ARPA: Waiting for the fallout: Australia and return of the patrimonial society

Thomas Piketty Capital in the Twenty-First Century, (trans. Arthur Goldhammer), Cambridge Massachusetts, The Belknap Press of Harvard University Press, 2014 (698 pp). ISBN 9-78067443-000-6 (hard cover) RRP $78.00.

In the opening of Nevil Shute’s novel, On the Beach, written in 1957, a nuclear war has devastated the Northern Hemisphere. Australia has avoided direct involvement in the war, but is waiting for the cloud of nuclear fallout to drift southwards, killing everything and everyone in its path. This second-hand disaster serves nicely as a metaphor for Australia’s current economic experience, which has been driven largely by the fallout from shocks to the major economies of the Northern Hemisphere.

Sometimes, such as in the Great Depression, the parallel with nuclear fallout is exact: the advance warning does nothing to help us escape the inevitable disaster. At other times, though, the warning has been useful. Following the near-meltdown of the US banking system in September 2008, the Australian government had time to respond to the impending Global Financial Crisis with a combination of fiscal stimulus and financial sector interventions that protected Australia from the recession that hit nearly every other developed country.

The situation is somewhat similar to that arising from the trends documented in Thomas Piketty’s book, Capital in the Twenty-First Century. Over the past 40 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 one per cent of the income distribution. Meanwhile, living standards for those in the bottom half of the income distribution have stagnated or even declined. This pattern may be seen even on such basic measures as life expectancy, which ought to improve as a result of advances in health care. Life expectancy for the well-off is advancing steadily, as expected. However, life expectancy is declining for women in the bottom half of the income distribution (Bosworth & Burke 2014). The same decline would almost certainly be evident for low income men, if it were not for a sharp drop in the number of homicides and, to a lesser extent, car crash fatalities. These are leading causes of premature death for low-income US males, but are not closely related to economic conditions.

Work by Piketty and others, 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. The same sharp increase in inequality may be observed in other English speaking countries including Canada (Conference Board of Canada n.d.) and New Zealand (Rashbrooke 2013). 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.

Compared to these countries, Australia looks more like France than like the rest of the English-speaking world. Although we 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 in March 2015 by the Australian Economic Review (AER). As Whiteford notes:

Other measures such as the Gini co-efficient 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 one 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 (Wilkins 2015). 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’ (p. 316).

Much of the credit for this comparatively benign outcome must go to prime ministers Bob Hawke (1983–91) and Kevin Rudd (2007–10). John Howard (1996–2007) can also claim at least some credit for not being the radical reactionary that many feared he would be. Hawke, along with Brian Howe, 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. The same would certainly have happened if Paul Keating, in most respects the dominant figure of the Labor government that ruled from 1983 to 1996, had got his way.

The crucial point at which Australia diverged from the rest of the English-speaking world was the Tax Summit of 1984. Keating, who organised the Summit, presented it with three options, two of which were designed to be unacceptable to the community. This presentation was expected to ensure support for the third choice, Option C, a broad-based consumption tax with no exemptions, which was to be used to finance large cuts in income tax. In the face of strong opposition from welfare groups, and in the absence of significant support from business, Hawke dumped Option C in favour of Option A which included the introduction of Capital Gains Tax and Fringe Benefits Tax. The result was to offset the increase in inequality in market incomes that arose from policies like financial deregulation. Of course, we eventually got a consumption tax: the goods and services tax (GST) introduced by the Howard Government in 2000. But the exclusion of most food from the tax base, demanded by the Australian Democrats as the price of their support, meant that the GST was much less regressive than the version Keating proposed.

The second big contribution of the Hawke Government was the restructuring of the welfare state, led by Brian Howe. 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, most notably by the concessional treatment of capital gains introduced under the Howard Government (with Labor’s support) in 1999. Nevertheless, in broad terms, a redistributive tax–welfare system was maintained under Howard, even as it was being eroded in other English-speaking countries.

Rudd’s big contribution was 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 our 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 we are a long way from the plutocracy that already characterises the United States, there is no room for complacency. Our 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. If the decline of the mining boom is mishandled, we could enter a long period of stagnation or even depression, which would bear hardest on those at the bottom of the income distribution. And the political pressure to take burdens from the rich and shift them to the poor is never-ending. The 2014 Budget, the Intergenerational Report and the recently published Treasury tax discussion paper (Treasury 2015) have all proposed such shifts.

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, and thereby 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 (Center for Responsive Politics n.d.).

