Opinion/Comment, Politics

Tackling inequality has the potential to drive the kind of economic growth Australia has been looking for

Tackling inequality has the potential to drive the kind of economic growth Australia has been looking for

In the decade or so since the global banking and financial crisis plunged the world into the Great Recession, policy makers around the world have been adopting a range of policies that were previously considered ‘unconventional’ as they has sought to promote economic growth, lower unemployment and reflate economic conditions.

Think about some of those policies.

Negative interest rates – fancy being paid to borrow money!

Quantitative easing or QE, which has been colloquially referred to as central banks printing money and dropping it into the streets out of a helicopter. Government debt levels exploded to levels only seen when the world was at war as revenue collapsed and in some instances, fiscal stimulus measures were implemented. To this day, governments are struggling to get their budgets anywhere near balance, let alone in a position to reduce debt.

It is clear, or at least it should be, that these policies cannot be in place forever. At some point, interest rates will normalise, central banks will have to mop up the excess cash from the economy and budgets will need to be repaired. This begs the vital questions of how to pull off these tricky maneuvers without disrupting financial markets and the economy?

I think I have an answer.

It will not appeal to everyone and is politically challenging.

It is to do with making society less unequal or, if you wish to avoid two negatives, making society more equal. The economic debate on inequality of income and wealth shows, unambiguously, that as inequality increases, the rate of economic growth slows or at least is slower than it would otherwise be.

In simple terms, the link between more equality and stronger economic growth is based on the observation that if, for example, a low income earner gets an extra $20 a week in their pocket, they are more inclined to spend most if not all of it, whereas a $20 a week extra to a very high income earner – think a billionaire – will have little influence on their spending patterns. If the tax system is structured in a way that sees low income earners taking home more pay while high income earners take home a little less, the economy will be boosted by the extra spending of the low income earner.

This extra spending will deliver a higher rate of economic growth which will, in turn, boost demand for labour and this will lower the unemployment rate. Such a policy initiative can be revenue neutral to the budget. This requires the very well off to pay more tax or get less tax deductions and those proceeds are redirected to low income earners.

This is where the political problem can emerge. As we can see in the current debate about income and company tax cuts, issues of fairness and equity are important aspects of the case for and against lower company tax rates and the introduction of a flat tax rate for both low and high income earners (those on $40,000 and $200,000 will pay the same marginal tax rate).

Polls show that many people are against the company tax cuts, largely because of fairness issues. There are other areas where inequality can hamper economic growth, including access to education and health care.

People on high incomes usually have little trouble accessing the best quality of health care and education. Poorer people often struggle on these fronts. Think access to health services in the public health system versus the private sector.
Wealth, health, and education This matters for economic growth because good health and high levels of skills and educational attainment are positively correlated with economic growth.

Countries with an educated workforce are generally rich. This is why most people want to have a good education for themselves and their children. It pays off not only for the individual, but for society.

Health care is also important. People who are sick do not go to work as often as those who are healthy. This extends to people taking time off work to care for sick relatives who have less access to health professionals.  To the extent that access to high quality health care allows the population to be fit enough to turn up to work, there is a clear productivity boost from wide access to good health care.

All of which goes to the point that economic growth can be nurtured by more than just interest rates, printing money, tax and government spending.

Policies that reducing income equality and improve access of low income people to education and health care is good for GDP.

Maybe policies aimed at reducing inequality will be the new wave of thinking when it come to generating stronger economic growth.  It will take bold political leadership but when other policies have had limited success, it seems a matter of time before this path is taken.

 

First published at The Kouk Blog. Tuesday 10 July 2018.

See: https://thekouk.com/item/620-tackling-inequality-has-the-potential-to-drive-the-kind-of-economic-growth-australia-has-been-looking-for.html

Stephen Koukoulas is one of Australia’s leading economic visionaries, a past Chief Economist of Citibank, heading global research in London for TD and a former Senior Economic Advisor to the Prime Minister.

6 Comments

  1. Too much government involvement, and policy makers like Mr Koukoulas who advanced socialist agendas, are to blame for the present mess. For him to suggest a Marxist (ie; even further Left) answer now that his failed policies are shown to have failed simply beggars belief.

  2. Stephen Koukoulas is a ‘Marxist’ huh Andrew? As someone who has studied, and disagreed with, the prescriptions of Marxism that is hilarious ‘news’.

    Yeah, let’s double down and do more of the same neo-lib trickle down darn it! After all “the definition of insanity is doing the same thing over and over again, but expecting different results” (Einstein).

  3. Same old Leftist crap from you buddy. I can’t comment because I’m not as studied as you are, not in that line of work, old, white, male. … blah, blah, blah.

    And let’s not forget the straw man: misquote me then attack what I didn’t say. Perfect! You do this every time which tells me you ought just skip over my comments and keep on believing you’re superior to the rest of us while dragging the world to its knees. Goodbye!

  4. Without getting too much into who is right or wrong here I would point out that the International Monetary Fund (IMF) have been agreeing with Koukoulas on this one for quite a while now.

    Here is but one late 2017 example headed “Inequality is getting so bad it’s threatening the very foundation of economic growth”. See: https://www.businessinsider.nl/inequality-impact-economic-growth-2017-9/?international=true&r=US

    I think it is fair to say that the IMF could not generally be accused of being peddlers of leftist crap?

  5. Thank you Richard for the tone of your comment.

    I would argue that the IMF certainly does take a generally socialist approach, along with the EU and UN. It’s the way of things generally in government circles around the world.

  6. So the structural adjustment and privatisation programs pushed to the maximum by the IMF until about 3 years ago are ‘socialism’?

    Interesting.

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