Piketty and the Australian exception (reposted from 2016 in response to the PC report in inequality)

In the light of the recent Productivity Commission report on inequality in Australia, I thought I would repost this piece from 2016. It’s not radically dissimilar in terms of its conclusions, but is, I think, more balanced than the “nothing to see here, move on” spin that’s characterized much of the coverage of the PC report.

 

Over the past forty years, leading developed economies, most notably the United States have experienced an upsurge in inequality of income and wealth. Most of the benefits of economic growth have accrued to those in the top 1 per cent of the income distribution. Meanwhile, living standards for those in the bottom half of the income distribution have stagnated or even declined.

Piketty’s work, published in reports and academic journals, has documented these trends. His book, Capital, not only brought the issues to the attention of a broader public, but presented an analysis suggesting that worse is to come. Piketty argues that we are in the process of returning to a ‘patrimonial’ society, in which income from inherited wealth is the predominant source of inequality.

Piketty’s work has previously focused mainly on the United States, but the research presented in Capital points to similar trends in the United Kingdom. Although inequality has grown much less in France, the third country on which he has detailed data, Piketty argues that the same trend will emerge unless there is a substantial change in political conditions.

To the extent that there is a general trend of the kind described by Piketty, we would expect it to emerge first in the English speaking world, where the shift to market liberalism and financialised capitalism was earlier and more complete. And, indeed, a sharp increase in inequality may be observed in other English speaking countries including Canada and New Zealand

Australia, on the other hand, looks like a counterexample. On most measures of inequality Australia looks more like France than like the rest of the English speaking world. Although Australians have experienced an increase in inequality on most measures, the general picture is one of broadly distributed improvements in living standards, as illustrated by Peter Whiteford’s contribution to a recent seminar on Piketty published by the Australian Economic Review (AER). As Whiteford notes:

Income growth was highest for the richest 20 per cent of the population, at close to 60 per cent in real terms, but even for the poorest 20 per cent, real incomes grew by more than 40 per cent between 1996 and 2007.

Other measures such as the Gini coefficient and the ratio of median to mean income tell a similar story. Inequality has increased over the period since the 1980s, but only modestly and with frequent reversals.

Turning to the top 1 per cent of the income distribution, evidence from tax data, presented by Roger Wilkins in the AER volume suggests that the share of income accruing to this group has risen, but not to the same extent as in other English speaking countries This is consistent with the observations of Piketty himself, who notes:

?the upper centile’s [top 1 per cent] share is nearly 20 percent in the United States, compared with 14–15 percent in Britain and Canada and barely 9–10 percent in Australia

Much of the credit for this comparatively benign outcome must go to the Labor government that held office from 1983 to 1997 and implemented a relatively progressive version of the market liberal reform agenda. Labor managed a reform of the Australian tax and welfare system that shielded low income Australians from the worst effects of the market liberal revolution that swept the English speaking world in the 1970s and 1980s.

In most countries, policies of financial deregulation, privatisation and microeconomic reform were accompanied by regressive changes to the tax and welfare systems. By contrast, Labor introduced broadly progressive tax reforms including a capital gains tax and a crackdown on tax avoidance.

Rather than treating welfare payments and tax policy as separate, the restructuring sought to integrate the two, taking account of the combined impact of means tests and tax policies to optimise the balance between efficiency and redistribution.

These changes weren’t sufficient to prevent growing inequality of income and wealth, and some of them were eroded over time. Nevertheless, in broad terms, a redistributive tax–welfare system was maintained under the succeeding conservative government, even as it was being eroded in other English-speaking countries.

Labor returned to office in 2007, just in time to make its next big contribution: the fiscal stimulus that allowed Australia to avoid the recession generated by the Global Financial Crisis in nearly every other country. In combination with previous successful pieces of macroeconomic management, such as the Reserve Bank’s handling of the Asian Financial Crisis in the 1990s, the result has been an economic expansion lasting nearly 25 years, unparalleled in Australia’s economic history, and scarcely equalled anywhere in the world. The strength of the labour market has encouraged a broad spread of prosperity not seen elsewhere.

