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Canada Discovers Trickle-Up Economics

There was always skepticism about claims that, as the rich became richer, income would “trickle down” to others. What wasn’t perhaps foreseen was that the trickling would actually be in the other direction, and that it would be more of a torrent than a trickle.

But the evidence is now clear. Over the last three decades, the tables of the rich have overflowed, with barely any scraps falling off. On the contrary, there’s been a massive transfer of income and wealth from Canada’s middle and lower class to the rich.

The result is that Canada has become a highly unequal society.

This is bad news, since a growing body of empirical evidence shows that extreme inequality has a clearly negative effect on a wide range of health, social and economic problems, as well as undermining democracy.

While some degree of inequality is inevitable and even desirable (allowing bigger rewards for those making bigger contributions), the level of inequality that exists today in the Anglo-American countries — the United States, Britain and Canada — is extreme, and almost unique in the advanced world.

This is a dramatic departure from the far greater equality that prevailed in the U.S. and Canada in the early postwar years — from 1945 to about 1980 — when the benefits of economic growth were more widely shared.

In the 1950s and 1960s, for instance, the real median family income in Canada was growing fast enough to double every 20 years. Since 1980, it has barely grown at all.

Middle class families have only managed to maintain their standard of living by working much harder than their parents, typically relying today on two incomes instead of one.

Meanwhile, at the top, things have been hopping. Indeed, virtually all the income growth in the last 30 years has gone to the top.

As a recent study by economist Armine Yalnizyan of the Canadian Centre for Policy Alternatives documents, the top-earning 1 per cent of Canadians almost doubled their share of national income, from 7.7 per cent to 13.8 per cent, over the past three decades.

And the higher up the food chain, the bigger the gains. The richest 0.01 per cent — those now earning on average $3.8 million a year — more than quintupled their share of national income.

All this can be captured vividly by imagining a “national income parade,” a concept developed by Dutch statistician Jan Penn to measure income inequality.

Everyone in the country marches in the parade, with heights determined by incomes, starting with the shortest (poorest) citizens and ending with the tallest (richest). What is striking is how low to the ground almost everyone in the parade is — except for a small number of giants at the end.

If we compare the Canadian income parade of the late 1970s to today’s parade, we find very little difference — not much has changed, that is — except at the very end.

In the 1970s parade, the final marcher towers above his fellow citizens, measuring more than 200 feet tall, about one-sixth the height of the CN Tower. In today’s parade, however, the head of the final marcher is no longer visible to marchers on the ground; even if they proceed to the CN Tower viewing deck, they’re not even up to his knees.

The massive upward flow of income has largely been invisible to the public, even though it may well amount to the most significant change in Canadian society in decades.

The impact on Canada’s social fabric is huge and likely to grow. Recent research — particularly the work of British epidemiologists Richard Wilkinson and Kate Pickett — shows that less equal societies almost always have more violence, more disease, more mental health problems, higher infant mortality rates, reduced life expectancies, as well as less social cohesion. The effects are most pronounced at the bottom, but are evident throughout the society.

Perhaps most striking is the finding that people in less equal societies have reduced social mobility. In fact, there’s little upward mobility today in the United States. Those wanting to give their children a chance to actually live the American Dream are better off moving to Sweden.

There’s also evidence linking extreme inequality with serious economic problems. The level of inequality reached in 2008 was virtually identical to that of 1929, suggesting that large concentrations of wealth at the top create a dynamic leading to reckless financial speculation and Wall Street crashes — with their devastating consequences of recession and unemployment.

But perhaps the most important impact of concentrated economic power is on democracy. As the great American jurist Louis Brandeis put it: “We can have democracy . . . or we can have great wealth concentrated in the hands of the few. We cannot have both.”

Efforts to limit the political influence of the wealthy — such as the tighter campaign contribution laws brought in by the Chrétien government — are useful, but can’t deal with the scope of the problem.

The wealthy exert influence not just through campaign contributions, but at every stage of the political process: in the forming of political parties, the writing of party platforms, the selection of candidates, the drafting and amending of legislation, not to mention the shaping of public opinion through think-tanks and media ownership.

The wealthy also often employ a form of blackmail, either directly or indirectly threatening they’ll leave the country if governments don’t capitulate to their demands for lower taxes. While it’s hard to imagine political leaders caving in to similar threats from other groups — say, electricians or teachers — the sheer economic power of the wealthy seems to quickly bring governments to heel.

Oddly, there’s been little probing of why income has gone so heavily to the top in recent years.

It’s hard to find any justification for the fact that, while the average CEO was making about 25 times the average worker in the late 1970s, today’s average CEO makes roughly 250 times the average worker.

Certainly there’s no evidence that today’s CEOs or other top-earning Canadians are any more talented, productive or hard-working than their 1970s counterparts.

The change is often attributed to “globalization,” although this fails to explain why it hasn’t happened in other advanced nations that also compete successfully in the global economy — like Germany, Japan and the Scandinavian countries.

A more likely explanation is that the rich have used their clout to get governments in the United States, Britain and Canada to change the rules, redirecting economic benefits to themselves.

They convinced governments, for instance, to alter the rules governing executive stock options, making them much more lucrative. (Although only about one-third of Canada’s top corporations were using stock options early in the 1990s, they were all were using them by the end of the decade. The value of stock options for Canadian CEOs exceeded their salaries by 300 per cent.)

The rich also managed to use their control of corporate boards to push up executive compensation. Since corporate boards are largely made up of corporate executives, a decision to raise the salary of an individual CEO helps set a higher standard for executive pay generally, benefitting all board members.

“They have a conflict of interest, since they have a stake in high financial salaries,” notes Richard Posner, a critic of today’s executive compensation (and also, incidentally, the judge who recently turned down Conrad Black’s U.S. legal appeal).

The rich also greatly enriched themselves by convincing governments to lower their taxes. Whereas the top marginal tax rate — the rate paid on income above a certain level — averaged 80 per cent in Canada in the early postwar years; it is now just 46 per cent (39 per cent in Alberta).

It was argued that lower taxes would encourage better performances at the top, increasing overall economic growth.

But that didn’t happen. On the contrary, economic growth rates were higher in the early postwar years — roughly twice as high — as they’ve been since 1980.

This suggests that higher taxes on the rich — like those in the early postwar era — do not discourage economic growth.

In fact, the introduction of an inheritance tax in Canada (like ones that exist in almost all advanced nations) would enable Ottawa to collect enough revenue to create educational trust funds for all Canadian children, thereby significantly improving national productivity.

Yet anyone advocating higher taxes on the rich is quickly denounced by groups like the right-wing Fraser Institute. Mark Milke, a commentator with the institute, dismisses concerns about rising inequality in Canada as merely the product of envy, or what he calls the “green-eyed beast.”

As the rich manage to direct more and more of society’s resources toward themselves, the appropriate response for the rest of us, apparently, is to celebrate their good fortune.

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