Canada must get serious about income inequality. But how? - Macleans.ca
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Canada must get serious about income inequality. But how?

To avoid the tumult afflicting America and Britain, we need to get serious. Sadly, there no consensus on how

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Liberal Members of Parliament give Minister of Finance Bill Morneau a standing ovation as he delivers the federal budget in the House of Commons on Parliament Hill in Ottawa, Wednesday March 22, 2017. (Sean Kilpatrick/CP)

Liberal Members of Parliament give Minister of Finance Bill Morneau a standing ovation as he delivers the federal budget in the House of Commons on Parliament Hill in Ottawa, Wednesday March 22, 2017. (Sean Kilpatrick/CP)

At the end of April, Finance Minister Bill Morneau spoke at a semi-private event at the Montreal offices of Power Corp. His audience was alumni of INSEAD, the fancy business school that charges around $120,000 for its one-year MBA. Everyone sat around dinner tables that had been set up in a long, rectangular room that featured Roman columns and a half a dozen large paintings by Jean-Paul Riopelle.

Morneau, who got his MBA from INSEAD in 1990, mostly talked about his short experience as a member of Parliament and a cabinet minister. In his previous life, he led an exponential expansion of the family business, Morneau Shepell Inc., enriching himself along the way. But Morneau said his personal milestones no longer involved spreadsheets. As a politician, “you are forced to look beyond your bubble,” Morneau said. “Middle-class anxiety is real.”

Our princeling prime minister and his millionaire finance minister are forever talking and tweeting about the middle class and those seeking to join its ranks. Their relentless messaging long ago became tedious. And yes, there is something disagreeable about Richy Rich politicians lecturing about the middle class while visiting the offices of billionaires, surrounded by privately held art worth tens of millions of dollars.

    But for those of you who haven’t, it’s time to get past all of that and admit that Trudeau and Morneau were onto something in 2016 when they wrote a budget that punished the wealthiest and handed out sops to almost everyone else. They saw something that most of us missed. Income inequality has spread beyond those countries that vote to quit Europe and elect Donald Trump. Canada is frustrated and angry too.

    There is a glimpse of that frustration in the results of the Canada Project, a joint effort by Maclean’s and Abacus Data to survey Canadian attitudes ahead of the 150th anniversary of Confederation. In the poll of some 1,500 people, 75 per cent said they disagreed with the statement, “The rich in Canada pay enough taxes.” That is an incredible number for a capitalist society. Even more remarkable, the results were consistent across regions, genders and age groups.

    It explains why Trudeau and Morneau raised the top marginal income-tax rate in their first budget. Overall, it wasn’t the smartest move. Higher taxes will hurt their efforts to attract and retain talented entrepreneurs. Yet the vast majority of voters wanted the richest to share their frustration, so their newly elected government obliged. There are better ways to punish the rich, such as forcing boards of directors to stop approving obscene pay increases for executives. But there would be no immediate payoff. So the government went for instant gratification, in part because currying favour with voters is what they do, but also because the public’s anger is such that something visible was necessary to keep it from turning into something worse.

    Income inequality is a legitimate threat to the economy and the social fabric. Brexit and Trump are Exhibits A and B. If you are looking for evidence closer to home, consider Canada’s slower growth trajectory. Demand will suffer in the years ahead because the population is getting older, but also because wages are stagnant for all but the wealthiest. Disenchantment could lead to political upheaval, and political upheaval causes uncertainty, and uncertainty weighs on investment. If budget deficits are cause for legitimate worry, then surely income inequality qualifies, too.

    Yet there is no consensus that it does. The editors of Income Inequality: The Canadian Story, a collection of essays published earlier this year by the Institute for Research on Public Policy, say “inequality Cassandras” and “inequality deniers” impede serious debate. The country’s poverty rates look good compared with other countries, and our safety net is relatively strong. That dulls the urgency to make sense of who is more right, the Cassandras or the deniers. “We don’t have the fire under our asses like other countries,” says Oana Branzei, a professor at the University of Western Ontario’s Ivey School of Business, who studies inequality.

    Between 1982 and 2010, the “market incomes” of the bottom 90 per cent of taxpayers increased two per cent, while those of the top 10 per cent surged 75 per cent, according to editors of that IRPP collection, David Green, W. Craig Riddell and France St-Hilaire. (Market income excludes government transfers and capital gains.) It’s unlikely those trends have changed. Wages are barely keeping up with inflation. Also, the commodity boom would have allowed lower skilled workers to obtain good salaries for a while. The collapse of oil prices in 2014 wiped out thousands of those jobs, and the economy was still struggling to regain its pre-crisis momentum when Canadians voted in 2015.

    The Canada Project

    Now, Trudeau and Morneau must deliver. Green, Riddell and St-Hilaire conclude that a little more of the same won’t narrow the income gap: they urge the government to go big and think long-term. Branzei worries that slower economic growth will mean less money for charities and other groups that have helped plug gaps between the rich and the poor in the past. She would like to see help for entrepreneurs who seek to aid marginalized people.

    Morneau might also take inspiration from the academic achievements of his fellow INSEAD graduates.

    Income inequality will shrink when more people have the educations needed to get jobs at companies such as Power Corp., or start the next great Canadian firm. A favourite policy of the federal government is to subsidize student loans. But that only eases income inequality on the margins, in part because it is often richer students who grab the subsidies. Experts say education must improve at the primary level, and through high school so students are ready to excel at university.

    That will require a long-term investment of effort and resources that won’t show results while Trudeau and Morneau are politicians. If they truly want to reverse income inequality, they will have to look beyond their bubbles.