COUNTING THE COST OF INEQUALITY
‘JUST IDEAS’ TALK #1
UNIVERSITY OF SYDNEY
FRIDAY, 18 NOVEMBER 2016
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One of the many things I love about Australia is our egalitarian ethos. We’re a nation that doesn’t have private areas on our beaches, and likes using the word mate. We rarely stand up when the Prime Minister enters the room, and prefer to pay a decent wage than have people relying on tips. Since the 1800s, when European migrants alighting from boats said that they felt they had entered a ‘workers paradise’, the spirit of Australian egalitarianism has burned bright.
Unfortunately, when there’s a bright light shining in your eyes, it can be hard to see anything else. Sometimes, I fear that we think that equality is merely about battlers and billionaires sharing the showers at Bondi Beach. An equality of manners is a lovely thing, but as many a homeless person has observed, you can’t eat politeness.
How much equality is there in Australia? One way of answering that question is to imagine that we divided up the population into five groups of about five million people each, and allocated the Australian land mass to them in the same way that wealth is distributed in Australia. For simplicity, let’s start from the bottom, and just draw lines of latitude across the nation that match the current distribution of wealth, as measured by the Australian Bureau of Statistics.
The most affluent five million people get everything south of Carnarvon (WA), Alice Springs (NT) and Rockhampton (Qld). That’s all of Tasmania, Victoria, South Australia, New South Wales and the ACT. It’s three-fifths of the Australian land mass, and just five million of them get to enjoy it. Everyone else has to move north of Rockhampton and Carnarvon.
The next most affluent five million get half of what’s left. If they’re on the east coast, they can live in Townsville or further south - so long as they don’t go into Rockhampton. If they’re on the west coast, they can live in Broome or further south, so long as they don’t go into Carnarvon. This group, the second-top, are the ones who get a proportionate share. They comprise one-fifth of Australia, and they get one-fifth of the land mass.
Now we’re looking at the middle fifth of Australians. They get a tenth of Australia - half their proportionate share. It’s the slim sliver from Port Douglas, north of Cairns (Qld), across to Kunnanurra (WA).
The second-bottom group of Australians get virtually all of what remains. Like each of the other groups, there’s five million of them, but they only get only one-twentieth of Australia’s land area. It’s a section that goes up to include Darwin and most of Cape York Peninsula.
If you coloured in a map of Australia at this stage, you’d be forgiven for thinking we were done. After all, more than 99 percent of the land mass is accounted for. And yet we still need to allocate a share of the land to a group that makes up five million of us.
Their share starts north of Darwin. It includes a tiny part of Arnhem Land and the islands northwards, plus a small pocket of Cape York Peninsula, where you can find the tip of the Australian mainland. I’ve stood at the tip of the tip. It’s Indigenous land, and it’s beautiful country. But I’m not sure I’d want to share it with five million people. Still, that’s what it’s like to be a group that gets less than one-twentieth of your equal share.
That’s Australian wealth inequality today.
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This is the first of three "Just Ideas" talks that I will deliver over coming months on inequality. They build on my 2013 book, "Battlers and Billionaires: The Story of Inequality in Australia", and a dozen or so lectures that I have delivered since then on the politics of inequality, the role of innovation, market concentration and inequality, and policies to address rising inequality.[i] My focus today will be on why we should care about the distribution of income. Because if I can’t convince you to care about inequality, then the rest of it doesn’t matter much.
I’m pleased to say that the conversation about inequality is crowded with excellent contributions from my parliamentary colleagues. In the past week alone, Bill Shorten, Tanya Plibersek, Chris Bowen, Jenny Macklin, Mark Dreyfus, Brendan O’Connor, Wayne Swan and Jim Chalmers are among those who have touched upon aspects of the inequality problem. My challenge today is not only to say something new, but also to find an angle different from theirs. It’s a good problem to have.
So, why care?
The starting point is to acknowledge what economics lecturers everywhere teach their first years. Economics is about maximising wellbeing, not money. The goal isn’t to see how big we can make our GDP, but how happy we can make our people.
Like all things, money has a diminishing marginal return. There are about one billion people in the world who live on less than a dollar or day. They spend most of their dollar keeping hunger at bay. But then there are about 1800 people who have more than a billion dollars. For them, more money means a larger yacht, a faster jet or another holiday home. If you believe that moving a person from $1 a day to $2 a day brings more happiness than giving a billionaire another dollar, then you’ve accepted the idea of diminishing marginal utility of money. There is no better argument for caring about inequality.
