Rising Inequality, Declining Democracy

December 12, 2011

The “Occupy Canada” movement (with a little help from CCPA research) has raised public awareness of the unprecedented growth in income inequality and wealth concentration in Canada over the last 30 years. And recent reports from the OECD and the Conference Board confirming this trend have raised alarm bells amongst the establishment.

Those who say that Canadians have no reason to protest (unlike our American counterparts) because things are so much better here are in denial.

While the income gap in Canada is not as extreme as it is in the United States, it has risen to levels not seen since the 1920s, and by some measures it is the worst it’s ever been. The Conference Board notes that since the mid -1990s, income inequality in Canada grew at one of the fastest rates in the industrial world, faster than in the US.

The richest Canadian 1% has almost doubled its share of the national income pie — from 7% to almost 14% -- over the last three decades. The average top 100 CEOs’ compensation was $6.6 million in 2009, 155 times the average worker’s wage. This gap is predicted to widen further in 2010. The 61 Canadian billionaires have a combined wealth of $162 billion, twice as much as the bottom 17 million Canadians.

Though most of the Occupy camp sites have been shut down for now, the underlying issues remain. And protests will not go away.

How have we come to this point? And what has it meant for democracy in Canada?

The Golden Age

After almost two decades of depression and war, the discredited free market ideology was replaced by a new international policy consensus inspired by the ideas of John Maynard Keynes and others.

The Keynesian paradigm sought to stabilize economies and reduce the volatility of earlier times. Full employment became a key priority. Active government participation in the management of the economy was accepted, as was the expansion of welfare state protections for its citizens. Governments regulated markets to ensure they served the public good. Marginal tax rates of 80% or more were imposed on the wealthiest citizens. Financial capital was strictly controlled and subordinated to the real economy.

Unions were formally recognized, and measures were put in place to strengthen their role in protecting workers’ rights and bargaining a fair share of productivity gains. They were, as John Kenneth Galbraith argued, a necessary counterweight to corporations, both in the market and in the political process.

This new consensus found expression in the United Nations Declaration on Human Rights. Not only did it contain political and civil rights essential to democracy, such as the freedom of expression, association and assembly, but it also included for the first time economic, social, and cultural rights. As John Humphrey, the Canadian drafter of the Declaration, wrote in his memoirs, “Human rights without economic and social rights have little meaning for most people.”

For about three decades after World War II, economies grew rapidly, as did productivity; income gains were widely shared; recessions were few and mild; and financial crises were nonexistent. Strong unions and active governments were the essential ingredients for the creation of large middle classes within the span of a single generation.

In Canada, the political consensus among the major parties supported the basic precepts of Keynesian economics and the modern welfare state.

The Keynesian era entered a period of crisis in the 1970s. The United States experienced successive international payments deficits, and in 1971 went off the gold standard, ending the Keynesian system of international monetary management. It also ended the regulation of international capital flows, prompting the return of private financial markets. Inflation and stagnation created a phenomenon known as stagflation, which persisted throughout the ‘70s.

Multinational corporations, facing competition from Europe and Japan, declining profits and union resistance, and aided by communications and transportation technology advances, began to shift production to low-cost regions and countries.

Neoliberal Counterrevolution

The crisis opened the door for the return of free market ideas — led by economists Milton Friedman and Friedrich Hayek, politicians Margaret Thatcher and Ronald Reagan, and supported by multinational business interests. This powerful alliance of ideas and interests overturned the Keynesian consensus with remarkable speed.

Conservative American political scientist Samuel Huntington wrote in a 1975 report for the Trilateral Commission that there was “an excess of democracy” in advanced industrialized countries. Neoliberalism was tailor-made for solving this “problem” — disciplining workers, fencing in politicians, and freeing capital.

By the early 1980s, neoliberal ideas were firmly entrenched in establishment circles. The new free market consensus was captured in the phrase, “government is the problem, markets are the solution.” The welfare state was decried as a drag on individual initiative and work incentives. Privatization, deregulation, sound money, free trade, and tax cuts became the mantras of the neoliberal age.

