November 2008: Help the Poor To Help the Nation

Poverty reduction is the best cure for an ailing economy
November 1, 2008

Canadians are looking to their federal and provincial governments to protect them from the repercussions of the global financial credit crunch. Among the necessary measures our legislatures should take—perhaps even the most effective—would be a determined joint effort to reduce Canada’s scandalously high rate of poverty.

A recent report by the Organization for Economic Cooperation and Development (OECD) disclosed that the gap between rich and poor in Canada widened far more than in most other OECD-member countries over the past 20 years. Canada now stands in a dismal 18th place among OECD countries ranked from best to worst on income inequality.

“After 20 years of continuous decline,” the OECD report stated, “both inequality and poverty rates in Canada have increased rapidly, now reaching levels above the OECD average.” The report noted that Canada spends less on cash transfers, such as unemployment and family benefits, than other OECD countries.

Taking action on poverty reduction will be crucial for our ailing economic fortunes. But federally, and in some provinces, governments seem reluctant to move decisively to help the poor or lessen income inequality. They cite the slowing economy and lower expected tax revenues as excuses for inaction.

As economists, we believe the exact opposite is in order. Now is the very time to act–and there are several well-founded economic reasons why we cannot afford to delay action against economic insecurity.

For starters, the present situation demands immediate counter-cyclical measures that can trigger an economic stimulus. This stimulus package should look to our economy’s greatest foot soldiers: local consumer power. Worldwide, the consumer is the biggest economic driver in the economy, accounting for more than half of final domestic demand in Canada. Every time a recession has loomed, sustained consumer spending has either kept the economy going south or it has been the source of strength for recovery.

There is good reason, however, to be concerned about consumer spending as unemployment rises. Employment insurance benefits and other income supports have been significantly eroded in the past 15 years. Restoring their reach and purchasing power, together with investments in benefits for low- and modest-income Canadians, is one way of stabilizing spending during bad times. The other is to ensure that work pays a living wage.

These measures counteract downturns because lower-income people spend on local economies first. That helps local businesses stay afloat during lean times.

Developing housing that low-income Canadians can afford during a downtown is another reason why a poverty reduction strategy makes good economic sense. The housing market is weakening, reflecting falling prices on homes and flat incomes of many potential buyers. An investment in residential construction that creates affordable housing options can keep thousands of middle-class workers employed. Acting today on affordable housing can provide a much-needed boost to the economy during bad times, while reducing economic insecurity and building assets for the long term.

But investments on poverty reduction are important not just because of the need for a short-term fix. Acting on poverty reduction is also smart economics because of what it means for Canada’s future prosperity. One of the fundamental tenets of economic thinking is the return on investment principle. And there is overwhelming evidence that investments we make in poverty reduction today will pay huge returns tomorrow.

Take education. Every dollar spent on early childhood education--key to school success for all children--eventually returns nine dollars to the economy over time. And yet the vast majority of poor children do not have access to early learning and childhood care. It’s a lesson about poverty prevention that we ignore at great peril, because the child we neglect today pays the price in later years. For instance, a Grade 10 student who drops out of high school loses out on more than $120,000 in their lifetime earnings. This kind of lost potential has repercussions for all of us.

It is the job of governments to look beyond the immediate crises and plan for the challenges that lie ahead. The mass retirement of baby boomers will slow labour force growth substantially and create a great demand for a highly skilled, well-educated, and productive workforce. But poverty robs people of their health, their hope, and their potential. We cannot afford such losses. The best and cheapest poverty reduction strategy is to move swiftly with investments on affordable housing, education and training, early learning and child care, public transit, income supports, and jobs that pay living wages.

Retrenching in the face of stubbornly high rates of poverty merely defers even larger costs to the taxpayer down the road. We urge the federal and provincial governments not to shrink from this opportunity to strengthen the national and provincial economies by investing in a concerted poverty reduction strategy now.

The sooner we act, the sooner everyone benefits.

(Arthur Donner is a Toronto-based economic consultant. Mike McCracken is CEO of Informetrica Limited. Armine Yalnizyan is a CCPA senior economist.)