7% GST - ouch

[opposites attract]

I don't think the language has anything to do with it.  France gets tons of immigrants too I know, and probably many other places.

I think they go to the UK because they know the UK is a soft touch.

[poorpolicies]

Amused bystander, you share the same flaw as Lee Hsien Long- you both listen badly. This is not about reading the words, it’s about understanding another perspective, even if you don’t agree with it. You’re not answering the points raised, just restating what you said earlier, with new supporting materials for your points.

The main thrust of what I and Oh My Gawd is saying is this- is raising GST the best way to go to provide a safety net for the poor and needy? Sure the government can give rebates and NSS to those who are impacted negatively. After all, there are one thousand and one ways to solve a single problem. But is raising GST the most effective and direct way?

Several concerns were brought up that it might not be, all of which were not addressed. For your reference, please allow me to put the points Oh My Gawd and I have raised together and summarise- a 2% increase would effectively translate into a 5%, 10% or 15% increase, there is no effective way to measure just how much to rebate, salaries for lower income groups in Singapore remain very low, incomes in general have not risen by much, so a higher GST would put a squeeze on spending power, thereby resulting in lower consumer confidence, less purchases and a downward spiral with less money to go around in the economy. According to economic forecasts, growth in Singapore is likely to slow down next year in reflection of the development in the US. This will surely worsen when people start spending more conservatively.

The GST is not the sharpest tool in the toolbox, with wide ranging repercussions, creating new problems without effectively addressing the ones it’s supposed to look into.

If the aim is to provide a safety net, why not go around it more directly. Isn’t it more direct to have a minimum wage to ensure the poor make enough to survive? It’s a contradiction to say taxes have to go up because this is the cost of becoming a developed country with better social welfare- while paying people developing country wages. It’s also a contradiction to aim towards becoming a developed country while pitching the skills- and wages- of the local workforce at the developing country level. The strategy to attract and hold on to more foreign investments is clearly confused and misplaced. So is the strategy to take Singapore to another level of development.

If it’s only about having the cheapest labour and having the lowest operating costs, why are the Scandanavian economies still doing well? After all, they have minimum wages, good salaries and high income taxes. If you want to emulate their social welfare system, the other conditions also have into the place.

In addition, there is much unhappiness on why more money has to be raised through higher taxes, when the government can clearly afford to give out a higher amount in New Singapore Shares, and it has such a higher foreign reserve, a significant amount of which has been put in money-losing ventures.

Overall, what LHL and the government are proposing doesn’t make sense on many levels and this is why people are not buying into it.

Leadership is never easy because there are so many issues and needs to consider. However what is causing LHL dearly is not so much lack of focus or sound policies, but his inability to listen well. As a leader, you cannot win hearts or minds if you cannot communicate effectively. And to communicate well, you first have to understand where other people are coming from and accept other perspectives even if you hold another opinion. Good luck to PAP in the next elections- they will need it if they continue along this road.

[-]

Well said, good analysis.

[Dr. Phil]

So many Nordic Groupies. LOL.

I read an article about  global competitiveness and Scandinavian countries have done well with Finland, Sweden, Denmark, Norway, and even Iceland in the top 10.

But the biggest employer in Iceland is the US military and they have just pulled out, as a consequence locals esp young people, migrate, unemployment stats look better…..

Norway is mineral-rich.... so we must always look closer at such “studies”.

Nevertheless this success has been achieved with a policy of extremely low corporate taxes and very high personal taxes, which fund social protection including a generous welfare state which takes the burden of healthcare, education and training off employers.

The idea is to make life as attractive and easy as possible for companies so that they can be as competitive as possible; R&D, innovation is given a high priority.

(These are some of Singapore’s many strengths and Singapore is also in the top 10; USA is No 2 and China is 46).

However over recent years serious economic difficulties have caused hitherto unprecedented high levels of unemployment across Scandinavia with Finland now at 9.5%.

Globalisation, de-regulation or free-for-all, has “intenationalised” markets and industry and shareholders’ horizons have if not ben opened, broadened in terms of availability of cheaper and more abundant loans for investment (lower than Scandinavian governments can offer to retain industry).

Relocating inustry lowers costs of production whilst maintaining unfettered access to global markets and sales revenue, which is the "clincher".

Exposure to European Union Membership has also brought an abundance of cheaper skilled and unskilled labour competing for limited jobs and the increased demands on welfare has increased the costs of providing such services, which must be recouped either from higher taxes or cuts in welfare spending.
It’s a downward spiral from here.

Many responsible for the Scandinavian welfare state accept its welfare demands have made it “uncompetitive” in world markets and have agreed cuts in welfare however Globalisation actually destroyed the model and free access to its services has overwhelmed its resources.

Even though an educated and highly skilled workforce should be expected to survive, industry is becoming increasingly mobile and automation and facilitate relocation to areas with an abundance cheap labour, in developing countries with few if any taxes or environmental, social or welfare demands; which are all considered production costs.
Skilled inputs can be outsourced.

Today survival depends on an intelligent blend of attractions; a good low-tax environment for companies and the state must provide healthcare, education and training to offer a skilled workforce and this requires intelligent management from government and success will always be relative rather than absolute.

Globalisation means corporations no longer have to respect the welfare of their home country or citizens; why should they?

Internationally, FTOs eliminate controls and sanctions and governments are increasingly losing the initiative to manage their nations and now serve corporations.

