Relentlessly Rising Wealth Disparity Threatens To Destabilize Canada: Author

Imagine a Canada where public schools and urban infrastructure are crumbling, the economy runs through constant boom-and-bust cycles, and ideological demagogues run rampant in the political arena.

Some more pessimistic readers might say that, to some extent, this Canada already exists. Others might note the parallels to the situation in the U.S. today. To Lars Osberg, a professor of economics at Dalhousie University, this is no coincidence. His new book exploring the growth of economic disparities in Canada over the past 40 years warns things could get much worse on our side of the border.

In The Age of Increasing Inequality: The Astonishing Rise Of Canada’s 1%, Osberg draws on a decades-long career studying economic inequality, one that reaches back to before our own era, when the issue came to be front and centre in the policy debate.

His book starts with data that may be familiar terrain for those who have followed the issue closely, but are nonetheless worth highlighting: Since 1980, the bottom half of Canada’s earners have actually seen their earnings in the workforce shrink, when adjusted for inflation. Only government transfers — in the form of welfare, disability, child and other benefits — have saved the bottom half from being materially worse off today than a generation ago.

Meanwhile, among the top one per cent, incomes have more than doubled — and income growth has been even stronger for the top 0.1 per cent. The higher you are on the income ladder, the better you’ve done in the past 40 years.

That’s a significant break from the era before the 1980s, when incomes were rising proportionally among all earners, and economic inequality was stable.

And the trend hasn’t stopped. A study released this week found that the net worth of Canada’s ultra-rich, defined as those with $30 million or more in assets, jumped by nearly 15 per cent in the past year. For Canadians as a whole, net worth shrank by 0.2 per cent over the past year, as house prices slid in some markets.

If it keeps going like this, Canada will be transformed, and not for the better, Osberg warns. At the heart of the book is the argument that societies where inequality is increasing — such as ours — are inherently unstable. Unlike Medieval Europe or the Mogul Empire in India, which had very high but stable levels of inequality, in our current era, the people at the top take more of the income pie every year.

As the 99 per cent watch the one per cent do better and better, they develop a sense they are falling behind, even if for many of them, incomes are still improving.

In an economy where the rich have ever more money, production increasingly shifts to luxury goods, and advertising has to create demand for more and more of those items. That “increases … resentment and unhappiness among those who cannot remotely afford these luxuries,” the book explains.

“The 99 per cent are told ever more often by advertisers that they are inadequate failures.”

So to keep up with ever higher material standards for status, the middle class piles on debt, Osberg writes. Sound familiar? Canadian household debt levels have reached record heights over the past few years, to among the highest in the developed world.

‘Dark scenario’

As the 99 per cent falls farther behind the rich while falling deeper into debt, the risk of political and economic instability grows, Osberg argues.

“This economic inequality leads to being susceptible to just wanting a change, any change,” Osberg said in an interview with HuffPost Canada.

“The trend for the future is that if we have this continual pulling away of the elite, it will create social strains that are very detrimental to the ideas of democracy and personal freedom that I think are important in non-economic ways to our well-being.”

In what he calls a “dark scenario,” Osberg sees rising inequality causing “authoritarian social movements [to] emerge, selling dreams of a return to “good old days” and finding scapegoats when that does not materialize.”

But another dynamic is playing out among the “winners” in the inequality game, the people at the top of the income ladder. As the rich grow richer, they stand to lose more, and so become more defensive about holding on to their wealth.

The wealthy today spend considerable money helping their children get a leg up, and as they grow wealthier, they can spend even more. The gap in equality of opportunity is rising. And equally importantly, the wealthy have less motivation to support a strong public education system. After all, why would you want to spend money educating your children’s competition?

“The bottom line is whether in the long run the elite will actually pay for good education for other people’s children,” Osberg’s book wonders.

He says the slowdown in the construction of urban infrastructure, such as subway lines, can also be linked to rising inequality.

When everyone benefits from growth, it’s relatively easy to get support for major projects like a subway line. But “those decisions are far harder to make when nobody wants to pay any more taxes, when taxes are de-legitimized among middle earners and people at the bottom are already struggling to get by,” Osberg said.

Meanwhile, as inequality of opportunity grows, “talent is wasted and total output is lower than it could be with equal opportunity.”

Additionally, as the rich grow richer, they have more leverage to control the political debate, through ownership of media, control over policy-influencing think tanks, and direct lobbying. That becomes even more problematic as the elite’s views increasingly diverge from the rest of society as they grow even richer.

“It’s the aristocracy and the masses,and the two have nothing in common,” Osberg said.

Bank of Canada: An inequality villain?

While much of this trend is global, and driven by worldwide trends like automation, Osberg’s book suggests some of it has been a made-in-Canada problem. In particular, he takes the Bank of Canada to task for its efforts to fight inflation in the 1980s and 1990s.

Osberg argues that in raising interest rates to astronomical levels repeatedly during those periods, the Bank of Canada damaged the economy through excessive borrowing costs and reduced the demand for labour. Inflation slowed down, but full employment never returned.

It’s no coincidence that Canada’s average hourly wage stopped growing at almost the same time that the Bank of Canada began its fight against inflation, Osberg argues.

That leads to one fairly simple measure that Osberg says can be taken to reduce the inequality: Reform the Bank of Canada so that it doesn’t just target a certain inflation rate, as the case is now, but also has a target for an unemployment rate.

Osberg notes that New Zealand’s central bank has switched to this system. In the U.S., the Federal Reserve never stopped targeting unemployment, which may help to explain why the U.S.’s jobless rate has been lower than Canada’s for most of the last several decades.

For Osberg, other possible solutions could include a basic income guaranteed to all, or a “participation income” — a sort of basic income paid only to those people who are somehow engaged in society, for instance as students or volunteers or caregivers.

And he suggests tax reform. The wealthy today take more and more of their income in the form of stock options, which are taxed as capital gains at half the rate of regular income, Osberg notes. And Canada’s lack of an inheritance tax (except for capital gains taxes charged on inherited assets) means there is little to stop the rich from inheriting more and becoming even wealthier, in a perpetual cycle that leaves everyone else behind.

Replace the carbon tax?

Osberg notes that a straight carbon tax would actually hit low-income earners harder than others, because they spend a larger share of their income on carbon-heavy activities like commuting and home-heating than wealthier people do. He suggests replacing it with a “carbon fee and dividend” — essentially a carbon tax that is paid back to consumers in the form of a “dividend.”

“If you tax carbon, it has the biggest hit at the top in terms of dollars raised, but in percentage terms, the biggest hit is at the bottom,” Osberg said.

Addressing the economic inequality problem in its entirety means implementing a host of solutions, not just a few, Osberg argues.

“We don’t want to stumble along blind and say the world is the way it will always be,” he told HuffPost. “It’s not necessarily a wonderful future that unfolds, and we have to be conscious of the stresses on our democratic system and civil liberties.”

Lars Osberg’s “The Age of Increasing Inequality,” published by Lorimer Books, goes on sale in Canada on Sept. 11.