Inequality debate must consider wealth as well as income

By Leith van Onselen

The author of the 2017 Household Income and Labour Dynamics in Australia (HILDA) survey has reportedly questioned Labor’s claim that inequality is at a 75-year high. From The Australian:

Roger Wilkins said although the news was grim, it did not back up Labor leader Bill Shorten’s oft-repeated claim that inequality is at a 75-year high.

“I would push back a bit against that very broad sweeping statement that inequality is at a 75-year high, not just because if anything inequality looks like it’s been edging downwards since the GFC, but also because 75 years ago we didn’t have Medicare, we had a much less progressive income tax system, so I think when you take a broader look at the distribution of economic wellbeing across the community, I think Australia is a more equal place than it was even 40 years ago,” Professor Wilkins told Sky News.

Labor employment spokesman Brendan O’Connor said the HILDA figures confirmed Labor’s message about growing inequality, particularly among middle and working class families.

“What we’re seeing is a widening gap between the very rich in our society, and those people who are earning their capital from their hard work,” Mr O’Connor told ABC radio…

“You can stand back and look at, for example, the latest GDP figures that show employees are now receiving 51.5 per cent of income, which is now the lowest in more than 50 years.

“You can see the minimum wage 20 years ago was 63 per cent of the median wage. It’s now down to 53 per cent of the median wage.
“So this gap is widening, and there’s a series of reasons…

The first thought that sprung to mind when reading this latest salvo in the inequality debate is: what about the inequality of wealth? Why hasn’t that rated a mention?

While income inequality may not be worse than 75 years ago, can we say the same about wealth?

We know from the latest Census that home ownership among younger cohorts has collapsed, whereas it has remained steady or increased among older cohorts:

And this was backed-up by the HILDA survey:

For example, the rate of home ownership among 18 to 39 year olds declined from 36% in 2002 to 25% in 2014. And within this same age group, the decline in home ownership has been largest for families with dependent children, falling from 56% to 39%.

Moreover, even for those in this group who have managed to buy a home, mortgage debt has risen dramatically. In 2002, 89% of home owners in this age range had mortgage debt, whereas by 2014 this had risen to 94%.

The HILDA survey also showed that differences in average wealth by age have grown dramatically. For example, in 2002 the median net wealth of those aged 65 and over was 2.8 times that of people aged 25 to 34, whereas in 2014 this ratio had increased to 4.5:

Put simply, inequality of wealth must also be considered, which bolsters the case for Labor’s inequality agenda.

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Comments

  1. this “wealth” has to be almost entirely bound up in home values, but i still quite dont know how it’s calculated. if i take out a mortgage with a 5% deposit on a million dollar sky kennel am i now a “millionaire”, or does only money paid towards a mortgage (not counting due funds) count as “wealth”? are these figures for households or individuals? find it really hard to believe the average 25-34 year old has a 200K net worth or there abouts.

    • Tassie TomMEMBER

      The two things that would contribute to most peoples’ net wealth is real estate equity and superannuation.

      If a 30 year old has been in the work force for 10 years earning $60,000pa, then they would already have about $60,000 in compulsory superannuation contributions. That goes a long way to their $200,000 “average” wealth.

      And remember – it only takes one 30-year-old to have been gifted a $1 million terrace house from their parents to bring the “average” of four other 30-year-olds with absolutely nothing up to $200,000.

      • Jumping jack flash

        Ah yes, never forget there’s lies, damned lies, and then, statistics.

        If averages aren’t quite cutting it to show that everything is awesome, while 49% of your population is writhing around on the ground on fire, you simply switch to averages of averages.

        Bring in the time aspect to show that on average, using the averages of the past 10 years where most people were not on fire, the number of people on fire right now is not a big issue at all.

        And, look, if you break it down into percentages of days on fire, there’s a total of 3650.something days in 10 years (on average), and only half the people have been on fire for a few hours which is such a tiny, tiny blip in the scheme of things, it hardly rates a mention, really.

