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The Cost Of Inequality Can't Be Priced In Dollar Terms

Economics is about maximising wellbeing, not money.

28/11/2016 5:28 AM AEDT | Updated 28/11/2016 5:28 AM AEDT
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"If you believe that moving a person from $1 a day to $2 a day brings more happiness than giving a billionaire another dollar, then you’ve accepted the idea of diminishing marginal utility of money."

Why should we care about inequality? The starting point is to acknowledge what economics lecturers everywhere teach their first years. Economics is about maximising wellbeing, not money. If one person had all the money in Australia, we'd be just as wealthy, but much less happy.

Globally, there are about one billion people who live on less than a dollar a day. Most of it goes on keeping hunger at bay. But then there are about 1800 people who have more than a billion dollars. For them, more money means a faster jet, fancier jewellery or another holiday home. If you believe that moving a person from $1 a day to $2 a day brings more happiness than giving a billionaire another dollar, then you've accepted the idea of diminishing marginal utility of money. There is no better argument for caring about inequality.

Putting numbers around this can be tricky, but an analysis by Lateral Economics finds that to get the same increase in life satisfaction, you either have to give someone on $15,000 another $6000, or someone on $100,000 another $100,000. Lateral Economics estimates that the cost of inequality to national wellbeing is the equivalent of $54 billion, making it a bigger problem than mental illness, obesity or long-term unemployment.

Over the past few decades, a significant share of the spending by the super-rich has gone into competing with their extremely affluent colleagues. The supply of harbourside mansions is basically fixed, so their price has skyrocketed. So has the price of a bottle of Grange, a spot at a top grammar school, or a Sidney Nolan painting. No surprise: all have risen faster than inflation. These are what economists call 'positional goods'. They're scarce, and they signal your spot in the pecking order.

In the world of luxury yachts, one expert observes that "The client who 15 years ago would have been satisfied with a 40-metre yacht, which would then have been one of the largest yachts in the bay, is now surrounded by dozens of yachts of 60-70 metres, and this plants the seed that he really ought to upgrade". If you want a luxury car that will accelerate faster horizontally than if it was dropped off a cliff, then the new Porsche 911 Turbo will do 0 to 100 in 2.7 seconds, about two seconds faster than the same model 30 years ago.

By contrast, I recently visited the Launceston suburb of Ravenswood. Average household income is $32,240 and unemployment is 16 percent. Family violence rates are high, and children often miss out on things other families take for granted, such as a car, school excursions, or social networks that provide a first job opening.

It's not just in northern Tasmania that this is a challenge. One in five Australian families say that they cannot afford a week's holiday away from home once a year. One in eight cannot afford dental care. One in 20 cannot afford Christmas presents for family and friends. Underemployment is at a record high, and wage growth is at a record low. One in 500 Australian adults are currently in jail -- the highest share behind bars in 115 years. Home ownership is at a 60-year low.

There are massive inequities in almost every sphere of Australian life. For example, in health, the poorest Australians have seven fewer teeth, and live for six fewer years. In economic terms, this inequality has been growing. Since 1980, the income share of the top 1 percent of Australians has nearly doubled. This represents around half a trillion dollars that has been shifted from the bottom 99 percent to the top 1 percent. Would the world really be much worse off if we took the standard for affluence back to 40-metre yachts and sports cars that could do 0 to 100 in five seconds?

For years, researcher Paul Piff has been looking at how being at the top of the pecking order might change the way we behave. In one of Piff's studies, researchers slowly stepped on to a pedestrian crossing as a car approached, and tested to see whether the driver would stop. They then looked at the relationship between the value of the car and the behaviour of the driver. Among those driving the cheapest cars, all stopped to let the pedestrian cross. But among those driving the highest-status cars, nearly half drove straight through.

In other work, Piff has shown that high-status respondents are more likely to cheat on a test, lie in a negotiation, or endorse unethical behaviour at work. Yet while his studies show that putting someone in a high-status position tends to encourage narcissism, greed and dangerous driving, he also shows that these traits seem to be malleable. A small egalitarian prompt caused those at the top to behave just like everyone else.

Yet the risk is that rising inequality is also accompanied by fewer opportunities for people to empathise with those who are more vulnerable -- to rub shoulders with those who have different life experiences than our own. In the United States, researchers have shown that the top fifth of American families are increasingly different from the rest of society, in terms of family structure, educational habits and lifestyle.

While the Australian data isn't quite as nuanced, there is good reason to think that the same patterns hold true here. If you spend all your time in inner suburbia, it's easy to miss the extent of deep disadvantage, since Australian poverty rates tend to rise the further you go from the city centre. Compared with a generation ago, Australians are less likely to be part of a social group, a trade union or a political group. The share of the population that volunteers or plays sport has also fallen. There are fewer opportunities for the affluent to empathise with these who are less fortunate than themselves.

Equality isn't a fashionable buzzword -- it goes directly to our sense of national identity -- of Lalor, Lawson and Lingiari. Australians are rightly proud of our egalitarian heritage. But to preserve it for our children, we need to act -- before the gap becomes too wide.

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Andrew Leigh is the Shadow Assistant Treasurer, and his website is www.andrewleigh.com.

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