[Unfair]

"Globalisation means corporations no longer have to respect the welfare of their home country or citizens; why should they?"

Because it is in their best interest to do so! A stable society with many consumers who have the means to buy the corporations' products is what these companies are interested in.

You seem to be a defender of capitalism in its rawest form. That is your right. But be sure that governments that do not protect the interests of its ordinary citizens - while being good friends with big business and foreign talent- will not last very long.  

[Talkingco*k]

Here's a list for our dear leaders of other ways to help peasa... we mean, lower-income Singaporeans other than raising our Goods and Services Tax...

1. Help lower their food costs by asking hawkers not to add hum to their mee siam.

2. Subsidize their entry fee into the upcoming IRs so they stand a bigger chance of becoming higher income people.

3. Sell them a magic stone.

4. Help lower their toilet paper costs by getting the State's Times to donate unsold copies to every home.

5. Reduce costs of running a constituency – have fewer MPs in your GRC.

6. Import more cheap overseas labour, so locals will feel better when they compare income.

7. Raise more revenue by suing more opposition people

8. Make the lower income group disappear by ordering them to get out of your “elite, uncaring face”.

9. Get millions of dollars from this guy in Nigeria who just emailed me.

10. Pay higher income people more so they can think up better ways of helping lower income people than by raising the cost of living.

11. I know! I know! How about raising their pay? No? Sorry I asked.

12. Help them emigrate, lor.

[@Dr Phil]

taken from an Australain on-line forum (name will not be mentioned)

Is Australia a ‘high taxing’ nation? What is the responsible answer?
By Tristan Ewins - posted Friday, 5 May 2006    Sign Up for free e-mail updates!

While it is true that income tax in Australia is relatively high when compared with some OECD countries, it is also true that many other countries with low income tax burdens have very high indirect tax burdens. (For example, taxes such as the GST.) The consequences for equity here, are notable, with regimes of high indirect tax leaving the poor and average income earners worse off than would be the case under a more progressive regime of income-based and capital-based taxation.

That said, it is well worth comparing Australia with western Europe and the Scandinavian countries including Norway, Finland and Sweden. Those favouring a regressive “flat tax”, for instance, never fail to compare Australia with Eastern European economies which have adopted “bare bones” taxation regimes in the wake of the collapse of the Eastern Bloc.

Yet when it comes to assessing our overall tax system, we are informed by the Business Council of Australia that we ought adopt a “weighted” system for the sake of a distorted outcome favouring tax cuts, and that western Europe and Scandinavia are “irrelevant” given that they enjoy a lower combined GDP than the United States. When considered on a country by country basis, however, with western Europe and Scandinavia included, Australia is the eighth lowest taxing nation in the OECD.
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In order to match Finland, for instance, which has rated as the most competitive economy in the world, Australia would need to increase taxation as a proportion of GDP by a massive 20 per cent. In other words Australia would have to raise taxation (and thus also vital expenditure on social and economic infrastructure) by over $160 billion a year. (Australian GDP is over $800 billion.)

Competitiveness is not simply a “race to the bottom” determined by who levies the lowest income and corporate rates. It depends on the quality of institutions and infrastructure, including education, health care, transport and communications as well as the level of innovation and the degree to which such innovation is actively supported by government.

The facts are simple. Australia is lagging in its provision of social and economic infrastructure. Hundreds die every year as a consequence of hospital waiting lists. We have a higher education system that is weighted more and more in favour of “full fees” - with the consequence being that students from lower income backgrounds are deterred from study. Universities are driven into a culture of dependence upon corporate sponsorship in the wake of inadequate funding for research.

What is more, we have a secondary education system that is moving more and more towards defacto privatisation where accessibility and “equality of opportunity” for poorer households will become a thing of the past.

Finally, as we are constantly reminded, we have an ageing population - and no idea how we are going to afford the continuance of programs such as the Pharmaceutical Benefits Scheme (PBS), nor how we are going to provide quality, dignified aged care in the future (let alone in the present).

And yet, among this social catastrophe, the call is always for further corporate and PAYE income tax cuts. This contradiction between the demand for social services and the demand for ever lower levels of taxation, has been referred to as “the fiscal crisis of the state”.

At present, the solution to these quandaries is seen as being the application of Public Private Partnerships and market principles, and further drift towards the principle of “user pays” in all spheres of life. That PPPs are an inefficient means of providing infrastructure is an established fact.

The Scoresby Freeway Public Private Partnership in Victoria, for instance, worth approximately $2 billion, would cost $7 billion to buy out as a consequence of foregone profits. Ultimately, therefore, the project is likely to cost motorists over three times as much through regressive flat tolls than it would if levied upfront through progressive taxation. Furthermore, questions of efficiency aside, the very idea of allowing “the market to sort us out” when it comes to health care, aged care and education is fundamentally unjust and inhumane.

