The Abbott government’s first budget inevitably will increase inequality in Australia. This has been at the centre of its hostile reception.
But isn’t it normal to have rising inequality? Isn’t it simply a natural condition of human society from time immemorial?
It’s certainly true that inequality has been a feature of human societies for at least the past 5000 years. But, intriguingly, for most of the existence of humans on planet earth, it was not.
According to a study by a pair of distinguished US archaeologists, economic inequality is a relatively recent invention.
“Anatomically and intellectually, modern humans were already present during the Ice Age” around 15,000 BC, write Kent Flannery and Joyce Marcus in their 2012 book The Creation of Inequality.
“Our Ice Age ancestors typically lived in small foraging societies whose members are believed to have valued generosity, sharing and altruism.” Hunting and gathering people usually work to stop inequality emerging. There were no monarchies 15,000 years ago.
But as the planet thawed and more complex societies emerged, things changed: “By 2500 BC, virtually every form of inequality known to mankind had been created somewhere in the world, and truly egalitarian societies were gradually being relegated to places no one else wanted,” writes the pair of professors from the University of Michigan.
Unequal societies, in other words, are not written in our genes. They are social and political constructs.
Individuals have wildly varying abilities; inequality between people is inherent. Some are faster than others, some more cunning, some more energetic, some more capable.
But for societies, equality or inequality in sharing the fruits of those various abilities is a choice.
In the most recent millennia, untrammelled inequality has had a poor record as a foundation for stable, successful societies. Gross inequality is an unsettling force.
When too much wealth is in too few hands it creates a critical situation “which history has diversely met by legislation redistributing wealth or by revolution distributing poverty”, write Will and Ariel Durant in their survey of civilisation, The Lessons of History.
If extreme inequality has proved to be a social disaster, so have efforts to create extreme equality.
The 20th century’s experiments with socialism and communism were resounding failures. Humans in large societies, it turns out, need to be allowed some selfishness as an incentive to work.
The quip that summarised the bankruptcy of Soviet economics was the factory manager’s remark that “the workers pretend to work and we pretend to pay them”.
A society that wants to succeed must choose some gradation of inequality – not so much that the poor rise up and murder the rich, and not so little that workers pretend to work.
But within that band, does equality matter? Let’s be hard-headed. Why create a complex web of taxes, welfare payments, minimum wages and other rules and regulations in pursuit of a touchy-feely pseudo-equality to give ourselves a warm inner glow about how virtuous we are?
It turns out that there’s a lot more to it. A mounting body of empirical research shows that equality is not just about giving us some sort of squishy feel-good factor.
Equality in modern societies turns out to be a hard national interest. A pair of British epidemiologists, Richard Wilkinson and Kate Pickett, summarised the findings of hundreds of peer-reviewed academic research papers in their ground-breaking book, The Spirit Level.
Some of the biggest problems in modern societies grow worse with growing inequality, and improve as equality rises - violent crime, depression, mental illness, obesity, educational failure and personal debt.
“It is clear that greater equality, as well as improving the wellbeing of the whole population, is also the key to national standards of achievement and how countries perform in lots of different fields,” Wilkinson and Pickett write.
Or, as Britain’s conservative prime minister, David Cameron, said in 2009: “Per capita GDP is much less significant for a country’s life expectancy, crime levels, literacy and health than the size of the gap between the richest and poorest in the population.”
America has been the most unequal among developed countries for the last century, and it’s growing more so.
It has reached such an extreme that Americans who drop out of high school can expect lives four years shorter than they could have expected just a couple of decades ago, according to Professor S. Jay Olshansky of the University of Illinois at Chicago.
The most equal countries are Norway and Denmark, according to the World Bank.
“Income inequality has widened in most OECD countries over the last 30 years,” reported the OECD in a study published this month.
It found a gathering concentration of income among the rich “even in countries where it has traditionally been low” such as Germany, Denmark and Sweden.
