2020 and the Future of Freedom, Social Peace, and Prosperity

 

This is not an exercise in hindsight—discussing what we could or should have done differently in 2020—but an examination of that year’s political trends, which represent a growing threat to freedom, social peace, and economic prosperity in Canada.

The trends that pose this threat were driven by leaders in the world of academia, media, and politics who find their inspiration in the manifesto of the prophet Karl Marx that was dictated to him by the God of Fairness. In 2020, they accelerated the shift from arguing that income inequality is caused by capitalists who exploit workers to arguing that inequalities are caused by the systemic discrimination of females, indigenous, racial, and other minorities taking place in rigged capitalist markets.

Under the traditional strategy, the advocates for greater income equality made much of the decadent life of the world’s billionaires and other super-rich people. The complementary part of the traditional strategy was to give much exposure to accounts of the sufferings of low-income families and their children that we encounter in the media every day.

Past efforts using this strategy have led to the creation of Canada’s welfare state. We now have a social security net that provides financial support to the physically and mentally handicapped, the retired poor, and the unemployed. It provides access to free medical services and basic education to all. The spending programs are backed by a progressive tax regime under which low-income earners pay no tax and the top 10 percent pay one half of all personal income taxes. This welfare state is supplemented by the efforts of food banks and many private charities.

However, more recent efforts to expand the welfare state have not succeeded. Gini coefficients—which are one if inequality is total, and zero if income equality is perfect—during the years 1999 to 2018 averaged .44 for families before tax and .31 after tax, without any trend and with annual values always within one percentage point around the average.

The recent failure to create enough voter support for the expansion of the welfare state to make the distribution of income fairer undoubtedly has contributed to the decision to switch to the new strategy with its focus on the role systemic discrimination plays in the economic and social suffering of demographic minorities. This strategy appeals to people who are unhappy with their income, wealth, or social status and makes them ready to vote for politicians who promise to end systemic discrimination and raise their incomes.

Finance Minister Chrystia Freeland’s 2020 fiscal update promised that her government would revamp social institutions and laws. This will almost certainly require changes to policies and institutions that are blamed for the discrimination suffered by several important groups of Canadians, but which have made Canada one of the freest and richest democracies in the world.

The first of these changes already has led to significant reductions in the freedom of speech, which arguably is the most fundamental safeguard of democracy. It was lost when universities in recent years have prevented in increasing numbers visits by speakers who defend existing institutions. Publishers of such views in public media are regularly shamed and some lose their jobs. More important is the restrictions on free speech caused by hate-crime legislation, which requires some state-appointed individuals to decide whether an author should be fined or jailed for voicing an opinion they consider incites hate.

The new strategy also envisions chipping away at the traditional methods used to hire employees or admit students on the grounds that they are a root cause of systemic discrimination. Thus, under the threat of legal action, some institutions of higher learning and private sector employers have been pressured into using quotas to select employees and students. Harvard University and the University of California are high-profile examples of U.S. institutions that have used such quotas, though they are also used in Canadian universities.

Private companies also are increasingly pressured to use quotas when selecting board members. It is reasonable for business owners to appoint board members with the best qualifications needed to contribute to the health of the company, but the quota system forces them to employ less-qualified individuals and reduces their income and property rights. Canada’s national income and prosperity thus suffer.

The use of quotas to eliminate systemic discrimination and reduce income inequality is wrong-headed because it rests on the false premise that discrimination leads to and is evidenced by differences in the proportion of minorities employed in specific occupations and the proportion they represent in the entire population. The basic fact is that no one can really know why such over- or under-representation of minority groups exist in any occupation.

The problem with using differences in the proportion of demographic groups in specific firms or industries as evidence of discrimination is glaringly obvious when we consider that blacks make up 13.4 percent of the U.S. population but are 81.1 percent of the players on professional basketball teams. Athletic abilities and personal preferences rather than discrimination explain the over-representation of blacks in this sport, just as they do in the rest of the economy.

