Allegedly, equity interventions – that are designed to redistribute the economic pie – come at a costs – that is, they reduce the size of the pie. So the policy choice is always constructed as a trade-off, you cannot have one without damaging the other.<\/p>\n
The problem is that there is little evidential basis for this assertion. Refer back to my blog yesterday – Republican agenda – simple and venal<\/a> – where some of the myths about the negative impacts of taxation on growth were challenged.<\/p>\n There is a solid body of evidence that tells us that income inequality and economic growth are negatively related. Rising inequality probably undermines the growth potential of a nation.<\/p>\n Nations that enjoy the longest periods of growth are those that are also moving toward greater equality of income and wealth. The evidence is fairly clear that rising inequality undermines the capacity of nations to grow in sustainable ways.<\/p>\n Even the IMF (April 8, 2011) – Inequality and Unsustainable Growth: Two Sides of the Same Coin?<\/a> – concluded that:<\/p>\n \n… longer growth spells are robustly associated with more equality in the income distribution.\n<\/p><\/blockquote>\n A prerequisite for resolving the unsustainable imbalances that led to the financial crisis will be to dramatically redistribute income back to workers – so that real wages growth closely tracks productivity growth and workers in sectors with little union representation are able to similarly participate in national productivity gains.<\/p>\n So fiscal interventions that not only work to ensure there is sufficient aggregate demand to sustain high levels of employment but also aim to dramatically reduce income inequality are both growth-friendly strategies. That is, there is no trade-off of the variety that dominates undergraduate textbooks in economics.<\/p>\n The IMF admit as much in this paper – IFM working Paper, 08\/168 – The Distributional Impact of Fiscal Policy in Honduras<\/a>:<\/p>\n \nAt least for the IMF, the potential tension between equity and efficiency can be avoided by promoting and engendering high-quality growth-that is, “growth that is sustainable in the face of external shocks; accompanied by adequate investment (including in human capital, to lay the basis for future growth); respectful of environmental and national concerns; and, last but not least, consistent with policies that reduce poverty and improve equity” …\n<\/p><\/blockquote>\n While they do not practice what they preach – given they are one of the major promoters of fiscal austerity which undermines equity, erodes the incentives to invest in human capital and provides no room for funding green developmental strategies (just ask what happened to the forests in Mali, for example).<\/p>\n On the theme of fiscal policy and equity, there was an interesting paper in this regard in the IMF Staff Discussion Notes series (No.12\/8R) – IMF Income Inequality and Fiscal Policy (2nd Edition)<\/a> – which was published on September 27, 2012.<\/p>\n The authors provide a detailed account of:<\/p>\n \n… how fiscal policy can address income inequality in both advanced and developing economies.\n<\/p><\/blockquote>\n They note that fiscal policy can influence the distribution of income:<\/p>\n 1. “directly through its effect on current disposable incomes”.<\/p>\n 2. “indirectly through its effect on the future earnings capacities-and therefore on market (i.e., pre-tax-and-transfer) incomes-of individuals”.<\/p>\n The authors then move on to examine the trends in income inequality across regions and over time. They conclude that over the last 20 odd years, income inequality has “increased in nearly all advanced and emerging European economies”. Only in Latin America has inequality started to decline since about 2000. Reason? They don’t offer one but the swing to the left of many of the governments there is the likely instigator of this reversal in trend.<\/p>\n The paper notes that:<\/p>\n \nMore recently, the focus has been on the sharp increase in the share of total income of the top income groups. Over the last three decades, the pre-tax-and-transfer income (i.e., market income) shares of the richest have increased substantially in English-speaking advanced economies, as well as in India and China, but much less so in Southern European and Nordic economies, and hardly at all in continental Europe and Japan …\n<\/p><\/blockquote>\n They also note that there does not “appear to be any discernible pattern to changes in income inequality in the aftermath of the financial crisis”. However, there is some evidence that as “fiscal consolidation efforts intensified, inequality started to increase”. Which is consistent with my claim noted above.<\/p>\n The question they then turn to is what has been the role of fiscal policy over this period. The answer is shifting.<\/p>\n They conclude that “(f)iscal policy has played a significant role in reducing income inequality in advanced economies, especially in economies with high initial pre-tax and transfer inequality”:<\/p>\n \nIn every year between 1985 and 2005, fiscal policy (i.e., direct income taxes and transfers) decreased the average Gini in 25 OECD countries by about one-third, that is, by around 15 percentage points …\n<\/p><\/blockquote>\n They document nation-by-nation breakdowns of the extent to which fiscal policy has played a role in reducing income inequality up to 2005.<\/p>\n Significantly, the design of fiscal policy matters:<\/p>\n \nMost of the redistributive impact of fiscal policy is achieved through the expenditure side of the budget, especially non-means-tested transfers, although income taxes are also important in many economies.\n<\/p><\/blockquote>\n This bears on the current debate where mainstream economists claim that the bulk of the fiscal consolidation that they recommend should be on the expenditure-side with tax cuts being favoured for the rich.<\/p>\n It will be of no surprise that the process works in reverse. If governments attack the expenditure-side (entitlements, transfers etc) and provide further tax breaks to the high income earners they not only will worsen income inequality but also undermine the growth process, both in the short-run as a result of the austerity, but also in the longer-term, by engendering higher inequality.