Inflation control displaced full employment as the main priority. Monetary policy replaced fiscal policy as the main macroeconomic tool. Central banks ceded the remnants of direct control of credit creation to private financial markets.

Whereas the Keynesian era was marked by rapid growth, low unemployment, widely shared prosperity, and economic and financial stability, the neoliberal era has been marked by three severe recessions, dozens of financial crises, slower economic growth, higher unemployment, ballooning inequality, and wealth concentration. Social spending in Canada and other Anglo-American countries (though not in the Northern European nations) declined as a share of the economy.

Financial capital gained vast new powers as deregulated financial markets expanded. Global financial players became powerful arbiters of which countries could borrow, how much, and for how long. Fiscal discipline, tight money, and free trade became the main criteria for “creditworthiness.”

Governments that strayed too far from business-friendly policies were punished by increasing their cost of borrowing or cutting off credit altogether. Bond traders, policing the parameters of acceptable policy choice, were exercising more power over economic policy than were democratically elected politicians. And this was accomplished, not by open democratic debate and consent, but rather by governments colluding with free market think-tanks, national and international financial bureaucracies, and business leaders.

A new generation of international trade and investment agreements, pioneered by the 1989 Canada-U.S. Free Trade Agreement (FTA), further undermined the democratic space available to elected representatives. The FTA reduced the ability of Canadian governments to shape industrial, resource, and investment policy. Indirectly, it helped business to pressure governments to lower labour, social, and environmental standards to create a “competitive level playing field.” It decisively shifted power from workers and communities to corporations. Corporations were now free to move their operations to wherever wages and regulations and standards were lower.

Workers came under intense pressure at the bargaining table. Union density in the U.S., plagued additionally by aggressive government and corporate attacks, fell dramatically, from 30% in the mid-1970s to less than 12% today. In Canada, the decline was less dramatic — from 37% to 31% -- but significant nevertheless.

The FTA locked in free market policies, reducing the ability of future governments to reverse or modify them. President Reagan described the FTA as an “economic constitution,” but others described it as a charter of rights and freedoms for corporations.

The FTA’s successor, NAFTA, introduced an investor-state dispute mechanism which allowed corporations to directly sue governments for policies that allegedly reduced anticipated profits, putting a chill on a range of government initiatives. It transferred jurisdiction over property rights disputes from national courts to international judicial panels. Disputes were resolved by these panels largely in secret and without the ability of the public to intervene in the process.

The decline of worker bargaining power, welfare state protections, and levels of employment led to a 30-year stagnation of median wages, despite large increases in productivity. This was in contrast to the previous three decades when median wages and incomes rose in tandem with rising productivity. The proportion of low-wage and precarious work — temporary, part-time, self- and casual employment — rose dramatically. Profits as a share of national income soared to historic highs while labour’s share dipped below 50%. National income gains in Canada were appropriated almost entirely by the top 20%, the lion’s share by the wealthiest 1%.

Lower voter turnouts

The deteriorating quality of Canadian democracy was reflected in the decline in voter participation over the last 25 years, from 75% in the 1988 “free trade” election to 61% in the most recent federal election. Canada now ranks 110th on a list of 152 countries in voter turnout. This drop was paralleled by a slide in confidence in the institutions of parliament.

There was also a steep decline in trust in government and, not surprisingly, in expectations of government. In 1965, 58% of the population had a high degree of trust in government and only 36% of the population said that government wasted taxpayers’ money. By 1993, barely 33% expressed trust in government while 79% said that government wasted taxpayers’ money.

Pollster Allen Gregg found that an incredible 62% of Canadians in 2005 did not believe politicians shared their view of the most important problem facing the country. By 2011, that figure had risen to 76%.

Richard Wilkinson and Kate Pickett’s research on inequality (published in The Spirit Level) found that more unequal societies have lower levels of trust, an essential element of healthy democratic governance.

