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Why inequality isn’t the biggest problem in China

12.12.2018, 苏州夜生活, by .

That Bill Shorten would put inequality at the centre of Labor’s campaign for election is hardly surprising.
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It’s not a new idea, but globally the Left has been unifying behind the theme of inequality for a number of years ??? as evidenced by their applause for Thomas Piketty’s seminal work (even if most fans barely opened the 700-page treatise).

While both the left and right of the Labor party can get behind a campaign on inequality, there are two big problems with the inequality narrative.

First, while issues such as poverty, disadvantage and stagnant wages are real concerns, it’s not actually clear that inequality by itself is a problem.

Second, Shorten’s solutions largely focus on taxing high income earners. This may satiate the envy of the “have nots” ??? and the “have some but want mores” ??? but it will do little to fix the underlying causes of inequality.

‘s welfare system has a number of payments that address poverty and disadvantage: income support payments for those out of work, schemes to support the economic participation of the disabled and the disadvantaged, and payments to help meet the extra costs faced by families and women who have recently given birth.

These payments all touch on inequality but they all have a separate and distinct purpose. Payments such as Newstart have activity tests, not just income tests, and taper out well below the median income. Newstart’s clear objective is to remedy poverty ??? not inequality.

If income inequality is the big problem, why are there no welfare payments primarily aimed at decreasing it?

There is little doubt inequality has increased since the 1980s. Statistics show that between the early 1980s and the mid-2000s inequality trended upwards, with ‘s Gini coefficient measure of income distribution rising from below 0.28 to above 0.32 on ABS data.

Since then equality has either fallen, or remained relatively flat: according to the recently released HILDA data ‘s Gini coefficient has fallen from 0.314 in 2007 back below 0.3 in 2015.

Counter-intuitively, there seems to be a much more urgent focus on inequality in 2017 than in 2007. To understand why, you need to move beyond inequality statistics.

Between 1984 and 2010, incomes for those in the bottom quintile grew by 27 per cent after accounting for changes in their cost of living. For those in the second bottom quintile, that growth exceeded 30 per cent.

Income growth for both the bottom and second bottom quintile exceeded growth for the top income quintile after accounting for respective changes in cost of living. In other words, inequality may have risen in raw terms but, on average, low income earners were better off.

HILDA shows even better news: absolute poverty (a measure of living standards for the poor) fell by around two-thirds between 2001 and 2011.

The problem is that, while incomes may have grown between 1984 and 2010, many have seen little or no improvement since then. In real terms, HILDA suggests the median household is slightly worse off than it was in 2009.

This is why the comparison between the top 1 per cent ??? where incomes are growing ??? and lower income groups, has so much more resonance now than it did before. This narrative was less potent when inequality was undisputedly rising, and is picking up steam when it is relatively flat.

There are many causes of inequality, some unequivocally bad, but in it was primarily strong economic growth that delivered rising inequality. That is why inequality spiked in the mining boom.

Yet at the same time, that boom brought rising employment and incomes. These things seem to matter more to voters than inequality ??? which is why Hawke and Keating ditched Whitlam’s tax and spend policies for a growth agenda in the first place.

It’s telling that the measures to combat inequality are largely on the revenue side. Focusing on inequality rather than living standards allows Labor to advocate for massive tax increases and more regulation on the productive sectors of the economy; exactly the kind of thing that will hammer economic growth.

Tax increases on the rich are perennially popular, but they will not lead to greater prosperity. In terms of ways to lift living standards, Labor’s main answer is an increase in education spending that might deliver benefits in several decades time and more welfare spending.

One big lesson to be drawn from the populist revolt that put Trump in the White House is that people don’t want more redistribution, they want more opportunities. Many in the working class are rejecting the perennial solution of the Left (more money and fewer obligations) in favour of the opposite: re-establishing a link between hard work and success that they believe is now broken.

You’d be tempted to draw the conclusion that had the government delivered on its jobs and growth agenda, they wouldn’t be facing a fight over inequality.

Simon Cowan is Research Manager at the Centre for Independent Studies

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