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Income stagnation and inequality: It’s not about the middle class

It’s about the poor, says Stephen Gordon


 

Kevin Milligan’s response to my posts (here and here) in which I expressed skepticism about the emphasis that the Liberals are putting on the middle class makes two important points: Earnings growth has been slow over the past few decades and inequality is higher than it was thirty years ago. These are crucial issues for policymakers, and there’s no point in trying to to downplay them. My concern is how these problems are being translated into a policy agenda focused on the middle class.

Economist Aaron Director is credited with an observation that has come to be known as Director’s Law:

Public expenditures are made for the primary benefit of the middle classes, and financed with taxes which are borne in considerable part by the poor and rich.

Turning the discussion about income stagnation and inequality into one about the problems of the middle class risks making things even worse for lower income households. After all, it’s not just the middle income group that has seen stagnant incomes:

I think it’s pretty clear that trends in incomes after taxes and transfers are more important than trends in income earned from the market. (If market incomes were all that mattered, I like to think we’d all be much more concerned with those low-income families trying to get by on $3,000 a year in market income and not on the rate of growth of median market incomes.) The difference between market and after-tax-and-transfer income is where redistribution policy shows up.

Here again is the trajectory of average incomes in the middle quintile, which I highlighted in an earlier post:

Governments — provincial and federal, and across all parties — have not stood idly by as median market incomes fell. In 1976, the net effect of government policy was to take away $3,000 a year (in 2011 terms) from middle-class families. By 2011, the government was supplementing incomes by a $3,000 per year. Market incomes may have fallen, but middle class families’ actual buying power has increased.

This benefit to the middle class has come at a cost: the Canadian tax-and-transfer system has become less progressive since the mid-1990s. Look at how the shares of government transfers have evolved: 

Families at the bottom of the income distribution have seen their share of the transfers pie shrink considerably. People with median incomes — the third quintile — have seen theirs grow. It seems to me that the last thing we need is another government determined to put the middle class first. Why not focus on lower-income households?

And while I’m on the point, let’s look at post-secondary education. Providing children from low-income households with access to higher education is one of the most effective ways to ensure a healthy level of social mobility in a society. But the trend in post-secondary student aid in Canada is an unhappy one:

(The above chart is courtesy of Alex Usher.)

So far, Canada has done well by international standards in promoting social mobility, and maintaining this good performance should be an overriding goal for policymakers.  If it’s important to give middle-class kids a chance at a university education, it’s even more important to give that chance to kids from low-income households. That, though, as the chart shows, doesn’t seem to be the priority right now.

Inequality and income stagnation are real issues. Representing them as only — or even primarily — problems of the middle class is likely to make the problems of the most vulnerable families worse.

 


 

Income stagnation and inequality: It’s not about the middle class

  1. A few quick points:

    1) I would be cautious about long-run transfer shares by quintile–are we sure the increasing share of people 65+ isn’t driving some of this?

    2) If I am discussing current wellbeing, looking at after-tax income is a better measure than ‘market income’ or earnings. Stephen’s correct about that–a dollar of transfer income buys just as much consumption as a dollar of earnings. But if you are interested in understanding what’s going on in the labour market, earnings is the right thing to look at. And, if I want to understand where things are going in the future, I’m interested in looking at the trends in the labour market (and therefore earnings), since maintaining middle incomes solely through transfers is not tenable.

    3) I’m not here to defend any particular political rhetoric, but I do think the economy of the last 30 years has served up trends in the labour market that are hitting middle (and lower) earners.This is different than the first 30 years after WW-II. I think that matters–and am happy it is drawing some attention.

  2. Here’s the bills being paid by the middle class:

    October 20, 2008 – London Health Sciences Centre. $10,000

    November 5, 2008 – Marketing Magazine – Rogers Media. $20,000

    2009

    January 31, 2009 – Ontario Library Association. $10,000

    November 2, 2009 – The Learning Partnership. $10,000

    November 6, 2009 – Waterloo Catholic District School Board. $15,000

    2010

    March 5, 2010 – Ontario Public Service Employees’ Union. $20,000

    April 23, 2010 – Charity of Hope. $15,000

    May 7, 2010 – Algonquin & Lakeshore Catholic District School Board. $15,000

    September 23, 2010 – REED Construction Data. $20,000

    December 6, 2010 – Certified Management Accountants of Ontario . $20,000

    2011

    January 25, 2011 – Rain 43 (Canada’s National Advertising Week), Toronto, ON. $20,000