But America, again, set the standard. Of all income growth in the 30 years to 2007, the top 1 per cent of earners collected an extraordinary 47 per cent. In Canada the figure was 37 per cent. In Australia and Britain, the top 1 per cent enjoyed 20 per cent of all income gains, according to the OECD.
The relentless rise of inequality across Europe and the US over the last couple of centuries is the subject of a fashionable new book by the French economist Thomas Picketty, Capital in the Twenty-First Century.
Barack Obama said last year that America’s rising inequality was “one of the defining issues of our time.”
How bad is the Australian performance? Australia has around the average of level of equality among the 34 rich countries that make up the OECD, according to that organisation.
A leading expert on the subject, Peter Whiteford of the ANU, makes three central points. First, while the rich in Australia have got richer in the past 20 years, the poor have also been raised up by Australia’s two decades of unbroken economic growth.
In the 20 years to 2008, Australian households overall enjoyed the second-fastest gains in real disposable income of any rich country. Real, by the way, means after adjusting for the effect of inflation. The fastest performer? It was Ireland, which then hit the global financial crisis. Irish incomes plummeted.
In other words, no country has done better overall for its people in the last generation. This is why the economist Ian McLean says that Australia is in its “third golden age” since white settlement, ranking with the long boom to 1890 and the postwar boom from 1945 to 1973.
In this “third golden age,” families on middle incomes have enjoyed an increase in their real disposable incomes of 50 per cent, says Whiteford. And families on the bottom of the income rank, the poorest 10 per cent, have seen their average real disposable incomes rise by 40 per cent.
The richest, nonetheless, did best, and so inequality increased up to 2008. After that, says Whiteford, equality actually gained a little.
Why? Because Labor raised the formula for paying the pension in 2009, and the wages of lower-paid workers grew faster than incomes of the rich when the global downturn hit.
“Overall,” says Whiteford, “while inequality in Australia has gone up and down a bit, it’s been on a long upward trend since the 1970s. It’s left Australian inequality at roughly the level the US was at in 1970.”
The first Abbott budget would put Australia on track for more inequality if the government can get all its measures through the Senate.
The clearest evidence is that while the cuts to welfare would be permanent, the 2 per cent levy on the rich is temporary.
Another stark fact: the poorest fifth of families would contribute $1.1 billion more to the government’s budget repair task than the richest fifth, according to the National Centre for Social and Economic Modelling or NATSEM.
Tony Abbott has challenged NATSEM’s calculations as not “pure” because they’d been commissioned by Labor. Natsem’s principal researcher, Ben Phillips, shoots back: “The Liberals liked our numbers back in 1999 when we modelled the effects of the GST for them. They liked our numbers in 2010 when we costed their election promises for them. Abbott has said we’re the best modelling agency around.”
Peter Whiteford agrees that its calculations are the best available.
Besides, the program that NATSEM uses is the same one it developed for the Treasury, so their numbers will be “almost identical, to within a rounding error” with the government’s own unpublished figures, says Phillips.
BHP-Billiton’s chief executive, Andrew Mackenzie, has said that budget is “fair”. That puts him in the minority of 33 per cent who says so, according to a Fairfax Nielsen poll. Sixty-three per cent say it is not fair.
And that’s the central reason the budget’s harshest measures are most unlikely to pass the Senate.
Joe Hockey has said that he intends to end the “age of entitlement”. Abbott himself has defended the proposal to impose a six months wait for the dole on people under 30 on the grounds that: “I think it's important that our institutional culture sends a very strong message that we expect people who are work capable to be either working or preparing themselves for work.”
The eminent economist Ross Garnaut has said that no important policy change can succeed if it violates the basic Australian concept of fairness. The budget is Abbott’s first attempt to rewrite Australia’s work culture and its definition of fairness.
It is failing. As inequality grew and incomes rose in Australia over the 20 years to 2006, the people grew more likely to think that it’s the government’s job to reduce income differences. The percentage saying so rose from 50 per cent to 55.
The government has tried to move in the opposite direction. Abbott has hit the hard limits of Australia’s concept of fairness.
Peter Hartcher is the political editor.