        And the trend, if you extrapolate, is completely solid.

  2. ceteris paribus

    Exactly Leith, the fortunate Melbourne homeowner in the last year accrued over $160,000 in net worth per $1m of property or part thereof, mostly tax-free and, of course, rent free, before getting out of bed. The property bubble alone has created huge wealth division.

    • When Thomas Piketty published his fat volume on trends in wealth inequality, one commentator / economist after another pointed out over the next year or so, that almost all the increase in inequality in recent times could be explained by the inflation in value of urban land. Piketty himself has a massive blind spot on this point, explicitly dismissing in his own discussion of the issues, any need to distinguish between wealth gotten by supplying goods and services in competitive markets and providing consumer surplus; and wealth gotten zero-sum in asset price inflation.

      Furthermore, the trend in Piketty’s data, to increasing equality from 1900 to the great reversal in more recent times, can be explained by the corollary to the contemporary inequality: automobile based expansion of cities making land supply competitive and collapsing the real price of urban land.

      This is so obvious from any available data, that the economics profession is inexcusably incompetent for not having it as a main pillar of their understanding of these issues. There is an undeniable correlation between rebound in real urban land prices – the return of extractive economic rent (of exactly the kind that led to the rise of Marxism and nationalisation a century ago) – and the onset of regulatory chokes on converting rural land to urban use. Britain in the 1950’s. California and Vancouver in the 1970’s. Toronto (but not all Canadian cities) in the 2000’s. Australia and NZ in the 1990’s.

      The absence of this rebound in cities that are still free to bring what was rural land into their local economy, is also undeniable evidence.

      Now watch the usual trolls that infest the blogosphere in deliberate obfuscation of this issue, deluge me with all their fraudulent and treacherous arguments. One, two, three….

      • ErmingtonPlumbing

        I like your penmanship Phil,…but calling those people “Trolls”, for simply and aggressively advocating for their own interests seems a little unfair.
        Isn’t it considered very unwise to bite the hand that feeds you,…and who feeds the “Qualified Economists” of today,…post Thatcherism,…mmm?

        https://youtu.be/mH8FWrbzxEs

        I do acknowledge that many of them have been so educated, indoctrinated and propagandised at Uni, through the media and in workplace, to the point of sometimes not knowing any better,.. as they say, there are few cynic at the top of any system,…but why do they have to be so sycophantic towards their Plutocratic benefactors?,….that makes them more Sluts,…than Trolls.
        Doesn’t it?

      • Thanks, Ermington.

        Sluts is probably the wrong word too, for brainwashed people. I have sometimes used “Janissaries” or “Droids”, but I would be pleased to have suggestions.

        Some of the people I have encountered on here, can fairly be called “trolls”. They never accept evidence, they are not out to prove their point of view with honest argument, they are out to sustain ignorance and keep people confused. There are several likely reasons someone might want to do this. It would be necessary to counter-troll, and present the evidence-based counter arguments to their BS every time they post; day after day after day until goodness knows when.

        The consensus among the core MB team, and the longest-term participants on here, has long been that “supply of land” is important. The trolls I am referring to don’t merely try to make it “less important”, they try to make it “of no importance at all”.

  3. Re: ‘minimum wage 20 years ago was 63 per cent of the median wage. It’s now down to 53 per cent of the median wage’ – simple question please?

    Is this possible from negative gearing – that is, say I negatively gear property to reduce my income, for purposes of reducing tax correct? Would this not show as reducing income at the higher end disproportionately, hence showing lowered income inequality.

    Can someone please explain if my understanding is correct. Genuinely do not get property-tax stuff.