There is a deep-seated cynicism about the ability (or desire) of governments to be responsive to citizens, and about the integrity of politicians, who are now in one of the least respected professions.

Years of stagnant or falling incomes, combined with rising private expenditures for education (tuition), health care (drugs), housing and other essentials, have reinforced the disconnect between taxes and the public services they provide, and increased public receptiveness to the conservative anti-tax message.

Assault on democracy

Unlike Red Tories, Harper Conservatives view greater equality as incompatible with individual freedom. They oppose the income redistribution role of government. They view the modern welfare state as an encroachment on individual freedoms and would like to largely replace its social role with private charity.

After squandering budget surpluses with $200 billion in tax cuts that disproportionately benefited the wealthiest Canadians, the Harper government has done next to nothing to mitigate the poverty and inequality that have deepened since the economic crisis hit in 2008.

Despite its minimal expansion of temporary unemployment benefits to a few long-term unemployed workers, more than half the unemployed are still not eligible to collect unemployment benefits. Despite persistent high unemployment, the Harper government basically turned immigration policy over to employers, who more than doubled their hires of temporary foreign workers right through the recession.

Harper has refused to expand the public pension system, implementing instead a bogus pension “solution” that will enrich the financial industry, but do nothing to address an approaching tsunami of baby boomers facing retirement without adequate income, or a longer-term crisis facing the country’s youth.

One of the first actions of the majority Conservative government was to force Air Canada and Canada Post workers back to work; and, in the case of the latter, imposing a lower wage settlement than the employer was offering.

Harper is using the crisis to advance his agenda: major spending and public service cuts; dismantling the Wheat Board (with supply managed sectors next in line); aligning Canadian policies and regulations with those in the U.S.; and negotiating a multitude of free trade agreements. These actions will bring neither the promised economic recovery nor improve the lives of the vast majority of Canadians.

The Harper government’s penchant for security and control has greatly expanded the coercive power of the Canadian state. Notwithstanding its “shrinking government” agenda, it has vastly expanded military and security spending and committed unspecified billions to implement its “tough-on-crime” agenda.

It has taken steps to constrain judiciary power, reduce public funding of political parties, and curb the political activities of unions. It has taken unprecedented measures to silence critical NGO voices. In a ruthless disregard for parliamentary democracy, it has shut down debate on its legislative agenda seven times in 26 sitting days.

These actions are aimed at diminishing diversity and concentrating executive power. All undermine the pluralism essential to democracy.

Looking ahead

Neoliberalism has undermined sovereignty—the ability of societies to shape collectively their own future; and the democratic policy space available to elected representatives to respond to the needs and priorities of their citizens. Finally, by driving the spectacular rise of the income gap between the richest 1% and the rest of society, neoliberalism has corroded an essential component of democratic governance: citizens’ trust in their government and their sense that we’re all in this together.

What does the future hold? Year four of the global economic crisis is unfolding with no sign of a real recovery. Unable to act to prevent financial meltdown and prolonged recession, the EU is heading toward breakdown. The American political class and their business backers are locked in a nasty power struggle, paralyzing efforts to foster recovery. Here at home, the Harper government blithely claims superior economic management abilities as it prepares for a major round of austerity that will only worsen inequality and unemployment.

Most countries are still gripped by stagnation, recession, or worse. The middle class is experience increasing stress and anxiety. The circle of poverty and despair is growing ever wider. Industrial world élites lack the courage and political will to collectively stabilize the world economy and bring about economic recovery.

Will the interests of the richest 1% continue to drown out the interests of the rest of us? Will democracy be pushed aside by plutocracy?

The worldwide “Occupy” movement — whatever happens in the short term — has started something important. Its early days have launched the first salvo in a worldwide struggle for justice. It will likely take years, but will, I hope, change the destructive direction of the last 30 years and put us on a course toward more inclusive democracies and more equitable societies.


Bruce Campbell is the Executive Director of the Canadian Centre for Policy Alternatives.