am writing. This chapter is now available on the book’s web site.

The question of whether measurement of ‘national happiness’ implies views about the good society is not just an arcane topic of academic interest. International agencies such as the UN and OECD and some governments have shown dissatisfaction with use of GDP as a well-being measure and an increasing interest in measuring national well-being more directly. Some of this interest in well-being measurement is motivated by helping individuals to make better choices, but the hope is often expressed that such measurements will assist governments to make better public policy choices and even to pursue national happiness as an over-riding policy objective.

   

Some researchers have suggested that that average life satisfaction is the strongest candidate as a measure of societal well-being because it is a single number that can be collected directly through surveys without ‘arbitrary weighting’.  (For example, see: Jon Hall et al, ‘Cutting through the Clutter: Searching for an Over-Arching Measure of Well-Being’, Journal of Institutional Comparisons, 8(4)2010.)

After reading the draft of Chapter 5 I hope everyone will agree with me that it is fanciful to view average life satisfaction as a measure of national happiness that does not involve arbitrary weighting. Perhaps it might be helpful if I provide a brief outline of the argument here to help readers decide whether or not to read the draft chapter.

It is possible, of course, to conduct surveys asking people in different countries how satisfied with life they are on a scale of 1 to 10 and then to average the results obtained for each country. The issue is whether it is appropriate to view such averages as measures of ‘national happiness’.

When people refer to such averages as measures of national happiness they are implying that national happiness rises to the same extent if a person’s life satisfaction rating rises from 9 to 10 as if some other person’s rating rises from 1 to 2. Individual researchers can make such claims if they wish, but they cannot claim that they are value free. I don’t think that they could even claim that such a view of ‘national happiness’ reflects values that are widely shared.

The need for value judgements is usually more transparent when composite indicators are used to make assessments of national happiness.

    

Whatever method is used, it seems to me that when researchers make comparative statements about levels of national happiness they are making implicit claims about the extent to which different countries have characteristics that a good society might be expected to have. So, why not consider directly what characteristics ‘good societies’ should have and make comparative assessments on that basis?

I suggest that there would be widespread support for the view that good societies are characterized by peacefulness, extensive opportunities for individual flourishing and a degree of economic security. The indicators used to measure the extent to which different countries have those characteristics show a similar ranking of countries to that provided by the OECD’s ‘Better Life’ index and the UN’s Human Development Index. The main advantage of using the ‘good society’ framework is in focusing explicitly on a consideration of the characteristics of good societies.

In my view, a focus on the characteristics of good societies is particularly appropriate from a public policy perspective because it tends to concentrate attention on matters that are within the domain of public policy. By contrast, when governments adopt ‘national happiness’ as an over-riding objective they are blurring the distinction between public and individual responsibilities.

I would be grateful for any comments on Chapter 5, or on any of the other chapters.

Would a 'Modest Member' please take an interest in anti-dumping regulation?

It was good to see the return of ‘The Modest Member’ column in the Australian Financial Review a couple of weeks ago. The original column was written by Bert Kelly, who used his wit and wisdom to good effect in promoting free trade, much to the discomfort of many people on both sides of politics. The latter-day modest members will make a worthwhile contribution if they display half the wit, wisdom and courage of Bert Kelly.

It is not yet clear whether the latter-day modest members will have the courage to emulate Bert Kelly. The series started with a column by Jamie Briggs on 7 February about lifting the dead hand of government i.e. reducing government spending. Today’s column by Kelly O’Dwyer is about the high cost of regulation. This is not a bad start, but it is hardly a test of moral character. So far Briggs and O’Dwyer have written the sort of stuff conservative politicians usually write when they are not in government.

A useful test of character for the modest members would be to attempt to emulate Bert Kelly by writing something sensible about Australia’s anti-dumping system. The modest members could usefully begin their consideration with an article by Bert, published in March 1972 and reprinted in ‘Economics Made Easy’, in which he explained that export prices that are lower than domestic prices are quite common in Australia and elsewhere. He noted that when we do it the practice is known as ‘marginal pricing’ rather than dumping. If the modest members take up this issue they might note that Austrade actually encourages prospective Australian exporters to use this practice.

If the modest members look carefully at the Productivity Commission’s recent report on anti-dumping duties they will see that the Commission found that none of the economic arguments that had been advanced in support of the anti-dumping system ‘provide any justification for Australia to retain an anti-dumping system’. In looking at this report and subsequent responses by the government and opposition, they might ponder whether or not the Commission will turn out to have been correct in its judgement that the anti-dumping system should be retained - on the grounds that it is unlikely to do much harm and may continue to be helpful in dealing with aspects of protectionist sentiment within industry and the community.

The modest members should ask themselves what Bert Kelly would have thought of proposals by their political colleagues to require foreign producers to prove their conduct hasn’t hurt Australian industry. They should also ask themselves what consequences are likely to follow from the government’s plans to ‘streamline’ the anti-dumping system. In particular, they should ponder the appropriateness of proposals of the International Trade Remedies Forum – the high sounding title the government has given to an unholy alliance of industry, unions and bureaucrats who benefit from the anti-dumping system – to enlist the Australian Bureau of Statistics to help complainants make a case for anti-dumping assistance.

One of the great strengths of Bert Kelly’s writing was his use of particular examples to illustrate the points he was making. In that regard, the modest members might find plenty to interest them in the current anti-dumping inquiry relating to aluminium wheels from China. In the light of recent discussions concerning further budgetary assistance to the car industry, they might ask themselves whether there is not some irony in a situation where Australian taxpayers could end up having to pay for the additional cost of imported inputs if this anti-dumping case is successful.  If they read the submission by Ford Australia they might wonder about the potential for a firm that is involved in protracted and acrimonious legal proceedings against another firm to initiate anti-dumping action as a tactic in a legal battle. If they read the submission by GM Holden, which argues against anti-dumping action because of its adverse effects on down-stream users, they might wonder whether the government was wise to reject the Productivity Commission’s recommendation that a public interest test should be included in the anti-dumping system. They might wonder why GM and its advisors think that line of argument might be influential.

It would not surprise me, however, if the latter-day modest members decide not to accept the challenge of writing about anti-dumping. Their political careers might be at risk if they start questioning the views of SophieMirabella the shadow minister for industry protection. As they tell themselves that discretion is the better part of valour they may take comfort from the fact that Bert Kelly pretended not to be without fear. Bert ended his anti-dumping article by telling readers that he didn’t ‘feel like chasing after the anti-dumping hare’ because ‘Mavis says I am in enough trouble already without getting mixed up with this kind of nonsense’.