Canada's best economic policy option: Inequality reduction

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Since the early 1980s, Canadian economic policy has consisted of introducing market-friendly policies. The stated goal was to increase productivity, defined as output per person-hour worked. Reliance on markets has not produced the expected results.

Speaking to the Ottawa Economics Association this spring, Bank of Canada Governor Mark Carney put a pointed question to Canadian business leaders. Given all the measures put in place by successive governments to promote productivity, why is business failing to invest?

Andrew Sharpe, the executive director of the Centre for the Study of Living Standards has documented the weakness of productivity growth, despite market-friendly policy measures introduced in Canada since the 1981-82 recession.

Meanwhile, in a series of studies, the Canadian Centre for Policy Alternatives has been revealing how the gap between the rich and everybody else has been growing larger. A CCPA study by Lars Osberg sets out how income inequalities have ballooned over the same nearly 30-year period when market friendly policies have failed to increase productivity.

Putting the CSLS and CCPA research conclusions together, it appears that market-friendly policies correlate with increased income inequality, but not improved productivity. Interestingly, evidence from northern Europe shows that more equal societies are more productive.

Given this picture, for Canadians, it would make more sense to reduce inequality directly, rather than to continue with failing policies.

Recent research from the World Health Organization and independent British scholars suggests that more unequal societies are less healthy societies. The WHO shows that the poorer you are relative to others in your society, the worse your health prospects become. Richard Wilkinson and Kate Picket demonstrate that the more unequal the society, the more social ills it produces. Their 2009 book The Spirit Level: Why More Equal Societies Always Do Better amounts to a major restatement of how societies should organize themselves.

The best available evidence suggest reducing income inequalities directly would be the intelligent policy choice for Canada. Such policies would start with the idea that the higher the income, the more benefits gained from society. Correspondingly, higher contributions to collective resources should be expected in taxes paid, beginning with a progressive income tax, but including levies on wealth, and transfers of wealth. Inheritance taxes on family wealth and capital taxes on corporations need to be understood as necessary contributions to economic and social well-being.

Specific policies to reduce inequalities would include empowering equality-seeking groups, boosting minimum wages, establishing living wages, introducing poverty reduction strategies, providing adequate social housing, improving social services, adopting early childhood learning strategies, "socializing" business investment through indicative planning, and committing to full employment.

Is it not better to live in a more equal society than a more unequal society? John Rawls, the late Harvard political philosopher, answered that inequalities could be tolerated only to the extent that income differences permitted a better life for the poorest in society. He was arguing that difference served as incentives and were necessary for increasing prosperity. Those defending the out-of-control salaries and bonuses paid to CEOs take the same line of thought. But, inequalities supported, fostered, and, yes, created by government policies have gone far beyond any amount needed to create incentives.

Given the disconnects between corporate performance and CEO remuneration, and market-friendly policies and productivity performance, Canadian economic policy amounts to ignoring available evidence, while embracing failed ideology.

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