Putting numbers around this can be tricky, but an analysis by Lateral Economics finds that to get the same increase in life satisfaction, you either have to give someone on $15,000 another $6000, or someone on $100,000 another $100,000. Lateral Economics estimates that the cost of inequality to national wellbeing is the equivalent of $54 billion, making it a bigger problem than mental illness, obesity or long-term unemployment.
Does this mean we should have perfect equality? Not a bit of it. In A Theory of Justice, philosopher John Rawls devises the thought experiment of an unborn baby, ignorant of its social position. That baby, Rawls argues, wouldn’t want perfect equality. That way lies the famines of Mao’s China, the drab sameness of Communist East Germany, and the lost potential of Castro’s Cuba. Rawls argues that instead, our unborn baby would want as much inequality as would benefit those at the bottom. I’m no Harvard philosopher, but my answer would be slightly different - as much inequality as would benefit those at the middle and bottom. Either way, you could reasonably question whether it is necessary for five million Australians to have nearly two-thirds of the nation’s wealth.
The case for high inequality is strongest when those at the top are investing their additional resources back into productive enterprises. Think of instances when entrepreneurs in Tel Aviv sell their firm and plough the money into zippy start-ups; or when Bill Gates and Warren Buffett devote much of their wealth into innovative strategies to reduce global poverty.
Unfortunately, this isn’t as large a share of the spending by those at the top as we might imagine. Over the past few decades, a significant share of the spending by the super-rich has gone into competing with their extremely affluent colleagues. The supply of harbourside mansions is basically fixed, so their price has skyrocketed. So has the price of Grange, a spot at Sydney Grammar, or a Sidney Nolan paintings. No surprise: all have risen faster than inflation. These are what economists call ‘positional goods’. They’re scarce, and they signal your spot in the pecking order.
Economist Robert Frank gives the example of the quality of a suit that a worker wears to a job interview. If I think you’ll wear a $200 suit, then I’ll feel comfortable doing the same. If I think you’ll wear a $2000 suit, then I might pay up or risk looking too sloppy to get the job. In the world of luxury yachts, one expert observes that ‘The client who 15 years ago would have been satisfied with a 40-metre yacht, which would then have been one of the largest yachts in the bay, is now surrounded by dozens of yachts of 60-70 metres, and this plants the seed that he really ought to upgrade.’ The world’s largest yachts now include multiple swimming pools, submersibles, jet skis, concert halls and dance floors. Running costs alone can be millions of dollars per year.[ii] If you want a luxury car that will accelerate faster horizontally than if it was dropped off a cliff, then the new Porsche 911 Turbo will do 0 to 100 in 2.7 seconds, about two seconds faster than the same model thirty years ago.
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Much of the spending at the very top goes on things that start with ‘private’. The share of the Australian population with a private jet or a private helicopter is higher than ever before (prompting calls a few years ago for a floating helipad on Sydney harbour). Norwegian Cruise Line has just announced that its newest ship will include an exclusive area - known as ‘the Haven’ - that is off-limits to the rest of the passengers. Travellers in this area will board and disembark separately. They need never rub shoulders with other passengers, but if they choose to do so, they have a special gold swipe card which guarantees them the best seats in the cinemas and restaurants. In some American airports, high-status travellers changing planes are driven between terminals in a sports car. Disney World recently began offering after-hours entry to those who spend more to stay in an on-site hotel.[iii]
Being ‘private’ is the quintessential positional good. By definition, if everyone can come in, then it’s not private. If everyone gets a good service, then it’s not exclusive. When nineteenth century French railway operators decided not to put roofs on their third class carriages, they were partly aiming to scare those who could afford it to travel in a higher class. But making the poor uncomfortable isn’t just inequitable; it’s also inefficient. And the same goes for pointless status races. Would the world really be much worse off if we took the standard for affluence back to 40 metre yachts and sports cars that could do 0 to 100 in five seconds?
While you’re thinking about these questions, let me remind you of how those in the bottom fifth of the distribution live today. Earlier this week, I joined my colleague Ross Hart at an early childhood centre in Ravenswood, in northern Tasmania. For reasons best known to themselves, town planners of a bygone age decided that the best place to locate a low-income suburb would be to the east of Launceston, across swampy land, and over a rise so it is out of sight of the rest of the city.
Average household income in Ravenswood is $32,240. That’s not per person, it’s per household. The most recent estimate put the unemployment rate in Ravenswood at 16 percent. Family violence rates are high, and children often miss out on things other families take for granted, such as a car, school excursions, or social networks that provide a first job opening.
