Measuring economic inequality

The last couple of posts have been about the problems of measuring something, and so is this one. I’ve written a couple of pieces about inequality (here, for example), and I feel that part of political correctness today is to go on and on about how it is getting worse, and how something should be done about it, mostly by socking the rich in some way. My perspective is that humans are not naturally equal, and that trying to make them so is fatuous. We do have a presumption of equality before the law, and you can see other comparable attempts to ensure that a particular inequality does not get in the way of fair outcomes (like the rules about salary caps in football). But the notion that Australia would be best if everyone had the same amount of wealth or income seems to me more than slightly nutty.

A more sensible outlook would be to ensure that, as far as possible, there is a floor of some kind, in incomes or health or welfare, which a good society tries to maintain, so that we don’t have beggars, or homeless people, or people dying of starvation. To a considerable degree, people are responsible for their own lives, but a good society does its best to help those who suffer catastrophes of various kinds. By and large we have such floors. About half Australian Government expenditure, for example, goes on welfare of various kinds*, and there is a basic wage, and each government tries to provide more cheap housing. In fact, what our government hands out as welfare payments is roughly the same as the revenue gained from income tax. There’s a thought.  But that is the way to go, I think. It is certainly the way Australia has gone.

As it happens, my current copy of the Australian Journal of Political Science (Vol.50, no.3, pp 393-411) has an article by Professors Fenna and Tapper, both of Curtin University in Perth, that tries to determine whether or not it is the case that economic inequality here is rising. I think it is a most useful piece of work. They point out that even the OECD has joined the cry about the evils of inequality, with successive publications emblematic of a widespread concern that economic inequality is becoming steadily and worrisomely acute across the developed world. Thomas Piketty’s Capital in the twenty-first century (2014), they say, has turned the concern into a ‘glamorous’ one.

Piketty, and Andrew Leigh MP, who has written on a similar theme with respect to Australia (Battlers and billionaires, 2013), argue that there has been a turnaround from what looked like growing equality after the second world war to a reversion to what things had been like in the 19th century — the rich being very rich indeed relative to the poor. And they see the rich today getting richer still.

How can one decide? Income is easier to measure than wealth, but they are plainly related. Tax records and household surveys, increasingly common in the developed world, give the analyst some sort of handle on the issue, though plainly there are problems with both. On the grounds that the data we have are the data we have, Fenna and Tapper go on to see what can be said about the situation in Australia.

They use ABS income survey data, which are relatively abundant from the early 1980s onwards. It seems that income inequality grew quickly in the 1980s; after that the trends are mixed. The authors summarise: The overall story for the distribution of market incomes in Australia…is one of rising inequality between 1982 and 1995, with a flat or slightly rising trend thereafter. The first phase was a period of rising unemployment…the second a period in which unemployment steadily fell…  Market incomes, essentially, are pre-tax incomes.

What about post-tax incomes? Fenna and Tapper distinguish two kinds, the first what they call disposable incomes (market incomes plus pensions and social welfare payments minus income tax), the second what they call final incomes (disposable incomes plus social transfers in kind minus indirect taxation). These indexes are important if you are interested in how well the welfare state operates to provide floors. And the results are mixed. But again to summarise: Taking all these eight series together we see a steady but small rising trend across 30 years.

What about the shares of the top 1 per cent and top 0.1 per cent, whom Leigh calls the ‘affluent’ and the ‘opulent’? [Digression: While my old Shorter OED makes these two adjectives synonymous, ‘opulent’ today has the added sense of ostentation, as in ‘ostentatiously costly and luxurious’. I do not move in the circles of the top 0.1 per cent, whoever they are, so it’s not clear to me whether or not they display their wealth in such a fashion.The only really rich person I have known didn’t flaunt his wealth at all.]

Back to the data. Here much depends, it seems, on taking account of changes to the Australian tax system — tax avoidance in the 1970s and 1980s lowered reported incomes. The authors suggest that the incomes of the really rich did rise over the period. The top 1 per cent had about 6 per cent of all income in 1970, a share that rose to 7.8 per cent in 2010, while the opulent 0.1 per cent possessed 1.2 per cent of incomes in 1970 and 2.4 per cent in 2010. Sounds bad? I don’t know what the error is likely to be in all these estimates. Fenna and Tapper show that most of the increase occurred before 2000. Thereafter the trend has been flatter, though upward. If one looks at the top 10 per cent of income earners, they earned 20.7 per cent of total incomes in 1970 and though there was a dip to 19.5 in 1978, their share today is the same as it was in 1970 — 20.7 per cent.

What about wealth? Again the analyst has to make do with wealth surveys, and the ‘rich list’ that comes out every year. If you take the top twenty per cent, their share of all wealth was higher in the 1970s and 1980s than it is now. The top one percent? A growing share: the trend is rising, but not strongly. The top 0.1 per cent? Their share has hovered at around 2 per cent for a long time, with occasional spikes.

What are we to make of all this? The authors provide  a short summary of their findings as follows: (1) there has been little change in the general shape of the distribution of income in Australia since the 1970s, and (2) no change in the overall distribution of wealth, but (3) there is some increased inequality occurring in the top percentile and above of both income and wealth.

I’ll make one methodological point first. The data are pretty rubbery, and at best provide a rough indication of trends. Having said that, my conclusion is that while the rich are getting richer, so is the rest of the society, compared to fifty years ago, let alone a hundred. Yes, it may well be true that some rich people are getting richer still (‘obscenely rich’, as some like to say), but there are few indications that they are generally happier or more satisfied with life than the rest of us. And there is a good deal of evidence from the courts that having lots of money does not always improve relations inside the family.

Do really rich people have more influence on government than the rest of us? Of course they do, and they always have had. Governments like to use mobile capital in various ways, and if that means sucking up to rich people, that’s what you do. What governments need is a cool head and some common sense, when they do so. They don’t always possess it, and that’s a pity.

For the rest, the notion that we must be moving back to the days of Jane Austen seems to me pretty far-fetched, and those who invoke such a future seem to me good examples of ‘problem-promoters’, a nice term I found in a book review, and propose to use again.

*A friend has done a some painstaking work on federal budgets, pursuing revenue and expenditure through each line of the giant document. You can see some of the outcomes of this work here.