There is growing concern about inequality, and rightly so. There is growing inequality in most countries - marked increases in some, with more and more of each nation’s income going to the top, more people in poverty, and a hollowing out of the middle class. But the fact that there is so much more inequality in some countries than others means that the degree of inequality is not just a matter of economics; it is the result of policies and politics. Each confronts the same laws of economics, the same global economic forces, but how they respond differs markedly.
In the past few years, there has been a fundamental shift in our understanding not only of the causes of inequality but also of the consequences. There are two ways to do “well”: to increase the size of the economic pie, and be justly rewarded for doing so; and to seize a larger share of the nation’s economic pie. The former is called wealth creation; the latter wealth appropriation or rent-seeking. There is a growing consensus that an increasing share of inequality at the top arises from rent-seeking - whether it takes the form of the exercise of monopoly power, taking advantage of deficiencies in corporate governance to seize an increasing share of corporate revenues, or using political power to get public resources at low prices or sell government goods and services at inflated prices.
But such rent-seeking erodes economic performance. It’s one of the reasons that countries with greater inequality grow more slowly and have more instability - countries pay a high price for inequality, as the IMF has been emphasizing in recent years.
Australia is not the best country in achieving shared prosperity, but neither is it the worse. Its pre-tax and transfer inequality or its post-tax and transfer inequality are neither among the best among the advanced countries nor the worst. By the standard measures, it does neither the best nor the worse in “correcting” the before tax and transfer inequality.
While the US (like Australia) prides itself on doing things bigger and better than elsewhere, its achievement in creating the highest inequality level among the advanced countries is not something to be boastful about - or for others to emulate. As we look around the world, those countries that have most closely followed the American model have similar results - high levels of inequality.
Joseph Stiglitz Colubmbia University Nobel Laurette Economics