Income inequality

In last year’s Speech from the Throne, the Harper government promised to introduce legislation to require “balanced budgets during normal economic times, and concrete time lines for return to balance in the event of an economic crisis.”

This proposed legislation makes little sense in terms of sound economic policy. But it will likely be introduced as part of the federal budget, expected early next month.

As Christopher Ragan argued in a previous Economy Lab commentary, it is simplistic to think we can set out firm rules for responsible fiscal policy, the conduct of which demands a nuanced understanding of the state of the economy and of public finances.

In the next few weeks (no firm date has yet been set), Statistics Canada will release the results of the 2012 Survey of Financial Security. This survey, which is unfortunately only conducted on an episodic basis, will provide a detailed look at the assets, debts and net wealth of Canadians. It will provide an important complement to the many sources of information we have on incomes and income inequality.

When we consider the economic resources of households, wealth – mainly consisting of housing, equity in businesses and financial assets – clearly matters a lot in terms of security and the ability to spend. National wealth is an important yardstick for comparing ourselves with other countries (it was why Adam Smith wrote about the Wealth of Nations), and we can only judge the real extent of economic inequality when we look at the distribution of wealth among households, and not just annual income flows.

University of Paris economist Thomas Piketty pioneered (with Emmanuel Saez) historical analysis of income inequality, and carefully documented the changing income share of the top 1 per cent in rich countries. Now he has done the same for wealth.

In a major article and a forthcoming English-language edition of his book, Capital in the Twenty-First Century, Mr. Piketty shows that the ratio of total household wealth to national income, or gross domestic product (GDP), in advanced industrial countries is not constant over time. In fact, the ratio was very high in the pre-industrial era and the early years of industrialization, but fell to a low of two to three times GDP between the First World War and 1970. Today, national wealth in the advanced economies is back to late-19th-century levels of four to six times GDP.

Generally speaking, wealth is higher relative to GDP in Europe than in North America. Here in Canada, wealth was at a low of 2.5 times GDP back in 1970, but is now about four times higher than GDP.

The reasons for the decline of wealth relative to GDP over much of the 20th century likely included the destruction of wealth in two world wars and the Great Depression, and an extended period in the middle of the century in which the financial sector was closely regulated and labour’s share of national income was high relative to the share of capital.

Mr. Piketty further shows that wealth was generally much more equally distributed by the mid-20th century than it had been in the pre-industrial era and the late 19th century. The share of all wealth held by the top 10 per cent in rich countries is typically very high, at 60 to 70 per cent, but this is still well below late-19th-century levels of 80 to 90 per cent.

Karl Marx famously argued that the stock of capital would inexorably rise and become concentrated in fewer and fewer hands due to the dynamics of capitalism. He was wrong. But Mr. Piketty fears that the rising ratio of wealth to GDP, combined with increasing inequality in the distribution of wealth since about 1970, may bring us back to the extreme economic inequality of the Victorian era and the so-called Gilded Age in the United States.

In the case of Canada, a very large share of net wealth (assets such as houses, pensions and financial assets, minus debts) is concentrated in relatively few hands, and that share has been slowly rising. In 2005, the top 10 per cent of households owned 58.2 per cent of all wealth, up from 51.8 per cent in 1989 (the earliest year for which we have data). The bottom 70 per cent of households owned just 14.5 per cent of all net wealth.

These numbers are generally acknowledged to significantly understate the real degree of wealth inequality, since surveys based on small samples will not include the few super-wealthy individuals who control much of Canada’s wealth. The 2013 Forbes magazine rankings show that 29 Canadian persons or families have more than $1-billion of assets, led by the Thomson family with assets of $20.3-billion.

It will be interesting to see, in the new Financial Security survey, if Canadian wealth inequality increased further from 2005 to 2012. This was a period in which housing prices increased significantly, while financial assets (which are much more concentrated in a few hands, with 80 per cent being owned by the top 10 per cent) did not do so well. However, household debt also rose sharply over this period.

The danger may lie more in the future than in the very recent past. If wealth, especially financial wealth, looms large as a share of GDP, and if rates of return on capital remain high in a relatively sluggish economy, wealth will become highly concentrated in the hands of the very few.

This article originally appeared in the Globe & Mail's Economy Lab.

Photo: rabbot. Used under a Creative Commons BY 2.0 licence.

For the first time ever, the percentage of Canadian seniors aged 65 to 69 who are still working rose to more than one in four in the autumn of 2013.

As shown by Statistics Canada, while the life expectancy of Canadians has been steadily rising, the average number of years spent not working has actually been stable since the mid-1990s – due to the fact that more and more seniors continue to work past the traditional age of retirement.

Apart from scandal, Parliament didn’t produce much in the just completed fall session – a grand total of three bills. But there was one ray of light, a Finance Committee report last week on one of our most serious problems, the growth of income inequality. The Committee was mandated to study the problem and propose solutions, paying particular attention to the federal tax and income support system.

The Committee heard from dozens of academic experts and public interest groups, and I was pleased to present a brief on behalf of the Broadbent Institute. This built on our own major report on inequality on what I believe to be one of the defining political issues of our time.

The Committee's report falls well short of being ideal. But it does represent a step forward, and provides some interesting insight into how the issue of inequality may play out in terms of partisan and public debate leading up to the 2015 election.