In order to adhere to the principles of “the fair go” in this country, while funding the infrastructure development necessary for enhanced economic competitiveness, we need tax reform aimed at improving the progressivity of the overall tax mix and increasing government expenditure as a proportion of GDP. Good places to begin would be as follows:

   * apply a system of “tax credits” to lower income earners while paying for the difference through a progressive restructuring of the PAYE income taxation system so as to come up with a result that is “revenue neutral”. Combined with the indexing of the bottom two income taxation brackets to eliminate bracket creep, such reform could move to eliminate poverty traps in the process of moving from welfare to work. Tax credits are superior to lifting the tax-free threshold as they target assistance to those most in need while denying tax relief to the wealthy;
     
   * apply a 4 per cent “infrastructure tax” upon business with the aim of improving transport, communications, education and training, and other vital social and economic infrastructure necessary to our international competitiveness. Such a tax would still leave overall corporate tax rates in Australia lower than the US rate;
     
   * restructure the Medicare Levy on a progressively scaled basis, with a highest bracket of 4.5 per cent and a low bracket of 1.5 per cent (four brackets in all in alignment with PAYE income tax rates - themselves restructured after the introduction of tax credits for low income earners) and introduce an Education Levy on the same basis. By making a directing link between taxation and priorities of expenditure, it is much easier to argue for increases in such taxation rather than arguing for increases in PAYE income taxation;
     
   * introduce wealth and inheritance taxes for those with assets of $1 million and higher;
     
   * repeal capital gains tax concessions;
     
   * remove dividend imputation (refunds on the taxation shareholder dividends as compensation for company tax). As mentioned in a previous contribution of mine, in 2002 the wealthiest 20 per cent of Australians owned 90 per cent of all shares. This, if anything, should provide a rationale for this move in the interests of distributional justice and equity;
     
   * impose a 1 per cent media diversification levy on all commercial media with the intent of raising capital for a “Media Diversification Fund”, with the purpose of achieving “equal opportunity of expression”. This was originally conceived of by John Matthews in his pamphlet, A Culture of Power; and
     
   * introduce a “Tobin tax” on international financial transactions at the rate of 0.1 per cent with the intent of substantially improving government revenue and moving to tame financial market fluctuations.

Such programs ought not to be seen as being a drag on Australia’s “economic competitiveness”. High taxing Finland and Sweden are, after all, the first and third most competitive economies in the world. Furthermore, we ought to be sceptical of claims that “high taxation” is leading to a “brain drain” in Australia. This, certainly, is not the case in Western Europe and Scandanavia. Such claims are generally not backed by thorough research and ignore other causes for Australia’s diaspora - such as a simple desire to experience the world or to be “closer to the centre of world events”.

By comparison with Scandinavian and West European rates of taxation, the tax suggestions made in this paper are modest - but nevertheless they provide an ample starting point in the long road towards enhanced economic competitiveness, greater social equity and better social outcomes.

The alternative is to continue along the present course of never-ending neo-liberal “reform” with smaller government and lower taxes leading, in turn, to what John Kenneth Galbraith referred to as “private affluence” and “public squalor”: ever increasing levels of private consumption alongside the deterioration of public services and institutions.

Rather than moving towards residual and second-class systems of public health care and education alongside heavily publicly-subsidised private systems, further accentuating class divisions, we need, like the Scandinavians to move towards the principle of universality and “solidaristic” taxation. This necessarily involves thorough-going tax reform.

The “safety net” approach to social services including health that emerges as a consequence of cuts in taxation, so favoured by the conservatives, merely invites the resentment of an “aspirational” class which enjoys benefits such as private health insurance, and does not wish to share in the costs of a system it does not use. This “vicious cycle” leads only to further tax cuts, further budget cuts, and the further marginalisation of public services and those who depend upon them. This is a process of “divide and rule”, and the conservatives are thoroughly culpable for the social crises they reap as a consequence of such policies.

Taxation, ultimately, is not merely about the budget bottom line. It is about the kind of society we build for ourselves: inclusive or exclusive, humane or barbaric, egalitarian or divisive. The Labor Party needs, now, to break with the politics of opportunism on tax, returning, once more, to represent its core support base, and to popularise tax reform among the broader community on the basis of improved social services provided universally to all Australians.

Watching Kim Beazley at the National Press Club recently, the Labor leader seemed to promise everything - including tax cuts to those on $60,000 a year and higher. Pitching his address to so-called “middle Australia” - supposedly those on about $55,000 a year - Beazley had little to say on how Labor’s taxation policies would benefit those on lower incomes.

As On Line Opinion writer, Andrew Leigh argued in March, “income of the median Australian adult is just $26,000 per year”. How will these people benefit from Beazley’s tax cuts, and how will Beazley afford significant improvements in social services while maintaining his established commitment to a budget surplus throughout the economic cycle?

You can’t afford significant boosts to expenditure in vital areas without progressive tax reform including tax increases in some areas - and this is the message that needs to become the “common sense” of the ALP well before the next election, with or without Beazley as leader.

[@Dr Phil]

Does high employment require high social inequality?

By Fred Argy - posted Thursday, 3 August 2006    Sign Up for free e-mail updates!

Many economists are fond of saying that a country can have relatively high employment or relatively low inequality - but not both.

The argument runs like this. Good employment outcomes can only be achieved through free, competitive markets, with low levels of social regulation, a high degree of wage flexibility, curbs on trade unions and tough welfare-to-work policies. Such policies are bound to widen earnings inequalities - but any attempt to counter this effect through tax-transfer redistribution measures would simply nullify the economic and employment benefits of the market liberalisation measures. Higher inequality is therefore a pre-condition for higher employment.

Economic theory alone cannot prove or disprove this kind of argument. Subject to the usual qualifications, economists start with a strong presumption in favour of free and competitive market economies - but once a high level of market freedom is attained, as is now the case in all Western societies, the profession is far from unanimous about the incremental effects of further market liberalisation on economic performance.