  4. A glimmer of hope for the rent/stay at home young adults. See The Canada 2020 Feb 2017 initiatives, http://innovationproject.ca/big-ideas/, where a whole of system seachange is hypothesised to bring back growth in innovation exports (main game). Well he Australian oldies aren’t going to do that, it’s the young adults except that they rent or are at parents home in some kind of zombie-half life state, so why would they bother just to pay more rent?? But Canada has more ‘go’ as with 75%+,- exports to US it has US financial system support (should be cheaper finance). We don’t. But a push for China, India, & South Africa to form their own big deep financial centre could fix that after we cut lose from US ones.

  5. ErmingtonPlumbing

    why were the lower classes not prepared for the changes in the economy and the accompanying political changes in spite of the fact that the labour movement has been a powerful influence for most of the century? The stratification of society is increasing, but the lower classes are becoming less organised and less able to use their numbers to influence the development of society via our representative democracy.”

    “Let us admit the fact that we have no analysis, no understanding at all. All we have is confusion dressed up as progressive thinking.

    When I have been struggling with these questions, I have gone back the early thinking about history and society of the nineteenth century international labour movement. A main idea was that social being determines consciousness, that is, economic relations in society determine our thinking and our culture, and that our thinking is much less conscious and free than we think it is.

    If we allow ourselves to analyse our society in the way I think early social democrats would, I think we would come to the following conclusions:

    Society is stratified. There is a small group at the top that is influential. There is a middle stratum that possesses intellectual tools and performs qualified work. The third and lowest stratum lacks intellectual tools, and does manual, often repetitive work.

    The middle stratum consist of two groups with no sharp boundary between them. One performs the qualified work in the production of goods and services (the ‘professionals’), the other (the ‘intellectuals’) has as their function to uphold the cultural, political and legal superstructure that is erected over and mirrors the base of our society, the market economy.

    I believe that a main function of our culture, from fine arts to footy today is to make people unable to use their intellectual faculties to formulate effective criticism and analysis while still allowing them to do their work in the economy. In this talk I use the word “culture” in a wide sense, including not only art and literature but also our social and political thinking. To intellectually format people, but still let them acquire the knowledge and develop the faculties needed for them to be productive is a complicated process. Therefore our culture is complex and difficult to analyse.

    Our society and our culture is not a conspiracy. There are no cynics at the top of the pyramid who use their power to maintain an unnecessarily unequal society. Stratified society is perpetuated because of the self-interest that everybody has in not sinking down. People believe what it is in their interest to believe. Influential people believe that a stratified society will always be necessary for economic growth and development. Their subordinates, the intellectuals of the middle stratum who maintain our culture, sense the cues from above, then produce ideology for the conservation of the current state of things, but are not conscious of the reasons for their actions.

    So, the objective function of our culture is to stop people from breaking away from the hierarchy, but at the same time allow them to develop specialised areas of competence and creativity so that they can participate in production and even develop the economy. Our culture treats you in two different ways depending on whether you are born into, or moving towards, the lower stratum or the middle stratum of society.

    Workers need only limited intellectual tools. After a basic education, the face that Culture shows the lower stratum is one that has the objective function of deterring them from unauthorised intellectual activity, that is to use their language and their knowledge to analyse our society and their position in it.

    It is therefore wrong, as the present prejudice does, to regard the lower stratum as hopeless yobbos who refuse to participate in a cultural life that would make their lives richer. On the contrary, they are right in rejecting most of our culture, but they throw out the baby, the useful intellectual tools, with the bath water. Most people unnecessarily have a bad conscience for their lack of interest in culture. They shouldn’t. Most of our art, literature, history writing, philosophy, social thinking and so on really is as irrelevant as most people think. Not by accident, not because those who made it are useless and isolated from real life, but because it is one of the objective functions of our culture to deter most people from acquiring intellectual tools. I think that much of our official culture exists in order to scare the majority of the people away from acquiring the habits of critical reading and analytical thinking. And at the same time as our schools often fail to interest children in reading and social and political analysis or even convinces them that such activities are futile, students are given the option of taking subjects like Soccer Excellence or Rugby League Excellence or Film Studies at High School as if these are the qualifications necessary for their futures.

