The Broadbent Blog


How to Address the Malaise of the Middle-Class

This blogpost appeared in the Globe and Mail on February 18th. 

By now, everybody is surely aware that the core commitments of the Liberal federal government are to “build a strong middle-class” and “help those working hard to join it.” But economic progress and social progress over the past three years seems to have been very limited, and it is far from clear that the government is pursuing the best overall strategy to promote higher living standards and greater income equality.

It is, of course, true that the federal government is largely a prisoner of economic circumstances over which it has no control, including everything from global stagnation to the impact of President Trump on trade. Yet, in the upcoming federal election, voters will likely determine the fate of the federal government based on perceived changes in their own household's well-being.

Over the past three years (third quarter of 2015 to third quarter of 2018), real GDP has increased by a cumulative 6.5%. But this growth was driven mainly by household spending and investment in housing, fuelled by yet another increase in household debt from 167.8% to 177.5% of after tax income. It is deeply disturbing that business investment in buildings, machinery and equipment and intellectual property has actually fallen as a share of the economy, undermining hopes of a shift to a more productive new economy capable of sustaining higher wages.

It is true that unemployment has fallen to a near record low of just 5.6% in December. But real (inflation adjusted) wages are as flat as yesterday's left over beer. Just-released income tax data show that median annual earnings adjusted for inflation rose from $36,740 in 2015 to just $36,980 in 2017, a miserly increase of just $240 or 0.6% over two years. Labour force data show that hourly wages increased by just 2.0% over 2018, almost exactly in line with prices.

The stagnation of pay is a bit of a mystery in that much of the recent growth in jobs has actually been in higher paid professional occupation rather than in very low-paid jobs. A possible explanation is that recent post secondary graduates are being paid much less than the retiring baby-boomers they are replacing.

In short, top line statistics suggest that ordinary middle-class households are seeing little or no increase in their incomes even as many, especially young people, sink deeper into debt. This helps explain the rise of the populist right which has targeted (largely imaginary) tax increases as the problem, and proposes tax cuts as the solution.

The Liberals respond by arguing (correctly) that they have (modestly) improved the incomes of lower income Canadians through reforms to the child benefit system, increased tax credits for the working poor, and also improved public pensions. A new tax credit for low income renters has been promised.

What the Liberals have not done is significantly improve public programs which significantly alleviate the cost burden on households through “in kind” benefits. A key example is Quebec's child care program, which, according to a recent report from the CCPA, costs parents of an infant in Montreal just $175 per month, compared to $1685 per month in Toronto. Yet the federal government have only very modestly increased their support for provincial child care programs based on the Quebec model.

The Liberals seem set to reject a “big bang” national pharmacare plan which would widen access to needed drugs for the uninsured, remove the need for private insurance, and lower the cost of current employer plans for employers and workers. Instead, they seems to favour a drug benefit narrowly targeted to the working poor.

When it comes to the acute shortage of affordable housing in our big cities, the best single option is to invest in high quality, mixed income, social and co-operative housing which increases non market supply. Yet the real estate lobby to allow new buyers to go even deeper into debt seems to be gathering steam as the answer to “affordability.” The new national housing policy is not very ambitious and is just getting off the ground.

The stagnation of middle-class living standards seems set to frame the pre election political debate over issues of affordability. Progressives should be arguing that bold public programs to meet basic needs outside of the market are a needed addition to targeted income supplements, and certainly far preferable to tax cuts which would inevitably mean cuts to the services we already have.

 

Andrew Jackson is Adjunct Research Professor in the Institute of Political Economy at Carleton University, and senior policy adviser to the Broadbent Institute.