Economy Lab

When business talks about inequality, it's time to worry

Special to The Globe and Mail

(Wolfgang Amri/Wolfgang Amri/iStockphoto)

Armine Yalnizyan is a senior economist with the Canadian Centre for Policy Alternatives





The world is marking the third anniversary of the biggest global economic crisis since the 1930s by staring down the imminent possibility of a second global downturn. Virtually none of the conditions that triggered the first one have been addressed.

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As nations steel themselves to provide more taxpayer-funded cash to stave off a new round of defaults while cutting supports for taxpayers, policy makers are pointing to rising income inequality as cause for concern in a climate of growing instability.



Notably, it’s not the usual voices of the left sounding the alarms, but pro-market heavyweights like the Conference Board of Canada and the International Monetary Fund.

That such groups are worried should be a signal to Canada’s private sector leaders: pay attention to the compensation gap between your lowest paid worker and that of the CEO, because those differences may tell us a lot about the mess we’re in. After all, businesses rely on the rising purchasing power of the many, not the few, to deliver growth and profits.



But income inequality has grown more rapidly in Canada than in the U.S. lately, according to the Conference Board report. Among 32 OECD nations, Canada has gone from better-than-average to worse-than-average levels of inequality since the mid 1990s, slumping from 14th to 22nd place, despite a decade of robust economic growth and record levels of job creation. Meanwhile, 15 OECD nations -- including peers like Norway and the U.K. -- were reducing income inequality.



Its earlier report noted: “[H]gh inequality can diminish economic growth if it means that the country is not fully using the skills and capabilities of all its citizens or if it undermines social cohesion, leading to increased social tensions. Second, high inequality raises a moral question about fairness and social justice.”



The links between rising inequality, halting economic growth and increasing volatility are getting harder to ignore.



The IMF devoted the latest edition of its in-house publication to income inequality. In it, economists Andrew Berg and Jonathan Ostry tackled a long-standing debate in the economics biz: the trade-off between equality and efficiency. “Do societies inevitably face an invidious choice between efficient production and equitable wealth and income distribution?” they ask. “In a word, no.” Their findings from data covering the period 1950 to 2006 show greater equality is linked to longer spells of sustained economic growth (a topic they develop more fully here). Conversely, more inequality breeds more volatility.

The main trends that fuelled the first crisis continue uninterrupted in Canada: eroding purchasing power of the majority; rising household debt; and growing concentration of incomes in the hands of those who already have the most, who grease the wheels of the machines that place big bets -- and produce wild swings -- in the stock market.



In Canada, the post-crisis period has seen average earnings drop while CEO paycheques enjoyed double digit gains. Household debt keeps hitting record highs. Tax breaks introduced since the recession, like the Tax Free Savings Accounts or accelerated corporate income tax cuts, simply widen the gap, funnelling the most cash back to those with the most cash. Fear of losing it all has produced market mayhem in recent months.



Not enough purchasing power. More debt. Greater volatility. The problems themselves provide the clues about how to fix things.



Sustained recovery depends on the creation of well-paying, permanent, private-sector middle-class jobs picking up at a faster pace.



Instead, we counter the pinch of shrinking paycheques with a public policy thrust set on cutting public sector jobs and throttling access to services that can actually increase purchasing power, like public transit, post-secondary training and education, or child care. It is hard to come up with more counter-productive policy.



It is in business’ interests to reduce inequality, but short-term gains eclipse the long-term view for too many. Governments have less excuse. Their job is not to save the rich and lose the economy. It is to think forward, to implement public policy that benefits the majority, sustainably, and reverses this relentless trend towards growing inequality.



At the very least, governments shouldn’t make things worse.



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