The Myth of ÔTwo AustraliasÕ:
Wealth and Income Distribution
By Robert Skeffington
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Australians are enjoying unprecedented economic prosperity, with the benefits being dispersed more widely than is often recognised. But you wouldnÕt know it.

Politicians find it difficult to declare that life is good. Former Prime Minister Paul Keating received a political mauling for saying: ÔThis is as good as it gets.Õ Politicians are better at eliminating the negative than accentuating the positive. And they are not alone. There is a coterie of commentators, journalists, activists and academics who are continually fuelling the notion that Australia and Australians are not doing very well.

In June 2000 The Australian launched a week-long campaign under the banner ÔAdvance Australia WhereÕ, with headlines stating ÔDeath of the fair goÕ; ÔUnhappy days are here againÕ; and ÔDeath of the dreamÕ. The series culminated in a competition for readers to send in the best letter detailing how bad life in Australia is. The winning letter read: ÔIf the Australian economy is so healthy, why are so many of us suffering?Õ

It is true that some people are suffering; their stories are real and to ignore them is wrong. But to look at a small number of people and extrapolate that the society is bad paints a misleading picture of Australia. The danger is that these complaints may leak into policymaking. By not recognising the advantages that economic reforms have produced, Australians will be less likely to support continued reforms, thereby depriving themselves of future benefits.

The more millionaires, the better

The observation that the rich are getting richer and the poor are getting poorer is often heard but rarely challenged in Australia. Yet there is nothing wrong with the rich getting richer. In fact, this is something we should crow about. The risks that entrepreneurs take and the wealth that is subsequently generated benefits the whole economy. The returns they make provide the incentives for entrepreneurs to take risks. The combined wealth of the 200 individuals listed in last yearÕs BRW Rich 200 totalled $61.35 billion, up 7.4% from 1999.1  To be eligible to gain entry on the BRW Rich 200, people needed a net worth of at least $85 million, which is $20 million more than the year before.

It is not just the super-rich who are doing well. Access Economics estimates that Australia has 240,000 millionaires, defined as individuals or couples (income units) with assets (net of debt) valued at more than $million.2  In 1993, there were 74,000 millionaires in Australia.

Moreover, research is now emerging in psychology that suggests, despite calls to the contrary, that money makes people happy. This is not because richer people buy happiness, but because wealth creates Ôsubjective well-beingÕ which allows people to view the world more positively.3

Some observers are critical of the number of millionaires being created in Australia on the grounds
that income distribution seems unfair; the poor are getting poorer, they cry. Yet data does not support this assertion. Research by the National Centre for Social and Economic Modelling at the University of Canberra concludes that there has been relatively little change in the overall distribution of total after-tax income since the early 1980s. Increases have occurred for the highest income earners and the poorest. Income increases at the lower levels have occurred due to increases in social security, which has happened despite tighter fiscal management.

Nor is AustraliaÕs current prosperity unduly based on debt. A conclusion made by the Melbourne Institute of Applied Economic and Social Research at the University of Melbourne in its September 2000 Household Saving Report is that the common perception that Australians have high and increasing debt burdens is not supported by the data.4  Forty seven percent of households have no debt. Of the remaining 63%, less than 10% use their income to service debts. Lower income households use a lower proportion of their income to repay debts compared to higher income earners. The Institute argues that this does not mean that low income earners do not have a care in the world, but it indicates that Australian households are not overextended in terms of their financial obligations and have the capacity to repay what they borrow.

The survey also found that the level of savings is increasing. Nearly 53% of all households now save some of their income. This is an increase from the 1999 (51.7%) and 1998 (48.2%) surveys. The Institute also concluded that there is a reduction in the number of households that manage to make ends meet (from 37.4% in 1998 to 36.7% in 2000).5

The misery index

AustraliaÕs prosperity is a result of the stable economic and legal environment that underpins our society. Australia was recently voted ninth in the world in the Heritage Foundation Index of Economic Freedom.6  The authors of the report believe Australia could improve its ranking even more in the near future. The changes to AustraliaÕs tax system, which will mean that 80% of Australians will be taxed at 30% or less, will potentially improve its economic freedom and subsequently the prosperity of its citizens.

That politicians do not boast enough about AustraliaÕs success is surprising because in economic terms, Prime Minister John Howard is one of the great leaders in AustraliaÕs history. HowardÕs record runs counter to an existing view that he is a Prime Minister without vision who does not show national leadership.

BRW and Access Economics developed a misery index (see pages 21 and 22) to compare the performance of prime minsters going back to John Gorton.7  The misery index assesses peopleÕs prosperity by combining a measure of unemployment and inflation. The index assumes that with fewer jobs and reduced purchasing power, people will be more miserable. The methodology is broadened to include more positive elements: wages, economic growth, interest rates and budget management were added to unemployment and inflation. The index then provides an assessment of how well each Prime Minister improved the economy during their term of office.

