I just read Andrew Leigh’s new book that he will launch July 1st in Canberra, July 2nd in Melbourne, and July 3rd in Sydney. I encourage you to attend one of these because it’s a ‘good yarn’.
In this new book, Andrew makes a plea for an egalitarian Australia that values mateship and that frowns on displays of wealth and inequality. He analyses the historical data on inequality, arguing that the low-point of inequality was reached in the 1970 and that Australia is currently becoming more unequal such that we have ‘returned’ to the levels of inequality in the 1930s. This leads Andrew to talk about the proximate causes and consequences of inequality, where he ultimately sides with the majority of Australians who dislike inequality.
You can see in this book Andrew Leigh’s passion for improving Australian society, as well as his great intellectual strengths: an easy anecdote-based writing style, a phenomenal memory for facts and names, and an almost unparalleled energy to ferret out data to illuminate his argument. He has dug up the prices of land and labour since the middle of the 19th century to see how labourers have fared relative to land owners; scoured the inheritance records since 1915 to see the reduction in wealth inequality from 1915 to the 1970s (with a virtual flat line since); combined data on top-income tax and transfers to arrive at long series for post-tax male gini-coefficients; found longitudinal data on the opinions of Australia about inequality; and of course he has dug through mountains of literature on inequality through the ages in Australia. I am always a bit in awe of Andrew’s easy command of facts and anecdotes and it is on full display in this book.
Andrew’s basic contention also seems pretty solid to me, which is that income inequality was high at the end of the 19th century, has gone through almost 60 years of decline since the first World War, and is in recent decades on the up again. Because the welfare system has expanded hugely in the last 50 years, income inequality overstates the actual degree of consumption inequality and hence one should probably see the current situation more as a slight reversal in the high equality achieved in the 70s rather than a true return to the days of the 19th century, but the trend is clear. Andrew essentially sees this rise in inequality as normatively bad in that greater inequality offends his sensibilities and he fears it would eventually lead to a society most of us do not want.
Along the way, Andrew constructs a narrative of inequality in Australia over the last 250 years with many charming factoids to keep the reader smiling, such as that Rugby League split off from rugby union because the working men playing rugby league wanted to be paid for their efforts rather than impoverish their families by indulging in the upper-class hobby of rugby union. The story of how the early governors of Australia failed to uphold equality because they found that giving more land to the more successful and bigger farmers simply meant more food production than handing out land to many inefficient farmers, is similarly enlightening: it shows how inequality truly can be good for a whole country in some circumstances simply because some people are more efficient with resources than others.
Andrew’s eventual policy prescriptions are a combination of the politically expedient and the basic advice to the poor of following the habits of the rich: somewhat Tony-Blair style, Andrew claims Australia is in danger of losing what is good about it, and then advocates the state to look after the weakest, the poor to look after their children in the way the rich do, and for Australia to maintain the pillars of the current labour party (the unions).
Andrew’s analysis of the causes and consequences of inequality is hampered by the desire to cater for two audiences: the academy and the general public. Andrew solves this tension by keeping the story mainly empirical and not to ‘get dirty with theory’ and thus adopt a larger narrative as to how economies work and hence where inequality comes from and how it interacts with other circumstances. This comes at a cost though: it leads Andrew to accept ‘facts’ he finds in recent empirical economic papers that really, on reflection, would kill his whole argument if he stuck to them. In particular, Andrew accepts that inequality does not adversely affect health and that it is good for economic growth, with trickle-down occurring in the long run. If he truly believed that, he should be a warm advocate of more inequality as ultimately being good for everyone’s health and wealth. It is clear from his policy prescriptions that he in fact does not believe either but he just can’t get himself to openly dismiss the (largely American) empirical literature that says these things.
In particular, Andrew accepts the idea that inequality is good for economic growth. He explains in endnotes why: if you look at the countries that have grown the last 50 years you will find that those that grew faster also became more unequal and that shocks to inequality seemed to have mildly positive effects on economic growth. Let us take that empirical stylised fact at face value. Does it then follow that inequality would help Australia’s economic growth? Not at all. Why not? Well, you need to unpack the deeper mechanisms to really understand what is going on.