    June 9, 2011 – Kincardine District Secondary School, Kincardine, ON. $10,000

    June 15, 2011 – Credit Institute of Canada, Ottawa, ON. $20,000

    2012

    April 25, 2012 – Queen’s University, Kingston, ON. $12,000

    April 30, 2012 – Literacy for Life, Saskatoon, SK. $20,000

    June 26, 2012 – Canadian Mental Health Association – Halton Region, Burlington, ON. $20,000

    June 27, 2012 – Grace Foundation, Saint John, NB. $20,000

    • Sorry but hatchet jobs is next door at sun media. This is an adult’s only blog – or it should be.

      • You mean “hatchet jobs ARE next door at sun media”

        Right?
        Are you one of the poor who did not have the opportunity to go to university and learn to write The Queen’s English?

        • Not to speak for kcm2, and to give your post more attention than it deserves, it can be read properly the way it is written. Like when you ask the salesperson “where can I find a wrench?” and they reply “Tools is aisle 4”. Look at is as “(Department of) hatchet jobs is…”

          • My post deserves no attention, but you are right, sort of. The use of the ‘implied’ subject or object – for instance your “Department of” – is beyond most Maclean’s readers.
            I shall, by your intervention, give kcm2 the benefit of the doubt.

          • Thx for coming to the defense of colloquial useage, but I fear Fred are more right than wrong. Why anyone could be arsed to point it out is another matter.

      • Yes, this blog should be for adults. I am very amazed at how many posters here consider themselves to be adults while condoning Justin’s double dipping practices.

        It’s easy, for adults, to figure out why politicians keep abusing the system; fake adults let them get away with it, if the name is right.

    • Hey you’re back. Have a nice summer?

      • Yes, so far summer has been really, really good. I have almost finished building my deck and now am in the process of building an outdoor sauna. but the weather, as of late, has been brutally hot and since the new sauna building sits on the sw side of my house, it gets really really hot there now, so not a good time to keep building.

        So the break in my carpentry project gives me a nice opportunity to catch up with you guys.

        Hope your summer has been going well, too.

        • I love it- someone voted you down. :)

  3. Allow me a bit more: If we are talking about helping out those with low income–say the bottom decile–arguably the right set of policy tools is likely to figure out how to optimize our transfer system.

    However, when we’re talking about earnings stagnation hitting much further up the distribution, it stops being feasible or desirable to improve things through ex-post transfers alone. The math does not work–there is not enough tax revenue at the top to boost the incomes of those in the middle.

    I am quite sure Stephen knows that math well. So, what I think he’s saying here is that the goal of policy should be to focus (only?) on those at the bottom, and let those in the middle do what they’re going to do.

    People have different tastes for redistribution, so it’s fine if someone cares only about avoiding extreme negative incomes and doesn’t care much about the shape of the upper 4/5ths of the income distribution. I might disagree myself, but it’s not wrong to have different tastes. To each his own.

    But even if you have those limited tastes for redistribution, I think that ignoring middle income stagnation is not likely to be a good political equilibrium–median voter and all that. The political system is going to focus on the middle–I don’t think that can be avoided.

    Given that inevitable focus on the middle, we could just let gimmicky and counterproductive ‘cut HST on home heating’ kinds of policies dominate the debate. Or we could try to develop a better policy approach.

    So, my position is:
    a) middle earning stagnation is happening
    b) it is not fixable through ex-post transfers from top to middle.
    c) politics will pay attention to the middle
    d) I’d rather have a discussion about what policy fixes we should try than cede the field to the ‘no HST on butter tarts’ crowd.
    e) part (d) is hard, but (c) makes it necessary.

    • First off: people have to be realistic.

      What does it mean to be considered ‘middle class’? That one has enough money to pay for extras besides paying the costs for necessities?

      And how many extras should those be?

      • “The goods of fortune in moderation.”

        • Absolutely! Everything in moderation and one can live a happy life.

