The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Wednesday, September 26, 2012

Andrew Leigh MP responds to my argument that "inequality is good"

You can read Andrew's excellent op-ed in Australia's premier newspaper here. My only comment is this. In yesterday's Sydney Morning Herald, Peter Hartcher referenced the work called The Spirit Level to rationalise his case for more equality. Specifically, he argues:

And as equality improves, so does a society's performance in dealing with violent crime, depression, mental illness, obesity, educational failure and personal debt, among many other problems, as Richard Wilkinson and Kate Pickett showed in their groundbreaking book, The Spirit Level.

Australia's leading inequality expert, Dr Leigh, used to believe in The Spirit Level's findings. In fact, he deeply wanted them to be true. But it turns out they are bogus based on Leigh's own research. This is what he said in a speech to the Sydney Institute earlier in the year:

But should we care about inequality? Or do we take the view that then Workplace Relations Minister Tony Abbott put in 2003: ‘in the end we have to be a productive and competitive society and greater inequality might be inevitable.’

One set of arguments suggests that we should care about inequality for what are called ‘instrumental reasons’. Inequality, some contend, is associated with worse outcomes in areas that society cares about, such as health, crime, savings and growth. This argument is put most strongly in The Spirit Level, by Richard Wilkinson and Kate Pickett. It is an argument that I used to believe. Indeed, I deeply want to be true, but my own research persuades me otherwise. The closer you get to these asserted effects, the more fragile are the findings. If there are negative effects of inequality on those social outcomes, they must be extremely small. (There are also small positive effects. For example, my own work shows that inequality boosts growth, though the trickle-down process is slow.)

I now believe that a better reason to care about the distribution of income is because humans have a palpable discomfort with high levels of inequality. As a father of two boys, I can attest that my sons are constantly benchmarking one against another. In preparing for this talk, I asked my older son whether he’d prefer that he and his brother both got one biscuit, or he got two and his brother got three. He chose one apiece.

And for those who missed it, enclosed below is an excerpt from my AFR column, which addresses Leigh's new arguments in favour of more equality (and prompted today's response):

The essential flaw in the case against exceptionalism is that it assumes the distribution of incomes that emerges from individuals exercising free-will within a market economy is somehow inferior to the narrower income distribution these critics idealise.

An acute irony here is that egalitarianism may be borne from a behavioural bias. In defence of greater equality, Leigh raises the famous “ultimatum game” where, given the choice, people frequently select no monetary rewards over an unequal allocation of rewards. That is, they are “happier” to receive $0 over $100 if it means their rival also gets $0 rather than $500.

Leigh overlooks the possibility these behaviours are both irrational and reflections of personal envy. At the very least, the ultimatum game and anecdotes around Australians’ indifference to authority do not supply evidentiary grounds for more redistributive policies.