Friday, December 29, 2006

Investing for Mobility: Fred Argy

FRED ARGY has advised governments from Menzies to Keating and has been awarded an OBE and made a member of the Order of Australia for services to economic planning. He has written widely, his latest being Australia Institute Discussion Paper no 85, Equality of Opportunity in Australia released in April 2006.

In this version of the article published in Thursday's Canberra Times he outlines the opportunity that Kevin Rudd has to promote true equality of opportunity in the coming election campaign.

* Read Nicholas Gruen and Don Arthur's reviews of Fred Argy's paper here.

Within days of becoming Opposition Leader Kevin Rudd drew a sharp distinction between two kinds of equality. Equality of opportunity was something he said he supported. Equality of outcomes was something he did not.

He is on the right track.

Australians like the idea of equality of opportunity because it taps into two of our most strongly beliefs – a system of rewards which is based on merit; and an equal chance to succeed.

They see no real point in equality of outcomes per se. We have enjoyed extraordinary prosperity, especially in recent years with the boom in export prices, so even the poorest Australians are better off than they used to be. And, while the gains in earnings have been skewed towards the top end, our progressive tax and social security system has done an excellent job of redistributing market income gains to the poorest 20% of households.

Another reason that we have no great enthusiasm for equality of outcomes is that we believe we have equality of opportunity.

We are very wrong...

Explaining why we don’t have true equality of opportunity and how to fix it is one of Kevin Rudd’s great electoral opportunities.

But first, let's define equality of opportunity, hereafter called EOP.

The narrow “classical liberal” view is that EOP merely means that each of us should be rewarded according to what we are able to bring to the labour market at any point in time. To achieve this the main thing the government needs to do is get out of the way.

The broader view of EOP is that each of us should be offered the opportunity to achieve our full potential over our lifetimes, irrespective of our social background. In order to achieve this the government has to minimise the risk factors and handicaps that hold us back early in life and ensure that there is access to education and other services that will allow us to achieve our full potential in later years.

Opinion polls suggest that this second broader notion of EOP is the one with the most support in mainstream Australia. It is also the one most likely to bind Australia together and it also the best idea economically, as it allows the full potential of the economy to be realised.

The best way to find out whether we are achieving broad EOP is through longitudinal studies that follow the same group of individuals over a long period of time. These can provide a useful measure of the relative “income mobility” in different countries – in particular the ease with which people of poor background are able to break out into higher income, occupational and social hierarchies.

What these studies show us is that neither of the two most talked about means of achieving equality of opportunity will do the job.

Freeing up markets facilitates upward income mobility but does not maximise it. It creates “more room at the top” but by itself does not ensure that everyone has the same access to the better jobs.

Income redistribution of the ‘passive’ (unconditional) kind cannot fill the gap because it does nothing by itself to develop human capabilities or to correct the underlying structural inequalities that distort the distribution of market incomes.

So what should we do? The studies suggest that the countries with the highest levels of income mobility have liberal economies mixed with high levels of social investment - in child development, public education, health care, housing, transport infrastructure, employment programs, – all targeted at the disadvantaged. The USA is not one of these countries. It has the freest and most productive economy in the world but because of its relatively low rates of social investment, fares badly on income mobility compared to, say, the Nordic countries.

How is Australia faring? In the past few decades we have both liberalised our economy, opening up new opportunities for enterprising people, and also invested heavily in our people, helping to broaden access to these opportunities. We have done well, ahead of countries such as the US and UK, although not as well as many of the smaller European and Scandinavian countries.

However, we now seem to be making the same mistake as the Americans – relying too heavily on economic freedom and not enough on active social investment to equalise opportunities.

Looking back at the main achievements of the Howard Government, most of them are economic. One could point to family benefits and lower unemployment as big social advances. And they are. But family benefits, however desirable, do nothing directly to increase human capability. And the Government’s success on unemployment conceals many worrying inequalities of opportunity in the labour market. As well, while national spending on health and education has increased, it has become less well targeted at the less privileged. The share of government benefits in kind going to the poorest households has been falling.

In my recent discussion paper for the Australia Institute, I highlighted a number of barriers to income mobility in Australia. They start in early childhood. These are perpetuated in adulthood and compounded by a range of barriers to employment, health, education, adult training, low-cost housing and public transport.

Most unskilled workers are trapped in chronic under-employment, relative low-pay, insecurity and unpredictable hours. We have large and growing education inequalities – in pre-schooling, secondary schooling and tertiary education. The technological divide is wide. And the availability and quality of health services is becoming increasingly dependent on one’s income and location.

The present distribution of market incomes in Australia might be merit-based at a point in time - but over people’s lifetimes it is at least as much a product of unequal opportunities as of relative merit. Many Australians are “stuck in the basement” not through lack of ability, effort or motivation but because but because they have no easy means of escape from the circumstances of their birth and the inequality of access to key services.

I fear that Howard’s recent WorkChoices and welfare access reforms will further compound the problem. They may help accelerate the transfer from welfare to work but they will lead to wider earnings differentials while at work and diminish workers’ voice in the workplace: More importantly, the reforms are very short-term oriented. They seek to achieve the desired employment outcomes almost exclusively by reducing the cost of labour to employers and applying the ‘stick’ to welfare recipients - instead of trying to overcome the low productivity and participation that results from poor education, inadequate training, geographical immobility and low work incentives. Moreover, the Howard reforms attack the symptoms of joblessness after they have occurred – when people turn up at the factory gate so to speak – and ignore the root causes which go back to the early childhood and teenage environment. They are “quick fix” policies without regard for the long term consequences.

By focusing on mobility and the means by which to achieve it Kevin Rudd can draw a real distinction between himself and John Howard.

The Howard way to high employment and productivity is not the only way. An alternative strategy would need to retain most elements of the liberal economy which Australia has built up over the last thirty years. For example, welfare support for able-bodied people should remain conditional on active searching for work or training. There should still be plenty of structural wage flexibility, so that wages can remain sensitive to shifts in relative productivity and structural change. And mangers should retain a considerable degree of managerial autonomy in hiring and firing (to allow firms to respond quickly and effectively to changes in market conditions).

But the alternative strategy should leave more room for collective bargaining, restore some worker-protection regulation and take a less harsh approach to access to welfare. And, most importantly, it should have as a cornerstone government investment to further activate labour participation.

The government should fund measures to correct early childhood disadvantages; remedial programs for older school children and youth who are under-performing; improved access to employment-enhancing services such as health, public education and public transport in low-income areas; retraining and life long learning programs; work wage bonuses such as tax credits for low-paid workers; assistance with entrepreneurial start-ups and targeted job-creation incentives; relocation subsidies to reduce the geographical mismatch between job vacancies and job seekers; and family-friendly policies such as flexible working patterns, paid parental leave, good quality and affordable child care assistance and family-friendly workplaces.

Mobility would be the watchword.

Would such a program be economically responsible?

It would have to be implemented gradually, with due regard for macroeconomic conditions. Over time, increasing mobility pays for itself by increasing the productive capacity of the economy. OECD studies make that clear.

In the interim, it could be paid for by broadening the tax base, eating into bracket creep or borrowing. Some of the cost could be recouped from the beneficiaries themselves through income-contingent loans like HECS.

An equal opportunity program would both appeal to Australian values and build the Australian economy.

And it isn’t being offered to the extent it should by the Howard Government.

Australia’s commodity price boom has generated 40 to 50 billion dollars of extra revenue for the Commonwealth over the last four to five years. Some of it went into the Future Fund but most of it was used to fund middle-class welfare and tax cuts.

The golden opportunity was missed.

Kevin Rudd has the chance to grab it.