  4. I think the problem is that “middle class” in political speech doesn’t actually mean the people in the middle quintile of the income distribution. Figures vary depending on country and the health of the economy, but according to surveys, 50-80% of people think of themselves as middle class. Consequently “middle class” issues get a disproportionate amount of airtime in political circles because you can sweep up a much larger share of the population than you can if you’re talking about the poor. Not only that, but the bottom quintile are, for various reasons, much less likely to vote than higher income brackets. Policies that are pointed toward the “middle class” therefore give very good political returns for self-interested politicians.

    • I believe something like 80% of Canadian self identify as middle class.

      • And so it is! Why would it not be?

        Most people are of average intelligence, have average ambition, have average hopes and dreams and keep falling into the same category. Not such a bad place to land into, that so-called middle class.

    • Harper refers to them as the ‘hard working’ Canadians.

  5. When the Rt. Hon. Paul Martin was the Finance Minister under Prime Minister the Rt. Hon. Jean Chretien, he ‘renovated’ the Income Tax Code vis a vis the Canadian Income Tax status of repatriated funds from offshore. Fortunately, at the time, he left in place the provision that allows a resident Canadian to repatriate to Canada ‘profits’ earned in Barbados – completely income tax free! Ever since then, I have arranged to have myself ‘registered’ in Barbados – and other jurisdictions equally ‘blessed’, ’cause they change with each new Canadian Government – so I never, ever, have to pay Canadian, or foreign, income tax.
    Completely legal!
    Even a burger-flipper at Harvey’s can do this.
    The 1% are 1% ’cause their smart. The 99% are 99% ’cause they ain’t!

    • It’s amazing to me how many Cons are apparently millionaires in their spare time ….and yet know nothing about the situation.

      None of your post is true….then or now

      • What?
        No comment on my homophonic error?
        Sheesh, yins is gettin’ might hard to bait!

        1996/97
        Do not under any circumstances research how many of the Rt. Hon, Paul Martin’s CSL assets were ‘flagged’ out of Barbados in 1996/97. Red flags will pop-up all over certain RCMP computers within femtoseconds !

        • LOL. EmilyOne doesn’t do research. But you knew that already.

          • EmilyOne is a classic bully – or so it says in the new DSM-V.
            It’s a shame too. The lady has a keen mind, but alas, her self-loathing and lack of post-secondary education renders her all too pedestrian in cognition and bullying technique.
            She coulda been a contenda!
            Glad to hear your outdoor sauna is progressing. I have an indoor sauna – it’s called my ‘house’ in the summer. My friends call it the Indoor Cold Storage Room in the winter.
            Spending $4,000.00 to lawyers to set-up my Barbados ‘registration’ and ‘repatriating’ only $17,000.00 over three years did not provide me with the financial wherewithal needed to install a decent furnace in my house. Nyuck!

          • LOL having given up on creating a summer temp, I see Cons are now going for stand-up.

          • I realise this question will cause you much mirth and opportunity to issue forth with junior-school recess calibre ‘bully-bullets’, but what is a “Cons”?

          • fred, yer dumb but not that dumb. Cons: you, fv, HI, Barb R, Harper….

          • Oh, you mean ‘Cons’ are the good people.

          • Thank you, but I am still none the wiser.

          • Libs, Dips, Greens…..Cons.

          • You’re speaking in tongues again!
            I am not of this land. Please to use The Queen’s?
            I am dumb, remember – spell it out.
            If you are referring to the particular political flavours one finds in this land:
            Libs – Liberals
            Dips – NDP?
            Greens – Green Party
            Cons – Conservatives
            Well? You are very mistaken!
            As far as I am concerned everyone in Canada is a damned Librul! I mean for the sake of the divine being(s) of your choice, y’all have democracy! How liberal is that?

          • Con also has another meaning…and it’s something you’re attempting to do right now….so Ciao.

          • Nyuck Nyuck!

          • EmilyOne says ‘Caio’ once again. This time for real, EmilyOne?

          • EmilyOne is bright enough to know when she has been manoeuvred and manipulated into an intellectual cul-de-sac wherein her plebian wit and ‘bully-bullets’ (bullettes maybe?) are without sting
            “Caio” is her only reasonable riposte – a strategic withdrawal as it were. Run away to live to fight another day.

          • I hear so many horror stories about people setting up bank accounts in countries such as the Barbados.