Together these factors explain why Australia has avoided the drastic increases in inequality seen in other English speaking countries. On the other hand, although Australia’s a long way from the plutocracy that already characterises the United States, there is no room for complacency.

Australia’s relatively equal distribution of income and wealth depends on a history of strong employment growth and a redistributive tax–welfare system. Neither can be taken for granted. The end of the mining boom has inevitably resulted in slower growth which bears hardest on those at the bottom of the income distribution. And, as elsewhere, the political pressure to take burdens from the rich and shift them to the poor is never-ending.

Moreover, Australia has not proved itself immune to the political dynamic, noted by Piketty, by which increasing personal wealth allows the wealthy to dominate politics, then enact policies that protect their own wealth. The archetypal example is Silvio Berlusconi in Italy but the situation in the United States is arguably worse. The majority of members of the US Congress are millionaires, with not much difference between Democrats and Republicans.

Given the pattern of highly unequal incomes, and social immobility observed in the US today, we can expect inheritance to play a much bigger role in explaining inequality for the generations now entering adulthood than for the current recipients of high incomes and owners of large fortunes. Inherited advantages in the patrimonial society predicted by Piketty will include direct transfers of wealth as well as the effects of increasingly unequal access to education, early job opportunities and home ownership.

The move towards a patrimonial society already happening in the US is evident at the very top of the Australian income distribution. As in the US, the claim that the rich are mostly self-made is already dubious, and will soon be clearly false. Of the top 10 people on the Business Review Weekly (BRW) rich list, four inherited their wealth, including the top three. Two more are in their 80s, part of the talented generation of Jewish refugees who came to Australia and prospered in the years after World War II. When these two pass on, the rich list will be dominated by heirs, not founders.

The same point is even clearer with the BRW list of rich families. As recently as 20 years ago, all but one of these clans were still headed by the entrepreneurs who had made the family fortune in the first place. Now, all but one of the families are rich by inheritance.

So, Australians have no room for complacency. In an economy dominated by capital, and in the absence of estate taxation, there is little to stop the current drift towards a more unequal society from continuing and even accelerating.

On the other hand, Australia’s relative success in using the tax and welfare systems to spread the benefits of economic growth provides grounds for optimism elsewhere in the world. Australia’s experience belies the claim that any attempt to offset the growth of inequality must cripple economic growth. On the contrary, the evidence suggests that there is plenty of scope for progressive changes to tax policy that would partly or wholly offset the trends towards greater inequality documented by Piketty.

40 thoughts on “Piketty and the Australian exception (reposted from 2016 in response to the PC report in inequality)

  1. Val

    Yes, that is true. But the LNP also implemented policies like bigger family payments that decreased inequality.

  2. Those payments typically were merely to provide some spin covering the greater amounts paid out by the LNP in various ways to those already well off. This during a good luck period coinciding with a lengthy global boom and Australian mining boom instead of investing in any infrastructure and/or a sovereign wealth fund.

  3. Smith9

    Here is a helpful hint. Use the words Sweden and election in your google search.

    So, I did a search for ‘Sweden election newspaper’. I got The Guardian, The Express, SBS, The Economis, Ha’aretz, the BBC, and The Financial Times, but no Swedish newspapers!

    I did, however, get a couple of non-newspaper Swedish news websites: The Local (Sweden), and Radio Sweden.

    In The Local I discover a report of a recent opinion poll showing decreased support (compared to the last election) for the SAP and the MSP, with increased support for the Sweden Democrats. I already knew about multiple polls like that, from Wikipedia, as I mentioned before. But does the story include polling figures specifically for working-class Swedes? No, no it does not. There are a lot of other election stories there on The Local, too, but none that look like the ones you were talking about.

    Radio Sweden’s website has a polling story too, about a poll in which respondents were asked to name their first preference and second preference among the parties running. Out of those respondents who gave the MSP as their first choice, the breakdown of second preferences was Liberals 27%, Sweden Democrats 26%, Centre 22%, Christian Democrats 16%. Maybe interesting but, again, not the story you were talking about.

