I’ve made the point before that real incomes in the United States have been more or less stagnant since 1974. It’s interesting to see John Quiggin dissect the reasons for this in the latest of his series of posts on economic doctrines which have been refuted by the global financial crisis:
Overall, the main factors sustaining growth in living standards for American households outside the top 20 per cent have been an increase in the labour force participation of women and a decline in household savings. Over the period since 1999, consumption financed by borrowing against home equity has been the main factor offsetting stagnant or declining median household incomes.
If one wanted to be reductionist about it, the end of the capacity to prop up living standards via credit (and the increasing costs of healthcare and middle-class positional goods such as higher education) explains much about Barack Obama’s victory (and his victory in the suburban vote was a significant component of the overall win).
Quiggin is a little more confident about the political implications of the end of the trickle-down theory than I am:
Politically, the failure of the trickle-down theory seems likely to produce a resurgence of the class-based politics pronounced dead in the era of economic liberalism. The contrast between the enforced austerity of any recovery period, and the massive, and massively unjustified, excesses of the financial elite during the boom period, will produce a political environment where phrases like “malefactors of great wealth” no longer seem quaint and old fashioned. (Just after writing this, I Googled it, and found it as the title of a piece in Time Magazine’s Swampland by Joe Klein, among the most reliable indicators of the political zeitgeist.)
There’s no doubt that neo-liberalism was itself a class-based politics – of the right. Whether or not there’s a swing away from this hegemonic political position, though, is somewhat doubtful. The mild ideological dissensus Kevin Rudd has just highlighted in his essay in The Monthly is one reflection of a boader debate. In America itself, the intensity of the Republican opposition to Obama’s stimulus measures is significant (and not unexpected – despite the superficial political commentary to the contrary). I also have no doubt those who currently hold economic power will not give it up without an almighty fight, global financial crisis or not. The question is – which side are the Obamas, Browns and Rudds of the world really on?
If we are going to have this debate, can we at least emphasise that the trends in median household income observed in the US are very different than those in Australia over the same period?
The reasons for rising income inequality in the US are more complicated than Quiggin makes out – the US labour econ literature focuses on skill biased technical change, trade liberalisation, low-skill migration, and a slowing in human capital accumulation, and changes in labour market institutions as contributing factors – and there is of course a lot of debate about the relative contributions of those factors.
But in Australia, even though there has been an increase in income inequality overall since the mid-1970s, if anything income inequality narrowed during the Howard years (see NATSEM work on this). Morevover, despite the increase in inequality over the full period – real median incomes did not stagnate.
That is not to say that the distribution of income is ideal in Australia, but you cannot assume that critiques that apply to the US are directly applicable here – we have a very different economic and political system.
Also, in Australia, most of the accumulation of debt was in the top half of the income distribution, not the bottom half – so the story of rising income inequality generating greater borrowing by poor people does not apply in general to Australia. That doesn’t mean that there weren’t low-income people that over-extended themselves here – just that it isn’t where the biggest debt accumulations (relative to income) were.
And yet, Labor Outsider, the impact of 25 years of the Accord and similar class collaborationist policies (in reality if not in name during the Howard era) is that the wages share of national income in Australia is at its lowest level in 40 years and profit share at it highest ever.
In other words the rewards of the 16 year boom went to capital, not labour. Labour got the crumbs from the feast at the table of capital. Now that there is a deep recession, with national income apparently shrinking, or about to shrink, guess who will get no crumbs at all while the feast (or at least multi-course degustation) continues?
And Rudd’s sudden conversion to social democracy (but not of the red blooded type, more its anaemic cousin)is part of that continuity of feasting (aka as the trickle down theory). Only this time nothing trickles down. All for the lords, nothing for us peasants.
As Labour Outsider points out the experience of Australia – http://www.oecd.org/dataoecd/44/47/41525263.pdf and the United States have been very different.
An OECD report on income distribution trends – Growing Unequal – http://www.oecd.org/document/53/0,3343,en_2649_33933_41460917_1_1_1_1,00.html -shows that the US – http://www.oecd.org/dataoecd/47/2/41528678.pdf – has been different from nearly all other OECD countries in that the earnings of male full-time workers fell in real terms between the 1980s and 2005. (Only Canada has had the same experience – but not so marked as in the USA.)
Again , this is not to say that Australia is ideal in any sense, simply that it is very different from the USA.
Yes, I’ve noted in the post that I’m talking about America. What the economic literature seems to me to miss are the political factors that contribute to income inequality.
John Passant: but how much of that shift is caused by “contractors” going from the “labour” share to “profit”?
Secondly, how much of that extra profit share of the economy has ended up in superannuation?
What political factors are we talking about? That two generations of Americans were duped into voting against their interests when their social movements (loosely described as freedom and religion) were co-opted? Obama, whatever his intentions, will have a massive fight on his hands even from his own party on things like universal health care since the right have successfully characterised it as contra-freedom and occasionally contra-religious (see the abortion debate).