            Did you set up a bank-account yourself or did you use a middle man or woman, for instance?

          • No horror story, I only funnelled 17,000 dollars through that loop-hole because that was my total world-wide income during those three years. I was a student. Later on, and through different countries, the tax avoidance – NOT tax evasion – scheme worked very well for me.

          • So you used Canadian (or American) lawyers to set everything up?

          • No lawyers. I slept with a Barbadian guy – he arranged everything.

            Though EmilyOne thinks me wealthy and a “Cons”, what ever the hell that means, I am just a poor girl. Though my story’s seldom told, I have squandered my resistance for a pocketful of mumbles such are promises. All lies and jest…..

          • No, I never said you were wealthy….your posts clearly give that away. As they give away your con morality….which is why I said ciao. You and FV have earned each other.

          • I see!
            You said “Ciao” but you really did not intend to abide by that declarative.
            How deliciously cunning of you! It took me by complete surprise.
            I am beginning to feel guilty, Ms. EmilyOne, perhaps my “Cons” morality is flagging and I am becoming, dare I say it; empathetic?
            You see, you sexagenarian minx, although I appear to be parrying bon mots with you, many of which escape your conciousness of course, and I appear to actually respond directly to you, what I might pixellate is not really meant for your erudition. My purpose is to make you ‘dance’ for us. And by “us” I mean; “We few. We happy few. We band of brothers ” who enjoy watching bullies dance. And what is really funny, is none of us are “Cons”!
            I must say though, you dance like none other I’ve encountered.
            Very entertaining you are.
            Thank you.

          • LOL best excuse for being a crackpot I’ve ever heard.

            Now go away.

      • What then is not true in fred’s post?

        • If I may, I will reply for the much blighted EmilyOne.
          To wit:

          “Not everyone in the 1% are 1% ’cause they’re smart. Some of us are quite dumb. It’s just we’re gawd-awful cute and can marry into it!

          • Nah, that’s too much grief for the money to beget.

          • True, but when a well-insured hubby has a terrible fall down the Scarlet O’Hara staircase in the west wing, said begetted grief becomes nowt but a misty memory lost in the gloam of the dawning new day.

          • :)

    • Cuz we all know a burger flipper or two with the necessary disposable income to invest in foreign stocks.

      • Perhaps not too many burger flippers with enough disposable income to invest elsewhere, but many middle class people would have money to invest elsewhere if they knew how to spend their hard earned money more wisely.

        There are plenty of middle income families who could not scrape by on $100,000 @ year, because they don’t know how to handle money, while some families could save money when being on a $100,000 salary or less. (whatever number one wants to use.)

        • $100,000 is hardly “middle income.” It’s high enough to be counted among the richest six per cent of all Canadians. And if some rich family can’t “scrape by” on more than what the other 94 per cent of us make, well I sure have no sympathy.

      • No investing involved! Sheesh! Are you that thick?
        Your pay cheque itself is funnelled through the foreign country!
        ANYBODY can do it!
        Even you!

        • Thick i may be, but for a guy/girl who’s as pedantic as you are, you might want to clean up your post…”profits earned in Barbados…”
          might lead a layman like myself to conclude you weren’t just talking about funneling a pay cheque through anywhere. Which sounds to me to be a dubious proposition in any case, one likely to not escape the eagle eye of our tax overlords. IOWs i think you’re full of it Freddy.

  6. Putting money aside for savings is key.

    When people set some of their earnings aside as savings, or pay off a mortgage sooner, the better they will do in the long run.

    Imagine what could be saved on an annual basis, per household, if coffees and lunches would be prepared and brought from home? 5 days a week x $10 @ day = $50 a week x 48 weeks = that alone is over $2,000 a year x 20 years = at least $40,000 in savings over the long run.

    There are many, many other examples of how money could be saved in regular middle income homes.

    It’s not necessarily what one makes but how one spends it!

    Being realistic is key. Politicians would be wise to deliver that as a message first and foremost.

    I think Flaherty understands what levels of saving can do to a middle class. He has given enough warnings about that, it seems to me. I don’t know if the middle class actually is prepared to take him up on his message. That then is up to the individual middle class member.

    But don’t blame others, if such wise choices can and must be made on an individual level.