So we need to turn to the empirical literature for guidance. Many economists like to compare “Anglo” countries (the US, UK, NZ and Australia) with those in continental and southern European countries (which I will call “Continentals”). This comparison does lend support to the “trade-off” theory: Anglo countries have generally performed better on employment criteria than the Continentals but worse on income inequality.

The Nordic experience

However the trade-off hypothesis is undermined by the experience of the Scandinavians (Denmark, Norway, Sweden, Iceland and Finland) and countries like Ireland, Netherlands and Austria. These Northern Europeans, whom I will call “Nordics”, have generally been able to deliver low levels of inequality as well as strong employment outcomes.

Some critics refuse to accept this assessment. sound familar Dr Phil?In particular they challenge the employment statistics put out by Nordic countries. They argue, for example, that while the official Swedish unemployment rate is well under 5 per cent, the “true” jobless rate is closer to 15 per cent because official figures fail to include discouraged workers who have stopped looking for work, young mothers who choose not to work, people on sick leave or on training and employment schemes, and so on.

Economists have always known that official unemployment figures tend to understate the degree of under-utilisation of the workforce and that there is considerable “hidden unemployment”. But this is not something unique to the Nordics. Exactly the same can be said of other countries. For example, in the US and Australia, if one adds on the number of discouraged and under-employed workers to the official rate, the true jobless rate is very much higher than the official rate. The estimates range from 10 to 20 per cent depending on what you include. same can be said for singaporeans living at home with children post-retirement as they can't support themselves!

The OECD has rightly chosen not to get into these messy complications. It publishes members’ official unemployment figures on a comparable and widely accepted measurement basis. And it tries to give some indication of cross-country differences in the incidence of “hidden unemployment” by publishing figures on the ratio of employment to working age population and labour participation rates. On all these indicators, the Nordic employment performance is quite comparable to that of the Anglos.

So how do we explain the Nordic success? In a forthcoming paper I hope to examine the issues in detail. In this short opinion piece I will, at the risk of over-simplification and over-generalisation, sum up my tentative views on four specific questions.

Why are the Nordics able to deliver social outcomes that are at least as good as the Continentals - yet out-perform them on employment?

I believe the answer lies with the methods of redistribution employed. These differ from the Continentals in three respects. First, Nordic countries rely less on employment protection legislation. In particular, they allow more flexibility on hiring and firing.

Second, the Nordics provide generous benefits for the jobless but the benefits are more tightly linked to work. That is, they reward well those who enter education or training or are actively searching for work but reduce their benefits if they reject these options.

Third, the Nordics rely relatively heavily on “social investment” as an instrument of redistribution and, as argued below, this approach is employment-friendly.

Why are the Nordics able to deliver lower social inequality than the Anglos - yet match them on employment?

Although Nordics allow more labour market flexibility than the Continentals, they have retained higher levels of employment protection, stronger legal safeguards for trade unions and generally higher minimum wages than the Anglos. This network of worker protection regulation, combined with more generous welfare benefits and more progressive taxes, helps explain why they have lower levels of inequality.

But doesn’t economic theory suggest that higher social regulation damages employment performance? Why hasn’t this happened in the Nordic countries? My explanation is twofold.

First, as many economists have long suspected, it appears that in moderation worker protection regulation is not too damaging for employment. Indeed an argument can be made that the deregulation process works best in the initial stages and then runs into diminishing returns and may even become counterproductive for productivity and employment if taken too far.

Second, and more importantly, the Nordics have used non-regulatory instruments of redistribution to promote employment. Three types of “social investment” seem to have contributed most to the Nordic success:

   * specific targeting of early child and youth disadvantages;
   * policies which explicitly seek to reduce socio-economic inequalities of access to health care, pre-schooling, public education, public housing and public transport; and
   * “active labour market programs” targeted specifically at disadvantaged job-seekers and people of working age (disabled persons and lone parents). These programs include diligent, well-funded job search and placement services; in-work bonuses; government training and job-readiness schemes; family-friendly policies, such as paid parental leave and good quality and affordable child-care assistance; remedial programs for youth who drop out from high school; financial incentives for employers to employ and train the long term low-skilled jobless; and subsidies to jobless persons who are capable of setting up and managing their own business.

There are credible studies showing high national economic returns in the long term from many of these social investment programs. The returns come in the form of higher employment (participation) rates; a more productive workforce and citizenry; greater geographic and occupational mobility of labour; less waste of potentially successful entrepreneurs; diminished health costs; lower imprisonment rates; less spending on juvenile delinquency; and savings in commuting time. There are also “external” economic spin-offs from increased community trust and harmony and greater community acceptance of structural reform.

In short, a major reason why Nordics have been able to reconcile high employment with low inequality is that they have invested heavily in their people and this has tended, over time, to offset any negative employment, efficiency and disincentive effects from social regulation and relatively high taxation.

Is the Nordic achievement sustainable in the long term?

It is often argued that Nordic tax levels are unsustainable in the long term. This argument has two strands. One is that voters will eventually rebel. And to an extent they have - but not sufficiently to fundamentally alter their social model. The other argument is that, in an integrated, highly competitive world economy, governments will in time be forced to cut taxes in order to avoid a brain drain and compete with low tax countries. That argument too is questionable. While high taxes do have negative effects per se, it appears from the Nordic experience that the economic returns from social investment have over time tended to outweigh the tax efficiency costs and there is no reason why the economic balance sheet should change markedly in the future.

