The Inequality Wolf has Arrived

For as long as I can remember, there have been periodic stories about inequality between rich and poor in Canada in the news. Almost always, these stories described this inequality as growing. And for a long time, inequality was not really growing in any meaningful way. Various measures of it might fluctuate up and down, but there were no consistent long term trends. Yet people kept “crying wolf”.

The thing is, now there really is a wolf. Since about 1995, inequality really has been rising in this country. A paper by Lars Osberg, available from the Canadian Centre for Policy Alternatives, presents recent evidence.

Inequality matters. We commonly compare countries, or judge how well they are doing over time using per capita gross domestic product, or some similar measure of average income. But this can be pretty misleading unless we know how income is distributed.

For example, Canada has a per capita GDP about 20% lower than the U.S. But if we compare the poorest 10% of Canadians to the poorest 10% of Americans, the Canadians are richer. The same thing happens if we compare the second-poorest 10% from each country. In fact, if we go on comparing tenths of the population like that, we find that the only Americans who are richer than the corresponding Canadians are in the richest 30%. This is because Canada is just a bit less unequal than the U.S.

Another reason that inequality matters is that taking a dollar from a millionaire and giving it to a hungry person surely improves the welfare of the hungry person more than it hurts the millionaire.

Why is inequality growing? In his new book, “Conscience of a Liberal”, Paul Krugman gives a lot of thought to this question. One possibility is that technology has created a high demand for those with the skills to develop and use it well, leading to high wages for nerds and devaluing the work of non-nerds. But this does not seem to fit observations well.

Inequality has not risen in all rich, technological countries. Also, it is not the incomes of regular working nerds that have risen disproportionately, but those of top corporate executives.

Krugman examines the history of inequality in the U.S., showing that, during the depression of the 1930's and WWII in the 1940's, government policies greatly reduced inequality in a short time. In Canada, too, economic policy during and after WWII seems to have created a much more equal society than existed before.

Many of those policies would sure send the right-wing think tanks berserk if anyone were to suggest them today. By the end of the war, the richest Canadians were paying over 90% of their income in income taxes. Taxes on poorer people were much lower. “Excess profits” taxes were levied on corporations.

There was heavy government involvement throughout the economy. This was aimed at ramping up military production rapidly, and it was very successful.

After the war, taxes were cut back substantially, but remained much higher than before the war. And it became politically possible for government to do things. People remembered the apparent failure of free market economics in the great depression and the success of government economic involvement during the war.

Many policies which reduced inequality were introduced or expanded. Programs providing education, health care, pensions, welfare, unemployment insurance, child support, and others, tend to benefit the poor while taxing the rich.

Krugman argues that inequality in the U.S. rose largely because hard right ideologues were able to use subtle race politics to take over the Republican Party and assume power, leading to a weakening of unions and the loss of government programs. He also argues that social attitudes which limited the size of the paychecks corporate bosses wrote themselves were weakened.

I suspect that norms regarding executive compensation have also changed in Canada. Also, governments cut back on social spending to tackle their deficits. These things seem adequate to account for the rise of inequality in Canada.

The most practical way to reduce inequality would be to increase taxes on the rich, and use them to pay for better services for all Canadians, and for programs for the poor.

This might cause a few very rich people to move elsewhere. But if we could create a country with top-notch systems for education, health care, transportation, etc., and without homeless people sleeping on the streets, that would surely be attractive to the sort of rich people we need – productive people who create new jobs and care about the sort of society they live in.

We need to worry less about maximizing per capita GDP and more about reducing inequality, especially about improving life for the poorest.

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