It’s not just in northern Tasmania that this is a challenge. One in five Australian families say that they cannot afford a week’s holiday away from home once a year. One in eight cannot afford dental care. One in twenty cannot afford Christmas presents for family and friends. Underemployment is at a record high, and wage growth is at a record low. One in 500 Australian adults are currently in jail - the highest share behind bars in 115 years. Home ownership is at a 60-year low. If you spend all your time in inner suburbia, it’s easy to miss the extent of deep disadvantage, since Australian poverty rates tend to rise the further you go from the city centre.
There are massive inequities in almost every sphere of Australian life. For example, in health, the poorest Australians have seven fewer teeth, and live for six fewer years. In economic terms, this inequality has been growing. Since 1980, the income share of the top 1 percent of Australians has nearly doubled. This represents around half a trillion dollars that has been shifted from the bottom 99 percent to the top 1 percent.
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For years, researcher Paul Piff has been looking at how being at the top of the pecking order might change the way we behave. Do high-status people recognise that their success is due to good luck as well as hard work? Are they more inclined to be generous to those around them? Or are they more like Yertle the Turtle King, the Dr Seuss character who demanded that his fellow turtles stand on top of each other so he could get a better view?
In one of Piff’s studies, researchers slowly stepped on to a pedestrian crossing as a car approached, and tested to see whether the driver would stop.[iv] They then looked at the relationship between the value of the car and the behaviour of the driver. Among those driving the cheapest cars, all stopped to let the pedestrian cross. But among those driving the highest-status cars, nearly half drove straight through.
In other work, Piff has shown that more affluent respondents are more likely to cheat on a test, lie in a negotiation, or endorse unethical behaviour at work.[v] One theory, he suggests, is that narcissism is not evenly distributed across the population. Upper class individuals in his studies are more likely to look at themselves in a mirror, display greater psychological entitlement, and show less compassion towards others. High-status respondents are more likely to be greedy, and less likely to empathise with those who have very little.
A similar result holds true when Paul Piff arbitrarily chooses to make some people "rich" and others "poor". In one experiment, he asks two people to play a rigged Monopoly game.[vi] One starts with $2000, gets $200 every time he or she passes Go, and is allowed to roll two dice. The other starts with $1000, gets $100 for passing Go, and rolls one die. Given that the assignment is random, neither player should think that they are in any way more deserving - yet this is exactly what happens. In game after game, Piff and his team observe the favoured player teasing their unlucky opponent, taking up more personal space, and eating more food from the snack bowl on the table. Asked after the game to debrief, the players who started with twice as much money and got to use twice as many dice often attribute their success to their superior strategy - forgetting that the game was so rigged that it was nearly impossible for the other person to win.
At this point, I should remind you that this is just a game, and that any resemblance to property developers, living or dead, is purely coincidental.
Yet while Piff’s studies show that putting someone in a high-status position tends to encourage narcissism, greed and dangerous driving, he also shows that these traits seem to be malleable. A small egalitarian prompt (starting by asking respondents to list three benefits of regarding others as equal) caused those at the top to behave just like everyone else.
Yet the risk is that rising inequality is also accompanied by fewer opportunities for people to empathise with those who are more vulnerable - to rub shoulders with those who have different life experiences than our own. In the United States, researchers have shown that income segregation has grown since 1970, with the share of children living in middle-class neighbourhoods falling from 65 to 40 percent. The top fifth of American families are increasingly different from the rest of society, in terms of family structure, educational habits and lifestyle.[vii]
While the Australian data aren’t quite as nuanced, there is good reason to think that the same patterns hold true here. In 2010, I wrote Disconnected, a book documenting the decline of civic life. Since then, statistics show that Australians are less likely to be part of a social group, a trade union or a political group. The percentage of the population that volunteers or plays sport has also fallen. There are fewer opportunities for the affluent to empathise with these who are less fortunate than themselves.
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Over recent years, we have seen a succession of excellent reports documenting the rise in inequality, including work from ACOSS, the Evatt Foundation and the Chifley Research Centre’s Inclusive Prosperity Commission. The National Reform Summit - sponsored by KPMG, The Australian and the Australian Financial Review - noted the importance of achieving ‘inclusive economic growth’. Prior to the last election, my colleague Jenny Macklin drew together much of Labor’s thinking on the topic in her landmark Growing Together report.
For anyone with a progressive bone in their body, these reports make grim reading. And yet the risk is that understanding what has happened to Australian inequality in the past generation makes us fatalistic about the future.