    • I don’t think the bottom quintile (to use the cold language of economics) have to worry much about putting savings aside or bumping up the mortgage payments. Their worries are more geared towards putting food on the table and choosing between keeping a roof over their heads or paying inflating utility bills, on a month-to-month basis.

      • Is this not a debate about the middle class?

  7. The Harper government has made sure that every Canadian is allowed to put $5,000 @ year, into a taxfree saving account.

    That is a good start in picking up important messages. The message is: don’t forget to save some money! Because it works.

    • Yes, very progressive. Maybe we can double the benefit by allowing low income Canadians to have $10,000 in their tax free savings accounts? Or, what the hell why not triple it for anyone on social assistance!

      • I was not talking about what to do about low income.

        I don’t understand why you try to twist my comment out of context by inserting somethings I have not said.

        But in any case, you must not be a saver or else you would probably have been more appreciative of the tax free savings account.

        Perhaps you would like to complain about the HST put on donuts, eh.

        • “Harper has made sure that EVERY Canadian is allowed to …”

      • The more people save enough to cover their own retirement, the fewer people have to be covered by the “safety net”. Promoting self-reliance and self-support should be a cornerstone of the progressive agenda. Entitlements are useless if there is no one who can provide them.

        • Exactly!

          We don’t need the latest gadget but many do want to latest gadget.

          We do not need a hairstylist to do our hair every month; but so many want their hair done by a hairstylist every month.

          We do not need everything new in the house; there are many things one can pick up second-hand for cheap.

          It’s all about choices.

        • So you would agree that instead of attacking defined benefit pension plans like the CPC and business commentators do, that we should be encouraging them as the gold standard that all employees and employers, both public and private, should be negotiating?

          • “The more people save enough to cover their own retirement” implies “defined contribution”, not “defined benefit”. “Defined benefit” implies an obligation on the part of someone other than the beneficiary.

          • If you want to reduce the burden on the “safety net” you should favour a retirement system that protects workers from the risk of short term economic downturn instead of forcing people into financial markets that are less regulated, and less transparent than casino games.

          • How thick are you? It doesn’t matter if you have a defined benefit pension, if there’s no money left in it to pay the pensions out, there will be no pay-outs. You can sue someone with no money all you want, you’re still going to get nothing from them.

          • If you look up above, you’ll see that my point began with a criticism of a savings incentives program that is a prescription for a problem that doesn’t exist. People that have extra money can look after themselves; it’s the people who don’t have enough money to live on government needs to concern itself with.

            All the boutique tax credits, subsides of mutual funds (RRSPs) and subsidy of bank capitalization (TSAs) won’t change the fact that if people don’t have enough money to live “you’re still going to get nothing from them.”

    • Poor people are lining up with their $5000/year accounts, I’m told.

      Oh wait, I’m not told anything of the sort.

    • Wasn’t that Garth Turner’s idea….credit where credit is due. ;)

  8. The Middle Class

    ‘Roughly 40-50% of the Canadian population
    falls into this category. Because of its size, it has tremendous
    influence on patterns of Canadian culture. There is considerable racial
    and ethnic diversity in this class and it is not characterized by
    exclusiveness and familiarity. The top half of this category is termed
    the “upper-middle” class with family incomes of $50,000 to $100,000
    earned from upper managerial or professional fields. The rest of the
    middle class (average middles) typically works in less prestigious
    white-collar occupations or highly skilled blue-collar jobs. According
    to the Applying Sociology Box (p. 277) the middle class dominate the Calgary Stampede.’

    http://wps.pearsoned.ca/ca_ph_macionis_sociology_6/73/18923/4844438.cw/index.html

    Below that is working class and then lower class.

    One of the best definitions I’ve seen in some time, so I thought posting it might help.

  9. The Wall Street banksters are overjoyed that he has economists talking about the results of their efforts, and them.

    The Dark Lords of Finance send their emissary Darth Freeland to say “Move along. Nothing to see in the world financial hydra. These are not the villains you are looking for. Go look at those poor suffering middle class victims of our wrath instead. Talk about them. Leave our derivatives unregulated. Let us manipulate LIBOR. Let us “tax” your soda, by jamming up metals warehouses by moving the aluminum for in a circle from warehouse to warehouse. etc. etc. etc.”

