Does inequality matter?

This week we hosted an interesting discussion on inequality (see video).

CIS Senior Fellow Robert Carling argued inequality is actually an integral part of a market economy, because the incentive of massive wealth drives and rewards innovation and risk taking. He noted that “if you accept that markets are the best way to organise economic activity … then you must accept some degree of inequality”.

Importantly, he raised the often ignored trade-off between equity and economic efficiency; and the fact that people mistakenly believe increasing taxes and redistributing income is essentially costless. This is not the case.

Another interesting point of view that both Melinda Cilento from CEDA and Jonathan Coppel from the Productivity Commission shared, was that the perception of inequality was also different from reality. When asked, people feel they are worse off and that the benefits of growth are only accruing to the rich.

Yet inequality in Australia has not increased substantially in recent years — in fact it may have decreased. Further, wages have increased across the spectrum in Australia.

In some ways, this is a case where Australia has imported arguments from the US and the UK assuming that they apply here. It’s also related to an increasing focus on, and anger towards, the rich.

Pointing out that the top 1% (or the top 1% of the top 1%) are doing really well and pretending that is the same as broad inequality is an effective way of stoking resentment.

It’s telling that the measures to combat inequality are largely on the revenue side. Focusing on how rich people are, rather than poverty, allows progressives to advocate for massive tax increases and more regulation on the productive sectors of the economy.

These are exactly the kind of things that will hammer economic growth, which — as Carling noted — may harm the disadvantaged more than the redistribution helps them. Tax increases on the rich are perennially popular, but they will not lead to greater prosperity

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 what they believe is the broken link between work and success.