Is the Nordic model exportable to Australia?

Until quite recently, Australia could boast that it had achieved a reasonable balance between employment and equality. Sure, we substantially deregulated the labour market but we also invested heavily in human capital and maintained a strong social safety net. However the Howard Government’s recent workplace and welfare measures have put us firmly in the American camp.

Does the Nordic social model offer Australians an alternative policy route to high employment? Many believe not. They argue that Nordic tax and redistribution policies cannot be exported to countries with a very different set of social values and priorities. There is more than a core of truth in that view.

Nordic redistribution policies rest on three pillars: deep-rooted egalitarian values (which stand out clearly in all international surveys); an electoral system which ensures that these values are fully reflected in the parliament; and a population which is ethnically homogeneous and geographically concentrated. These features are lacking in most other countries. For example, in the US and Australia, poor people tend to be predominantly from minority groups and are often geographically and socially segregated from the better off people, producing a “them” and “us” mentality.

But Australians still have a strong and passionate belief in equality of opportunity - the notion that everyone should have an equal chance to achieve their full potential, irrespective of their social background. It is the essence of what we all mean by a “fair go”. Since the Nordic “social investment” model is all about equalising opportunities, parts of it should appeal to Australian values.

Of course, we can never go a long way down the Nordic path. But the confident assertion of Howard ministers that the only way to improve our employment performance is through harsh welfare-workplace measures, which produce greater inequality, is a half-truth masquerading as economic science.

First published in New Matilda on July 26, 2006.

[@Dr Phil]

Joblessness and income inequality: has Australia taken the wrong turn?
By Fred Argy - posted Friday, 27 January
2006    Sign Up for free e-mail updates!

All governments keep a sensitive eye on what is happening to inequality of incomes and inequality of opportunity because they want to be seen to be fair and because sharing the nation’s incremental prosperity helps bind the community together. But governments are also concerned about national productivity, because it is the key to prosperity and high real wages; and joblessness, because it causes economic waste, poverty and unhappiness.

These four policy targets are not always reconcilable with each other. Too much fiscal zeal in pursuit of egalitarian values can have disincentive effects on work and innovation. Excessive use of employment protection laws (EPL) - laws which restrict the rights of employers to set wages, dismiss employees, use casuals and so on - can deter employment of low-skill workers. Increased employment of “fringe” workers often requires some sacrifice of national productivity. And to pursue productivity without regard for its wider effects on quality of life and inequality is to lose sight of what society is all about.

To assess how governments have been responding to these policy trade-offs and challenges over the past 15 to 20 years, I have chosen four performance indicators - far from comprehensive but all important predictors of community happiness and cohesion:

  1. income inequality - the share of GDP going to the lowest income quintiles;
  2. income mobility - the degree of upward income mobility over one’s lifetime or relative to one’s parents, as measured by longitudinal studies;
  3. productivity - measured either by GDP per hour worked or multi-factor productivity (which are better indicators than GDP per worker as the latter ignores cross-country differences in rates of investment and in work/leisure preferences); and
  4. employment - measured as a proportion of working age population.

Governments differ as to the relative policy weight they give to each of these goals and the methods they use to advance them (in particular the role played by EPL). Among developed countries, there seem to be four distinct “social models”. The table below sums up how the models differ on scale and mix of redistribution (with relative number of stars implying no normative judgment) and the sorts of outcomes they have delivered (with most stars going to the best performers on the four societal criteria above).

can't past table here, sorry

What does the table tell us?

Model 1 is dominated by the US. Its overall scale of fiscal redistribution is at the low end of the spectrum, with relatively “flat” tax structures and low levels of income support and social investment. And it has relatively free labour markets, with little use made of EPL.

This model delivers very good economic outcomes but poor distribution outcomes, both in terms of income inequality and income mobility.

Model 2 has been embraced by countries like Britain, Canada, Ireland and NZ. Relative to model 1, income support benefits are more generous (although conditional) and there is a little more job protection. But the overall scale of redistribution, especially through EPL, is modest compared to models 3 and 4.

Model 2 can boast good economic outcomes but on income distribution and mobility it produces very mediocre results - although with less inequality than model 1.

Model 3 is found among the larger continental Europeans such as France and Germany and some of their neighbours. It redistributes on a large scale, making extensive use of EPL and unconditional income support.

This model delivers a more equal income distribution than models 1 and 2 but its performance on social mobility is only marginally better. Its productivity performance (properly measured) is about equal to that of the first two groups. But it performs poorly on employment - not as poorly as is often claimed by those who focus solely on official unemployment figures, but certainly well below par.

Model 4 is favoured by the Scandinavian countries and some of the smaller Europeans (such as the Netherlands and Austria). It involves high taxes and redistribution on an even larger scale than group 3 - but the income support provided, while generous, is more work-conditional and employment protection laws are less strict than group 3 - although stricter than in groups 1 and 2 (or Australia).

Instead this model relies heavily on “active” social programs to enhance the productivity and mobility of low income people throughout their life cycle. For example, in addition to spending much more on education, governments in Denmark, Norway, Sweden and the Netherlands invest about four times more (relative to GDP) on active labour market programs - job placement, training, employment incentives, integration of disabled people, direct job creation and start-up incentives - than the English-speaking countries.