Up until the December 2000 quarter when the chances of an economic downturn looked more pronounced, economic conditions were better than any time since the early 1970s. John HowardÕs premiership ranks first, with Prime Ministers John Gorton and Bob Hawke coming second and third respectively. HowardÕs government ranks best at improving unemployment. If John Howard left office tomorrow he would be the only Prime Minister since Gorton to leave with average unemployment rates better than when he assumed office. Howard is ranked second to Gorton in economic growth.

Real wages have increased during HowardÕs premiership. This brings his index ranking down, but due to productivity increases, the wage increases have been more sustainable. Although the Prime Minister could have scored higher in this area, the result is likely to produce less misery in the electorate.

The Australian economy has experienced the longest period of economic growth over 4% and has not had negative growth since the June quarter of 1991. It has had 13 quarters of growth of this magnitude. Although the economy is looking subdued, it is set to bounce back by 2002. Few economists are predicting a recession, but if it does occur it will not be characterised by high unemployment and high inflationÑindicators which are regarded as the most painful manifestations of a recession.

Many Australians are benefiting from the buoyant share market, which does not exhibit the inflated valuations of the US market. An Australian Stock Exchange survey released in early 2000 showed Australia is the leading shareholder nation in the world, with over 40% of adults owning shares directly (if superannuation and managed funds are included, share ownership is closer to 54%).8

Stockbrokers J.B. Were & Son, in analysing the 1999-2000 results for the largest 134 listed companies, have found that profits increased 24%. What is interesting is that companies have managed to make this profit from sales increases of 16.6%. There are always risks associated with any investment, but people are set to continue to benefit from the increased efficiencies in the economy. Projections for these companies in 2000-2001 is for profits to increase by 20.3% which equates to almost $23 billion.

It is interesting to examine how the spoils of AustraliaÕs buoyant economy are allocated. There is some evidence to suggest that the distribution process is relatively widespread. In the workplace, for example, the traditional tensions between labour and capital are changing. In a low inflation environment workersÕ earnings have grown and productivity has increased. Increases in average weekly earnings for the last 12 months has been about 4%. Labour productivity rose 2% in 1999/2000 on the back of 4.3% for 1998/1999.9  According to Salomon Smith Barney, labour productivity has averaged 3.1% per year during the current expansion (since 1993/94), the strongest result for any expansion in more than 35 years.

Although work is being done differently, with outsourcing and contract based employment becoming more popular, the issue of job uncertainty has not emerged as the problem that may have been expected. According to surveys conducted by the Roy Morgan Research Centre in 1999, 74% of employees think their current job is secure. In 1975, it was 76%. These results indicate job security is relatively high and that it has not changed markedly from the past.

In addition, the pattern of job duration has not changed significantly. According to the Australian Bureau of Statistics (ABS) the number of people in jobs of three to five years duration was 14% in 1998, 13% in 1988, 15% in 1980 and 12% in 1972. Rather than job duration falling over time, the opposite is the case. In 1998, 42% of workers were in jobs for more than five years, compared to 38% in 1972.10

Not only are employers and employees being rewarded by increased productivity and higher wages, but the Ôwin-winÕ is not at the expense of traditional losers in this equationÑthe unemployed. Unemployment is falling and the participation rate is increasing. Unemployment is 6.3% and the participation rate is 63.8%. Twelve months ago these figures were 7.5% and 63% respectively. The current participation rate is the highest since the mid-1990s.

Employment is likely to continue improving. Traditional labour market ÔoutsidersÕ will benefit from the ageing of the Australian population. As the demographics change, employment opportunities for young people will improve. With the scourge of youth unemployment minimised a fundamental problem that has afflicted Australia for decades will have finally been addressed.

The benefits of being employed are greatly diminished if purchasing power is undermined through high inflation. Despite concerns over AustraliaÕs monetary policy, there is little disagreement that an independent central bank charged with keeping inflation under control is desirable. High oil prices and a depressed Australian dollar have not even managed to derail the inflationary targets. If the GST stimulus effect is taken into consideration, AustraliaÕs inflation is still in the 2-3% band set by the Reserve Bank of Australia. A low inflation environment not only benefits consumers, but it is particularly beneficial to people on fixed incomes such as social welfare recipients.

Table 1: Economic Performance Index: Ranking of Prime Ministers against eight economic indicators

The myth of Ôtwo AustraliasÕ

A favourite description used by those wanting to talk-down AustraliaÕs good fortune is the notion that there are Ôtwo AustraliasÕ, ranging from Ôblack and white AustraliaÕ to Ôcity and rural AustraliaÕ. There is no doubt that some people in Australian society are doing better than others, but some commentators are blinded by the cause and effect of the problems.

This contrasts with Aboriginal leader Noel Pearson who is starting to build a movement which looks more at the solutions to the disadvantages that indigenous people have rather than solely reflecting on the causes of the problem. Pearson argues that one of the answers to the problems facing his people lies in the prosperity of the economy and the need to develop ways of accessing some of this for Aborigines. Yes, indigenous people are disadvantaged but the most effective means of distribution is through the market, rather than what Pearson calls welfare dependency. Inherent in this economic self-determination is that the economy does produce good outcomes, but it can be even better.

