ANDREW LEIGH MP
SHADOW ASSISTANT TREASURER
SHADOW MINISTER FOR COMPETITION
MEMBER FOR FRASER
Why should we care about inequality?
The 2015 Economic and Social Policy Public Lecture
University of Wollongong
*** CHECK AGAINST DELIVERY ***
Dutch economist Jan Pen once suggested a simple way of visualising the extent of
inequality in a society.[1] Imagine, he suggested, a parade, in which each person’s
resources were represented by their height.
Suppose we were to conduct such a parade in Australia. People of average wealth
would be average height. Those with half the average wealth would be half the
average height. Those with twice the average wealth would be twice the average
height.
Let’s suppose the parade took an hour to pass you. What would you see?
For the first half a minute, people would be literally underground. These are the
people with more debts than assets. Perhaps they are homeless, but have credit
card debts. Or they are a business owner about to go bankrupt.
Then would come the little people. For the first few minutes, they are no bigger than
lego figures. They might have some clothing and a television, but little else. By the
ten minute mark, people are the size of a child’s doll. They might own an old car.
Twenty minutes have gone by, but still the marchers are no taller than a newborn
baby. Most probably don’t have regular work – they might have odd jobs, or be
reliant on the pension. Few would dream about them – or their children – breaking
into the central Sydney property market.
It’s now half an hour. The watchers are getting bored. Heights aren’t rising much. Are
we really only halfway through the parade?
They notice something else, too. Even although the parade is only halfway over, the
people are still short. They’re about 100 centimetres tall; about the height of a four
year-old. Thinking about it, one watcher realises that this is because wealth is so
skewed – the mean is much higher than the median.
Forty-five minutes in, and the watcher can now look the marchers in the eye. These
are homeowners with well-paying jobs – in many cases probably with two full-time
workers in the household.
Ten minutes to go, and the parade is suddenly getting interesting. Now, the
marchers are two and a half metres tall, and the heights are rising fast. These people
own multiple homes, and most likely have earnings well above average. They’ve
done well over the past generation, with earnings having risen three times as fast for
the top tenth of Australian workers as the bottom tenth.
Five minutes till the end of the parade, and the marchers are four metres high. Now
come the giants. Ten metres high, then fifty, then one hundred metres high. Their
shoes are now as big as the watchers – their faces as high as office buildings.
One-thirtieth of a second before the end of the march, and we’re into the BRW rich
list. The poorest person on the BRW rich list is twice as high as Centrepoint tower.
The rest are taller still. Now, their heads poke into the clouds. The tallest person in
the parade is nearly 50 kilometres high – halfway to outer space.
Does inequality matter?
But does this matter? Some economists have argued that we shouldn’t worry about
inequality. According to Robert Lucas, ‘of the tendencies that are harmful to sound
economics, the most seductive, and in my opinion the most poisonous, is to focus on
questions of distribution’. Martin Feldstein criticises a focus on inequality as being
mere envy, and writes that ‘there is nothing wrong with an increase in wellbeing of
the wealthy or with an increase in inequality that results from a rise in high
incomes’.[2]
Yet economics has a long history of being concerned about not just the average, but
also how it is distributed.
Adam Smith wrote that ‘This disposition to admire, and almost to worship, the rich
and the powerful, and to despise, or, at least, to neglect persons of poor and mean
condition… is… the great and most universal cause of the corruption of our moral
sentiments’.[3] The economics Nobel has been awarded to several economists who
worked on inequality, including Simon Kuznets, Amartya Sen, Joseph Stiglitz and
Paul Krugman. The Clark Medal, the young person’s Nobel Prize, recently went to
Emmanuel Saez, one of the world’s leading inequality scholars. According to Google
Books, the share of books that discuss inequality has doubled since 1960, and is
now at an all-time high.[4]
There are two sets of arguments typically used against inequality: intrinsic and
instrumental. Intrinsic arguments are that inequality has a cost in and of itself.
Instrumental arguments are that we should care about inequality because it makes
us sick, increases crime, or reduces the savings rate.
In my view, economists – and many others who care about inequality – have been
too quick to skip over the intrinsic arguments in favour of instrumental ones. In so
doing, we’ve missed out on the chance to engage about what inequality really
means, to talk about the ethics of inequality. Because the instrumental arguments
are fragile, we’ve effectively put our worst foot forward.
