<i>Illustration: michaelmucci.com</i>

Illustration: michaelmucci.com

There is growing concern about inequality, and rightly so. There is growing inequality in most countries - marked increases in some, with more and more of each nation’s income going to the top, more people in poverty, and a hollowing out of the middle class. But the fact that there is so much more inequality in some countries than others means that the degree of inequality is not just a matter of economics; it is the result of policies and politics. Each confronts the same laws of economics, the same global economic forces; but how they respond differs markedly. 

In the past few years, there has been a fundamental shift in our understanding not only of the causes of inequality, but also of the consequences. There are two ways to do “well”: to increase the size of the economic pie, and be justly rewarded for doing so; and to seize a larger share of the nation’s economic pie. The former is called wealth creation; the latter wealth appropriation or rent seeking. There is a growing consensus that an increasing share of inequality at the top arises from rent seeking - whether it takes the form of the exercise of monopoly power, taking advantage of deficiencies in corporate governance to seize an increasing share of corporate revenues, or using political power to get public resources at low prices or sell government goods and services at inflated prices. 

But such rent seeking erodes economic performance. It’s one of the reasons that countries with greater inequality grow more slowly and have more instability - countries pay a high price for inequality, as the IMF has been emphasising in recent years.

Australia is not the best country in achieving shared prosperity, but neither is it the worst. Its pre-tax and transfer inequality or its post tax and transfer inequality are neither among the best among the advanced countries nor the worst. By the standard measures, it does neither the best nor the worse in “correcting” the before tax and transfer inequality. 

While the US (like Australia) prides itself on doing things bigger and better than elsewhere, its achievement in creating the highest level of inequality among the advanced countries is not something to be boastful about - or for others to emulate. As we look around the world, those countries that have most closely followed the American model have similar results - high levels of inequality. 

While there are many dimensions to growing inequality, perhaps the most invidious is inequality of opportunity. Western democracies pride themselves in providing a level playing field, in which all who would work hard can prosper. But it’s a myth, and nowhere more so than in the US, in spite of the rhetoric about the American dream. The life prospects of a young American are more dependent on the income and education of his parents than is the case in other advanced countries. And there is a vicious circle: inequality of outcomes leads to inequality of opportunity which leads to further inequalities of outcome. The prospect for America’s future is thus still more inequality of outcomes and opportunity.

Some in Australia talk about emulating the American model. To be honest, while there are many great aspects of my country, our economy has not been performing particularly well - consistent with the earlier observation that economies with greater inequality don’t. Indeed, the American economic model has not been delivering for most of its citizens - income in the middle is lower than it was a quarter century ago; the median income of a full-time male worker is lower than it was four decades ago; the minimum wage has stagnated for half a century. This contrasts markedly with Australia, where median household income has grown at an average annual rate of 3.3 per cent, almost twice the Organisation for Economic Co-operation and Development average of 1.7 per cent - and much, much better than the US. 

There are several areas where Australia should be particularly cautious about imitating the US model. One of the reasons that the US has gone to the bottom of the league tables in economic opportunity is our education system, and especially the way higher education is financed. It is one of the reasons that only about 8 per cent of those in the bottom half get a college education. Australia’s income contingent loan program, HECS, is the envy of the rest of the world. It works. The best US universities are superb - the best in the world - but they are all either state financed or non-profits, supported by generous philanthropy. They compete vigorously in quality - but it is not conventional market competition, where price plays a pivotal role. The under-regulated for-profit universities excel - in exploiting children from poor families and in lobbying to make sure that they can continue to do so. 

Another area in which Australia leads, and America fails, is health. The American mostly private health care system is probably the least efficient in the world - spending twice the percentage of GDP of Australia, with much poorer results, exemplified by a life expectancy that’s three years shorter. The country is perhaps the only in the advanced world not to recognise the right to access to healthcare, with the result that inequalities in health outcomes are enormous. 

A third area where America trails is basic welfare support and systems of social protection. With almost one out of four children living in poverty, and with deficient public support, the prospects for their future are not rosy - and this will inevitably translate into weaker overall economic performance for the country. The combination of unequal education opportunities and access to healthcare and inadequate systems of social protection translates into poor average performance of our children - well below the average of the advanced countries in standardised tests, in contrast to Australia, whose children perform well above average. Contrary to what some in Australia’s government have suggested, support for poor families is not only a moral imperative, it is an investment in the country’s future. 

Two big lessons of economic research over the past 10 years are that inequality is not the result of inexorable laws of economics but rather of policy; and that countries that adopt policies that lead to high inequality pay a high price - inequality not only leads to a divided society and undermines democracy, but it weakens economic performance. Hopefully, as Australia debates its new government’s budget and economic “reforms,” it bears this in mind. 

Joseph Stiglitz is the winner of the 2001 Nobel Memorial Prize in Economics. He is a former chairman of President Clinton’s Council of Economic Advisers and Chief Economist of the World Bank. His most recent book is The Price of Inequality: How Today’s Divided Society Endangers Our Future.