True, the trend over the past three or four decades has been that inequality has steadily risen, with only one or two exceptions. But if you take a longer view, you recognise that it doesn’t have to be that way. From the 1910s to the 1960s, the income share of the top 1 percent approximately halved, from 13 percent to 7 percent. Wages became more equal too, with unskilled workers earning 71 percent as much as skilled workers in 1901, but 91 percent in 1957. In other work, Mike Pottenger and I look at the ratio of the BHP CEO’s pay to average workers’ earnings. We find that from the 1920s to the 1950s, wages grew faster on the factory floor than among executives. There is nothing about inequality that says it has to rise.
We can point to other episodes too. When the pension was increased in 2009, it took the benchmark rate from just below the poverty line to be above the poverty line. As a result, a million Australians were shifted out of poverty. Don’t let anyone ever tell you that policy cannot reduce poverty and inequality.
In this talk, I have focused on why we should care about excessive inequality. If you accept that a dollar brings more happiness to a minimum-wage worker than a millionaire, then it isn’t a big stretch to recognise that a society which only looks after its millionaires may end up becoming a less happy nation. If you were a child about to be randomly assigned into a household in Australia, would you really want a community in which the top fifth had nearly two-thirds of the wealth, while the bottom fifth had less than one-100th? And given what we know about how high-status people tend to behave towards others, do we want to encourage an environment in which the benefits of economic growth go overwhelmingly to a fortunate few?
In making the case for why we should care about inequality, I have focused only on intrinsic arguments - the direct impacts of inequality. I have deliberately chosen not to focus on the instrumental arguments - those which say that we should care about inequality because it affects some other important outcome. This is partly because the instrumental arguments can be oversold. Yes, inequality probably reduces social mobility; but I’m less persuaded that it increases crime rates.
But the other thing that happens when progressives focus primarily on the instrumental arguments is that we leave our best arrow in the quiver. If one person held all the wealth in Australia, we’d still have the same GDP, but we’d be a pretty miserable nation. In the same way, rising inequality risks lowering national wellbeing. To appreciate inequality is to recognise the difference between a democracy - which operates on the principle of one person one vote, and the sharemarket - which operates on the principle of one dollar one vote. In a democracy, each person’s happiness has an equal value. One person’s happiness should not be based on another person’s unhappiness.
If you ask people what they pride about being Australian, you’ll often get answers like ‘mateship’ and ‘the fair go’ - suggesting that many people see egalitarianism as an end, not a means to an end. Equality isn’t a fashionable buzzword - it goes directly to our sense of national identity - of Lalor, Lawson and Lingiari.
Australians are rightly proud of our egalitarian heritage. But to preserve it for our children, we need to act - before the gap becomes too wide.
[i] See eg Andrew Leigh, ‘Battlers and Billionaires: Australian Egalitarianism Under Threat’, National Press Club, Canberra, 27 March 2014; Andrew Leigh, ‘Fair gone? How governments can guard against growing inequality’, ANZSOG/VPSC Victoria Lecture Series, Melbourne, 19 February 2015; Andrew Leigh, ‘Why should we care about inequality?’, The 2015 Economic and Social Policy Public Lecture, University of Wollongong, 21 May 2015; Andrew Leigh, ‘Markets, monopolies and moguls: the relationship between inequality and competition’, John Freebairn lecture in public policy, University of Melbourne, 19 May 2016.
[ii] David Batty, ‘Superyachts and bragging rights: why the super-rich love their ‘floating homes’’, The Guardian, 10 October 2016
[iii] Nelson Schwartz, ‘In An Age of Privilege, Not Everyone is in the Same Boat’, New York Times, 24 April 2016.
[iv] Piff, P.K., Stancato, D.M., Côté, S., Mendoza-Denton, R. and Keltner, D., 2012. Higher social class predicts increased unethical behavior. Proceedings of the National Academy of Sciences, 109(11), pp.4086-4091.
[v] Piff, P.K., 2014. Wealth and the inflated self class, entitlement, and narcissism. Personality and Social Psychology Bulletin, 40(1), pp.34-43.
[vi] Cardel, M.I., Johnson, S.L., Beck, J., Dhurandhar, E., Keita, A.D., Tomczik, A.C., Pavela, G., Huo, T., Janicke, D.M., Muller, K. and Piff, P.K., 2016. The effects of experimentally manipulated social status on acute eating behavior: A randomized, crossover pilot study. Physiology & behavior, 162, pp.93-101.
[vii] Thomas Edsall, ‘How the Other Fifth Lives’, New York Times, 27 April 2016