From John Ray's shorter notes
December 19, 2010
Australia squares the circle
I am putting up below a large excerpt from an article which sets out data tending to show that Australia scores very highly both as one of the freest countries in the world and also as one of the most "equal" countries in the world.
This has a huge bearing on Left/Right political controversies. The Left generally argue for more economic equality while conservatives generally argue for more economic liberty.
So what the Australian example shows is that such competing claims are not entirely a zero-sum game. You can at the same time have more of what both Right and Left want. I think that is a finding of very far-reaching implications for other countries, such as the USA. There are already major similarities between Australia and the USA so a convergence on the Australian system by the USA should, at least in theory, be much easier than most other sorts of change.
I think the analysis is so important that I am going to put up nothing else here today. I hope that anybody coming by today will use their time here to read at least my excerpt below, if not the whole original article
On the one hand you can be a small government, inequality-tolerant country like the United States; on the other you can be a high taxing, egalitarian state like the Scandinavian countries, and all countries fit somewhere on this spectrum from right to left.
What is not appreciated, but has been demonstrated by recent research, is that Australia offers a genuine alternative to these models—a unique form of low-taxing egalitarianism—that is both more successful and more sustainable than other models.
This combination of freedom and fairness in Australia has provided an environment conducive to economic reform and can continue to do so in the future.
Australia is one of the most economically free countries in the world, and has for some time been among the smallest governments in the developed world, with low levels of tax and spending. Last year, according to the OECD’s latest Economic Outlook, Australia was the Thatcherite’s number one performer, with not only the lowest level of government spending of all developed countries but also the lowest level of taxes of all developed countries (equal with South Korea).
Although it is easy to find waste in Australian governments, it is still a lean and small state when compared with other developed countries. In fact, Australia’s relative position in Chart 1 is likely to be enhanced through its very low levels of public debt -— the high levels of debt across most OECD countries imply higher future tax levels to repair severely impaired balance sheets.
The important point of this measure, though, is not a particular level and ranking in any one year but the general level, which shows Australia as a very low tax country among peers. Even when other indicators of economic freedom are included, Australia performs extremely well.
The US-based Heritage Foundation think tank compiles an annual Index of Economic Freedom, which measures each country over a broad range of economic freedom indicators, including tax levels, business freedom, trade restrictions, property rights and labour market flexibility, among others. The latest Index (2010) places Australia as the highest ranking developed country for economic freedom (ranking third overall after the city-states of Hong Kong and Singapore).
The smaller size of government in Australia is a key contributor to the dynamism and strong economic performance the nation has demonstrated over recent history. Treasury official David Parker is correct when he says pinning down a precise optimal size of government is difficult, but:
"[both] theory and empirical research by the OECD lend support to the notion that government expenditure, and the taxes required to finance it, can have negative effects on efficiency as governments become larger. Similarly, it appears that a larger government is associated with slow growth. So, it is reasonable to think that Australia has been well served by having a general government sector that is relatively small and stable compared with other OECD countries".
Obviously, there is a limit to how small a government can be without encountering significant drawbacks. Where that point is will be a matter of infinite debate, suffice to say that it is below Australia’s current level. As it is, Australia is a highly successful economy with one of the highest economic growth rates in the OECD over the last 20 years. It has very low government debt, it avoided the Asian Financial Crisis in the 1990s, and it was the only major developed country to have avoided a recession during the recent global financial crisis. It also has one of the highest standards of living of any country in the world.
Fairness is an inherently subjective concept; nonetheless, it is critical to successful governance. In this article, economic fairness is used in the sense described by former Prime Minister John Howard above, that is, the avoidance of levels of inequality that impede cohesion and opportunity.
Some classical liberals, such as Milton Friedman and Friedrich Hayek, believe that the only criterion of fairness is adherence to proper procedural norms, and that measures of income and wealth distribution are irrelevant. Peter Saunders (formerly of the CIS), describes this view of fairness:
"the liberal conception of fairness denies the relevance of any distributional principle, whether egalitarian or meritocratic. Fairness simply requires an open system governed by the rule of law; it is judged by procedures, not outcomes ... Provided these rules are followed, the result is ‘fair.’"
