Andrew Leigh

My AFR article today is on the mining boom and inequality. A big thanks to Parliamentary Library researcher Alan Payne, who painstakingly compiled several of the statistics below (but of course bears no responsibility for any policy conclusions).

Boom Times for the Few, Australian Financial Review, 26 July 2011

In 1978, US economist Henry Aaron described the study of inequality as being like ‘watching the grass grow’. After becoming more equal in the immediate post-war era, inequality in most English-speaking countries had flatlined for decades.

But alas for Aarons, the grass started shooting up as soon as he spoke. Inequality in developed nations has surged over the past generation, with computerisation and deunionisation among the key drivers.

Today, something new is going on. With commodity prices nearly 4 times higher than they were a decade ago, the proverbial pet-shop galah can recite the positive impact of the mining boom on the overall economy. Yet few have stopped to consider the impact of the mining boom on Australian inequality.

Simple economic theory tells us that the mining boom is likely to have concentrated impacts. Few industries are as capital-intensive as mining, so the share of the boom that accrues to workers is significantly smaller than if the boom had been in a labour-intensive sector like education or retail. And with substantial lead-times, a run-up in prices is likely to benefit existing players more than it would in an industry that is easier to enter, like construction or cafes. Given these factors, we should expect that the splash in mining cash will go to the few, not the many.

In the sharemarket, mining stocks now comprise one-fifth of the All Ordinaries index, up from one-tenth a decade ago. In turn, shareholders have rewarded mining bosses generously. From 2003 to 2010, the pay of BHP’s CEO tripled, while CEO pay increased sixfold at both Rio Tinto and Newcrest.

Indeed, what’s happening at the top of the income distribution really is the big story of Australian inequality. According to taxation data, 1849 people had annual incomes over $1 million in 2001-02. In the most recent figures (for 2008-09), there were 6395 people in that income range (indeed, there were 7905 in 2007-08). Not surprisingly, Western Australians now make up a larger share of this group of annual millionaires than they did a decade ago.

The same pattern shows up in figures from the Australian Bureau of Statistics, which divides households into five income groups, and calculates the share of disposable income that each receives. By the end of the noughties, each of the bottom four quintiles had a smaller share than at the start of the decade, while the richest fifth of households had gained about two percentage points. For the first time, the top fifth of Australian households now have twice their share of national income (41 percent), while the poorest fifth of households have about one-third of their proportionate share.

Is the recent rise in inequality due to the mining boom? While it’s hard to be sure, much of the objective evidence points that way. We’re not seeing a growing gap between the poor and the middle – instead, modern Australian inequality is a rising gulf between the middle and the top. This is likely to manifest itself in skyrocketing prices for beachside real estate, escalating fees at elite private schools, and growing attempts to use money to influence political outcomes.

As an academic economist, one of the projects that I found most exciting was a coauthored study with Oxford University’s Tony Atkinson, which looked at long-run trends in incomes of top income groups, such as the richest 1 percent. As a politician, I’m naturally drawn towards thinking about policies that provide greater equity without reducing economic growth. One such policy is to shift Australian mining from royalty taxes to a profits-based tax. When prices rise, miners will pay more tax. When prices fall, miners will pay less tax. Due to be legislated later this year, a Minerals Resource Rent Tax will raise more revenue, more efficiently. MRRT monies will be spent on regional infrastructure, boosting retirement savings (particularly for low-income Australians) and cutting company tax rates.

We can see the positive impact of the mining boom in many indicators – from capital investment to GDP growth. So it shouldn’t be too surprising that the boom has probably also affected inequality. The challenge for policymakers is not to stop the boom, but to find policies that are both efficient and equitable, and help create opportunities across the society. As any sailor knows, it’s the rising tide – not the tidal wave – that lifts all boats.

Andrew Leigh is the federal member for Fraser. At the recent Australian Conference of Economists, he received the biennial award for the best Australian economist under 40.

The ANU has recently posted on their website the video of Lindsay Tanner speaking about his new book, Sideshow (introduced by Gia Metherell and thanked by yours truly). It's just on an hour long, but well worth watching.