    And if people can’t be prevented from independent thinking by means of discouragement and strict formatting, there is a last net which catches almost everybody who makes it that far. I believe that most of what is seen as progressive and radical thinking today in our cultural, academic and intellectual life are simply diversions for keeping rebellious minds occupied and isolated from the social predicament of the lower classes.

    The great mistake of the Social Democrats of all countries is that they put all their efforts into economic redistribution and failed to build a movement that could take up the battle about the laws of thought. The Social Democrat leadership thought they were going to solve the problems with some major reforms and settlements between industrialists and representatives of the majority. Now when the economy is changing, and the Welfare State is being dismantled, the majority of the population are unable to take part in the analytical debate about their future.

    Of course many people will think it is outrageous when I dismiss much of our contemporary cultural and academic life as being just a big confusion-producing mechanism in the service of social stratification, that keeps dissenters occupied and makes it difficult for people to analyse our society so that they can organise themselves politically and try to rid society of the things that divide us and consume our energies (drugs, crime, ethnic conflicts, discrimination and so on).

    But I have been driven to this desperate conclusion by the fact that our current thinking can’t provide any solutions to our problems.’

    http://australianpolitics.com/2000/08/12/noel-pearson-the-light-on-the-hill.html

    • Isn’t it simply that the infamous US, UK, GER & Swiss finance cartel has exhausted the opportunity to extract value from the developing world, or the developing world is awakening, and is now turning on its own to support its infinite greed.

  6. Tassie TomMEMBER

    One of the biggest problems with wealth inequality, and in particular high asset prices relative to wages, is that it reduces social mobility.

    You can get yourself highly educated, work hard in a high-paying job, but your economic rank will not improve by much. And conversely if you are born rich then you can do not very much your whole life, but with your asset base so large you are unlikely to experience significant declines in your economic rank.

    A graphic example is the Greeks in Melbourne. They came out in the 1950s. Greece was ravaged by WW2, most of the migrants came with very little behind them. However, they could get jobs as factory workers or builders labourers or market gardeners, and with their humble income they could rent a house, save some money despite renting, and then buy a house. With a house as a base they could provide their children with (reasonable) quality public education and a stable upbringing, and now many of their children are doctors and lawyers and bankers and businesspeople and are doing very well.

    It is really difficult to see the latest waves of migrants’ children having these opportunities – they cannot save while renting, they will never be able to afford a house, and the quality of public education has arguably declined relative to private education and would make it very difficult for their children to “get a good job that pays good money”.

    I wonder if there is a social mobility index, and I wonder how that has changed with time?

  7. I think the debate should consider our first born and family heirlooms and the air we breath !

    Why should any of us peasants have the right to property and liberty, its all just a cover for those evil corporations ?!

    Better that we appoint benign, wise expert politicians and technocrats to seize the means of production and distribute everything in their infinite wisdom !

  8. Spot on UE.Income tax too high – enterprise is stifled. Wealth tax, Swiss style would be nice, capital transfer tax not bad, deals with the cost of living in a community with a safety net.

  9. Professor Wilkins was right to put this subject in perspective. To remind everyone that although Labor is harping on about inequality at every opportunity (I’m under 30 and can assure Labor this continual moaning is driving me nuts) the reality is we are more equitable now than forty or seventy five years ago.

    I don’t expect to have the same wealth or assets as my parents at this stage of my life but eventually I will. The inequality of wealth is a generational issue associated with accumulation of assets over many years, primarily property for many and a lifetime or work or business success for others. Don’t begrudge this success after all everyone at a place like Macrobusiness is here to gain insight into markets, understand cycles, be aware of investment opportunities (such as Macrobusiness’s own Investment Fund) all with an eye focussed on ensuring their own personal financial success.