    Unless one solves the root cause of the global economic problem, which is US-bankster-led financialization of economies everywhere, one has no chance of addressing income inequality.

    Obama is on the verge of nominating Larry Summers to replace Bernanke. The money is still flowing to the Egyptian military who has just free Mubarek. He is fully throated behind continuing all the surveillance programs. If you progressive types still think that he is on the side of ordinary people…

    • My gawd! What did you take this weekend anyway??

  10. Its always fun to hear the experts debate this stuff, but i can’t help thinking you guys seem to miss half the debate. Incomes may or may not have declined that much across the board but what has undoubtedly taken off is cost of living – or cost of just getting by. I know that’s another tricky thing to measure definitively, but just a brief conversation with the average person in the street will give you a clue. 15 years ago i could rent an apartment on the main floor of a house in central Edmonton for as little as $ 350 . It wasn’t a dump. nor was it anywhere near the top of the rental market at the time; other factors come into play, the market was probably nearer the bottom at the time than the top. Nevertheless, with a bit of hunting ap’t’s were available in this price range at the time. I’m pretty sure that apt would now be running in the neighbourhood of $7-900/month. I’m also pretty sure there are still lots of young folks out there still only bringing in $22-2500/month. Do the math,

    My point is while i have no real concept of how we measure cost of living, basically it’s bs. The working poor and the precariously employed have a good deal more of a struggle to get by then i did just 15-20 odd years ago. Frankly i don’t know how they do it. It’s not just Edmonton either, trying renting an affordable apt in say Victoria or Vancouver.
    I’m not so convinced the better off are so much securer either. Most folks i know these days are in debt to the eyeballs and still one or two cheques away from hitting the street or renting, if they can still afford it…at least at the mercy of the housing/job market heading south. So i’m not so sure the question of who is better off is so relevant; one’s scrapping by somehow, the other is living in fear of the interest rate taking off or the market crashing.

    • For as many who face problems with the situation, and I agree with you, there are equally many whose wealth has increased because of the increase in housing prices. That low rent and low housing prices 20 years ago made those who bought at that time quite well off. Many folks that I know who bought in Calgary in those years made more money on the appreciation of their home than working.

      And yes, there are quite a few who bought late and got stuck with negative equity in the face of stagnant wages.

      From the standpoint of an economist, that is real money in the pockets of the middle class.

      • The hitch in that argument is its fine if you’re selling your pricy house in west Van and buying a condo.[downsizing]But if you want to continue living in west Van it’s pretty much a wash. I’d love to know if the housing bubble of the last decade in particular is a net benefit or not. Probably very hard to get a good handle on.
        edit: Also im troubled by the concept of big jumps in housing costs. The money’s in your pocket for a while when you sell, but where do you think your kids are going to live if crazy price fluctuations affect all levels of the market?

        • the thing with buying into the housing market is never a know-beforehand. But if the mortgage can be paid, then one does not have to worry about the value of the house per se, at least not in the short term. Only when buying for speculation or when being forced to sell a house (for whatever reason, and there are many, so buyer beware), is it of importance to understand the market.

          • That deoes not apply if you happen to be a first time buyer with little equity and not much down. Until very recently that was the case for more then a few in the current housing market.

          • Of course it applies to first time buyers as well. As long as the mortgage payments can be made, it does not really matter what the price of the house is at any given moment in time. Only when one must sell or when one is in the market for speculation purposes only, does it really matter what value the house is in at particular times.

            When the mortgage payment is being made, the bank will not repossess the property. And so what does it matter if a first time home buyer will find the value of the home below purchase value for a while? Means nothing.

          • It’s a question of debt carried and what might happen if the rates climb. Then the question of whether the payments can be made are central. There are lots of new home buyers in Vancouver in this predicament…caught precariously between being maxed on their payments and the value of the property declining.

          • Regardless of rate increase: if the mortgage payment can be made, there is no risk involved. That is why I said in my earlier post- Buyer beware! Think about what lies ahead in your own personal lives. That would be the thing to watch out for, not the market of up and down house prices in those cases.

          • “Regardless of rate increase: if the mortgage payment can be made, there is no risk involved.”

            Im sure there must be a smidgin of logic in there somewhere, if one could be bothered to look for it.

          • What then would be the risk if mortgage payments could be made?

            I will look at that list of risks. Please provide.

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