Quotas are not a productive way to eliminate discrimination, so what can be done to discover where discrimination exists and how it can be dealt with? In his book “The Economics of Discrimination,” Nobel laureate economist Gary Becker has provided the answer: Encourage and enable employers to maximize profits by hiring the most qualified workers regardless of their gender or ethnic backgrounds. Employers who follow this rule increase their business at the expense of those who do not and ultimately go under. Basketball teams that discriminate against hiring blacks no longer exist.

This model for the creation of a world without discrimination has room for government policies. Public education about the evils of discrimination is one such policy, but more important is the elimination of obstacles to the efficient operation of labour markets created by unions and government regulations, which in the past prevented women from becoming firefighters, soldiers, medical doctors, and workers in many types of occupations.

The removal of such restrictions will take time, as will the growth in the number of employers who realize that discrimination is not in their interest. But relying on markets will cost less and will be fairer than relying on quotas to eliminate systemic or any other type of discrimination.

Herbert G. Grubel is professor of economics (emeritus) at Simon Fraser University and a senior fellow at the Fraser Institute in Vancouver.

This paper has appeared on the website of The Epoch Times 

https://www.theepochtimes.com/2020-and-the-future-of-freedom-social-peace-and-prosperity_3653940.html

 

WHY WAGES AND INCOMES HAVE BEEN STAGNATING

WHY WAGES AND INCOMES HAVE BEEN STAGNATING

According to Nobel laureate and influential public intellectual Joseph Stiglitz, “In the US, the bottom 90% has endured income stagnation for a third of a century. Median income for full-time male workers is actually lower in real (inflation-adjusted) terms than it was 42 years ago. At the bottom, real wages are comparable to their level 60 years ago.”

These statistics drive much of the current political debate in the United States, Canada and most other Western democracies. The trouble is that they measure the wrong thing. Wages and incomes determine the amount of market goods and services consumers can buy. But through time public demand has shifted increasingly to the provision of non-market goods that determine well being and are supplied by governments: the stability and predictability of income, the quality of the environment and characteristics of national culture.

Politicians have responded to these demands with a vengeance. There now are public insurance programs that make incomes more stable and predictable: government-run insurance against the results of personal ill health, accidents, unemployment and retirement. For the entire economy there are regulations for the prevention of financial instability, global warming and harm to the safety of consumers and workers.

The public has also demanded policies that affect its sense of well being by making it feel good: policies to clean the environment; make the distributions of incomes and wealth more equal; create racial and gender equality; accept large numbers of immigrants and refugees and create a multi-cultural society.

There are several aspects of these government policies, which bear directly on the problem of low wages and incomes discussed by Stiglitz. First, the benefits from social insurance programs involve the redistribution of incomes. The value of the programs to society is assumed to be equal to the governments’ cost of operating them, which means that these programs can never increase the productivity of labour and capital and lead to higher average incomes and wages.

Second, policies aimed at the delivery of other non-market goods result in ephemeral, non-measurable benefits at an uncertain time in the future that cannot be recorded in wage-increasing current income, as is the case with policies preventing of global warming or financial crises.

Third, while these non-market benefits are not recorded in national income, their creation results in the use of labour and capital that is withdrawn from the production of market goods. The value of resources used by regulatory agencies and by private firms complying with regulations has been estimated to be worth $1.8 trillion in the United States in 2015.

In addition, some regulations reduce economic growth by imposing costs and delays on entrepreneurship and innovation. Some regulations actually lower growth, as will happen if the efficient use of fossil fuel is replaced by the less efficient use of renewable sources of energy to create electricity. (The US Supreme Court has in fact stopped this replacement on the grounds that the costs are too large.)

In effect, these economic consequences of regulations show again that there is no such thing as a free lunch. The more the public wants greater security in all aspects of their lives and more feel-good policies, the smaller will be incomes and wages that can be used to buy market goods.

These public preferences can also explain the vexing puzzle why since 2008 interest rates near zero have not generated economic growth. The reason is that reduced incomes and wages of the public have lowered the demand for private goods and the need for growth-generating investments by so much that even the very low interest rates are insufficient to induce private sector investment and cause cash-rich companies to buy back shares or their competitors.

