Following its review of the federal election loss, the Labor Party is to drop the term “the big end of town” because it is said to be divisive and not sufficiently appealing to aspirational Australia.
“Labor should position itself as a party of economic growth and job creation. Labor should adopt the language of inclusion, recognising the contribution of small and large businesses to economic prosperity, and abandon derogatory references to ‘the big end of town'”.
I never liked the “big end of town” as a term. I doubt it had much of an effect either way in the election. But it was vague and not accompanied by any sufficient narrative explaining that increasing inequality is our fundamental economic problem, that extreme and growing inequality needs to be addressed if we are to have a functional economy, make inroads into combatting climate change, protect democracy and improve social justice.
Labor needs to develop a convincing narrative around economic inequality. Once this narrative is in place, Labor should not hesitate to utilise more ‘cut through’ terms such as “the economic elite”, or the “the one percent” or “the half of one percent”. This is not the politics of envy or exclusion. It is an objective description of an existing economic reality.
Oxfam’s 2019 inequality fact sheet states:
“In Australia and globally, inequality continues to grow. Last year we saw yet another record increase in the number of (mostly male) Australian billionaires, increasing from 33 to 43. Their collective billionaire wealth increased by a massive $36 billion to $160 billion in total. This is equivalent to an increase of $100 million a day (figure 1). The Australian billionaire wealth increase of $36 billion last year is enough to fund about half of the Australian Government’s total health budget for the 2018-19 financial year…The latest Credit Suisse data shows that the share of wealth concentrated in the hands of the top 1% of Australians was 22% last year (figure 2). As was the case in previous years2, the top 1% of Australians owns more wealth than the bottom 70% of all other Australians combined. This is while worker wage growth remains sluggish and the wealth share of the bottom half of Australians remains stuck at just 9% in 2018.”
According to the ABC’s Australia Talks survey, the overwhelming majority of Australians think inequality is a problem. Though the survey also shows half the nation thinks anyone who works hard enough can get out of poverty.
Labor’s narrative first needs to explain the reasons that lie behind persistent and deepening inequality.
The French economist, Thomas Piketty argues that capitalism’s tendency to produce greater and greater inequality results from the rate of return on capital generally exceeding the rate of economic growth. Returns on assets, like real estate and shares are disproportionately held by the wealthy. In the USA, for example, the top 10% of the population own 80% of the shares. Because returns on these assets rise faster than overall economic growth, the proportion of total wealth held by the rich must increase relative to everybody else. Piketty argues for a global wealth tax.
Another explanation for growing inequality is the financial system. Only 3-5 % of the money in the economy is notes and coins. The rest is electronic entries on computer servers. Banks need only hold a small percentage of their loans in reserve. When they lend out money in excess of their reserves they create new money in the economy. As Nobel Prize-winning economist Joseph Stiglitz has written banks can“create loans essentially out of thin air. The bank can just enter into its books that an individual has a deposit (a right to spend money) of say $100,000. The bank in a sense owes the borrower this money. But lending the money means that at the same time the bank creates as asset of equal value- the loan itself.”
The ability of private banks to create loans out of thin air and charge interest on these loans invariably exacerbates inequality because it siphons wealth away from those who must actually work to earn money into the financial sector. Check out this video.
Moreover economies in the developed world have become financialized. Financialisation elevates the significance of the financial sector relative to the real sector; a decreasing proportion of bank loans end up in the real economy. Instead they bid up share prices and the cost of property. Economic growth is increasingly driven by financial markets. The lower and middle classes keep working more for less, and finance has gone from a tool used to provide capital for the production economy to an end in itself, where speculators can even make a living off public and private debt. As Dr Matilde Massó, Marie Curie Research Fellow at the University of Leeds puts it, “financial capitalism is far less equitable and distributive than the productive economy at the heart of the economic growth between 1950 and 1970. Dividends and financial investments rise while salaries and long-term investments in equipment, plant and machinery go down or keep steady.” The result is a growing salary gap between the top and bottom segments of corporations, as well as increasingly precarious employment.
It is all very well for Labor to talk about the need to create more wealth and improve productivity. But the reality is that under the economic structures that now dominate developed western economies improvements in productivity are disproportionately appropriated by capital.