Not that those pressures aren’t absent from Australian politics, but they sure are muted in comparison.
A correction – “earnings of male full-time workers fell in real terms between the 1980s and 2005. (Only Canada has had the same experience – but not so marked as in the USA.)” – I should have said that this refers to the bottom half of US male FT workers. The real earnings of the top half have increased, but not by as much as in Australia or most other countries. Real earnings have increased for female workers across the US wage distribution.
Do the US studies include company-provided health-care programs, or do they just focus on take-home salaries?
Health-care costs have been outstripping inflation, and taking up companies’ capacity for higher wages. That doesn’t mean the overall benefit to the worker isn’t increasing (well, except for the inefficiencies of US health-care, but that’s another story).
Not an issue in Oz of course.
Robert -
Despite popular myth, the popularity of contracting arrangements as a substitute for regular employment has actually decreased in Australia in the last few decades. I think the reason for this is that the tax scale is considerably less progressive than it once was, and the ATO is a bit less tolerant than it once was of perks for small business. So the tax advantages of making yourself a company are much less than they were in, say, the early 1980s.
I dunno that you can talk of how much of the profit share “goes into” superannuation. I’m no fan at all of superannuation, but I don’t think its conceptually clear just what that would mean. Insofar as you can make sense of it, compulsorily withholding wages from low income people to put it into superannuation seems the opposite of what you posit.
The wage figures in the US are for gross earnings before tax – which do not include employer contributions for health care or pensions.
However, since the people without health insurance or employer-provided pensions are most likely to be in the bottom half of the earnings distribution, I would suspect that this makes the inequality in earnings growth even higher, although it could mean that some of those in the bottom half who have employer-provided coverage might not have experienced this fall or as much of a fall as earnings figures imply.
Like derrida derider my understanding is that in Australia employer superannuation contributions should be included in the wages share, since they are deferred wages.
DD: I suppose I meant that I was assuming that the profit share of the economy used to go mostly to the upper end of the income and wealth scales.
With super (and the consequence that everybody with a super account gets a share of corporate Australia’s profits), a bit more of it should end up in the hands of the lower-paid, shouldn’t it?
Thanks for the info on contracting. So we can rule that one out for the increasing share taken by profits over wages, then.
Then the figures are incomplete and any comparison misleading. Total package cost (including super and other allowances) to the employer is how these things are usually measured in Australia. Surely someone tracks the equivalent for US employees.
Just to be clear – The figures for all OECD countries are for gross wages before tax – so while they are incomplete they are conceptually consistent. And as I said including health care contributions in the US would be expected to widen wage inequality, since the lower half of the earnings distribution are less likely to be covered.
As you alluded to, there is also a question of whether higher employer health care contributions are equivalent in welfare terms to an increase in wages.
Mark, it isn’t that the economics literature ignores political factors – it is just that it tends to focus on the impact of particular policies – so for example, there is a literature that looks at whether freezes/reductions in the minimum wage impacted income inequality. All economists understand that policy changes don’t occur in a political vaccuum but, apart from political economists, leave it to political scientists/theorists/historians of ideas to chart the reasons for the shifts.
LO,
I’m not so sure that income inequality narrowed in the Howard years. Sure, things improved slightly after the end of the recession in the early 90′s, bu the later years of Howard’s reign saw a small but noticeable increase in Australia’s gini coefficient, from around .305 in 2000 to .308 by 2007. The reason for this icnrease were the skewed nature of the Costello tax cuts, particularly at the top end.
Peter, the ABS calculates a different figure for Australia’s gini coefficient than that given by the OECD report you mention (admittedly the Gini coefficient is only one measure of income inequality).
According to the ABS data from the Survey of Income and Housing, Australia’s Gini coefficient is .307 (see the bottom paragraph of this link.”
This would mean that inequality has slowly worsened since 2000 (the OECD report suggests the reverse, that inequality has slightly improved). Any stats nerds out there that want to help explain the difference in the figure?
Ben – I was talking about the full term, not one part of it. I wouldn’t be surprised if the large reductions in marginal tax rates at the top of the distribution toward the end had an impact on income inequality – but even so, a change in the Gini from 0.305 to 0.308 is miniscule. Indeed, with the measurement error of these things I doubt it is statiscally significant. It is also the case that the more recent tax cuts offered at the last election were weighted toward the bottom part of the distribution.
I think it is fairer to say that there is little evidence of an overall trend to greater income inequality in Australia during the Howard years – which runs counter to the conventional wisdom.
My main point is that we can’t just take evidence that pertains to the US and treat it like it is relevent here, just because we associate Howard politically with the conservatives in the US. Things are just too different.
The decline in the wage share cannot be treated identically to the income inequality issue, because they measure different things – wages are not the only source of income, and measures of income inequality focus on post tax/transfer outcomes, not pre tax/transfer outcomes.
