Let’s take a moment to look at inequality on the sporting field by comparing one of the most unequal contests – English Premier League football – with one of the most equal – the Australian Football League. Of the last twenty EPL championships, Manchester United has won twelve. In the same period, no AFL team has won more than three premierships.
There are simple structural reasons for this difference. English football operates much like feudalism. The money from television rights is shared out according to each team’s finishing position, with the top-ranked teams getting the most. Players are signed by scouts, who search the globe for promising players. A recent report put Manchester United’s salary bill at £174 million (around AUD$265 million). The AFL is a great deal more egalitarian. Television revenue goes to the league, which shares it out evenly among the teams. Players enter the game via a draft, in which lower ranked teams get first pick of promising players. And a team’s total salary bill is capped at about $9 million. Teams such as the Geelong Cats have argued that the AFL should do even more redistribution, but everyone admits there is more equalisation in AFL than English football.
Supporters of the more unequal game might point to the innovations that English football engenders. With such vast resources, Manchester United is at the cutting edge in its use of technology, development of game strategies, medical treatment of injured players and selection of new recruits. A phenomenally rich club is able to pioneer techniques that are then adopted by other teams.
But inequality comes at a cost. Economists describe the Australian Football League as having more ‘competitive balance’ than the English Premier League, meaning that you’re more likely to see an upset at the AFL. The main reason to make any sport more equal is so that it becomes interesting to watch. English football these days tends to be tiresomely predictable.
It wasn’t always like this. If you look back over the eleven decades of both tournaments, you’ll find that the top-scoring team has won a similar number of times. Manchester United has been the champion 17 per cent of the time, while in the AFL (and its predecessor, the VFL), Carlton and Essendon have each won 14 per cent of premierships.
Yet in recent years, the two tournaments have radically diverged. English football has become increasingly unequal, while the AFL has been fairly equal. Take the Adelaide Crows: in 1996, they came twelfth on the ladder. In 1997 and 1998, they won the premiership. In 1999, they came thirteenth. Such a story of rags to riches to rags is inconceivable in English football. For over twenty years, Manchester United has been among the top three teams (with the result that half of all English fans follow United). As the sports economist Stefan Szymanski points out: ‘even if United fans don’t care about the rest of the English Premier League, surely their own interest in the League is made more interesting by having credible rivals?’
Inequality not only has costs across sporting teams; even within teams, larger gaps can reduce performance. A recent study looked at the significant rise in salary inequality in US major league baseball. It found that teams with large gaps between the best and worst paid players underperformed those with more equal wage distributions.
Robert Lucas argues that ‘of the tendencies that are harmful to sound economics, the most seductive, and in my opinion, the most poisonous, is to focus on questions of distribution’. Martin Feldstein believes that ‘there is nothing wrong with an increase in wellbeing of the wealthy or with an increase in inequality that results [solely] from a rise in high incomes’. One of the arguments most often made by such critics is that discussions of inequality distract from the more important problem of improving outcomes for the truly disadvantaged. Why worry about the gap between the rich and the rest, the argument goes, when we should be concerned with the wellbeing of the poor.
The problem with this argument is that while we might be able to set an appropriate poverty line for a decade or two, rising incomes for the middle class will eventually change our notions of what poverty means. For example, the seven-shilling minimum wage that was seen as reasonable in the 1907 Harvester judgment would be regarded as grossly inadequate today. The least affluent Australians are richer than half the world’s population, but we wouldn’t tell someone in Blacktown to compare themselves with the poor in Bangladesh. Even our definitions of homelessness depend on what is classed as ‘inadequate housing’: by today’s definition, most nineteenth-century Australians would be regarded as homeless. You can’t define poverty without thinking about what’s normal in a society. As the British historian Richard Tawney neatly noted: ‘what thoughtful rich people call the problem of poverty, thoughtful poor people call with equal justice a problem of riches’.
The interrelationship between the wellbeing of the rich and poor was recognised by the grandfather of modern economics, Adam Smith, who argued:
This disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition … is … the great and most universal cause of the corruption of our moral sentiments.
To Smith, it was only fair that everyone should get a share of the national wealth, that schooling be free, and taxation be progressive. A focus on inequality has marked the writings of several Nobel laureates in recent decades, including Simon Kuznets, Amartya Sen, Joseph Stiglitz and Paul Krugman.
Broadly speaking, arguments about inequality fall into two groups. The first are ‘instrumental’ arguments: inequality matters because it affects something else that you care about (such as growth or mobility). The second are ‘intrinsic’ arguments: inequality matters inherently.
Let’s start with the instrumental arguments, beginning with the question: do unequal countries grow faster or slower? Christopher Jencks (Harvard), Dan Andrews (now at the OECD) and I took data for the past half-century and looked at whether initial inequality predicted economic growth. We found an effect, although not in the direction I had expected. Our study concluded that countries with higher income inequality experienced more rapid economic growth.
One reason for this might be that inequality spurs entrepreneurs to take risks. Starting a business can often be exhausting and risky. If your start-up idea means working sixteen-hour days and taking out a second mortgage on your home, you’re probably more likely to take a shot if the rewards of success are very high. Another reason might be that today’s rich provide tomorrow’s start-up capital. You can see this happening in places like Silicon Valley and Tel Aviv, where the super-rich often invest in new ventures.