The policy works. Model 4 delivers low and stable levels of income inequality, high and rising levels of income mobility and very good productivity and employment outcomes. The Scandinavians also rank high in international competitiveness league tables.
The “best” mix of instruments?

The poor employment outcomes in much of continental Europe are partly due to rigid monetary policy but, one suspects, they are also due to excessive reliance on EPL. This suspicion is confirmed when one looks at Italy, Spain, Portugal, Turkey and Greece. These countries, which are not included in our tabular analysis, have very restrictive job-protection laws and deliver poor employment outcomes (as well, they are not generous with fiscal redistribution so they also produce poor distribution outcomes).

On the other hand, the success of model 4 suggests that high levels of redistribution are not per se incompatible with good economic and employment outcomes - provided the main redistribution method is fiscal rather than regulatory and the policy mix is liberally spiced with “active” government intervention to help people get jobs and improve mobility and work incentives.
Lessons for Australia

Australia’s policy mix of the last decade - liberal economic reform with moderate employment protection regulation and conditional income support for working age Australians - has been fairly close to that of model 2. And it has delivered similar employment and productivity outcomes but with somewhat less income inequality. With a record like this, Australia could have simply rested on its laurels. But reform is the name of the game. So we got the recent workplace and welfare reforms. These take us towards model 1 (indeed in terms of how we treat trade unions and how we reward welfare to work we now have harsher regimes than the Americans).

But the cross-country evidence above suggests that moving from model 2 to model 1 produces little economic benefit and considerable distributional pain. On the other hand, even a partial move from model 2 to model 4 offers more equality of opportunity without any national economic cost. Sweden, for example, has much less income inequality than Australia, as well as more generous sickness, parental and study leave arrangements, better education outcomes and, it appears, greater intra-generational social mobility. Yet over the last five years it has achieved much stronger productivity growth than Australia, as well as higher employment/population ratios (with fewer casual jobs), lower inflation and a substantial external account surplus (unlike our big deficits, despite booming commodity prices). Much the same can be said of the other Scandinavian countries.

Has Australia taken the wrong turn?

The author is indebted to Ian McAuley for helpful comments on an earlier draft.

[@Dr Phil]

Equality of opportunity - is it a fact or an illusion?
By Fred Argy - posted Wednesday, 7 September 2005    Sign Up for free e-mail updates!

Opinion polls consistently indicate that Australians want to see merit, education and enterprise well rewarded and strongly believe in individual responsibility - which is why they are prepared to tolerate a good deal of income and wealth inequality and are cool towards passive redistribution.

At the same time, Australians enthusiastically support “equality of opportunity” as a national goal. This goal has two components: absence of discrimination (formal or informal) in hiring, promotions and pay on the basis of race, ethnicity, gender or age; and the idea that every person prepared to work hard should be able to achieve their full innate potential, regardless of parental wealth, status and power.

Interestingly, a majority of Australians believe their society already performs well on the equal opportunity criterion - that they live in a “fluid” society marked by high levels of social mobility (easy movement of individuals to a higher class or social status than those of their social origin). Is this perception in keeping with reality? We cannot yet answer this question confidently. Some longitudinal studies (HILDA and Negotiating the Life Course (NLC) and Longitudinal Study of Australian Children) currently under way are producing some useful measures of short-term mobility (over three to five years), and these show a moderate degree of short-range income mobility, but lifetime results will not be available for some time.
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In the meantime, we can draw some tentative conclusions by looking at the overseas evidence on intergenerational social mobility - which is quite rich and extensive. While some of the evidence is contradictory, one can detect broad support for the following propositions:

  1. There is a good deal of intra-generational income mobility - both up and down the ladder. In most countries studied, between 30 and 40 per cent of adults rise to higher income and occupational ranks during their lifetime. For the most part, the upward movement is short range (up just one or two grades) but a few make it to the top. Much of the observed annual “poverty” is only transitional, reflecting passing events, such as separation and divorce, joblessness and studying.
     
  2. In most countries intra-generational mobility has increased significantly over the last few decades, reflecting not only economic liberalisation but also the expansion of education, active redistribution policies and anti-discrimination policies.
     
  3. The story is less encouraging when one looks at inter-generational mobility (the ability to break away from parental environmental effects), which is a key determinant of equality of starting opportunity. In nearly all countries studied, the occupational and education status of adults is strongly and positively correlated with that of their parents - i.e. children from low socio-economic backgrounds have much less chance of achieving management or professional positions over their lifetime than those with well-off parents. To some extent this is inevitable, as people inherit genes (innate ability), values and knowledge from their parents - but it also reflects unequal access to education, retraining, health, employment and housing. Economically successful parents are able to spend more on goods and services (such as education and health) which enhance their children’s labour market prospects, and have superior location and social networks.
     
  4. Intergenerational income mobility is no higher, and on some measures may even be lower, in the US than in social democratic countries like Sweden, Norway and the Netherlands. It appears that income mobility gets at least as much of a boost from active redistributive polices and wide access to employment-enhancing services as it does from flexible labour markets and low taxes.
     
  5. Moreover intergenerational mobility is tending to increase in many European and Scandinavian countries - but it is stable or actually declining in the US (and UK). A key reason is that Scandinavian and European governments have generally been more successful in reducing education inequality. They have also given poor families better access to medical care.