Our own first attempt by a billionaire to buy his way into politics—Clive Palmer with his Palmer United Party—appears to be in disarray for the moment, but there is no reason to suppose it will be the last, or that wealth will not come to dominate Australian politics in other ways. Mark Triffitt presents some acute insights into this problem in his contribution to the AER volume (Triffitt 2015). Addressing the problem from the other direction, Paul Frijters and Gigi Foster (2015) argue in their contribution that most of Australia’s wealthiest people derived their wealth, not from innovation but from success in industries where connections and political favours play a crucial role.

Among the contributors to the AER volume, the case for complacency is presented mainly by Richard Pomfret, in a ‘For the Student’ piece entitled ‘Is Inequality Increasing?’. Pomfret presents two arguments as to why we should not be concerned about growing inequality. The first, an old one, is that the distribution of income shows substantial mobility over time. However, this is largely due to life cycle effects, in which, for example, low income university students (supported by high income parents) become high income professionals and then return to low incomes as retirees, living off savings. The more relevant question is whether someone whose parents were in the bottom twenty per cent of the income distribution has a good chance of reaching the middle or top of the income distribution. Increasingly, and particularly in the United States, this is no longer true (Greenstone et al. 2013).

Pomfret’s other argument, which has been popularised by Piketty’s critics, concedes the fact that income and wealth are more unequally distributed but makes the point that ‘many of the [American] super-rich were not born rich and their wealth is not due to high returns on capital’ (Pomfret 2015. p. 107). This fact may be (in fact, must be) true in the early phases of a shift towards greater inequality, but it proves nothing about the future trends predicted by Piketty.

The fact that currently wealthy Americans have not, in general, inherited their wealth follows logically from the fact that, in their parents’ generation, there weren’t comparable accumulations of wealth to be bequeathed. More generally, starting from the position of relatively equal income and wealth that prevailed between about 1950 and 1980, growing inequality of income must precede growing inequality of wealth. This is an arithmetic necessity, since wealth is simply the cumulative excess of income over consumption, and the current crop of high-income earners have not been notable for restraint as regards luxury consumption (Bain & Company 2013).

So, given the pattern of highly unequal incomes, and social immobility observed in the United States 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 is already happening at the very top of the income distribution. The claim that the rich are mostly self-made is already dubious, and will soon be clearly false. Of the top ten people on the Business Review Weekly (BRW) rich list for 2014, 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 twenty 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. Yet another way of making the point is to look at the BRW Young Rich list, consisting of 100 people under 40 who have made their own fortunes. The aggregate wealth of this group is $5.13 billion, a substantial sum, but significantly less than the $7 billion wealth of James Packer, who inherited his money at the age of 38.

So, Australians have no room for complacency. In an economy dominated by capital, and in the absence of estate taxation—briefly discussed, and quickly dismissed, in the recent Treasury tax discussion paper (Treasury 2015)—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. Australia’s experience belies the claim that any attempt to offset the growth of inequality must cripple economic growth.

REFERENCES

Center for Responsive Politics n.d., Personal finances: Richest Members of Congress 2013 [Online], Available: http://www.opensecrets.org/pfds/ [2015, Apr 2].

Frijters, P., & Foster, G. 2015, ‘Rising inequality: A benign outgrowth of markets or a symptom of cancerous political favours?’, Australian Economic Review, vol. 48, no. 1, pp. 67–75.

Pomfret, R. 2015, ‘Is inequality increasing?’, Australian Economic Review, vol. 48, no. 1, pp. 103–111.

Rashbrooke, M. (ed.) 2013, Inequality: A New Zealand Crisis, Bridget Williams Books, Wellington.

Triffitt, M. 2015, ‘The consequences of inequality for public policy in Australia’, Australian Economic Review, vol. 48, no. 1, pp. 76–82.

Whiteford, P. 2015, ‘Inequality and its socioeconomic impacts’, Australian Economic Review, vol. 48, no. 1, pp. 83–92.

Wilkins, R. 2015, ‘Measuring income inequality in Australia’, Australian Economic Review, vol. 48, no. 1, pp. 93–102.

John Quiggin is an ARC Laureate Fellow at the University of Queensland. He has written hundreds of journal articles on a wide range of topics, and six books, most recently Zombie Economics: How Dead Ideas Still Walk Among Us (Australian edition published by Black Inc., 2012).

View other articles by John Quiggin:

Water Policy (Digest, Sep 2007)
The Oil Shock of 2005 (Digest, 21 Nov 2005)
Labor’s Economic Policy Options (Digest, 12 Jul 2004)
Myths of the Market (Digest, 11 Nov 2002)
Economics of the Dark Side (Digest, 20 May 2002)
Active Labour Market Policy and Macroeconomic Stabilisation (Journal, Nov 2001)
Corporate Collapses and Deregulatory Dilemmas (Digest, 5 Oct 2001)