Intrinsic concerns about inequality
Let’s start with the intrinsic arguments. Imagine two societies, both with the same
average income. In one of them – call it Fairfield – the resources are pretty evenly
distributed. Some people have more than others, but the best-paid person is only
paid ten times what the worst-paid receives. In the other society – call it Unfairfield –
one person has all the money, and everyone else has nothing.
Where is average happiness higher? If you’re like most people, you’d say that
Fairfield is a happier place than Unfairfield. While it’s true that interpersonal
comparisons of utility are methodologically tricky, it still strains credulity to imagine
that one person’s gain from having all the money outweighs everyone else’s loss
from having nothing. Most of us intuitively believe that a dollar brings more
happiness to a homeless person than to a billionaire.
The philosopher John Rawls formalised this idea in his famous thought experiment
about the ‘veil of ignorance’.[5] Imagine, he said, that you were waiting to be born.
From inside your mother’s uterus, you would be ignorant as to whether you were
about to be born tall or short, black or white, rich or poor. Given that, would you
prefer to be born into Fairfield or Unfairfield?
Rawls’ answer helps us think not only about inequality, but also about redistribution.
From behind the veil of ignorance, he argues, we would want inequality only so far
as it raises the wellbeing of the most vulnerable. You probably wouldn’t want a
perfectly equal society, where rewards are divorced from effort, since that model has
been shown to work badly. A bit of inequality boosts innovation, and encourages
entrepreneurship.
Moreover, as economists know, redistribution comes at a cost. Employment taxes
reduce work effort – what Arthur Okun called the problem of the ‘leaky bucket’. [6] A
good tax-transfer system should bear this in mind in deciding how much it should do
about reducing inequality.
Some argue that policy should ignore ‘equality of outcome’, and focus only on
‘equality of opportunity’. This sounds good on first blush, but soon runs into practical
problems. Are we really prepared to give a poor child all the resources available to
the most affluent? Even if we wanted to do so, could public policy ever really make
up for differences in the home environment?
Moreover, as inequality scholar Tony Atkinson points out, a system that cares only
about what happens until the starting gun is fired is effectively a system that says we
shouldn’t care if one of the runners trips over.[7] From an ethical perspective, why
should we work to address differences of luck when a child is born, but then ignore
bad luck during life? I’ve been thinking a lot about luck lately, and have a book
coming out later this year on the topic. The more I delve into it, the more I notice that
luck shapes a great deal of life’s outcomes.
Interestingly, it doesn’t require a veil of ignorance to find support for egalitarianism.
Surveyed about their ideal distribution of wealth in Australia, even the most affluent
respondents nominated a distribution that is more egalitarian than the one we have
today. Asked how much wealth the top quintile should have, they nominated a figure
of 24 percent, considerably below the actual figure of 62 percent.[8] Asked whether
‘differences in income are too large’, three quarters of Australians agree, up from
two-thirds in the mid-1990s.[9]
Scholars studying happiness frequently ask respondents to rate their life satisfaction
on a 0 to 10 scale, and then aggregate these figures across a society. If we take this
perspective – that a one-point movement up the scale is of equal value regardless of
the respondent and regardless of the starting point, then we can ask how much
money it costs to raise happiness for different people. According to one study,
getting a one-point happiness gain for the poorest households cost $6000, compared
with $100,000 for the richest households.[10] This suggests that a well-targeted social
safety net like Australia’s does a lot to raise average happiness – even if the bucket
leaks along the way.
I once asked my 8 year-old Sebastian which of the following he would prefer. If he
got two biscuits and his 5 year-old brother Theodore got three. Or if he and
Theodore got one biscuit apiece. He replied immediately that he would prefer the
latter, ‘Because it would make me sad if Theo had more than me’.
You might chuckle at this, but plenty of economic research finds similar results
among adults. A US survey found many people would prefer to be poorer in absolute
terms, so long as they were better-off in relative terms.[11] In the ‘ultimatum game’,
many players will forego money rather than accept a result that they regard as unfair.
