The False Trade-Off of Prosperity and Fairness

Published by Progressive Australia in Economics, Fairness
by David Hetherington

At the heart of a debate around the future of work and the economy is a presumed trade-off: prosperity versus fairness. Economists like to dress this up as efficiency versus equity, and this is where the problem starts. Equity is as a troublesome caveat which serves to detract from the efficient (and elegant) solution in a zero-sum game. The first issue with this is that it implies a necessary trade-off between the two. The second is that it dehumanizes the central problem, which is why I prefer prosperity and fairness.

The evidence suggests that the trade-off between prosperity and fairness is far from clear-cut. Countries with higher incomes per person tend to be more equal. This doesn’t mean high incomes causes greater equality or vice versa, only that high incomes do not necessitate inequality. The great exception to this trend is, of course, the United States which has high incomes and high inequality. Yet even there, an interesting picture emerges. As inequality has grown in the US since 1970, average weekly earnings have fallen in real terms. Again, it’s not clear that prosperity and fairness are a necessary trade-off.

What is clear is that presenting prosperity and fairness as a trade-off makes people behave as though it is. The public debate takes the trade-off as a given and the public responds in kind. Ross Gittins writes of how participants in economic experiments behave less selfishly and more in the common interest when the experiment is titled Social Exchange Study rather than Business Transaction Study, or Community Game rather than Wall Street Game.

Over the last decade, the Australian public debate has embraced the false trade-off between prosperity and fairness, and the public mood has moved significantly in favour of prosperity over fairness. The reasons are varied, but the key point is that as a community, we are less willing to embrace solutions which deliver long-term prosperity and fairness if they involve any short-term sacrifice or cost. Deferred gratification ain’t our thing.

Companies fight tooth and nail against any proposal that remotely threatens their quarterly earnings, even where it’s clearly in the public interest – we now expect this. The orchestrated campaign against pokies reform is a case in point. What’s more curious is that they resist these proposals even where they may provide profitable opportunities down the track. The resistance of corporate Australia to a carbon price shows a lack of imagination about the opportunities presented by the transition to a low-carbon economy.

Individuals have also become less willing to sacrifice short-term prosperity in the pursuit of long-term outcomes which combine fairness and prosperity. Responses to Per Capita’s annual tax survey show that Australians want higher spending on public services and infrastructure, but believe their taxes are too high. They believe higher income earners are taxed too little, even when they are themselves high income earners who describe themselves as overtaxed.

This community sentiment has got politicians scared. The Rudd Government retreated from the CPRS in the face of focus group pressure, and Labor has been surprisingly reluctant to trumpet the success of its Keynesian response to the global financial crisis, presumably for fear of being painted as antiquated Lefties addicted to debt. While Julia Gillard’s (re-)embrace of a carbon price is welcome, progressive political leaders should do more to decouple the false link between prosperity and fairness by advancing solutions which instead reinforce a virtuous circle between the two.

The virtuous circle involves a recognition that markets provide powerful forces that can be harnessed to promote prosperity and fairness, but remain a means rather than an end. Market design has already been used successfully in areas as diverse as employment services and water management, and a well-designed carbon market is a logical next step.

The virtuous circle requires a further recognition that, contrary to the claims of classical economics, much human behaviour is predictably irrational. Policy should be developed with this insight in mind, rather than the assumption that individuals are perfectly rational, utility-maximising calculating machines. Initiatives which put pre-commitment limits on gambling losses, or provide opt-out default superannuation accounts explicitly recognize the limits of human rationality. And they demand small short-term costs, often by producers, in the pursuit of long-term social and economic gain.

The list of policy ideas that builds on these insights is long. We can capture the dividends of the mining boom by channeling super-profits tax into a sovereign wealth fund. We can increase housing supply by restricting negative gearing to new-build dwellings only. We can finance infrastructure by tapping the nation’s superannuation pool. We can stimulate R&D, not only through extra public spending, but also by promoting competition so that our large oligopolists are forced to compete on innovation as well as price.

Each of these initiatives will attract resistance from privileged incumbents threatened by change. Yet each advances fairness as well as long-term prosperity. As we’ve seen in the carbon tax debate, the battle will be fierce. Progressive leaders face no more important fight.

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David Hetherington is the Executive Director of the progressive think tank Per Capita.