Growing income gap a warning to leaders

OECD report shows rift in Canada increasing at quick rate
October 22, 2008

The internationally respected Organization of Economic Cooperation and Development threw out a warning flag to Canada this week.

It says the income gap between Canada’s rich and poor is growing faster than most of the other 30 developed nations in the world, and that our governments need to stop that trend.

The news is about as sober a warning as it gets. Canada is falling behind internationally. We used to be above the average when it came to income equality. Now we’re below average. And there’s really no good excuse for it.

As a nation, we are richer than most. Ours is the ninth largest economy on the planet. We have seen one of the strongest, most sustained periods of economic expansion in our history.

But most of the gains of economic growth have gone to the richest 10%. Earnings for those in the middle have been stagnant for 30 long years, and workers at the bottom are losing ground compared to a generation ago.

That’s why income inequality is getting worse. The majority of Canadians have been shut out of a decade’s worth of incredible economic growth.

Now, with the global economy veering off the rail, we need to ask ourselves: How much worse can it get? And what can we do to stop it? The OECD report is clear: Our governments have a strong role to play.

Canadian government interventions traditionally offset these trends, but not recently. In the past 10-15 years governments backed away from investing in public benefits that help the majority of Canadians and replaced them with tax cuts that benefit the richest 10% -- exacerbating income inequality in Canada.

Help for those at the bottom – like unemployment insurance and social assistance - have been stripped back as Canadians have been told to fend for themselves.

That’s just dumb economics, and a recipe for greater instability and slower economic growth.

Back in the 1920s – the last time we experienced such dramatic income polarization – Henry Ford saw in his workers an obvious solution: If he paid his workers higher wages, he created more consumers for his automobiles … and a healthy middle class.

Compare that to the last 10 years, where governments and markets alike have focused on building up an unstable economic system that rewards the rich and asks everyone else to wait for the drops of prosperity to trickle down.

In the meantime, the rich got richer while housing prices and the cost of living soared for the rest of us. Our paycheques didn’t keep up.

What can governments do?

Governments are being asked to bail out banks and investors, but they can also act to stabilize incomes for the jobless, speed up investments in badly needed infrastructure projects, and engage in counter-cyclical investments like housing to maintain jobs in the middle of the income spectrum.

Now would also be an opportune time for the federal government to partner with provincial governments on a clear poverty reduction strategy with targets and timelines – because in a shaky economy, we need all hands on deck.

Anything less means Canada will continue down the darkening path of growing income inequality, and our nation will become increasingly unstable. It’s time to take the warning and change our course of action.

For the past 30 years we’ve been told that governments are the problem and markets the solution. A crumbling global economy puts the lie to this simplistic view.

As this drama continues to unfold, people and markets alike are turning to governments to stabilize the situation. The question is: Will our governments act to protect Goliath, or will it realize there are many Davids out there awaiting help too?

One course of action will reinforce growing inequality – the other will stem it.

Armine Yalnizyan is a senior economist with the Canadian Centre for Policy Alternatives.