What Book to Read?

Readers of this blog might remember that not long ago I wrote a review of The Price of Inequality, by Joseph Stiglitz, which investigates the increasing economic inequality of American society. Battlers and Billionaires (2013) covers some of the same ground for Australia. Leigh argues that while things are not as bad here as in America, the level of inequality is nevertheless of major concern.

After an introduction which summarises his argument, Leigh gives a brief historical survey of inequality. He argues that despite a belief in Australia that Jack was as good as his master, high levels of inequality prevailed in the nineteenth and early twentieth centuries. This was followed by what he calls ‘the great compression’, whereby equality increased significantly until the 1970s. Thereafter, inequality rose again in what he calls ‘the great divergence’, so that wealth is rising more quickly among the already rich than the rest of the population, while the wealth of the very richest is growing even faster. This divergence has been accompanied by a decrease in social mobility. Leigh identifies changes in technology and globalisation, de-unionisation and tax cuts which benefit the rich more than the rest as the factors contributing to growing inequality. He suggests that a strong economy with high productivity, an improved education system, a strong union movement, carefully targeted social welfare and progressive taxation are all needed to reverse the current trend. Rather more controversially, he argues that we need to do something about ‘the role that family structure plays in perpetuating advantage and disadvantage across generations’. And he wants to keep egalitarianism ‘at the heart of our national story’.

Leigh differs somewhat from Stiglitz in his assessment of the importance of inequality. For Stiglitz, it is unquestionably a bad thing. Leigh agrees that inequality has adverse effects on social mobility, and may skew political outcomes in favour of the most affluent. He also agrees with Stiglitz that much of the new wealth comes from rent seeking – such as cashing in on high overseas mineral prices – rather than hard work and innovation.  But he argues that inequality is not always a bad thing; unequal countries grow more quickly than equal ones, even though the trickle down effect is very slow. He sees growth as necessary to lessen inequality; you need a bigger pie if people are going to get a bigger slice. So much for the limits to growth.

These arguments are underpinned by a range of statistical and other evidence. Leigh deals with this with a light touch; there is a lot more information and explanation, and details of sources, in the extensive end notes. Leigh is a former Professor of Economics at the Australian National University, and I get the impression that he would have been a very good teacher. He keeps things clear and simple, illustrating his case with interesting anecdotes and analogies – for example, using war time examples and comparing different football codes. This is a much easier book to read than Stiglitz’s.

What I prefer about Stiglitz’s argument, however, is the way his analysis links inequality to the free market economy, which he presents as a construct whose nature has been profoundly affected by political action, or inaction – usually in the interests of the rich. Leigh’s book is not really about politics at all. This is in some ways surprising, since he is now a Labor member of the Australian Parliament, and shadow deputy Treasurer. What he doesn’t say is that ‘the great divergence’ began just about the time that a Labor Government took steps to open the Australian economy to the forces of globalisation, reducing tariffs, floating the dollar and privatising some government assets. This in turn decimated manufacturing industry, consequently weakening the union movement. Leigh might well argue – though he doesn’t here – that the Labor government introduced a superannuation system, and provided a better safety net for those who lost out in the process of globalisation than did conservative governments of Regan in the US and Thatcher in the UK. As a result, the level of inequality in Australia is less than in those countries. He merely notes that the welfare system has a much greater equalising force than the tax system. All the same, it seems at least in retrospect that more could have been done to limit the burgeoning wealth of the very rich, for example by more fairly sharing the profits of the minerals boom. Labor recognised the need to intervene at the bottom end of the market economy in the 1990s, but not at the top end, which was left unconstrained. By 2010, the share of top 1% had grown to 11% of the wealth in Australia, and the share of the rest of the country had shrunk. I’m not an economist, so how would I know, but this looks more like wealth being sucked up than trickling down.

All the same, this is an important book, and worth reading if you value egalitarianism.

You can read more about the politician Andrew Leigh here. If you are interested in his academic work, try here.