While this view correctly values rules-based procedures, ignoring the distribution of resources in society would be deeply unwise for policymakers. To begin with, high inequality can impair social cohesion and lead to civil unrest and riots.
History shows us that in extremis, wide income disparities have contributed to countless violent revolutions. Indeed, the University of Chicago has published research estimating the increased likelihood of revolution resulting from measured increases in inequality.
On a more mundane level, income inequality is a key source of populist economic policy. American libertarian judge and author Richard Posner has lamented some of the serious policy problems in the United States caused by a damaging level of inequality
Australia feels egalitarian, and many outsiders have also commented on the egalitarian nature of Australian society. In his book Down Under, the American-British travel writer Bill Bryson joined a long list of observers in describing Australians as ‘instinctively egalitarian.’ Apart from this strong sentiment (which is important in itself ), it is also interesting to consider a range of economic data released in recent years that shed new light on the extent to which our notions of egalitarianism translate into practice. The data below looks at how Australia compares in terms of wealth inequality and income inequality, and shows the extent to which the government policies have contributed to those levels.
When comparing the efficiency of reducing inequality, that is, how much inequality is reduced for the size of the welfare bill and tax levels, Australia ranks as the most efficient country. The highly egalitarian result for Australia is achieved through the most progressive transfer system in the developed world, coupled with one of the most progressive tax systems in the OECD.
We have very little government money going to higher income people and low levels of tax on lower income people. Chart 5 (page 8) illustrates this tight level of targeting, showing Australia as the means testing capital of the world, with the lowest percentage of government transfers going to the wealthiest half of the population of any developed country.
The tight targeting of government spending also means that Australia has the second lowest level of ‘churning’ among developed countries after South Korea (churning is the simultaneous payment of taxes and receival of benefits by households).
Mapping the freest and fairest
It is helpful to conceptualise the previous measures of size of government and inequality by placing them on charts (6 to 8), which we can call the freedom and fairness maps. (Note the year of tax levels has been selected to match the year of the inequality data, and some minor countries have been omitted to reduce clutter.)
The most desirable sector for a country to inhabit in a freedom and fairness map is the south-west quadrant. Economic liberty combined with egalitarian distribution shows us the freest and fairest countries, and the countries that best combine those two attributes will possess both domestic harmony and economic strength.
I call this combined quality of Thatcherite low tax government and relative equality of resources an egalitoryan quality (of course, some might consider this a bit cheeky when one considers the historic associations of Toryism).
The north-east quadrant—high taxing inequality—is the least desirable position to inhabit, and countries in this sector will exhibit social conflict and poor economic performance. The other two quadrants contain outcome tradeoffs.
Socialists, blithely unconcerned by high tax levels, would obviously prefer the northwest quadrant, while some libertarians might prefer the south-east corner of high inequality and small government. Classical liberals, according to the earlier definition, will have no preference for south-east or south-west, as long as it is south (and would similarly have no view on whether north-west is superior to north-east).
So who is the freest and fairest of them all? Australia is the only large developed country that occupies the south-west quadrant in both charts. (South Korea would possibly occupy the same region, but Warren did not assess Korean income inequality under the more appropriate methodology.)
Other countries that share the southwest sector in one respect fail in the other. Low-tax Switzerland is quite even on income distribution but has one of the worst wealth inequalities in the developed world. Low tax Ireland, whatever its positions on the charts at the time of measurement, has an economic crisis and all indicators lurching to the negative.
Both graphs make a reasonable case for Australia as the standout egalitoryan country. In cricketing terms, we are an excellent batsman, a first-class bowler, and possibly the best all-rounder in the world.
Certainly among the most relevant and comparable (high immigration, heterogeneous, Anglosphere) cultures, Australia stands out for its combination of small government and lower inequality. In fact, Australia’s position of relatively low inequality is probably even better than it looks on these charts because of its very low level of government debt. Most other OECD countries are likely to engage in regressive measures in coming years to repair their serious financial positions.
This note originated as a blog post. For more blog postings from me, see
EDUCATION WATCH INTERNATIONAL,
POLITICAL CORRECTNESS WATCH, and
AUSTRALIAN POLITICS. I update those frequently.
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