In most contexts, the threshold for unfairness in the ultimatum game is when one
person gets more than three times as much as the other.[12] Psychology researchers
have documented a strong tendency to barrack for the underdog. [13] Across
neighbourhoods and between countries, those in unequal places tend to be less
happy with their lives. This reflects what economist Lester Thurow once called ‘the
income distribution as a pure public good’.[14]
Instrumental concerns about inequality
The other approach to inequality is to focus on how it affects other things that we
care about. In The Spirit Level, Richard Wilkinson and Kate Pickett argue that
inequality affects a plethora of social variables. If Britain became as equal as
Scandinavia, they argue, mental illness would be halved, teen birth rates would fall
by two-thirds, homicide rates would fall by three-quarters, and everyone could get
seven extra weeks’ holiday a year.[15] It’s a heady concoction, but I can’t quite bring
myself to swallow it.
Much as I appreciate their focus on inequality, my own analysis of the data suggests
that when you move away from looking at a snapshot in time to analysing changes
over time, the effect of inequality on some of these social outcomes is less clear.[16]
For example, one of the sharpest falls in crime over recent decades has occurred in
the United States, a country where inequality has risen rapidly. We need to be
cautious about blaming everything on inequality.
That said, there are some instrumental reasons to worry about rising inequality. As
incomes become increasingly concentrated, there is a risk that affluent donors will
exert a disproportionate influence over policy outcomes. In the United States, a
recent report listed nine billionaire donors currently being courted by the Republican
Presidential hopefuls – among them the Koch brothers and Sheldon
Adelson.[17] These donors will likely have a significant impact on the policy positions
that these candidates adopt.
As Republican Party boss Mark Hanna put it, ‘There are two things that are
important in politics. The first is money, and I can’t remember the second.’ One study
found that US Senators’ voting behaviour is very strongly related to the opinions of
their richest constituents, but unrelated to the views of their poorest constituents. [18]
In an environment where campaign advertising matters, too much inequality may tilt
the political playing field away from the median voter and towards the median donor.
Another instrumental reason to be concerned about inequality is because of its
impact on social mobility.[19]
To see this, imagine a ladder in which mobility reflects the extent to which a child
climbs up or down from their birth rung. In a fully mobile society, the rung you end up
on is independent of the place you started. In a static society, people are born and
die on the same rung. Most of us viscerally recoil at the thought of such a feudalistic
outcome, with the waste of talent that it implies. But yet there is mounting evidence
that inequality and immobility go together.
If mobility is the extent to which a person moves up or down the ladder, mobility can
be thought of as the gap between the rungs. A society with high inequality – with
large gaps between rich and poor – is one in which the ladder is hard to climb. But
evidence from across countries and neighbourhoods seems to show that more equal
societies are also more mobile societies. Contrary to those who say that we ought to
tolerate inequality because anyone can make it, the truth turns out to be that very
unequal societies are also those in which fewer people move from rags to riches.
What can be done?
What policy reforms might reduce inequality? In Battlers and Billionaires, I proposed
eight ideas:
1.
2.
3.
4.
5.
6.
7.
8.
Maintain pro-growth policies
Improve our education system
Acknowledge the role of family structure in perpetuating disadvantage
Recognise the role of unions in reducing inequality
Ensure that our welfare spending is targeted to the neediest
Maintain a progressive income tax system
Make more use of randomised policy trials to evaluate social policies
Keep egalitarianism at the heart of our national story
Today, let me add four new ideas to that list that I think are worth considering. In the
interests of full disclosure, let me also admit that three of them are drawn from Tony
Atkinson’s excellent new book, Inequality: What Can be Done?, which I heartily
recommend to you.
9. Put new policy ideas under the equality lens. With inequality at a 75-year
high, no government can afford to ignore the implications that new policies
have on inequality. At present, new projects and policies might be subject to
Regulation Impact Statements, Regional Impact Statements, Environmental
Impact Statements, and Health Impact Assessments. Yet there is no similar
process to look at distributional effects. Whether such a process should be
formal or informal is an open question, but closer scrutiny of inequality ought
to be on the agenda.