What does the overseas experience (and the limited local data) tell us about occupational and income mobility in Australia? One can be confident that many low-income earners rise in ranking over their lifetime - indicating a fairly mobile society. As to inter-generational income mobility, however, one can only speculate. Australia has a much more egalitarian history than the US - but our social values have been steadily converging and this “Americanisation” is likely to continue as a result of recent and prospective industrial relations reforms and growing inequalities of access to education, health, housing and employment. It is possible therefore that Australia will be following the US down the road of diminishing (or at best stable) equality of opportunity. Even those Australians who refuse to worry about relative poverty and inequality may find this prospect discomforting.

First published in The Canberra Times on August 30, 2005.

[@Dr Phil]

Unemployment, inequality and public responsibility
By William Mitchell - posted Friday, 2 August 2002    Sign Up for free e-mail updates!

Australia’s long period of full employment that followed World War 2 came to an end in 1975 when the federal government abandoned its responsibility for maintaining demand at levels sufficient to ensure that employment growth absorbed the growing labour force.

Subsequent discretionary monetary and fiscal policy decisions have meant that the Australian economy, like most others, has been prevented from generating enough jobs to employ the available labour.

The same policy decisions have also not allowed the economy to generate enough hours of work to match the preferences of the employed. The result has been persistently high unemployment and rising levels of underemployment. In 1972 there were more job vacancies than unemployed. Now there are around 8 unemployed for every job vacancy. The unemployed cannot search for jobs that are not there!
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Despite the long period of robust economic growth since the early 1990s recession, the Australian economy did not remotely approach full employment. In the last four economic cycles low point unemployment rates have been 4.6 per cent (June 1976), 5.5 per cent (June 1981), 5.6 per cent (November 1989) and then 6.0 percent in September 2000.

The low point unemployment has steadily ratcheted upwards over successive cycles. Despite one of the stronger growth rates in the 1990s among OECD economies, the unemployment trend remains positive. The problem is even worse when one broadens the measure of labour wastage.

In May 2002, the official unemployment rate was 6.3 per cent. The labour market indicators developed by the Centre of Full Employment and Equity (CofFEE) at the University of Newcastle show that if estimated hidden unemployment (workers who want work but are not actively looking) is included the rate of labour underutilisation jumps to 8.6 per cent. Including the underemployed (part-time employees who desire more hours of work but cannot find them) pushes the wastage rate to 12.5 per cent.

The cumulative costs in terms of foregone output and the social malaise related to unemployment are huge and dwarf the costs of alleged microeconomic inefficiency.

Accompanying the persistently high unemployment in most countries has been increasing levels of economic inequality. This has manifested in terms of declining employment opportunities for the least skilled and a wider dispersion of earnings.

While unemployment remains the major cause of poverty the new problem is that growth no longer seems to be associated with improved equity. The combination of strong growth, persistent labour underutilisation and rising economic inequality in the 1990s has overturned the received wisdom. Economic growth had until the mid-1970s provided upgrading bonuses which reduced income inequality (and poverty rates). These bonuses were in the form of productivity improvements, increased working time and labour force participation rates, occupational upgrading, and rising average earnings for the most disadvantaged in the labour market.

The considerable labour market deregulation and microeconomic reform since the late 1980s has not only created job losses overall but has also exacerbated inequality. More fractional employment opportunities with less earnings security are now being forced onto the employees.

The indicators of poverty in Australia have shifted as a result. In the 1970s, the main group at risk was the aged without home ownership. Now the youth, the unemployed, the underemployed and the low-paid service sector workers are the groups at risk. Increasing numbers of older workers are also induced into premature retirement by disability and other pensions as a consequence of the lack of available work.

Economists offer several explanations to link joblessness to the rising inequality. First, technological change has been biased towards higher skilled workers. There is some truth in this but it does not explain the large shifts away from unskilled job opportunities. Second, increased competition through trade from low wage countries in Asia has led to declines in manufacturing in the older industrialised nations. While valid, the shift against the unskilled has also occurred in the non-traded services sector. Third, significant changes have occurred in the industrial relations and wage determination machinery that have disadvantaged the lower paid workers. The growth in individual agreements in Australia has disadvantaged full-time employees who can earn higher mean and median wages with correspondingly less inequality under collective agreements. Further, employees receiving awards only are subject to relatively low wages, as compared to other employees in the same occupation or industry. Finally, labour market changes referred to as ‘bumping down’ whereby as job opportunities for lower skilled workers shrink and more skilled workers enter the labour force the less qualified are driven out of traditional employment areas by the more skilled employees.

The overriding problem has been the overall lack of jobs and the structural changes that have occurred have merely exacerbated this situation.

The mainstream response calls for even more labour market flexibility and is epitomised by the 1994 OECD Jobs Study. But the Federal government’s market-type systems of employment services and training recently praised by the OECD do not create paid-work opportunities. Full employment has been replaced with full employability as the legitimate goal of government. Research from a number of countries suggests that training programs do not reduce unemployment but rather reshuffles the queue.

The orthodoxy argues that, with the unemployed now more work ready as a result of the Intensive Assistance offered through the Job Network, further reductions in award pay conditions and a push towards more common law settlements of industrial disputes will help generate new jobs. The current push in Australia towards substantially relaxing unfair dismissal legislation is in this vein.

