Welfare offers rich pickings for the wealthy
By Philip Soos, Deakin University
A few weeks ago, a Deakin University academic, Martin Hirst, made some interesting comments about the politics and economics of class warfare and redistribution. He correctly noted that the accusations of class warfare by Coalition politicians and newspaper journalists against the ALP in relation to the recent budget are clearly overblown. The usual rhetoric of socialism, class warfare, envy, punishing success, neglecting wealth creation and so on were bandied about.
The usual story is that the liberal-left side of the political and economic spectrum focuses more upon government outcomes, redistribution, regulation, and social welfare, while conservatives favour market-oriented outcomes, entrepreneurialism, low taxes and privatisation. The ALP is typically seen as the former and the Coalition as the latter. What is fascinating about this bifurcation of ideology is that it is largely mythical, with the differences between progressives and conservatives conveniently manufactured into a framework that does not accord with reality.
US economist and co-director of the economic think tank Center for Economic and Policy Research (CEPR), Dean Baker, has accurately noted that conservatives are just as interested in outcomes that redistribute wealth and income from one party to another. His excellent books The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer and The End of Loser Liberalism: Making Markets Progressive detail the many ways by which this occurs.
British economist Fred Harrison provides evidence in his book Ricardo’s Law: House Prices and the Great Tax Clawback Scam that even under progressive taxation systems, the wealthy pay no tax as they are able to recoup decades of taxes paid due to the uplift in land values of property portfolios within several years of an economic boom. The productive enterprise of business and labour, taxpayer-funded infrastructure and speculative bubbles have the effect of increasing land values, allowing landowners to privatise colossal windfall gains without having to lift a finger. (Property improvements are the exception.) Those who rent get nothing at all.
Although, of course, the middle and working classes own property as well, it is overwhelmingly concentrated into the hands of the rich. In Australia, according to data from the Household, Income and Labour Dynamics in Australia (HILDA) Survey, the inequality in real estate ownership is staggering. In 2002, the top 20% (quintile) of Australian households by wealth own 57% of all net property. The latest ABS Household Wealth and Wealth Distribution report for 2009-10 shows that the top 20% of households by net worth owns 59% of property by net value, a slight increase from 2002.
Land values have rapidly escalated from $1.2 trillion in 1996 to $4.1 trillion in 2010, providing the rich with an enormous gravy train worth trillions, especially when combined with a whopping $53 billion in property subsidies and tax breaks annually. It is not unusual for single detached houses to appreciate in value by $50,000 to $100,000 per year. Multiply this by all the property that the wealthy holds and it is not difficult to see that increasing land values can outweigh taxes paid.
The same holds for natural resources as well, with the federal government and mining industry at the centre of a clash over minerals. Mining firms gain above-normal profits by selling minerals they do not own or create. This excess profit can be taxed away with a rent resources tax that does not distort the economy, as economists of all stripes will acknowledge. This, however, has not prevented conservatives from denouncing it as a big, bad tax that will damage the economy and “job creation” (the public relations-friendly term for profit). In this respect, it is crucially important to the mining billionaires that they be given a free ride.
A feudal-type policy that is in full force today is the transference of wealth via inheritance. Most wealth is not earned through hard effort on the market, but is transferred from one generation to another within a handful of wealthy families. Although it is difficult to accurately assess, studies generally put this at around 60% to 80% of all wealth. The rich who were born as trust-fund babies aren’t required to put in any effort to earn their wealth.
Another favoured policy is that of corporate charters, comprising a wide-scale intervention by government to subsidise and protect capital. These rights expose the rank hypocrisy of conservatives. They contend that rights for labour (social welfare, minimum wage legislation, workplace rights, unionisation) cause disruptions in labour markets and thus should be cut back. Strangely enough, nothing is said about the increasing of rights for corporations, which are limited liability, sovereignty and immortality. Rights for labour are bad, yet rights for capital that benefit the rich are not even commented upon.
The distortions caused by charters are truly epic, as it allows for concentrations of capital above what would exist in a competitive market environment by limiting the liability of investors – the top 5% own 43% of equity investments and 70% of net business assets. Corporate concentrations of wealth ensure producers wield substantial power not only over consumers, but the political process. Some corporations comprise economies larger than small nations and their operations are centrally planned, which immediately begs the question over the efficiency of income and resource allocations. The ridiculous compensation packages are not the natural outcome of competitive markets.
At the heart of the conservative nanny state (Baker’s term) is government monopoly, which conservatives staunchly defend. The pretext for implementing intellectual property is to support research and development and to protect creative art. This, however, is a complete farce as there are plenty of alternatives for doing so without having to resort to gouging consumers with monopoly prices. Tariffs may cause mark-ups of 30%, but patents on medicines can easily result in increases of 3,000% above competitive prices. IP saturates every corner of our economy, resulting in mass redistributions to those who own the patents, copyrights, trademarks and trade secrets – the rich.
This is just a brief sketch of some government outcomes that conservatives support (the criminalisation of drugs and “defence/national security” spending are also top priorities). As Baker notes, the evidence shows that conservatives generally support government and market outcomes that redistribute wealth and income to the rich (flood up and trickle down policies), while progressives support redistributive outcomes to help the middle and working classes.
These outcomes lead to interesting treatment of those who are not rich. While landowners, investors and trust-fund babies are getting the free ride of their lives, the poor and workers are counselled to develop a strong work ethic and stop relying upon social welfare. Of course, the rich have never seen a problem with welfare, as long as it goes to them. They have always fought a bitter class war to ensure they own the wealth of the nation.
While conservatives preach the gospel of Milton Friedman and Ludwig von Mises, the policies they advocate are far removed, often preferring to huddle behind the nanny state while denouncing it when it helps to support those who need it. Oddly enough, they fail to see why social welfare is needed in the first place: the policies that benefit the rich are so effective in concentrating wealth and income into their hands that it leaves too little for too many.
Philip Soos does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.