01/02/2012 - 11:28

Accusations over income disparity a bit rich

01/02/2012 - 11:28

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The politics of envy have reappeared in the US, and could make their way here.

The politics of envy have reappeared in the US, and could make their way here.

BEATING up the rich is a tried and true political tactic, especially in tougher economic times.

US President Barack Obama is the latest to adopt this strategy, using his recent state of the union address to raise the issue of income disparity, which is the dog whistle for targeting the wealthy.

In the middle of an economic downturn that President Obama cannot be fully blamed for and, sensing vulnerability in his likely election foe, former private equity player Mitt Romney, the US president has decided on the ground where he would like best to fight.

Whether or not that will work will become clearer over the next few months.

However, we ought to be watching this closely because if attacking the rich works in the US, where financial aspiration is part of the culture and millionaires are celebrated as important contributors to society, then it is bound to be taken on with gusto again here where the tall poppy syndrome makes the wealthy a much less protected species.

That is especially the case for Western Australia, which has more of the wealth per capita (on paper at least) but few numbers when it comes to the democratic decision making. Of course in tough times, when the middle class switches from feeling wealthy to feeling poor (almost overnight in many cases), the wealthy are generally a minority no matter where they are. Let’s face it, politicians know that majorities don’t make good punching bags.

Beating up on the rich is really just a political strategy appealing to voter jealousy, because taxing rich people more has little impact on an economy, except to discourage them from investing.

In fact, I always find it a little absurd that when people are demanding lower interest rates, in part to get business moving and employing people, that they also want to raise taxes on the very people who make most of the investment decisions.

Of course, much of that jealousy is expressed about people who made it during the good times and, when the music stopped, seemed to have held on to it. It is a retrospective viewpoint, often held by those who squandered their opportunities when the sun was shining. 

What annoys me most about this political tactic is the big part the politicians play prior to a downturn, before playing the jealousy card and putting the blame elsewhere.

While I think the income gap issue is largely a furphy, the politicians never seem to recognise that if they believe this gap is a problem they ought to do more to understand it and manage its outcomes, rather than simply believing that pegging back the wealthy will achieve anything positive.

Income disparity is largely a furphy because the real tests of standards of living keep rising for everyone.  Child mortality, life expectancy, educational opportunity; these are the true measures of the health of society. 

In a place like Australia, I would find it hard to believe that, by any of these measures, we have gone backwards in the past 40 years, even though the gap between the so-called ‘haves’ and so-called ‘have nots’ has grown significantly. 

Even other, more financial indicators such as home ownership, foreign travel and cars per household would have risen in correlation with the gap between those at the top and those at the bottom.

An example is the debate around the car industry. The news that automobile workers are to lose their jobs and local production needs to be propped up makes many people feel threatened economically and, therefore, perceive themselves to be poorer.

Yet the gradual and sensible reduction in motor vehicle import tariffs over the past few decades has made cars so much cheaper. Couple that with banking deregulation, which reduced the barriers to buying a car. No matter what your income may be, you are more likely to be able to afford to buy a new car today than in 1970.

Sure, those buying bottom-of-the-range new cars still can’t afford a Mercedes or BMW, but they never could. Two decades ago, though, they had to put up with a second-hand vehicle; now they have a new one.

So it is their perception of their wealth and the likelihood of meeting their own aspirations that really counts, not the actual income gap. That perception changes with the economy and, the worse the economy gets, the more negative the perception.

Also, not all costs have come down.

Housing affordability is a real issue that has, in part, played a role in the perception surrounding income levels and their fairness. In the hierarchy of needs, a roof over your head is pretty important and the emotional attachment in the form of home ownership is unusually strong in Australia.

The cost of land and construction has risen markedly this decade, in part due to the taxes and regulatory burdens imposed by several tiers of government. I won’t blame politicians for all of the affordability issue, but they have played their part by ignoring or even welcoming the rise in house prices.

The first homeowners grants are the peak of political ineptitude on this subject. Those policymakers identified the broad problem and then created a solution that just made things worse. 

While the music was playing many believed it would never stop; that meant the high costs we are saddled with today were not seen as an issue during booming price rises. The high cost of homes, which are persistently expensive despite the current downturn, is definitely a negative indicator in my book when it comes to living standards.

The problem with high house prices is they are difficult to bring down for a whole host of economic and political reasons; so politicians need to do more to ensure housing prices don’t boom again to the degree they did this decade.

They need to find ways of using the tax system to reduce the incentive to invest in property at the expense of all other rational options – and that includes foreign investment. They need to ensure land is released more quickly. They need to reduce the regulatory burden on housing construction (imagine what it would be like if it was unionised as well), and they need to stop adding incentives for buyers just when their false exuberance is flagging in the face of reality.

To a certain degree, this is what happened in the car industry and it was a very successful outcome in terms of improving the position of Australians at every income level to buy a vehicle. Certainly that has, ultimately, come at a cost to a number of automobile industry workers; but their incomes (and therefore their contribution to the income gap) have been falsely inflated by anti-competitive regulations and subsidies, which actually made the gap worse rather than better.

The fact is, more Australians are better off being able to afford a cheaper car than allowing a few people to earn more than they should working in a protected industry that put cars further out of reach of those with lower incomes.

Therefore the more politicians can fight the issue of income disparity at the cost side of the equation, the less of a problem this perceived gap will be.

Unfortunately, fighting costs is harder than blaming the rich – and there is always someone whose political motivation to find a convenient target is greater than their desire to develop policies that might actually have a better longer-term outcome for the very people they claim they are trying to help.

• mark.pownall@wabn.com.au

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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