The shift of the public demand from market to non-market goods has profound implications for economic policies. Expansionary monetary and fiscal policies to stimulate the production of market goods must fail because the stock of labour and capital are finite and already utilized fully in the production of market and public goods. In addition, expansionary monetary policy will create inflation and expansionary fiscal deficits will eventually become unsustainable. Both pathologies can be cured only by recessions and fiscal austerity.

The preceding analysis does not imply that the growth in the production of non-market goods has failed to increase the well being of the public. However, it does suggest that the public needs to be aware that it is impossible to have both, more market and non-market goods and that asking politicians to ignore this fact will lead to inflation and austerity in the future and possibly much more instability and lower levels of income and wages.

Published in the Financial Post on November 9, 2016, page FP7.

The Untold Tale About Income Inequality

The annual OECD report on income inequality released a short time ago has once again received its ritual media coverage in Canada with headlines like “Rich-poor gap growing in Canada” and “The rich are getting richer and the poor are getting poorer”.

The explanation of the growing income gap found in these stories fundamentally involves blaming free markets for causing the export of middle class jobs to the developing world, the privileged who exploit consumers to get fat salaries and bonuses and the politicians who buy financial support from the rich by lowering their income taxes.

There is never any consideration of the really important causes of income inequality in Canada. One of these arises from the aging of the population, which increases the reported income of the growing numbers who are near retirement and have income from work as well as their nest eggs. Increased income inequality due to this phenomenon should not be considered a blemish on society and require corrective policies.

One of the most important causes of growing inequality in Canada never mentioned in the media is due to the country’s immigrant selection policies. Statistics Canada reports that the incomes of recent immigrants initially is about 60 percent of the incomes of Canadians and rises to a maximum of 80 percent after ten years in the country.

Government data show that these recent immigrants are over-represented by more than 20 percent in LICO poverty statistics. (Low income cut-offs, or LICOs, are a gauge of the income level at which a family may be financially stressed because it has to spend a greater share of its income on basic needs, such as food, shelter and clothing, than an average family of similar size.) Of the immigrants living in poverty, 38 percent receive housing subsidies while only 23 percent of Canadians do. Immigrants with low skills compete with low income Canadians, depressing their wages and increasing inequality.

During the last 10 years alone, about 2.5 million immigrants have entered Canada and contributed to the growth in income inequality. Should it be reversed by raising income taxes on the rich, who already pay for fiscal transfers worth $6,000 a year to each immigrant due to progressive tax rates and universal access to government benefits and who already pay much to support the larger number of Canadians who have been pushed into the low-income class by competition from the many immigrants with low skills?

The media reports on income inequality never mention the life cycle of earnings experienced by all Canadians. After schooling, incomes are low but increase with age, reaching a peak around age 60 and drop again in retirement. Would Canadian society really be better off if the government gave more money to the young starting their careers and take it away from those at stages in life where incomes but also family obligations are highest?

These reports also fail to note the presence of Canadian adults in the low income classes that is due to temporary influences like illness, divorce, unemployment or life style choices that see them travel the world or study for a different career. Similarly those in the top income brackets are there only for a limited period of time, like the athletes, performers and artists whose extra-ordinary success often lasts only a few years. Many entrepreneurs and executives in the private sector earn high incomes for a short time in their work lives.

The importance of life-cycle incomes and temporary influences on the distribution of income is documented in studies of the incomes of individuals through time. Statistics Canada tracked low-income earners between 2002 and 2007 and found that 60 per cent moved into a higher income group after one year, 79 per cent did so after two, and nearly 90 per cent after six. In the United States, of 100 workers who were in the bottom 20 percent of earners in 1996, 45 percent had moved to higher brackets nine years later. Of 100 in the top quintile of earners, 39 percent had moved to lower ones.

It is a tragedy that these truths about causes of income equality in Canada rarely reach the public and leave it with a seriously distorted view of conditions in Canada.