<\/p>\n The final part of the paper I will comment on (due to lack of time) is that the positive redistributive impacts that fiscal policy has been having has been decreasing since the mid-1990s. Over the decade from the mid-1980s:<\/p>\n \n… fiscal policy offset 73 percent of the 3 percentage-point increase in market income inequality. Although the inequality of market income increased by less over the subsequent decade, the distributive impact of fiscal policy actually diminished. As a result, during the two decades from the mid-1980s to the mid-2000s, fiscal policy offset a much lower 53 percent of this increase, and market income inequality still grew by twice as much as redistribution.\n<\/p><\/blockquote>\n What is the reason for this decline in redistributive impact of fiscal policy?<\/p>\n They culprits line up one after another and they are all called neo-liberal.<\/p>\n The IMF paper says that:<\/p>\n \nThis fall in the redistributive impact of fiscal policy reflected policy reforms that reduced the overall progressivity of the tax-benefit system. In the absence of policy reforms, the distributive impact of progressive tax-benefit systems tends to automatically increase as market income inequality increases (e.g., due to higher unemployment or increasing incomes of higher income groups). However, in many economies, reforms since the mid-1990s have reduced the generosity of social benefits, particularly unemployment and social assistance benefits, and have also reduced income tax rates, especially at higher income levels …\n<\/p><\/blockquote>\n This is the environment that accompanied the labour and financial market deregulation pushes that together created the dynamic where the most destructive characteristics of the capitalist system were unleashed in 2007 and 2008.<\/p>\n The policy developments that undermined the gains in reducing inequality were directly responsible also for the crisis. And what is worse, they are the same policies that are being promoted as a solution to the crisis.<\/p>\n But as the riots all around Southern Europe are starting to tell us – people are no longer believing the lie. The solution that the elites propose to end the crisis – fiscal austerity – will only make it worse. Fiscal austerity is failing and has been failing for some years now. Look at Ireland – it started to destroy itself in early 2009. It is now the end of the 2012. No recovery should take that long and no recovery requires things to get much worse before things get better.<\/p>\n A properly scaled and designed fiscal intervention can not only maintain existing levels of inequality (and reduce it further) but it will also be able to provide for instant employment and income growth. A public sector job offer to an unemployed person is instantly expansionary. The effect is immediate. The same cannot be said for monetary policy interventions.<\/p>\n And now for the serendipitous part of the story …<\/p>\n There was a Sydney Morning Herald article today (November 15, 2012) – To those who have much, more will be given as handouts<\/a> – which reported on a paper that a Senior Australian Bureau of Statistics official presented to an Economics Meeting yesterday. I have seen the presentation slides.<\/p>\n The SMH article chose to report the controversial aspects of the research and barely put the work the ABS is doing in context. Briefly, there is an OECD-motivated effort underway (since 2010), which national statistical agencies are participating in, that is designed to resolve the anomaly between microeconomic and macroeconomic data published under the System of National Accounts (SNA).<\/p>\n Microeconomic data such as income and expenditure surveys collect detailed information on a unit record basis, which allows us to understand the relationship between income, consumption and wealth and the distribution of each across households.<\/p>\n The National Accounts data – the macroeconomics data provides no distributional perspective and allows us to perceive an “average household”. But, of-course, no particular household might be “average”.<\/p>\n The problem has been that the two sources of data are not consistent. For example, the micro data on consumption does not add up to the National Accounts measure of final household consumption.<\/p>\n In 2009, the OECD Working Party on National Accounts – as the ABS official’s presentation indicated – sought “to create an expert group to devise a robust and internationally comparable methodology that would allow the generation of distributional information on households consistent with the macro (national accounts) estimates”.<\/p>\n From the ABS presentation we read that the goal of the OECD Expert Group that was established is:<\/p>\n \nTo use existing micro data to produce distributional information for household income, consumption and wealth that are consistent with System of National Accounts (SNA) concepts and SNA averages published for the household sector.\n<\/p><\/blockquote>\n The ABS presentation was about the development of that framework and some of the preliminary results that have emerged from the effort to date. I won’t go into the technical aspects of this work although it is very interesting. In due course, when the statistical agencies are satisfied the linking of the micro and macro information is robust enough then a full disclosure will be forthcoming. Then we can return to examine the work.<\/p>\n But as a result of the preliminary work to date there have been some very interesting results emerging. It was these results that the SMH article reported on.<\/p>\n The ABS presentation produced the following graph f0r 2009-10, which shows the distribution of wage and salary income across the income quintiles in Australia. What you observe is that the top 20 per cent of Australian household income recipients take about 46 per cent of the total wages and salaries paid out. The bottom quintile earn less than 3 per cent of the total wages and salaries paid in Australia.<\/p>\n So there is considerable wage inequity in Australia.<\/p>\n
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