Distribution matters

By contrast, in Australia – where real incomes have continued to rise, albeit far from equally, across almost all parts of the income distribution – most of the increase in household debt has been incurred by households in the top 40% of the income distribution, who are more capable of servicing it, and who have used it mainly in order to acquire assets, rather than to sustain consumption spending. That’s a major reason why Australia has avoided the degree of household financial distress seen in the United States. But it’s also a reason why we should be concerned to prevent an American-style polarization in the distribution of income and wealth from occurring here.

More generally, the fact that the economic gains resulting from the policy agenda pursued, to varying degrees, around the world over the last three decades have accrued so disproportionately to upper income groups has undermined political acceptance of (let alone support for) the key elements of that agenda – including deregulation of financial and other markets, reductions in barriers to cross-border trade and investment, and lower rates of corporate and personal income tax. 

There is, instead, increasing support around the world (including in Australia) for more stringent regulation of financial markets, new barriers to cross-border trade and investment, greater government involvement in setting executive salaries, and new or higher taxes. Except for more stringent regulation of financial markets and institutions (for which, in many instances, the weaknesses and excesses exposed by the financial crisis have made a strong case), most of these things would have harmful effects on economic activity, income, investment and employment. 

I’m not in favour of higher marginal tax rates, on top income earners or anyone else. Nor do I support lowering the thresholds at which the top tax rates become payable. But I do think there’s a strong case for curtailing the various avenues which are disproportionately by upper income taxpayers to reduce their tax bills, including ‘negative gearing’, the concessional tax treatment of capital gains, and the use of trusts. Curtailing or eliminating these tax privileges would not only improve the fairness of the tax system (and the resulting distribution of income): it would also reduce the complexity of the tax system, and the extent to which the tax system distorts investment decisions. 

More broadly, those who want to see a more open and less-intrusively regulated economy (as I do) need to be aware of the consequences of what they propose for the distribution of income and wealth, and hence for public acceptance of those proposals. 

To paraphrase something Winston Churchill said in a different context, markets provide (in most cases) the worst mechanism we have for determining what gets produced, by whom, how, where, for what price, and for sale to whom – except for every other one that’s ever been tried. (That’s why, like almost every other economist I know, or know of, I think ‘putting a price on carbon’ is preferable to ‘direct action’ as a way of responding to climate change). 

But there’s absolutely no guarantee that the distribution of income and wealth produced by markets will be socially desirable, or politically sustainable; indeed, there’s plenty of evidence to suggest that more often than not, it won’t be.

Thus, if there’s to be less government intervention in the means by which incomes are generated by the operation of ‘market forces’, based on the belief that the result will be a higher aggregate level of income, there may well need to be more government intervention in the way in which that higher level of income is distributed, in order that the end result is socially and politically sustainable.

For much the same reason, those who want to see productivity-enhancing structural change in the economy, and productivity-enhancing organizational change in individual workplaces, also need to think about the distributional consequences of what they propose. 

It may not be illegal for executives of companies to award themselves large salary increases or bonuses, or to put their hands up for large options packages with undemanding performance hurdles, whilst simultaneously sacking large numbers of their employees (or arguing for greater freedom to do so). 

But the ‘optics’ of it are dreadful. That kind of behaviour does nothing to enhance public understanding or acceptance of the occasional need for painful and unpleasant changes in the way work is organized, or the number of people who do it, in individual workplaces. It does terrible things to the loyalty and morale of the staff who remain after ‘restructurings’ have been undertaken. It exacerbates trends in the distribution of income and wealth which, if taken too far, threaten to undermine public support for a market economy. And, to my mind at least, it’s morally, and ethically, wrong.