    I could read dozens of news stories about the Swedish election and not find the ones you’re referring to; or you could just tell me which ones you’re referring to–if, in fact, you actually know of any.

  4. JD, it is obvious that much of the Swedish white working class has deserted the Social Democrats. The Social Democrats used to get 40% to 50% of the vote; now they are down to less than 25%. This isn’t because reindeer herdsmen have deserted the party.

    The New Statesmen acknowledges it in this article but it produces no figures:

    “For most of the 20th century, the country was considered a social democratic “one-party state”. But the latest round of polls put the Social Democrats on an averagely European 24 per cent, roughly on par with the conservative Moderates and not far ahead of the far-right Sweden Democrats. This is particularly unsettling for the ruling left-wing coalition of Social Democrats and Greens.

    On the face of it, the Social Democrats’ downward spiral follows the same pattern as in Germany, Austria, the Netherlands and France. The traditional alliance between working-class voters and well-educated urbanites, which has sustained the left for over a century, has fractured. While the party has further strengthened its appeal to young urban professionals, many traditional working-class voters, and particularly men, have deserted the party towards the Sweden Democrats.”

    ***www.newstatesman.com/politics/staggers/2018/06/lesson-swedish-social-democrats-not-one-you-think

  5. The Swedish Social Democrats punched themselves in the eye when they allowed the biggest per capita influx of immigrants in recent European history to occur.

    The ALP would be a broken mess, just like the Swedish Social Democrats, if it adopted a soft line on border security and we had hundreds of thousands of boat arrivals. The public doesn’t want it. The public has no reason to want it. From my experience, many newly arrived immigrants themselves don’t want it.

    Ironically, the ALP is only electable today because the Right stopped the boats.

  6. Hugo

    The New Statesmen acknowledges it in this article but it produces no figures

    No figures! That’s my point. The New Statesman (or Itay Lotem, writing for it), like Smith9 and like you, thinks that the explanation for the trend apparent in the opinion polls is that young urban professionals have stuck with the SAP while working-class men have moved from the SAP to the Sweden Democrats, and that’s certainly one possible explanation, but what’s the basis for excluding the alternative explanation that it’s young urban professionals who have moved to the Sweden Democrats while working-class men have stuck with the SAP? or the other alternative explanation that both groups have shifted from the SAP to the Sweden Democrats in equal proportions? or the other other alternative explanation that the largest number of the voters leaving the SAP have moved to the Left Party, while the largest part of the increase in support for the Sweden Democrats has come from voters leaving the MSP? or the other other other alternative explanation …. I don’t think I need to go on. Itay Lotem does state that there has been a surge in support for the Sweden Democrats in Stockholm’s richest neighbourhood; why is that supposed to be happening, then?

    Itay Lotem also states that the SAP experienced its sharpest drop in support when it started talking about more restrictive immigration policy, which also doesn’t obviously and immediately fit with the story you want to tell.

  7. I can find dozens of articles that say that the Swedish working class has largely deserted the social democrats. What I can’t find is actual poll numbers.

    “It is wrong to believe the SD recruits from conservative circles. This happens, of course, but it’s not the dominating factor. On the contrary, there are many studies that show the SD gets most of its recruits from the working class.”

    ***www.theguardian.com/commentisfree/2010/sep/24/sweden-democrats-far-right-election

    “The Sweden Democrats enjoy higher electoral support than ever before, according to a new poll by Sifo on behalf of newspaper SvD. The poll aslso shows that the anti-immigration party has greater support among working class voters than the Social Democrats.

    On Thursday, the Sweden Democrats received 25.2 percent in a web panel survey by YouGov, which put them ahead of the governing Social Democrats on 23.4 per cent. But YouGov’s polling method has been criticised by other polling institutes and by analysts.