10. Encourage ethical behaviour by firms and executives. In the wake of the
Global Financial Crisis, Harvard’s MBA class of 2009 originated a voluntary
pledge for graduates, in which they promised to ‘create value responsibly and
ethically’. In the employee-owned company John Lewis, a pay policy does not
allow the highest-paid person to get more than 75 times what the lowest-paid
person receives. In TSB Bank, the figure is 65. In Traidcraft, it is six. If this
sounds radical, recall that Plato thought the society-wide figure should be
four.[20] While I do not favour a compulsory cap on top salaries, I do admire
firms that are beginning a conversation about pay equity within their ranks.
11. Consider inequality in competition policy. In arguing for competition laws
in the United States, Senator John Sherman, one of the originators of
competition policy, cited excess inequality as one of his concerns, worrying
that ‘inequality of conditions of wealth, and opportunity that has grown within a
single generation out of the concentration of capital into vast combinations to
control production and trade to break down competition’.[21] And yet our
competition law is silent on the issue of equity, with its object merely being ‘to
enhance the welfare of Australians through the promotion of competition and
fair trading and provision for consumer protection.’[22] A more explicit
consideration of inequality in competition policy would not change most
outcomes, but might make a difference on the margins, with considerations
such as the distribution of outlets in low-income neighbourhoods.
12. Recognise the relationship between economic inequality and gender
inequality. According to figures released earlier this year, the gender pay gap
is now at a 20-year high. Part of the reason for this is that many of the lowestpaid occupations (eg. child care worker, hairdressers and cleaners) are
majority-female; while many of the highest-paid occupations (eg. surgeons,
financial dealers and actuaries) are majority-male.[23] As the pay gap between
child care workers and surgeons has grown, the gender pay gap has grown
too. In this sense, economic inequality is a feminist issue. Related to this is
the gender wealth gap. Within the top 1 percent, only one-fifth of all wealth is
held by women; a share that drops to one-thirtieth if Gina Rinehart is
excluded.[24] Better recognising the way in which economic inequality impedes
gender equity in Australia is an important facet of addressing inequality.
Over recent years, inequality has been taken up as a central issue by many senior
figures.[25] In Osawatomie, President Barack Obama drew on Theodore Roosevelt’s
example to highlight the importance of the issue. In Evangelii Gaudium, Pope
Francis denounced inequality and called for action on social disadvantage. Last
year, Thomas Piketty’s 700-page book on inequality topped the best-seller lists,
sparking a global conversation, while giving heart to economic historians toiling in
dusty library basements everywhere.
Between Piketty, the Pope and the President, inequality is fast becoming a central
issue of our age. Pen’s Parade reminds us that the disparities between rich and poor
are significant. Inequality matters for instrumental reasons, but mostly for intrinsic
ones. Put simply: most of us want a more egalitarian Australia than we have today. A
richer conversation about inequality is not only in the interests of the disadvantaged,
but all Australians who want to maintain a fair society.
ENDS
Jan Pen, 1971, Income Distribution: Facts, Theories, Policies, Praeger. See also Clive Crook, ‘The
Height of Inequality’, The Atlantic, September 2006. In the ABS’s 2011-12 Household Wealth and
Wealth Distribution survey, the mean wealth was $728,139, while the wealth at the 10th to 90th
percentiles was $29,600, $88,388, $186,981, $313,000, $434,234, $573,008, $753,594, $1,026,169
and $1,594,626 respectively. The cutoff to enter the 2014 Australian 200 rich list was $250 million,
and the top value was $20 billion (on the January 2015 Forbes Australian rich list, this figure was
US$11.7 billion, or around $15 billion).
[2] Both Lucas and Feldstein are quoted in Branko Milanovic, 2007, ‘WhyWe All Care About Inequality
(But Some of Us Are Loath to Admit It)’, Challenge, Vol. 50, No. 6, pp. 109–120.
[3] Adam Smith, 1759, The Theory of Moral Sentiments, A. Millar, A Kincaid and J. Bell, London,
Chapter 3.
[4] The share of inequality mentions in the Google Books catalogue has risen from 0.0006% to
0.0013%, which is a significant increase, but also helps put the topic in perspective. See
https://books.google.com/ngrams
[5] John Rawls, 1971, The Theory of Justice, Harvard University Press, Cambridge, MA.
[6] Arthur Okun, 1975, Equality and efficiency, the big tradeoff. Brookings Institution Press,
Washington DC.