Andrew Leigh and Andrew Southcott debate the price on pollution on ABC News 24 Capital Hill, hosted by Lyndal Curtis.http://www.youtube.com/embed/Rdmc0gtatkI

In his new book, Adapt, economic journalist Tim Harford tells the story of ‘Geoff’, a man who is determined to reduce his carbon emissions. As he goes through his day, Harford shows Geoff making a series of well-intentioned mistakes: going out of his way to wash his dishes by hand rather than use the dishwasher (Harford argues that the dishwasher has a smaller carbon footprint), but then choosing to tumble-dry rather than line-dry his clothes (which uses significantly more carbon). Geoff buys energy-efficient lightbulbs, but then decides not to install them until his existing ones pop (which will cost him more). He switches off his mobile phone charger, but leaves his desktop computer on standby (Harford tell us that the computer uses 100 times as much energy).

The point of Harford’s story is that solving climate change through personal action alone is hard. Even if we had a sophisticated computer program that could tell us the carbon intensity of a particular decision, how many of us would bother to check it?

Thankfully, there’s a simpler solution. The effect of putting a price on carbon is to change prices so that they reflect the carbon emissions embodied in them. Under a carbon price, an environmentalist doesn’t have to know precisely how a product was made – you just need to look at the price tag. By modestly changing prices (overall price impacts will be just 0.7 percent), carbon prices will change consumption patterns. As any marketer can tell you, customers already flock to cheaper brands. With a carbon price, there will be an incentive to choose the low-carbon option.

This incentive will exist for both firms and households. For firms, carbon pricing will encourage them to think hard about how they can reduce emissions. A recent Economist article gave the example of the potato chip firm Walkers, which discovered its carbon footprint was unexpectedly high.

‘It turned out that because Walkers was buying its potatoes by gross weight, farmers were keeping their potatoes in humidified sheds to increase the water content. Walkers then had to fry the sliced potatoes for longer to drive out the extra moisture. By switching to buying potatoes by dry weight, Walkers could reduce frying time by 10% and farmers could avoid the cost of humidification. Both measures saved money and energy and reduced the carbon footprint of the final product.’

With carbon pricing, we can expect to see simple changes like this taking place inside each of the 500 large polluters, as managers and workers look together for ways to reduce emissions. The better companies succeed, the more that business assistance can be used to grow the firm and increase employment.

Changing prices and providing assistance is the Labor way of achieving reform. As Paul Keating pointed out on Lateline, this is precisely why we floated the dollar. But it’s also a simple description of trade liberalisation (which reduced prices of imported vehicles and clothing, and provided industry assistance for textile and car workers), as well as the Accord itself (which kept real wages constant in exchange for improvements in the social safety net).

Unlike previous Liberal Party leaders – and conservative leaders in Britain and New Zealand – Tony Abbott refuses to accept that the market can be used to solve environmental problems. (Perhaps this suspicion of markets isn’t so surprising from a self-confessed admirer of the late BA Santamaria.) What Mr Abbott fails to realise is that a government that won’t use price signals has to fall back on heavy-handed alternatives like regulation, mandates and bans. That’s why the Coalition’s ‘Direct Action’ plan is so much more expensive – and less effective – than the Gillard Government’s Clean Energy Future approach. We’re now in the ‘Bizarro World’ in which Tony Abbott is the proponent of highly interventionist solutions, while Labor favours the market-based approach of pricing carbon.

Little wonder that a poll of members of the Economic Society of Australia, released at last week’s Australian Conference of Economists, found that 79 percent agreed with carbon pricing, while only 12 percent supported direct regulation. When it comes to reducing carbon pollution, a carbon price is the only sensible way to go.

(Cross-posted at the ALP blog)

ABC Canberra is looking for local storytellers for their 'Now Hear This' competition. This year's theme is 'Changes'.

More details here. One of last year's stars, Eleri Harris, is now an ABC producer and presenter, so you never know where the competition might lead you...

Today I held a mobile office with Member for Canberra Gai Brodtmann at the Civic bus interchange to discuss the Gillard Government's Clean Energy Future Plan.

Tackling climate change is an issue that many local families and businesses in the ACT have been eager to discuss with me, and there is a broad community consensus that the time to act is now.

The Labor Government's Carbon Price will target the biggest polluters, while driving investment in clean energy technologies and infrastructure. The package is designed to assist those who need it most, with 9 out of 10 households due to receive tax cuts or increased payments.

Details on the Clean Energy Future Plan can be found at  http://www.cleanenergyfuture.gov.au/.

I understand that many people will have questions about the Plan and how it will affect them. I am happy to answer these questions, so please feel free to email me or call my office on (02) 6247 3457 if you would like more information.

Talking carbon pricing with the locals.

