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Jonathan Kay: The key to Canada's economic advantage over the United States? Less income inequality

More from Jonathan Kay | @jonkay

The key to our economic advantage over the US? Less income inequality

If you’ve seen pictures of the Gateway Arch in St. Louis, then you have seen the Kuznets curve, named after the influential Russian-American Harvard economist who came up with it.

Simon Kuznets’ theory, encapsulated in the arch-shaped graph, was that income inequality: (1) is low in primitive agrarian societies; then (2) rises as industrialization and capital formation leads to the creation of an urban, gilded class; and then (3) falls back down as democracy and high productivity permit the development of a welfare state. The theory accords with most non-economists’ casual understanding of 20th-century economic history, which imagines that acute economic inequality maxed out during the heyday of the Rockefeller, Carnegie, Morgan and Vanderbilt dynasties, but then was tamed by the New Deal and all that came after it.

But that’s not what happened. Yes, income inequality declined in the decades after the Great Depression, but only until the 1970s, at which point it began spiking upwards. When Ronald Reagan became U.S. president in 1980, the top 1% of American earners took home 10% of all income. Thanks to the wealth-concentrating effects of deregulation, globalization and information technology, that figure is now close to 25%. The result: Median U.S. household income has been nearly flat for the last three decades, while the take-home pay of high earners has more than tripled.

In her new book, Plutocrats: The Rise of the New Global Super-rich and the Fall of Everyone Else, Chrystia Freeland describes how smart investors have developed a “consumer hourglass theory” to capitalize on this reality. She gives the example of Citigroup’s “Hourglass Index,” which includes Saks at the top end, and Family Dollar at the bottom.

Applying social-justice arguments, many leftists have seized on this data to make the case that American capitalism, in its current state, is fundamentally immoral. But even die-hard laissez-faire types should be concerned by America’s increasingly U-shaped income profile. The very poor don’t buy much. And the very rich spend a relatively small amount of their money on consumer goods. A mass-retail capitalist economy cannot function if it is not being fuelled by a prosperous middle class that’s too rich for Family Dollar, but too poor for Saks.

Income polarization also gives rise to all sorts of more intangible losses for a society — including in the areas of trust and social mobility. A society of haves and have-nots is a society of gated communities side-by-side with trailer parks, the sort of scene one witnesses in Latin America. The polarization of wealth also has a corrosive effect on democratic politics, because it encourages plutocrats and entrenched corporate interests to funnel billions into whatever corps of political ideologues are willing to robotically defend the status quo — a phenomenon that was on display in the recent U.S. election campaign.

Rising levels of income inequality in the United States may even have played a major role in the 2008 sub-prime mortgage crisis. “In a democracy, politicians and the public are unlikely to accept depressed spending power if they can help it,” writes Jonathan Rauch in a recent edition of National Journal. “They can try to compensate by easing credit standards, effectively encouraging the non-rich to sustain purchasing power by borrowing. They might, for example, create policies allowing banks to write flimsy home mortgages and encouraging consumers to seek them. Call this the ‘let them eat credit’ strategy.”

The good news, here in Canada, is that we have so far avoided the massive upsurge in income inequality that has afflicted the United States. As a new TD Economics report indicates, median household income (not average, but median — the difference obviously is important in this context) has been higher in Canada than in the United States since 2006, and income inequality in this country has been flat since the late ’90s. The top 1% of Canadian earners take home about 13% of all income, roughly the same level it was 15 years ago. Household income growth was solid from 1998-2010 across every single income quintile.

What’s the reason for this? According to TD, it’s “rebounding government transfers, rising minimum wages in Canada (up by more than 50% on average nationwide since the late 1990s), and a respectable pace of job creation within several lower-wage areas of the service sector.” TD might have also added a few other factors — such as our well-regulated banking sector, which completely avoided a sub-prime crisis that destroyed $11-trillion in household wealth, and a universal health-care system that ensures working-class families don’t have to hold a yard sale to pay for dialysis or chemotherapy.

Meanwhile, American conservatives are cheering on Michigan’s “right-to-work” legislation that will further cripple a union movement that already is becoming irrelevant. Despite their militant excesses, strong unions helped create the conditions that led to Americas postwar boom. But no one in the Tea Party seems to remember that anymore.

As I’ve argued before, a good way to describe the Canadian economic approach might be “hardheaded socialism,” the term Stephen Marche coined on back in July. But many conservatives are allergic to the s-word. So instead, it might be marketed, for American consumption, as the Northern New Deal — an especially apt term, given that the other nations that embrace its policies are Scandinavian nations such as Sweden.

Americans would be well-served by looking to Canada for lessons on taming income inequality. As FDR showed the world in the ’30s, sometimes it takes a socialist to save capitalism from itself.

National Post

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