Another area is the so-called rural-urban divide. Like the indigenous example, no one can deny that some people in rural Australia are doing it hard. But rural Australia is doing much better than many commentators assert. Commodity prices have improved and the lower Australian dollar is set to make rural exports even more attractive. Rural industries have had to endure restructuring, but the reforms now put these industries in an excellent position to compete internationally and reap the benefits. The dairy industry is such an example.

If everything is going well, why are some people so unhappy, and why do the rest of us let them say it uncontested? The ability for this negativity to dominate the debate is likely to be a product of the prosperity we are lucky enough to enjoy. Because Australia is doing so well, minority groups feel more confident and become more assertive. The success of the economy makes claims for funding seemingly more palatable as individual requests are not likely to put undue pressure on a governmentÕs fiscal management.

This negativity is not unique to Australia. Wealthy countries that are benefiting from economic reform are at the forefront of this trend to say that life is not good. This criticism is usually based on economic inequality. A 1996 World Bank report, however, found that OECD countries such as Australia have relatively even distributions of income. The highest income differentials exist in South America and Africa.11 

Critics of economic reform in Australia often support their argument with the view that unfettered market forces will lead to the so-called divided society that exists in the United States. Yet demonising the US is little more than a convenient form of denial.

According to the Economic Report of the President 2000, the unemployment rates for African-Americans and Hispanics were the lowest ever recorded in the US. In 1998, the US recorded the lowest ever poverty rate for African-Americans. The report also found that between 1993 and 1998, the average incomes of the bottom quintile of American families grew at a faster rate than the top quintile of families. In 1999, the US economy produced nearly 30 times the volume of goods and services as it had in 1899 and although it used five times the amount of workers to achieve these production levels, unemployment was only about 4%.12 

Another reason why the positives are not adequately recognised is that activist politics has become prone to the hijacking of causes. An example of this is the S11 protests in Melbourne. The protestors cobbled together numerous causes in order to create, in political terms, economies of scale. In order to criticise globalisation, the current problems were painted as a symptom of a larger phenomenon. There are perverse political incentives in making problems look even worse.

One of the catchcries for anti-globalisation protestors is that the wealth gulf between developed and developing countries is expanding. Implicit in this is that Australians should feel bad about being successful. Research by the former Commonwealth statistician, Ian Castles, however, dismisses the view that inequality between countriesÕ wealth is increasing. He finds that the gap is closing, with the last decade experiencing an increase of about 3% in the income of poor countries.13

Table 2: How Prime Ministers changed the performance of economic indicators

Business has not successfully challenged the anti-globalist cry. Individual chief executives feel uncomfortable speaking about public policy. In this regard, Australian business is a victim of its own success. With the increased efficiency in the economy, boards find it hard to support a chief executive who is vocal on issues without a direct link to the companyÕs bottom line. Also, as business becomes more global, Australian chief executives are increasingly spending more of their time overseas and therefore are either unwilling or unable to speak about domestic social issues.

Conclusion

Unduly focussing on the negative is not without its consequences. First, it may restrict prosperity. A lot of the benefits that Australia enjoys are the result of past economic reforms. By not recognising the benefits, there will be more resistance to further change and the benefits it may accrue will therefore be lost. Second, talking-down Australian society creates a more fertile environment for opportunistic political parties whose policy prescriptions are aimed at fixing things that are not broken. The rise of the One Nation Party is a classic example.

Endnotes

1 Business Review Weekly (26 May 2000).

2 Access EconomicsÕ millionaire count quoted in E. Shann, Business Review Weekly (26 May 2000), 17.

3 R. Cummins, ÔPersonal Income and Subjective Well-Being: A ReviewÕ, Journal of Happiness Studies vol. 1 (2000), 133-158.

4 D. Harding and M. Hammill, Mercantile Mutual-Melbourne Institute Saving Report, (September Quarter 2000).

5 As above.

6 Heritage Foundation/Wall Street Journal, Index of Economic Freedom (2000).

7 The misery index was first published in BRW 3 August 1998. It was updated for BRW 26 May 2000 and for this article.

8 Australian Stock Exchange, Share Ownership Survey, (2000).

9 Figures on earnings: ABS, Average Weekly Earnings 2000, ABS Cat No. 6302.0, (Canberra: Australian Bureau of Statistics, 2000). Figures on labour productivity: ABS, Australian System of National Accounts, ABS Cat No. 5204.0, (Canberra: Australian Bureau of Statistics, 1999).

10 ABS, Labour Statistics 1999, ABS Cat No. 6209.0, (Canberra: Australian Bureau of Statistics, 1999).

11 K. Deininger and L. Squire, ÔMeasuring Income Inequality: A New Data-BaseÕ, (1996), mimeo.

12 Council of Economic Advisers, ÔEconomic Report of the PresidentÕ, (Washington: US Government Printing Office, February 2000).

13 Ian Castles, ÔReporting on Human Development: Lies, Damned Lies and StatisticsÕ, Paper presented to the Australian Social Sciences Academy Symposium, Facts and Fancies of Human Development, (Canberra: The Australian National University, November 2000).

Author

Robert Skeffington is a senior journalist at Business Review Weekly.

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