    • Disagree Simone. The fact that people were less equitable in the time of the Robber Barons in the USA is not to the point. People who work need to be properly compensated and the income tax system is inequitable. People who have assets need to be taxed, especially real estate where sitting on your arse on a block of land pays more than working your guts out. This is obviously grossly unfair. Banjo Paterson with his Georgist views consider that such unearned wealth should go to the state.

      “To whom does the finest house in Sydney belong? It belongs to a man who inherited a huge fortune made solely out of the rise and rents of real estate near Sydney: a man who counts his fortune by hundreds and thousands, and spends most of his time in England. He never did a day’s work in his life, and yet can have every luxury while hundreds of his fellow countrymen have to toil and pinch and contrive to get a living.”
      “The injustice, the stupidity of the arrangement consists in the fact that our immediate predecessors granted away for ever and ever in fee simple, free of rent, the best lands we had, and left the present generation to wilderness.”

      “All value created by the State (should) go to the State.”

      “When the land was granted away in fee simple a cruel mistake was made which has early shown its effects on us and our prosperity. The present system is absurd and unjust, in that it enables some people to get a lot of benefit from the community to which they have no right, and it discourages industry and prevents production.”
      https://www.prosper.org.au/about/geoists-in-history/banjo-patterson/

      I would tax work lightly and unearned wealth heavily.

    • I don’t expect to have the same wealth or assets as my parents at this stage of my life but eventually I will.

      On average, only if you inherit them.

      There have been numerous posts here on MB over the years (not to mention elsewhere) showing that current generations have less wealth than previous generations did at the same stage in life.

      • That’s where the problem lies, comparing 25-35 year olds today with 25-35 years ten or twenty or more years back. University (often extended or dual degree), travel, establishing career all delay the onset of formation of wealth. Think of it as freer longer, richer later. Some of us will benefit from inheritance but that goes for everyone with parents or grandparents doesn’t it. Unlike Fitzroy above, I don’t see a problem with unearned wealth, if anything, something of a bonus.

      • That’s where the problem lies, comparing 25-35 year olds today with 25-35 years ten or twenty or more years back. University (often extended or dual degree), travel, establishing career all delay the onset of formation of wealth.

        Uh huh. How are they any different to apprenticeships and military service ?

        You can do better, 3d.

      • Very different Mr Smithy. Those who undertook apprenticeships or entered military service immediately entered the paid workforce at a comparatively young age. Those completing studies delay decent incomes for five or six years and many retain HECS debts too. Traditional adulthood as in career, property, children are all delayed and as such, the comparison criteria with previous age cohorts is largely irrelevant. My parents had three children, a house, a single income and holiday shack on the Peninsula by the same age I am now. Very different.

      • drsmithyMEMBER

        My parents had three children, a house, a single income and holiday shack on the Peninsula by the same age I am now. Very different.

        Yes, well, houses cost ca. 1/4 as much, so it was very different indeed.

        How much more than them do you earn in real terms at the same age ?

      • Lol, tried being a Blackfella and got unearthed, now try a new gender. Probably a transgender lesbian jew next time. Keep trying 3d

    • “Professor Wilkins was right to put this subject in perspective”.

      Correct. And here is Professor Wilkins putting the subject in perspective:
      “inequality is currently high by modern (Australian) standards and … there are things we can and should be doing to reduce inequality”.

      I am glad you agree with his perspective Simone.

      “the reality is we are more equitable now than forty or seventy five years ago”.

      Are you going to support that or are you just going to say it?
      In 1981-82 the Gini coefficient for household income inequality was .27 in 2013-14 it was just under .33

    • Jumping jack flash

      “I don’t expect to have the same wealth or assets as my parents at this stage of my life but eventually I will”

      you lost me here.
      Your desire to have as much as your parents is based on a flawed assumption where you think that you can, because they did.
      It isn’t going to happen because there’s just not the same amount of debt capacity left in the system.

      We really wrung out the turnip over the past decade or two. What we’re getting now is just the last few dribbles while we game the system with artificially lower interest rates and use immigrants to try and frack out the last bit of debt capacity.