Yet while the effects of inequality on growth are positive, ‘trickle-down’ works slowly. Viewed from the standpoint of the bottom 90 per cent, we found that it took over a decade for them to get enough economic growth to make up for having a smaller income share. Put another way, it takes quite a while for the pie to grow enough to make up for the fact that the poor have received a smaller slice.
Another instrumental reason to care about inequality is its impact on social mobility. Although the data isn’t clear-cut, it looks as though in countries with larger income gaps, the accident of your birth tends to determine where you end up. In the next chapter, I will discuss what we know about intergenerational mobility in Australia, and the suggestive evidence that inequality makes it harder for someone to move from rags to riches. Although inequality is often justified on the basis of mobility, it looks as though there isn’t much of a trade-off between the two. Instead, countries tend to get the best or worst of both worlds: equal societies are mobile, while unequal societies are also immobile.
A third instrumental reason to be concerned about inequality is its impact on democracy. As we saw in the Introduction, the rich are more likely than the poor to engage in political activity (such as contacting government officials or signing petitions). But there is also reason to think that rising inequality may skew political outcomes towards the interests of the most affluent. As the Republican Party boss Mark Hanna said of US politics in the Gilded Age: ‘There are two things that are important in politics. The first is money, and I can’t remember the second.’ Recent studies have found that US senators’ voting behaviour is very strongly related to the opinions of their richest constituents, modestly related to those of middle-income constituents, and unrelated to the views of low-income constituents. Contrary to Plato’s fear that the poor would wield too much power in an unequal democracy, the reverse seems to be closer to the mark.
Inequality can also affect political outcomes by shaping our notion of the common good. Democracy does not require perfect equality, but a strong democracy does depend on a society with enough equality that people ‘bump up’ against those who are different from them. Without a modicum of social mixing, shared interests can become subservient to self-interest. When the most affluent use different hospitals and schools, travel solely by private transport and live among those in their own income bracket, they may lose touch with the need for a strong safety net to protect the most disadvantaged. It works the other way, too. If the poor are cut off from the rich, they may cease to understand how hard you have to work to create a successful business. (In the United States, leisure time has become increasingly unequally distributed over recent decades – while the rich have a larger share of the money, the poor have a larger share of the leisure time.)
Looking beyond growth, mobility and democracy, others have claimed that inequality – as distinct from, say, poverty – worsens social outcomes such as health and crime. Yet on closer inspection, such claims turn out to be fragile. Inequality does many things, but its effects on life expectancy and homicide are small or non-existent.
Let’s sum up the instrumental arguments about inequality. It is modestly good for growth, although trickle-down is very slow. Based on the available evidence, inequality is probably bad for mobility and democracy. And inequality doesn’t appear to have much impact on health and crime.
Philosopher John Rawls’s great insight was to imagine how people would think about inequality if they did not know where in the pecking order they would end up. Put yourself in the position of a baby that’s about to be born: before you leave the womb, you have no idea whether your family lives in a shack or a mansion. Given that ignorance, what kind of income distribution would you choose?
Rawls’s conclusion was that from behind the veil, people would tolerate differences only if their effect was to make the poor better off. Put another way, you would only accept a smaller share if it would increase the total size of the pie. This means that you probably wouldn’t choose perfect equality, since that would be a world that didn’t reward effort. On the other hand, viewed from behind the veil of ignorance, extreme inequality would look as unattractive as putting all your income on one number of the rou
lette wheel. The ideal would be something in between.
The veil of ignorance makes us think about justice and fairness without regard to our own attributes.
In choosing a society with fair redistribution, we would likely have in mind the fact that our economic success is significantly shaped by factors we cannot control. For example, the genetic lottery shapes our intelligence, health and looks – all factors that affect earnings. Children who have the luck to be first born have certain advantages, but that doesn’t make them any more meritorious than their siblings. Luck also shapes how our talents are valued. If I’d been born into a competitive hunting society, my poor eyesight and light build would have made me a bad spear-thrower and a lousy fighter, but that wouldn’t have made me any less deserving. So too a plain-spoken factory worker is of equal intrinsic worth today as he was a generation ago, even though there is now less demand for his skills. Luck affects not only what we’re born with, but also whether our particular talents are rewarded by the society we join.
The veil of ignorance makes us think about justice and fairness without regard to our own attributes. Each of us needs to ask the question: what kind of a society would I want if there was an equal chance that I might be born weak or strong, male or female, with rich or poor parents, able-bodied or with a disability, Indigenous or non-Indigenous? Thinking about the world through the veil always makes me feel a little more vulnerable. My guess is that if you were faced with the prospect of starting life with myriad disadvantages, you’d probably opt for a relatively equal society.
Edited extract from ‘Battlers and Billionaires: the Story of Inequality’ in Australia by Dr. Andrew Leigh, published by Black Inc. RRP $19.95. Available in print and ebook. To purchase, visit http://www.blackincbooks.com/books/battlers-and-billionaires.