    However, a new poll on Saturday by Sifo, on behalf of the newspapers SvD and Göteborgs-Posten, also underlined the growth in voter support for the third biggest party in parliament. At 17.8 percent, a 2.6 percent rise on June, the Sifo survey represents the largest support that the party has ever received.”

    ***sverigesradio.se/sida/artikel.aspx?programid=2054&artikel=6238243

    “How is it that the Swedish populist nationalist party the Sweden Democrats receives its strongest support from the established working class, in spite of the high degree of class voting and left–right mobilization which is known to characterize Swedish politics? Based on surveys from the SOM (Society, Opinion, Media) Institute as well as the Swedish National Elections Studies, this article shows that this is not a result of increasing anti-immigrant attitudes in the working class or of decreasing left–right polarization among voters. Rather, we present the argument that the weakening alignment between the working class and the Social Democratic Party and the weakened left–right polarization between the main parties have created a structure which has left room for a realignment between large parts of the working class and the Sweden Democrats along the alternative underlying ideological dimension of authoritarianism/libertarianism.”

    ***www.cambridge.org/core/journals/government-and-opposition/article/room-for-realignment-the-working-class-sympathy-for-sweden-democrats/5F7EC10B46A3BF706B9AD2B975D9729B

  8. In a poll taken in May by SCB, a quarter of members of the main LO labor union, which has historically been very closely aligned with the Social Democrats, expressed support for the far-right party.

    https://www.politico.eu/article/sweden-joins-the-club-far-right-democrats-jimmie-akesson-stefan-lofven-general-election/

    That article has a link to a report of the poll, but that’s in Swedish, which I don’t know.

    However, a couple of observations are possible.

    One is that 25% is a far higher figure than the Sweden Democrats have achieved in any election until now, so that poll is showing much higher support for the party from LO members than the baseline represented by past election results (although 25% is not a majority; if 25% of LO members support the Sweden Democrats, that also means that 75% do not support the Sweden Democrats)..

    Another is that recent opinion polls have generally been showing increased support across the board for the Sweden Democrats. So, does the 25% of LO members reported by this one poll represent a higher level of support for the Sweden Democrats among LO members than among the rest of the population, or does it simply reflect a general national increase of support? There’s not enough information to tell, one way or the other. A figure of 25% is at the high end of the range of results for the Sweden Democrats in individual polls over recent months, but it’s not outside the range.

    Incidentally, although Smith9 insisted this information is available from Swedish newspapers, none of the three sources you have cited is a Swedish newspaper.

  9. JD: “Another is that recent opinion polls have generally been showing increased support across the board for the Sweden Democrats. So, does the 25% of LO members reported by this one poll represent a higher level of support for the Sweden Democrats among LO members than among the rest of the population, or does it simply reflect a general national increase of support? There’s not enough information to tell, one way or the other.”

    Actually all you had to do was follow the first link in the article you cite, which has an opinion poll showing the Sweden Democrats are in third place with about 20% support while the Social Democrats are on 25%. That accords with the other opinion polls I have seen yesterday and today.

    If the members of the main organised labor outfit, that has traditionally cleaved to the Social Democrats, intend voting for the Sweden Democrats at a greater rate than the rest of the population, one doesn’t need to consult Captain Obvious to surmise that non-organised labor is even more likely to vote for the Sweden Democrats.

    The Social Democrats are now a shadow of their former selves and they have themselves to blame.

  10. The Swedish SDP saw its greatest decline between 2005-2010, when it lost two federal elections in a row to the centre right alliance. Which then did everything it could to ensure the SDP would lose more support.

    http://portal.research.lu.se/ws/files/3462138/2064087.pdf

    Claiming refugees are the core reason for its decline over the last 20-25 years is the essence of shooting yourself in the foot.