The report lays out the evidence of the growth in economic inequality in Canada, confirming the sustained rise of the income share of the top 1 per cent, and describes some of the key underlying causes, including changes in the labour market. But most experts cited seemed to agree that government policies have also worked to exacerbate the problem.

A major disappointment in the report, reflecting the views of the Conservative majority, is that it fails to underline why the rise in income inequality should be of pressing concern to all Canadians. Almost everyone else on the planet, from the World Health Organization to the OECD and the IMF, stress this reality: high levels of inequality have negative social and economic consequences for everyone, rich and poor alike.

The opposition parties were much better. The NDP supplementary report states that “high levels of income inequality slow growth, destroy communities, and prevent millions of Canadians from reaching their full potential.” The Liberal Party states that “if Canada does not address its growing levels of inequality, it faces costly economic and social consequences, from decreased productivity to poor health outcomes.”

In a more encouraging vein, the majority report cautiously endorses some positive proposals. Given stated support from both of the opposition parties, these could, and should, move to the top of the government agenda as we approach the 2014 federal Budget and the 2015 federal election.

The Broadbent Institute and other witnesses highlighted the need to increase the Working Income Tax Benefit (WITB) which supplements the incomes of working poor families, thus raising earned income from low wage jobs and helping offset unnecessary barriers to moving from welfare to work.

The majority report calls on the federal government to “formally review the WITB to determine how it could be expanded or modified to further benefit Canadians.”

The majority report, again accompanied by stronger statements from the opposition parties, further calls on the federal government “to make early childhood education and child care more accessible and affordable in all areas of the country, including through increased support for affordable early childhood and education and care programs.”

Such programs are key to removing barriers to work by single parents, mainly women, and are also important to expanding lifetime opportunities for low income children. However, the key question to ask of the Conservatives is whether they are actually prepared to fund income supports for the working poor and early childhood programs. After all, their stated priorities, following elimination of the deficit, are to cut income taxes by introducing family income splitting and by raising contribution limits for Tax Free Savings Accounts.

It is encouraging that both of the opposition parties, with only guarded support from the Conservatives, place a strong emphasis upon importance of addressing the needs of Aboriginal Peoples, especially in the area of education.

The NDP also stressed the importance role of collective bargaining in achieving more equality and opposed recent changes in EI that compel workers to take jobs at much lower wages.

Both of the opposition parties call for some limited measures to make the tax system more fair, but neither endorses higher income tax rates for the very affluent, one source of funding new social investments.

The NDP alone condemns the Conservative proposal to extend income splitting to families with children, a measure that would cost some $2.7-billion per year in lost revenues, provide no extra support at all for single parents and lower income working families with children. It would primarily benefit the most affluent. The question for the Liberals is how can they support new social initiatives if they also support the loss of funding brought about by this income splitting proposal and oppose new tax increases.

While the issue of the growth in income inequality has now been put on the table by all parties in this report, it is clear that there will be plenty to debate about possible policy solutions leading up to the next election.

This article originally appeared in the Globe & Mail.

Photo: mcdemoura. Used under a Creative Commons BY-NC-ND 2.0 licence.

Finance Minister Jim Flaherty says the economy is too weak to support a modest, phased-in increase in Canada Pension Plan (CPP) premiums divided between employers and employees.

This is disputed by experts, and also contradicts Conservative messaging in two important ways.

First, in every other context, from the Speech from the Throne, to the recent Economic and Fiscal Update, the Conservatives have bragged about Canada's economic performance and highlighted the chances of a strong recovery. Except when it comes to the CPP debate, "the land is strong."

The standard view in economics and in policy circles is that wage increases come at a cost that impacts individual firms negatively. According to this view, wage increases also lead to losses in a firm’s competitiveness in foreign markets. Thus, until the advent of the global financial crisis, mainstream authors paid little attention to the fact that wage growth had lagged behind the sum of productivity growth and inflation, in most countries and for several decades, and that as a result wage shares had fallen. There was also little concern with the rise in wage dispersion— the gap between the income share of the top 1% and the rest that became a part of the lexicon during the Occupy Wall street movement.

There is broad agreement across the political spectrum that we need to create more 'good middle-class jobs', especially for young people leaving the educational system, recent immigrants to Canada, and aboriginal persons.

Middle-class jobs can be seen as those which provide decent pay, working conditions, and benefits; a measure of employment security; and, above all,  opportunities to build skills and progress over time in a career. In today's labour market, these kind of jobs generally require a professional or advanced technical qualification acquired through postsecondary education.

The Parliamentary Budget Office has come out with a report suggesting that the Conservatives will likely balance the budget ahead of schedule. But, and it’s a big but, they also found there would be no balanced budget in 2016 if there were no Employment Insurance (EI) surplus. 

The Conservatives' use of the EI surplus to pay for a balanced budget deserves closer scrutiny.

In October, 2011, two leading U.S. economists, Nobel prize-winner Paul Krugman and Lawrence Summers, squared off in Toronto in the high-profile Munk Debates. At issue was the question of whether North America faced a Japan-style era of prolonged economic stagnation.

Mr. Summers, former Treasury secretary under president Bill Clinton, a key White House economic adviser in President Barack Obama’s first term, former president of Harvard University, and for a time a highly paid adviser to a leading hedge fund, is as close to an establishment economist as one can get. He was widely reported to be President Obama’s personal choice to replace Ben Bernanke as chairman of the Federal Reserve Board, and probably would have been nominated if not for strong opposition from the many Democratic senators who saw him as too close to Wall Street.