The proposal to reduce the relative wage of the unemployed (less skilled) is really just the traditional wage cutting argument that was discredited during the Great Depression. Research fails to substantiate the hypothesis that wage inflexibility accounts for the joblessness of the least-skilled. Research also fails to find "wage elasticities" large enough for relative wage cuts to represent a cure.

The accompanying welfare attacks on the unemployed merely reinforce the underclass status that joblessness has brought.

What can be done about it? A renewed commitment to full employment requires the Federal government to abandon its obsession with budget surpluses, which really just squeeze the wealth of the private sector. Only net government spending can fill the expenditure gap left by the private sector.

Further, the whole thrust of active labour market policy is predicated on the belief that the long-term unemployed represent a structural bottleneck that can only be addressed by supply initiatives like training and welfare reform. But the long-term unemployed benefit from long periods of demand expansion because firms will lower their hiring standards and pay the training costs rather than leave positions vacant. Several studies have found that long-term unemployment is not a separate problem from unemployment in general.

Further, the government must increase its own employment. What is not often noted is the impact of the decline in public sector employment growth in Australia. In 1973, the public employment share was around 3 per cent higher than it is now. That amounts to more than 600 thousand jobs being lost today. In both Australia and the USA, labour force growth and private employment growth have averaged around 1.9 per cent per annum since 1970. The major difference between the countries is that public employment growth in the USA has been proportional to labour force growth whereas in Australia public employment growth has averaged a paltry 0.6 per cent per annum. This difference translates into our higher unemployment rate.

While a vibrant private sector is essential for a healthy economy it will never provide enough work for those who want it. Public sector job creation is the only way we will return to full employment and reduce economic inequality. The countries that avoided the high unemployment in the 1970s (like Japan, Switzerland, Austria, Norway) all maintained a sector that acted as an employer of the last resort.

During the 1950s and 1960s, the public sector played this role in Australia with many labour intensive opportunities being always available to absorb the low skill workers when private sector demand was slack. The abandonment of that capacity is largely why we have had persistently high unemployment and the rising inequality.

A positive step would be for the Federal Government to replace Work for the Dole, which the Department of Employment and Workplace Relations admits is a welfare compliance program, with a Job Guarantee instead. The extra cost of paying the unemployed the safety-net wage is not high and the wasted labour could be given jobs in community and environmental development areas. The gains in self-esteem and independence would alone be worth the change.

[@Dr Phil]

Sorry for the flood of articles, but if you take the time to read them you'll see that there is alot more to the success of the "Nords" then right-wingers give credit for and that there are alternative ways of achieving the economic objectives desried by the Singaporean government.

Not in anyway suggesting they should change track, just that there are other models worth discussing from an intellectual perspective.

[Dr. Phil]

Unfair, I can only give you the benefit of the doubt and explain your bizarre responses as a symptom of youth and naivity.

Globalisation has released corporations from having to pretend to be loyal to a domestic country, their population, their industrial relations, social and welfare responsibilities etc etc.

Such loyalties either increasel costs of production or reduce access to greater profits.

Corporations exist to create profits and not to be distracted with the provision of employment or welfare etc etc and wherever profits are to be found, their current loyalties will be found.

Globalisation and Free Trade Agreements allow them to set-up anywhere knowing they can sell their goods "back home" and anywhere else they choose.

There are no longer tariffs or constraints as there once was to make them think twice about migrating.

Business without Borders; it probably sounds better in French.  

They do not care whether this causes hardship or instability, its not their responsibility.

If "domestic" consumers object what can they do? Today marketing, brand labelling, re-branding overcomes all obstacles.

The most important consideration is whether governments obstruct their access to markets.

Control over domestic markets is the only weapon a government had and today Globalisation is the unilateral peace agreement which has disarmed them.

Corporations are above nationality, patriotism, religion, ethnicity...its all about profits.

Patriotism is a dangerous impediment to good order in the international business community.

[Dr. Phil]

@DR. PHIL, I usually can read three short paragraphs, introduction, substance and conlusion. It will take me all night to read your cut-and-paste mountain and doubtless after I finish one article I will have forgotten how it began.

But let me make one point.

Having understood a little about corporate fidelity you will understand Australia's maintains employment and corporate loyalty because much indutry is mineral based ie exports of coal, minerals, oil, gas...

These bounties of nature cant be taken to areas where cheap labour is abundant.

Australia also still retains some Trades Union influence (do you know what a Trade Union is?).

Like Singapore, Australia also has a very smart PM and a community not yet ravaged by indiscriminate and massive immigration that its people still care for each other and their nationhood.

This characterises Norway too.

Elsewhere in Scandinavia, no doubt like Korea, a few massive employers receive priveldges from the domestic government which keeps their loyalty...so far.

[Unfair]

Dr. Phil: the only one who is "bizarre" here is you!

Most of continental Europe has been able to produce societies that are rich, egalitarian (as in relatively small gap between rich and poor), and with a social safety net for those that are disadvantaged. Sure, they are fine-tuning their system all the time, and abuse of the social safety net is a problem.
However, the standard of life of the vast majority of Europeans is far higher than that of the vast majority of Singaporeans while the average income per capita is very similar.

My Singapore colleagues and friends are constantly worried about being "retrenched", about the health care costs for their parents and themselves. They stay late in the office, don't take their vacation days, and are generally much less "relaxed" than in Europe.