[7] Anthony B. Atkinson, 2015, Inequality: What Can be Done? Harvard University Press, Cambridge
MA, p.10.
[8] David Neal et al., 2011, ‘Australian Attitudes towards Wealth Inequality and Progressive Taxation’,
Report prepared for the Australian Council of Trade Unions, ACTU, Melbourne.
[9] Andrew Leigh, 2013, Battlers and Billionaires: The Story of Inequality in Australia, Black Inc,
Melbourne, p.126.
[10] Lateral Economics, 2011, The Herald/Age – Lateral Economics Index of Australia’s Wellbeing,
Final Report, Lateral Economics, Melbourne, p. 43.
[11] Sara Solnick and David Hemenway, 1998, ‘Is More Always Better?: A Survey on Positional
Concerns’, Journal of Economic Behavior and Organization, Vol. 37, No. 3, pp. 373–383.
[12] Hessel Oosterbeek, Randolph Sloof and Gijs van de Kuilen, 2004, ‘Cultural Differences in
Ultimatum Game Experiments: Evidence from a Meta-Analysis’, Experimental Economics, Vol. 7, No.
2, pp. 171–188
[13] Nadav P. Goldschmied and Joseph A. Vandello. 2012, ‘The Future is Bright: The Underdog Label,
Availability, and Optimism’, Basic and Applied Social Psychology, Vol. 34, No. 1, pp. 34–43.
[14] Lester C. Thurow, 1971, ‘The Income Distribution as a Pure Public Good’, Quarterly Journal of
Economics, Vol. 85, No. 2, pp. 327–336.
[15] Richard G. Wilkinson and Kate Pickett, 2009, The Spirit Level: Why More Equal Societies Almost
Always Do Better, Allen Lane, London, p. 261.
[16] Andrew Leigh, 2013, Battlers and Billionaires: The Story of Inequality in Australia, Black Inc,
Melbourne, pp.99-101.
[1]
Russell Berman, ‘A Guide to the Billionaires Bankrolling the GOP Candidates, The Atlantic, 24
April 2015.
[18] Martin Gilens, 2005, ‘Inequality and democratic responsiveness’, Public Opinion Quarterly, Vol. 69,
No. 5, pp. 778–796.
[19] For a summary of the literature, see Andrew Leigh, 2014, ‘Does Too Much Inequality Prevent
Social Mobility?’, OECD, 26 September 2014.
[20] Anthony B. Atkinson, 2015, Inequality: What Can be Done? Harvard University Press, Cambridge
MA, pp.125, 151-152.
[21] Anthony B. Atkinson, 2015, Inequality: What Can be Done? Harvard University Press, Cambridge
MA, pp.126-127.
[22] Competition and Consumer Act 2010 (Cth), s.2.
[23] For specific figures on the gender composition of these industries, see Andrew Leigh, ‘Why
inequality is a feminist issue’, Debrief Daily, 19 April 2015.
[24] Pamela Katic and Andrew Leigh. ‘Top Wealth Shares in Australia 1915–2012’ Review of Income
and Wealth (forthcoming 2015).
[25] Many of my Labor colleagues have weighed into this debate, including Michelle Rowland, Andrew
Giles,
[17]
Penny Wong, Brendan O’Connor, Pat Conroy, Jim Chalmers and Tanya Plibersek: see
quotations in Andrew Leigh, ‘Fair gone? How governments can guard against growing
inequality’, ANZSOG/VPSC Victoria Lecture Series, Melbourne, 19 February 2015.
Jan Pen, 1971, Income Distribution: Facts, Theories, Policies, Praeger. See also Clive Crook, ‘The
Height of Inequality’, The Atlantic, September 2006. In the ABS’s 2011-12 Household Wealth and
Wealth Distribution survey, the mean wealth was $728,139, while the wealth at the 10th to 90th
percentiles was $29,600, $88,388, $186,981, $313,000, $434,234, $573,008, $753,594, $1,026,169
and $1,594,626 respectively. The cutoff to enter the 2014 Australian 200 rich list was $250 million,
and the top value was $20 billion (on the January 2015 Forbes Australian rich list, this figure was
US$11.7 billion, or around $15 billion).