One good thing is we don’t have to worry about the failed e-doctrines of both Austrian economics and Marxism. What we are dealing with now is simply the worst of capitalism and the worst of communism combined – state-capitalism. ( Also known as National-socialism. All within the state, nothing outside the state, nothing against the state.) This current crisis clearly suggests that the collapse of the state will be the next big implosion. So I would suggest all prudent and responsible democratic socialists get busy migrating the best of the welfare state over to the net. I’d rather have a rose revolution here than any ‘Great’ French or Russian style one.
Sorry Ben – didn’t see your post – I haven’t the time to look into why the OECD measure differs from the ABS. Does the OECD use the Survey of Income and Housing? It could be that there are differences in the final measure of income used. I’d also note, that the confidence intervals surrounding the SIH data will be large enough that a change from 0.305 to 0.307 will be statiscally insignificant, so you wouldn’t be able to reject the null of no change.
LO – in terms of the significance of the Gini data, I agree with you
But I think you also miss an important point, which is that while broad income inequality might have been more-or-less maintained at 1990′s levels, the truly rich did superbly out of the economic boom. For those at the very top of the 99th percentile, wages and asset values soared in a way even those at the bottom of the top 10% could only dream about: For example, the final salary package including bonuses of Macquarie Bank CEO Alan Moss in 2007 was $33 million, or an astonishing 570 times the ABS figure for an average annual full-time wage of $57,860
Even comparing the top 10% to the bottom 10%, the income gap between these two groups widened in the ten years from 1995-96 according to John Wicks in his 2005 Brotherhood of St Laurence paper The reality of income inequality in Australia.
Those gains came from deregulative and globalising changes in the labour market and favourable tax policies like the Ralph reforms, which taxed capital gains at lower levels than wage income.
Were those concessions to the super-rich worth it, in terms of “economic competitiveness”? Have they had a beneficial impact on Australia’s social fabric?
The difference between the OECD and ABS figures is due to the fact that different equivalence scales were used to adjust for household size. In fact , the OECD figures were actually calculated for the OECD by the ABS.
The difference between the two years is unlikely to be statistically significant.
You will get slightly different pictures of trends depending on the measure used. The Gini coeffient is sensitive to changes in the middle of the distribution, while the 90/10 ratio is more sensitive to the extremes.
Ben – I’d be careful about citing the Brotherhood paper – if it was writtin in 2005 the data would be quite a few years old by now. I’d be very interested to see, whether according to the same data as used by the ABS get those gini coefficients, whether the 90/10 ratio increased significantly. I’d be suprised if it did – as I would expect it to generated a larger increase in th Gini than was observed.
As I said, to get a proper picture of income inequality, you have to look at it from a range of angles – and I also try and understand its underlying causes. I don’t find it particularly surprising that certain individuals experienced enormous income growth during the recent boom – but Moss’s 2009 income certainly won’t be 33 times the average full time wage! Incomes at the very top tend to be quite cyclical – which is why you have to examine things over a much longer time frame.
As for discussing various tax changes, they have to be considered one at a time. I think the reductions in capital gains tax helped to fuel the property boom in the early part of the decade – and in that sense were unhelpful. At the same time, capital gains tax is a tax on investment, so if it is taxed too highly, it reduces the incentive to invest in all the items that increase the capital stock and hence boost longer-run potential growth. There are similar issues with corporate income taxes. People forget that the incidence of a tax does not fall at where a tax is levied – many taxes levied on businesses are simply passed on to consumers, or reduce the wages that employees earn.
Please don’t take any of this to mean that I think Australia’s tax system is optimally designed. It isn’t, and many of the loopholes/deductions primarily benefit higher income earners and those with the ability to structure their affairs so as to minimise tax.
I think we disagree on labour market regulation. I’ve long been the view that labour market regulation is a bad way of tackling inequality – the burden of wages above what the market can bare will always fall on the most disadvantaged workers – low-skilled and young – and that is unfair – the right way to tackle income inequality is through the tax-transfer system – systems of EITCs, negative income taxes, etc.
Overall, I think Australia is a far more productive, competitive, sustainable country than it was prior to 1983 – which was a watershed in terms of Australian public policy. That said, there is still a lot of room for reform – investment in public infrastructure and human capital has been too weak – governments of all hues still pass on too many subsidies to special interests – much more could be done to improve the plight of the less disadvantaged. As always it is not a matter of deregulation good or bad – it is a matter of getting regulatory and policy settings right – growing the size of the pie, while ensuring that as many people as possible get to share that increase. And that aint always easy to do!
From what I recall, there is evidence to back up Ben’s claim that the very top of the income/wealth tree has been doing rather better than the rest of us out of the last couple of decades.
I think Andrew Leigh had a paper on the topic which he linked to from his blog; the top 1% and top 0.1% were taking a considerably bigger share of the pie than they used to.
The events of the past few months may alter that a bit, I suppose.
The architect of that more productive, competitive, sustainable country was on Lateline tonight. PJK certainly didn’t underplay the seriousness of the crisis, and he reckons the US is in for a 6-7 year recession.