The storm in the inequality teacup

The idea that economic inequality is a problem — and an increasing one — demanding public policy remedies has taken root in Australian political and policy debates. But there is a sense in which these debates have leapfrogged the relevant facts.

The Productivity Commission has done a great service by applying its analytical skills to an elucidation of these facts. Among the Commission’s findings are that:

• Income inequality has increased slightly since the late 1980s, but the extent of the increase is contested, and since the global financial crisis the trend indicates a slight decline.
• Australia’s inequality is close to the OECD country average and if there has been any increase it has been at a slower pace than in most other developed countries.
• Regardless of inequality, the benefits of income growth have been fairly evenly shared across all income deciles.
• The tax/transfer system has a powerful equalising effect on household incomes.
• Wealth is much less evenly distributed than income and consumption — and wealth inequality increased up to 2010 — but is more evenly distributed in Australia than in most other developed countries.
• Australia stands out for its high degree of household income and wealth mobility. Thus, income inequality based on multi-year averages is lower than that based on annual income.

All up, the facts do not support the salience of inequality in Australia’s contemporary political debate.

So why has inequality taken hold as a political issue? The Commission does not venture onto this ground, but I would suggest three reasons:

• Inequality is a hot issue in certain major countries (particularly the US) and has been transplanted here — not least by touring rock-star economists such as Piketty and Stiglitz — notwithstanding the different context.
• Those on the left and centre-left have chosen to highlight inequality for political advantage because it fits neatly into the contemporary narrative of victimhood politics.
• Inequality has become a lightning rod for all manner of peoples’ economic grievances (stagnant real wages, low housing affordability, etc) whether or not they are germane to inequality per se.

Debate is one thing; actual policy is another. The danger is that a misguided emphasis on correcting inequality will lead to policies that damage economic well-being across the board. As the outgoing Commission chairman said, “Inequality is not a sound basis for the determination of public policy”.