    • For those who pay the GST on top of the top marginal rate with the levies and the uplift, it is about 60%, with the BAS payments this is paid usually quarterly.

      • drsmithyMEMBER

        Not sure what the BAS has got to do with it. GST is paid by the purchaser, it’s only collected by the seller.

        The difference is that in 1950 the top rate kicked in at 10,000 pounds. Apparently the average annual wage in 1950 was about 433 pounds, attracting a marginal rate of 13%. Today that would be equivalent to about $55k (I am using the median rather than the average), attracting a marginal rate of 32.5%.

        So the top rate kicked in at ~23x typical wage. Which today would equate to about $1.2m.

        There is no way the income tax scale is as progressive today as it was in the past.

      • The people who pay the tax are the people who do the work. In the hands of the worker he or she pays 600$ to the tax office on a1000$ job

    • You’re right it’s rubbish. Menzies had the top marginal rate at 75% at the start of the 50s.
      Also worth considering: biggest one off tax cut to the rich in Australia’s history came from the working class hero Paul Keating in the mid to late 80s. Top rate was cut from 60% down to 49% I think.
      Pretty sure the sharpest increase in the Gini coefficient for household income inequality also occurred under Keating.

  10. what about the inequality of wealth? Why hasn’t that rated a mention?

    Because whenever anyone in the media talks about taxing “the rich”, they mean taxing income.

    Conflating wealth with income is standard practice in Australia.

  11. Yes, asset prices are indeed the main driver of wealth inequality but people need to bear in mind that these things go in cycles:
    Wealth is only a snapshot in time i.e. I own property worth (today) $2m and I have debts of $1m, leaving me with a net worth of $1m. However, an economic slump could very easily reduce my net worth if it were accompanied by a substantial drop in property prices i.e. My property is valued (tomorrow) at $1.25m, while my debt stays largely static, meaning my net worth has plummeted 75%.

    The big danger today is that people treat their net worth (today) as money in the bank and they live like it is.

    • Jumping jack flash

      “However, an economic slump could very easily reduce my net worth if it were accompanied by a substantial drop in property prices”

      oh for sure, but while the debt is flowing free and/or there’s plenty of cashed-up foreigners brought in as buyers of last resort, it’s all going to be apples, mate.

      As the debt pushes prices up, it simultaneously increases debt capacity, and secures itself from risk.

      • “As the debt pushes prices up, it simultaneously increases debt capacity, and secures itself from risk.”

        That’s correct to an extent — it does increase the collateral against which further debt can be loaned but it’s a ponzi scheme all the same. And no it doesn’t secure itself from risk — at least it didn’t in any other country that has had a housing crash in the past. As prices go up the absolute size of the loans go up (the increase in collateral is largely irrelevant) and the ability to service larger loans (absent commensurate wage increases) becomes more difficult. Banks can’t increase people’s wages but they can reduce lending standards which is what has supported lending for several years … until now. The wind has shifted, lending standards are tightening up and Aussies are at debt saturation point — only the foreigners are still having an influence (and that is waning).

        There will be an almighty adjustment to house prices here – especially once the Chinese ponzi collapses

  12. Jumping jack flash

    Stands to reason that there’s going to be a divide if you can become an instant multi-millionaire from effortlessly selling a house; the poor rube who bought it from you handed you an enormous debt mountain they’re now on the hook to pay off for the next 30 years.

    And that’s not even counting your super, if you have any.

    It only takes a few of these transactions to happen to skew the averages in any demographic.

    Its a marvellous system for the winners. They get maximum gain from minimum effort, which is the entire idea of the system – effortless millions funded by infinite debt.

    But for the debt-soaked losers who can’t or won’t flip, or weren’t astute enough to get debt-induced, infectious, capital gains from buying in an area of high turnover and/or debt concentration, well, they’re not looking so pretty.