According to economist Mark Blyth, labour’s share of national income peaked in 1963 at 65%. Today it is around 56% across the G20 countries. Productivity gains between 1979 and 2016 were shared as follows: The bottom 20% got none of it. In fact, they lost about 1% in their real wages. The bottom 20-40% had an increase in real wages of just .77%. The middle received an increase 3.5%. The upper middle 10% and the top 20% received an increase of 27.5% but with most of this going to the top 1000th of the top 1%.
Globalists argue that these figures do not take sufficient account of improvements made in the share of global wealth taken by the developing world which includes, for example, having taken 500-600 million people out of extreme poverty in China. But Blyth says that the top 1% took more of the value of productivity increases over the period than did the entire developing world including China.
The problem of inequality is international. While there has been some progress in reducing those who live in extreme poverty, a billion people still live in it and the definition of extreme poverty (less than US $1.90 a day) is extremely low. Nearly half the world’s population still lives on less than US $5.50 a day.
Some inequality is unavoidable and even desirable. But the current levels are out of all proportion to incentive, effort, justice, demand management, social mobility, aspiration or just about any other measure you wish to nominate.
We will not beat climate change without making inroads into economic inequality. Resentment at inequality in the West is feeding economic nationalism when climate change is only amenable to global solutions. Hence the abandonment of the Paris Agreement by the Trump administration and the high correlation between right wing economic nationalism and climate change denial. Redressing the extremes of economic inequality is not enough to redress climate change. But it is an indispensable condition for doing so.
Inequality is an economic problem because it distorts the relationship between reward and effort and because high levels of household debt (as families borrow to compensate for stagnant wages) means demand and investment stagnate. Monetary policy now seems unable to overcome this problem. Where governments create new money in the economy through quantitive easing this has typically been through central banks creating new reserves to buy government bonds. Again this resulted in the new money getting stuck in the financial system boosting bond and stock markets with very little money flowing through to the the productive economy. A far more effective way to boost the economy would be for central banks to create money, grant it directly to the government, and allow the government to spend it directly into the real economy.
Inequality is a problem for democracy- two quick examples- Clive Palmer’s election spend of $60 million and the prospect that the 2020 US election will be a contest between two billionaires.
Two candidates for Democratic Presidential Nomination Elizabeth Warren and Bernie Sanders are supporting a wealth tax as part of their platforms. Warren’s wealth tax proposal would also impose a 2% tax on net worth between $50 million and $1 billion. She has previously said that it would be used to fund her ambitious climate agenda, a slate of investments in child care and reductions in student loan debt. She says the richest 130,000 families in the US who would be targeted by the tax hold nearly as much wealth as the bottom 117 million families. Despite the highly targeted nature of the wealth tax proposals, if Warren or Sanders obtain the nomination they may fall victim to the same sort of misleading scare campaign Labor faced over franking credits. This remains to be seen.
Of course any effort to tax wealth is obfuscated by dubious allegations of “double taxation” and other excuses designed to protect economic privilege.
But the fact is we do already tax accumulated wealth in Australia. We tax the most common form in which wealth is held by workers, namely their houses. We call the wealth tax which applies to the value of these house “rates”. It levied by local government. If you rent the house out you will pay also income tax on the rent. But this does not get you out of paying rates on the value of the underlying asset. Nobody argues this is “double taxation”. But if a rich person sells a house they own for $3 million and chooses to buy $3 million of shares, they may pay income tax on their share dividend (or their dividend may be “franked”). But in either case they will pay no tax on the value of the underlying assets- the shares themselves. How is this fair or consistent? Wealth held by individuals should be taxed consistently whether it is held in the form of housing or shares.
If it is too difficult to introduce new taxes from opposition in Australia, as recent experience arguably demonstrates, another policy option would be for Labor to support an inquiry into economic inequality in Australia. What is the extent of economic inequality in Australia? What do Australians believe to be the extent of economic inequality in Australia and to what extent do their perceptions match reality? Who holds the wealth and in what form? How did this come about? What are the levels of inequality that Australians think are fair? How does this compare to the actual situation? What are the policy options for reducing levels of economic inequality to levels Australians would regard as fair?