Ever since Freakonomics, economists have been boring spouses and dinner party guests everywhere, under the misconception that everybody is delighted and astounded by the counterintuitive wonders of the economist’s view of the world. Unfortunately most of them do not study things like why today’s bikie gangsters have crazy names like Ismail, Maher and Mahmoud, and no bikes; or why university graduates tend to live with their parents. Instead, they study things like the efficiency of the tax system or game theoretic approaches to optimal auction design.

Treasury Secretary Ken Henry fancies himself a bit of an accidental undercover economist too, and lightened up an Australian Council of Social Service conference with some wacky economic conundrums and paradoxes. “How much inequity should we allow?” was the speech’s title, which the cheeky rogue admitted was “mildly provocative” on purpose, designed to “help pique your interest”. Now an audience of luminaries from the ‘community services and welfare sector’ might think they know all about inequality. But had they ever thought about it like an economist?

On the other hand, take company tax, which at first glance would be of most interest to wealthier Australians. Reducing it would seem to be inequitable. But there are strong arguments to the contrary. In the face of competition from countries with low company tax regimes, higher company tax rates could work to reduce overseas investment in Australia, which could reduce the number of jobs available, lower the demand for Australian workers and, in this way, lower wages. This is the reason why many economists argue that, in the long run, company tax affecting mobile capital is paid by labour — predominantly geographically immobile unskilled labour.

The genre convention is to use each of these lighthearted OMG! flashes of enlightenment to illustrate a serious economic principle. In this case, the tenets of welfare economics. You see, society chooses the level of inequality, presumably by delegating one of its members to review the tax and transfer system. (“…and because it now appears to bear my name, I have even more incentive to get it right!”) But not in circumstances of its own choosing, because a fully equal society, which the Treasury secretary is as committed to as anyone (“a deep respect for the writings of Amartya Sen”!), dulls incentives. The point is to find exactly that optimal point where inequality is just motivating enough but not so motivating that it engenders “capability deprivation”, because once you’ve come down with capability deprivation, all the motivation in the world is liable to just make you sit around smoking ice all day then knife your bunkmate at the Salvation Army.

Granted, the sweet spot is hard to find, and ultimately it’s a trade-off which society weighs up carefully in the mind of its designated reviewer of the tax and transfer system. And it seems that this mind is concluding that as society we are altogether too equal and not motivating enough, given the immense labour shortage Treasury sees right round the corner. Again, the exactly correct mix might be a wildly utopian ideal, but Henry has put together a potentially achievable minimum platform:

  • the Newstart allowance (i.e. the dole), at around $225 a week, is not motivating enough and should be made more motivating so that the recipient feels more like getting a job or training.
  • The Disability Pension, at around $300 a week, is great at motivating people on the Newstart allowance to fake a disability or concoct a depression, but not so great at motivating the partially disabled to return to work or training, which is crazy because work “could make them happier and healthier and our society more equitable”.
  • Public housing rents set to 25 per cent of income are discouraging workforce participation because were the unemployed recipient to get a job their rent would rise; there may be more health and happiness to be found in the incentivising arms of private landlords. Of course, the welfare system should still assist by providing some funds for the renter to pass on to said landlords, so long “of course” as the level of rental assistance recognised “that compromise would be needed to balance incentives to work with some stability of tenure for tenants.”

Those irreverent economists!

Published in: on 5 April, 2009 at 1:05 pm  Comments (1)  

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  1. You can really see in cases like this why Marx believed that the bourgeois state functioned like a third leg of a stool, next to property owners and laborers. After all, we certainly wouldn’t want to question the imperative to earn a wage and pay rent; if we did, the optimizing of our state economists would cease.

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