11/08/2015

Australia's national story is unique. A bushranger who spoke poetically about social justice is celebrated, at once a criminal and a national hero. Young Australians have distinguished themselves in war not just for their grit and bravery, but for the easy egalitarian ways between officer and soldier. Our democratic tradition was founded by a motley crew of gold diggers: women and men, local and immigrant, patrician and proletariat, united in protest under the Southern Cross. Through each of these foundation stories runs a common thread: equality.

The resulting distribution of wealth is out of whack with our national values. Today, the nine richest Australians control as much wealth as do the poorest 4.5 million. Using income measures, Australia is today only the 21st most equal nation in the OECD - behind Canada, Korea, Ireland, Luxembourg and sixteen other developed countries.

Looking ahead to 2040, we are going to have to work and fight harder to sustain the equal Australia we believe in. Global forces are driving inequality up. But in thinking through an agenda to tackle Australian inequality, we accept the economic shifts underway. We cannot control global forces; we cannot wind back the clock. Raising tariff walls, nationalising the banks and shutting out immigrants will not bring back the old Australia. Nor should we want it to. Economic growth over the last 24 years has raised the incomes of the least well-off Australians significantly. But growth can have sharp edges.

We are concerned with how to help the vast bulk of Australians adapt to a radical transformation of the global economy, so they can share in the benefits of economic change rather than be victims of it. But to solve the problem, we must first understand it.

Instagram is a social-media application you use to take photos on your phone and share them with friends. Today, Instagram has 300 million users and counting. Kodak, the photography company, had at its peak a 90% share of the US film market and 145,000 employees. But in 2012, Kodak declared bankruptcy, a casualty of the digital revolution. Months later, Instagram was sold for US$1bn. The company had just 13 employees.

Instagram is a commonly used example to illustrate how technology and globalisation are changing the economics of work. Instagram's market is everyone in the world with an internet connection, its cost of serving each customer is almost zero. And ultimately, its vast economic rewards - which once would have shared wealth, through wages, across many thousands of workers - sit in the hands of a small number of founders and employees.

These trends are not just evident in upstart innovators like Instagram. Clare represents many manufacturers in Melbourne's southeast and she is a regular visitor to local factory floors. Today, robots are commonplace. In many of these businesses, profits are going up, but the number of workers is going down.

At the lower-skill end of the labour market, jobs that cannot be outsourced or mechanised - such as food services and personal care - are growing in number. But, conditions there are deteriorating. The minimum wage has decreased as a share of the average wage - nearly 60% in the early 90s, less than 45% per cent today. Less than two-thirds of Australia's workers have paid annual leave and sick leave. More than a million workers are underemployed - they have some work, but want more and can't find it.

Australian families earn about 80% of their income from wages. So anything that affects how wages are calculated and distributed is likely to have a big impact on inequality. Technology and globalisation are at the root of the problem. Agriculture workers were replaced by farm machinery, manufacturers by robots. Now, those under threat are our paralegals, accountants and designers. Who will be next? An Oxford University study predicted in 2013 that almost half the jobs that exist today in the US will be replaced by machines within two decades.

Australia's designers, customer-service staff, medical and many other professionals are competing in a global labour market, or soon will be. For many, the pressure on wages will be down. But those with highly valued skills - brilliant managers, dazzling creatives, tech-savvy wunderkinds who can write code or design machines - will reap huge rewards. The guys who started Instagram are multimillionaires. Some Kodak employees who lost their jobs when the company went bust probably never worked again. Technology and globalisation are holding down wages and conditions at the bottom, and pushing them up at the top.

While wages matter most to income inequality, over the coming decades, trends suggest that capital income will play a bigger role in driving inequality. The amount of capital being held to generate income is increasing. Capital in high-income households is also delivering better returns than labour is in low-income households, so families who possess a lot of capital are seeing naturally higher income growth than those at the other end of the spectrum. And those who have the most capital are, in the main, already very wealthy.

In Capital in the Twenty-First Century, French economist Thomas Piketty used historical data for 20 countries to show that in a capitalist economy returns to capital will almost always grow faster than the economy itself. Piketty's findings - and recent Australian experience - suggest that capital, as with labour income, is likely to play a more significant role in driving inequality in the years to 2040.

Housing is a distinctively Australian wrinkle in the capital story. Historically, home ownership in Australia has not just been for the rich. But over the last generation, large numbers of young (and some not-so-young) Australians are getting locked out of the market. Research released in 2015 by the Grattan Institute showed that young people in the lowest income bracket are now half as likely to own a home as they were in the early 1980s. Meanwhile investors have increased their share, representing 25% of the values of home loans in 1995, and 40% by 2014. And 60% of all investor-housing debt is held by Australians in the top fifth of income earners. Housing, once an equalising force, is becoming part of the problem.

Declining home ownership among certain groups has been fuelled by high house prices, which have in turn been stoked by public policies - including limits on the growth of our cities, increased population size, cheap credit, the pension-eligibility test and negative gearing.

The policy mix needs to change. We need to increase the supply of affordable housing in our cities, help voters understand the links between higher-density urban development and housing affordability, and make a massive investment in public transport so that more parts of our cities are great places to live. And we need to wind back negative gearing. It's a tax break for investors that keeps house prices artificially high, young people out of the property market, and grows the wealth of the already wealthy.

How we collect taxes and distribute them through our transfer system (benefits such as pension and unemployment payments) doesn't make for riveting dinner-party conversation. But without this kind of redistribution, millions more Australians would live in poverty and our nation would be more unequal than Mexico, a land of shocking destitution and extreme wealth, of barrios and billionaire.

Australia's transfer system does a very good job of making our country fairer. Analysis from Professor Peter Whiteford at the ANU shows that Australia targets welfare spending at the people who need it most, better than almost any country in the world. This, though, is a double-edged sword. It means that when we cut welfare, we cut the living standards of the poorest people in the country, and inequality rises instantly.

The role of government in redistribution will continue to be contested over coming decades. The nation faces a series of rising bills. If governments manage this by cutting support to the most vulnerable, they make an explicit decision that while the nation grows wealthier, some should be left behind.

The federal budget is complex, and Australians cannot be expected to make sense of how different households will be affected by changes to our tax and transfer system over time. The federal government should release an inequality statement with each budget, so we can have a better-informed national debate about whether changes over time are fair.

In thinking about how to help Australians adapt to global economic change which gives much greater rewards to those with skills, the obvi