  11. Here is the Wikipedia page I mentioned before, which gives more reliable information about more polls than one person’s memory:
    https://en.wikipedia.org/wiki/Opinion_polling_for_the_Swedish_general_election,_2018

    There are polls, including some in the last week or two, that show aggregate support for the Sweden Democrats at 24 or 25 percent. On the other hand, most of the polls show their support as lower, some significantly lower. It’s possible–it’s even probable–that out of so many polls there are one or two that are just plain wrong and showing aggregate support for the Sweden Democrats higher than it ever really was. But then, it’s also possible that the poll which found 25% of LO members supporting the Sweden Democrats was one of the individual polls which was just plain wrong. And it was taken in May, when the indication of all the polls taken together is that aggregate support for the Sweden Democrats was higher than it is now.

    After saying all that, I agree that the reported figure from one poll, even in May, of 25% of LO members supporting the Sweden Democrats does tend to suggest that support for the Sweden Democrats among LO members is higher than among the rest of the population. But statistically the indication is not strong. If every poll did a breakdown showing results for LO members and for the rest of the population, and reported it, then we’d have a strong basis for drawing conclusions. But it seems that’s not done.

    The more general observation that the SAP has suffered a serious long-term decline is obviously true; we can tell that from election results, which are necessarily a more reliable source of information than opinion polls can ever be. The causes of this long-term decline, however, are something we can’t read off directly either from election results or from opinion polls.

  12. Nick: “Claiming refugees are the core reason for its decline over the last 20-25 years is the essence of shooting yourself in the foot.”

    Such a claim would be overreach, so it is a good thing no one said that. The refugee crisis is a core reason, not the core reason for the decline of the Social Democrats.

  13. Did the Inequality Report mention that the wealth of the richest 20% of Australian households is now 70-80 times that of the poorest 20% of Australian households, as compared to 30-40 times back in 2003?

    Did it note that every quintile now owns more wealth than every poorer quintile put together. ie. the second richest quintile owns more in total than the third, fourth, and fifth put together. The third, more than the fourth and fifth etc.

    Or did it not bother to make those kind of obvious comparisons at all, and instead just showed that the ‘Wealth Gini’ moved from .5 to .6?

    You have to wonder when a thread on inequality gets glossed over and turned into a thread about race and border control. It’s almost like what the Liberal party does on a daily basis.

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  15. You have to wonder when a thread on inequality gets glossed over and turned into a thread about race and border control. It’s almost like what the Liberal party does on a daily basis.

    In the context of a distribution where the mean is far above the median, redistribution has the potential to make an overwhelming majority better off, and that’s without taking into account suggestions that there’s evidence that reduced inequality produces general benefits across society for nearly everybody.

    So, if it seems to be the case that the possibility of a reduction in inequality is not motivating the votes of the majority, it’s reasonable to discuss what else might be motivating their votes.

    Having said that, here are some quotes from articles Hugo has cited:

    The Social Democrats seem in step with centre-left parties all over Europe, as a growing number of voices called to get tough on immigration and follow the “will of the people”. And yet, it was precisely at this moment that the Social Democrats dropped in the polls to their lowest level in over a decade.

    At the very least, this should serve as a warning for left-wing parties that feel the pressure to embrace a prohibitive immigration policy. Firstly, they do not work. Research shows that voters lost to the far-right will not return to the social democratic embrace. … Voters who state “immigration” as their primary concern will always choose the real thing rather over the forced imitation.

    Secondly, … in an age that is as polarised as it shows a desire for social cohesion, the left needs a new vision … based on multi-ethnic solidarity rather than a narrow national ethnic vision. … This includes refusing to take cues from the far-right.

    Based on surveys from the SOM (Society, Opinion, Media) Institute as well as the Swedish National Elections Studies, this article shows that this is not a result of increasing anti-immigrant attitudes in the working class … Rather, we present the argument that the … weakened left–right polarization between the main parties have created a structure which has left room for a realignment …

    I don’t know that these arguments are valid (how could I?), but these are sources Hugo has chosen to cite, and according to them the problems the SAP are experiencing are a result of not putting enough emphasis on reducing inequality and what the party needs to do to recover support is return to that emphasis; so in this respect Hugo’s own chosen sources appear to contradict Hugo’s position.

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