Tuesday, November 22, 2011


We keep being told of the "trickle-down" effect: if someone gets a pay bonus then it eventually trickles down and the entire economy benefits from it.

Unfortunately, less and less money appears to be trickling down at the moment and instead it's only a few who are managing to hoover up the rewards of our increasingly sophisticated world, as this column points out . . .

Very nicely thank you

Paul Keating, always a luminous wordsmith, once spelt out what he claimed was Labor's guiding philosophy. He insisted a very special idea animated the workers’ party. Their world wasn't composed of dog eating dog. Whenever there was a bit of profit left over – that little extra bit of icing on the cake – Labor would share it round.

The others wouldn't. It was a keen point of difference. John Howard was well aware of the powerful image of the plutocrat, stuffing his swag with money before driving away in their Mercedes, while the ordinary person (with their children to feed and educate; mortgage to pay) was left standing hungrily, rummaging through the bins in the second-hand op-shop.

That's why, in his 1996 victory speech, Howard was quick to dedicate “my government to the patents of traditional Australian values. And they include those great values of mateship and egalitarianism." It was a vision of prosperity for everyone; with workers being rewarded according to their effort.

So how has the reality matched both sides’ political rhetoric? Unacceptably. The world both sides conjure up that describes us sharing in the bounteous opportunity of economic prosperity doesn't bear any resemblance to the way things have turned out. Even more depressingly, neither side of politics appears willing to consider any way of redressing this spiraling trend towards increasing inequality. Instead they celebrate it.

Here I'm indebted to the Grattan Institute's Saul Eslake for pointing me in the direction of the Paris School of Economics' World Top Incomes Database. This is a terrific little website which enables you to measure income disparity (as opposed to wealth) in countries around the world.

Start exactly 50 years ago in 1961, the year Julia Gillard was born. It's easy to discern a simple trend. The graphs take on a “U" shape. In that year, for example, the top tenth of income earners received nearly a third (29.7 percent) of the rewards. By 1978 their proportion of take-home had dropped to just a quarter (25.01 percent). The nation had become more egalitarian. But then the trend reversed itself.

By the last year of Bob Hawke's government the top 10 percent of earners grabbed 27.66 percent of the share. The inexorable trend had reasserted itself; it zoomed ahead under Keating. He did help workers; but those at the top benefited most. By 1996, when he’d lost office, the upper demographic were nearly back to where they'd been, receiving almost a third of income.

Since then the overall trajectory has remained steadfastly committed to greater and greater inequality. In 2007, the last year for which there are statistics, the top tenth took home 31.5 percent of income. And the concentration of remuneration becomes quicker the closer you get to the top. Even the merely ‘rich’ are being left behind as the ‘very rich’ earners draw further and further away from their brethren.

Four years ago the top five percent snaffled 21.6 percent of the take. But the plutocrats did even better! The top one percent of earners managed to grab nearly a tenth (9.8 percent) of income. The single consistent trend has been for senior management to seize a larger and bigger share of the profits, regardless of the government's so-called political complexion. The period from which this disparity became inexorably set in concrete was Keating's time as Prime Minister. From that point onwards the gouging of profits had apparently become acceptable; even desirable.

Was this a worldwide trend? Possibly, but if inequality makes the world speed faster then we should be happy that Australia is doing more than it's bit to hurry things up. UN figures for income (as opposed to wealth) are rather old (from 2006) but they show inequality here is higher than in economic basket cases like Ireland, Greece and Spain (although less than Portugal, the UK and the US). It's not so much what these figures prove as what they disapprove. There's absolutely no indication that offering the bosses greater remuneration produces better economic outcomes.

The only underlying correlation that's borne out by the statistics appears to be that there is no direct relationship whatsoever. Detailed comparisons of executive remuneration and resulting national productivity improvements clearly and incontrovertibly demonstrate one startling fact: no matter what you put on the X or Y axis, and whichever way the graph is held up to the light, there is absolutely no demonstrable relationship involved between pay and productivity.

Higher pay for bankers may lead to economic success for the economy, but it's difficult to prove. Giving a surgeon more money may assist them concentrating in between golf days and yachting events. The difference is that a medical operation has the potential for a catastrophic personal result for the patients. The surgeon's personal actions (along with others in the team) are demonstrably and intimately linked with the outcome of the operation. That's not necessarily the case in business, government, or any larger (by definition, bureaucratic) institution where the people in charge are far more dependent on the efforts of their minions.

Let's take, for example, the operations of a mythical airline company. Pilots and engineers are directly responsible for the planes safety. The cabin crew deals with passengers, directly shaping their flying experience. The remote CEO sits in a far-away office, dreaming of Asian expansion in the supposedly lucrative high-spending markets offshore. Selling his visions, no matter how implausible, allows him to pockets millions. Investors who've been watching their fortune dwindling continue to watch share-value vanish before their very eyes.

Financial engineering may be important to the future of the company, but so is keeping the workers happy and getting them to do the job today. Eventually it won't be possible to tighten the screws further, but this just sets our economy up for continued battles between workers and bosses. This is bad for society and while we expect government to play a role in facilitating a more even distribution of wealth.

In this regard the current government's efforts have been disappointing. The Liberals have been, if possible, even worse. Although Labor tackled means-testing benefits, its resolve weakened in the face of opposition. The point is that there's nothing “natural" about the means used by the wealthy to sequester their profits. Eslake reels off potential tax reforms. Capital gains tax. Superannuation. Negative gearing. Trusts. Exemptions from GST.

This government is becoming conspicuous by its failure to live up to its own speechifying.

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