John Quiggin is a rare beast. He produces 500 academic words a day, plus endless blog posts for his two blogs. He's written on just about every policy topic imaginable, and always manages to find something fresh to say about them. In fact, I can't recall a conversation of substance with John in which didn't learn something new - whether we were talking about water, education, crime or politics.

So I was most chuffed last night when John was awarded the Distinguished Fellow award from the Economic Society of Australia, following in a long line of extraordinary economists, including Trevor Swan, Colin Clark and Bob Gregory (who gave a splendid intro about John's shift from mathematics into economics).

Incidentally, I was also delighted to receive the Young Economist Award for the best Australian economist under 40, following on from my friends/coauthors Joshua Gans and Paul Frijters. (Thanks to Justin Wolfers and Joshua Gans for very kind words, and Danielle Cronin for writing it up in the local press.)

My AFR op-ed today explains why providing household assistance doesn't undermine the effect of introducing a carbon price.

The price is right for consumer shift, Australian Financial Review, 12 July 2011

One of the most persistent myths in Australian politics has been that providing household assistance undermines the effect of imposing a carbon price. If the prices of carbon-intensive products rise by $10 and you give me $10 in assistance, aren’t we back where we started?

If there was only one product in the world, the answer would be yes. If there’s only one thing I can buy, you can be sure that’s where every dollar in my wallet is going to go. So if you put the price of that product up and increase my income, I’ll carry on exactly as before.

Yet the one-product world is a far cry from the vast plethora of options facing modern consumers, who can spend on anything from a ballet lesson to a bunch of bananas, a train fare to a television. And here’s the insight from modern economics: when you have choices, changing relative prices changes behaviour.

While we’re sometimes coy about it, government policies change relative prices all the time. When we raise the first homeowner grant, house sales go up. When we cut tax rates on superannuation contributions, more people put money into their retirement accounts. When we raise cigarette taxes, fewer young people take up the habit. And when we tax alcohol, fewer people buy it.

Yet here’s the other thing: all these taxes and subsidies also affect government revenue. All taxpayers help subsidise homeowner grants and superannuation, and all of us share the revenue from alcohol and cigarette taxes. But the revenue impacts don’t undermine the price changes.

In understanding how carbon pricing works, there’s no more critical distinction than the difference between prices and incomes. Indeed, it’s this distinction that should make us optimistic about moving to a low-carbon economy. If some supermarket prices rise, but you have more money in your wallet, you have a choice: you can either buy the same amount of the high-carbon products, or make a switch to a low-carbon product.

One of the great things about a market economy is that we can leave it up to people to decide what’s best for themselves. For example, some might decide to turn off the beer fridge, so they can spend the household assistance on a new surfboard instead.

This will parallel the choices being made inside the 500 largest emitters, where managers will look for creative ways to cut CO₂ emissions in order to save money for the company. Indeed, when the US introduced an emissions trading regime in the 1990s to tackle acid rain, firms found so many innovative ways of reducing emissions that the eventual cost was just one-third of what the boffins originally anticipated. Anyone who thinks companies will shut up shop rather than find creative ways of reducing carbon emissions underrates the ingenuity of Australian businesses.

To see the fallacy in the ‘money-go-round’ argument, just think back to recent increases in households’ disposable incomes. When economic stimulus cheques were sent to millions of households during the global downturn, did families spend it all on high-carbon products? When the single pension was raised by $65 a fortnight in 2009, did pensioners put it all towards goods that produced carbon pollution? And when tax rates were cut in recent budgets, did taxpayers spend all the money on carbon-intensive commodities?

In each case, the answer is no. If you increase disposable incomes, we spent the money on the next thing we’re hankering after: a nicer brand of coffee, a new book, a visit to the cousins. The same principle holds for tax cuts and pension increases that will be delivered as part of the clean energy future plan.

By pricing carbon, we’re encouraging a shift to a cleaner economy. But assistance offers a simple guarantee to most Australian households: if you want to keep buying the same things, you’ll be able to do so. Indeed, some groups will receive a buffer – such as full rate pensioners, who will get a 1.7 percent increase in their pensions to compensate for a 0.7 percent price rise.

Since Tony Abbott has called economics ‘boring’, it’s perhaps not surprising that he is in complete misinformation mode on this point, describing tax cuts to assist households as ‘a con’. Yet language sometimes reveals. When universal superannuation was introduced in the 1990s, Abbott told parliament that it was ‘a con’. Let’s see how long he’s able to rage against good economic policy this time around.

Andrew Leigh is the federal member for Fraser.