Let us thus think about the different types of economic growth underlying the economies of different countries and their growth experience the last 50 years. Loosely speaking, one type of growth is of the ‘beggar thy neighbour variety’ where you have countries growing fast because they undercut the taxation of other countries. Switzerland, the Virgin Islands, Luxemburg and others are good examples of these. They saw fast growth combined with rising inequality, helped by laws encouraging greater inequality, i.e. laws that attracted the very rich to park their money in those countries. It may be good for those countries but it clearly wouldn’t work for all countries: who would Australia beggar?
Another type of growth is of the ‘sell your natural capital’ variety where countries sell what is in the ground. The small oil states and the high mineral countries (like Botswana, which is basically a diamond mine) belong to this group and also saw rising inequality together with high growth. The key thing about those countries though, to which Australia now also partially belongs, is that inequality is not inevitable at all, unlike the ‘beggar thy neighbour countries’. As Norway shows, it is perfectly possible for a country to tax the resource sector for the benefit of the whole population and thus get the growth and equality.
A third group of countries would the ‘catch-up’ countries (like China now or Australia in 1800) which first see a growing inequality as the more able take advantage of new opportunities but later on see a reducing inequality as mass-education lifts the bottom and the economy shifts to a new phase associated with a fourth group. That fourth group would be the developed high-skill countries (like Japan, South Korea, and Germany) where growth comes from high skills and thus primarily from high-quality mass education. Those countries have fairly low inequality and very high national wealth. The fact that many small countries hang around these ‘investing’ countries and are free-riding on them in terms of providing tax havens and poaching their skilled workers does not mean that inequality would be good for those countries. Indeed, it is fairly detrimental to growth in this fourth group to which Australia might well want to belong too. Certainly the narrative Andrew Leigh pitches his book in would have Australia move towards that kind of economy in which case he should really stop believing inequality would be good for growth in Australia!
Similar things can be said about inequality and education or health: without unpacking an aggregate simple relation between year-on-year changes in health and inequality one basically will have difficulty forming a considered opinion about what the underlying relation is between inequality and health in Australia. So whilst the academic literature focusses in the main on the more easily documentable short-run relation between inequality and health (including some of my own writings!), this doesn’t mean that the consensus opinion amongst health organisation and health economists is truly that inequality has no adverse effect on health. Quite the contrary: the consensus opinion is that it is most likely bad for health because of long-term impacts on stress, self-esteem, and even in-utero effects on the next generation. That type of consensus is driven more by the fact that the US has relatively low aggregate health concentrated amongst the poor compared to other rich countries, than an analysis of year-on-year variation which is the flavour of the moment in health economics simply because so many other things go on in the longer run that one can’t convincingly prove anything. Being unable to convincingly prove to academic referees and editors that inequality is bad for long-run health doesn’t mean that policy makers shouldn’t go with the best-guess anyway! Indeed, when it comes to the ‘bad things’ Andrew does connect to inequality he includes the bad habits that the poor give on to their kids. These of course include health-related habits around food, smoking, exercise, pregnancy, etc., so there is a long-run causal pathway between inequality and health right there that Andrew seems to not notice he believes in.
To an academic, a bit of theory (even expressed verbally) would have helped the argument and have tied a few disparate observations together. Andrew Leigh for instance notes the decline in the unions since the 70s, but misses the key reason for why unions exist: unions organise labour to share in the rent of the industries involved. They hence thrive when there is a deviation from perfect competition and hence when there are rents to be shared. Protected manufacturing industries and government bureaucracies are a case in point. Hence the decline in the unions and the reduction in the tariff walls of the 70s are two sides of the same coin. The current penchant for government-protected cartel-sectors (doctors, mines, hospitals, universities, etc.) similarly creates large rents which are shared by unions of administrators. This comes at the cost of open competition and thus likely longer-term growth. Etc. A bit of theory would really help the academic reader put the avalanche of facts in a single framework so that the real policy tradeoffs come into view.
But, to be fair, this book is not really aimed at academics. It is written for the general market of everyone interested in facts and stories around Australian inequality. For that group of readers, this is a very good book with lots of data that set you thinking about inequality and lots of affirming anecdotes as to why Australia should actively seek less inequality. I hope it is widely read and becomes a great success for Andrew.