[2] Both Lucas and Feldstein are quoted in Branko Milanovic, 2007, ‘WhyWe All Care About Inequality
(But Some of Us Are Loath to Admit It)’, Challenge, Vol. 50, No. 6, pp. 109–120.
[3] Adam Smith, 1759, The Theory of Moral Sentiments, A. Millar, A Kincaid and J. Bell, London,
Chapter 3.
[4] The share of inequality mentions in the Google Books catalogue has risen from 0.0006% to
0.0013%, which is a significant increase, but also helps put the topic in perspective. See
https://books.google.com/ngrams
[5] John Rawls, 1971, The Theory of Justice, Harvard University Press, Cambridge, MA.
[6] Arthur Okun, 1975, Equality and efficiency, the big tradeoff. Brookings Institution Press,
Washington DC.
[7] Anthony B. Atkinson, 2015, Inequality: What Can be Done? Harvard University Press, Cambridge
MA, p.10.
[8] David Neal et al., 2011, ‘Australian Attitudes towards Wealth Inequality and Progressive Taxation’,
Report prepared for the Australian Council of Trade Unions, ACTU, Melbourne.
[9] Andrew Leigh, 2013, Battlers and Billionaires: The Story of Inequality in Australia, Black Inc,
Melbourne, p.126.
[10] Lateral Economics, 2011, The Herald/Age – Lateral Economics Index of Australia’s Wellbeing,
Final Report, Lateral Economics, Melbourne, p. 43.
[11] Sara Solnick and David Hemenway, 1998, ‘Is More Always Better?: A Survey on Positional
Concerns’, Journal of Economic Behavior and Organization, Vol. 37, No. 3, pp. 373–383.
[12] Hessel Oosterbeek, Randolph Sloof and Gijs van de Kuilen, 2004, ‘Cultural Differences in
Ultimatum Game Experiments: Evidence from a Meta-Analysis’, Experimental Economics, Vol. 7, No.
2, pp. 171–188
[13] Nadav P. Goldschmied and Joseph A. Vandello. 2012, ‘The Future is Bright: The Underdog Label,
Availability, and Optimism’, Basic and Applied Social Psychology, Vol. 34, No. 1, pp. 34–43.
[14] Lester C. Thurow, 1971, ‘The Income Distribution as a Pure Public Good’, Quarterly Journal of
Economics, Vol. 85, No. 2, pp. 327–336.
[15] Richard G. Wilkinson and Kate Pickett, 2009, The Spirit Level: Why More Equal Societies Almost
Always Do Better, Allen Lane, London, p. 261.
[16] Andrew Leigh, 2013, Battlers and Billionaires: The Story of Inequality in Australia, Black Inc,
Melbourne, pp.99-101.
[1]
Russell Berman, ‘A Guide to the Billionaires Bankrolling the GOP Candidates, The Atlantic, 24
April 2015.
[18] Martin Gilens, 2005, ‘Inequality and democratic responsiveness’, Public Opinion Quarterly, Vol. 69,
No. 5, pp. 778–796.
[19] For a summary of the literature, see Andrew Leigh, 2014, ‘Does Too Much Inequality Prevent
Social Mobility?’, OECD, 26 September 2014.
[20] Anthony B. Atkinson, 2015, Inequality: What Can be Done? Harvard University Press, Cambridge
MA, pp.125, 151-152.
[21] Anthony B. Atkinson, 2015, Inequality: What Can be Done? Harvard University Press, Cambridge
MA, pp.126-127.
[22] Competition and Consumer Act 2010 (Cth), s.2.
[23] For specific figures on the gender composition of these industries, see Andrew Leigh, ‘Why
inequality is a feminist issue’, Debrief Daily, 19 April 2015.
[24] Pamela Katic and Andrew Leigh. ‘Top Wealth Shares in Australia 1915–2012’ Review of Income
and Wealth (forthcoming 2015).
[25] Many of my Labor colleagues have weighed into this debate, including Michelle Rowland, Andrew
Giles,
Penny Wong, Brendan O’Connor, Pat Conroy, Jim Chalmers and Tanya Plibersek: see quotations in
Andrew Leigh, ‘Fair gone? How governments can guard against growing inequality’, ANZSOG/VPSC
Victoria Lecture Series, Melbourne, 19 February 2015.
[17]