Why the Income Inequality Deniers are Wrong

This article was published in an abridged form in the National Post. I like this opening better, so I posted it here.

You couldn’t have made it through 2012 without running into a story about income inequality.  Chances are, it made you think about how you fit into the story.  That’s “entirely constructive”, as Bank of Canada Governor Mark Carney called the awakening triggered by the global Occupy movement.

A year later, some people think it’s time you go back to sleep.  A new debate is emerging in Canada: is inequality worth discussing at all?  On the “no” side are four main arguments, all deeply flawed:

• Canada is not like the US

• The growing gap is not growing in Canada anymore

• Income inequality is not an issue because people experience income mobility

• Income inequality is not the problem; poverty is

Canada is indeed not like the U.S.  In countless ways, nobody does extreme like the U.S.  America may be more equal than Turkey, Mexico and Chile in the OECD block of the world’s richest nations.  But since the 1990s, Turkey, Mexico and Chile all reduced income inequality.  In the U.S., the gap between the rich and the rest grew, unabated.

Andrew Coyne argues the gap is not growing in Canada, a position fuelled by a recent TD Bank report. That study said income inequality grew until the early 2000s then stopped increasing.  But Miles Corak, an economist and international authority on the links between income inequality and social mobility, demolished both Coyne’s conclusion and the TD study. Corak’s blogs show income inequality has not stopped increasing in Canada, and offer better ways to measure it. He points out Canada is not immune to the many ways in which inequality threatens opportunity.

This skips over a more important question: why hasn’t Canada seen a reduction in income inequality?

In the decade before the global crisis, our economy was firing on all cylinders and employment rates reached record highs. From the mid 1990s to the mid 2000s, 15 of 32 OECD nations reduced income inequality. Not us. Instead of harnessing our extraordinary track record of job creation and economic growth, Canada tumbled further down the inequality rankings than any other nation, slumping from above-average equality to below-average.  If such a buoyant market didn’t help close the gap, what will?

A year ago economist Stephen Gordon offered some insights on how to assess income inequality in Canada, noting it has grown constantly over the last 30 years, but in different ways.  From the 1970s to the 1990s inequality grew because more people lost ground at the bottom of the income distribution in the wake of two big recessions; after the mid 1990s, the gap grew because the rich did so much better than everyone else, seeing the lion’s share of income gains from economic growth.  So much for trickle down.

The Fraser Institute mounted the income mobility defence of the economy’s track record over the past generation.  Their recent study dismissed the rich-got-richer concerns by countering that the poor got richer too.  They emphasized that the poor have seen faster rates of growth in their incomes than the rich since the mid-1990s. Their idiosyncratic marshalling of the facts and interpretation of the evidence was enough to pull Statistics Canada’s former Assistant Chief Statistician, Michael Wolfson, out of retirement.  He publicly laid bare the deep methodological flaws in their study, and finished by reinforcing  that growing income inequality remains a serious issue in Canada.

That takes us to the last argument, and a critically important reminder: poverty should be of far greater concern than income inequality.

There’s an internal incoherence with this approach.  Unless you’re the type who is willing to go on  record saying  “let them eat cat food”  improving the lives of the poor means providing either more opportunity or more cold, hard cash.  That involves money, which is where follow-through usually falls off, because it means some form of redistribution. And that brings us back to the beginning.

The IMF has warned that higher inequality is correlated to shorter spells of growth, more market volatility. The Conference Board of Canada cautions that Canada’s levels of inequality mean squandered potential.  Just this week TD Bank CEO Ed Clarke acknowledged inequality in Canada has been growing for the last 30 years, raising a challenge  for society that demands discussion.

Whether you want less poverty or a more robust economy, greater innovation or improved productivity,  better life chances or a healthier democracy, the way forward in Canada involves reducing income inequality.   But markets, alone, don’t reduce income inequality, not even when the economy is chugging away at full speed.  So what can we do?

First, don’t dismiss the issue. Start a conversation about how we can reduce income inequality. The ideas will flow from across the political spectrum, because this isn’t a partisan issue. It’s a problem for everyone.

Income inequality has become as inconvenient a truth as climate change, and every bit as challenging to our future. It, too, has its share of deniers.  But the evidence that is accumulating around the world makes clear — burying the issue under a false sense of progress won’t protect us from the massively disruptive consequences of a growing gap. Stay awake. Start talking.