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Amanda Lang answers your questions on income inequality and the 1%

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1. From Dave Mun: 

Are public sector compensation/benefits growth actually outpacing the private sector?

Amanda: It's clear that public sector wages AND benefits are outpacing the growth of the private sector, on both fronts. Many policy analysts point to the benefits as the area of greatest concern, since lower wages today in the private sector, combined with weaker pensions and other retirement benefits later, add up to a dangerous outcome for many private sector workers. Some people talk about the outcry that may ensue down the road, as those same private sector workers realize they are paying, through taxes, for the better benefits others are receiving. It's a problem we will likely have to address...But some would note the solution isn't necessarily to lower public sector wages and benefits, but rather to think of them as the floor or baseline for the private sector. That is, force businesses to match what government is willing to pay. The only weakness in that argument, in my view, is that governments may be less sensitive to market forces and also fiscal prudence, than private business. A politician can offer rich benefits years down the road to public sector employees knowing they will be long gone when the costs must be borne. The answer may lie somewhere in the middle - forcing the public sector to be fiscally prudent, and also asking businesses to reconsider benefits for their employees over their whole lifetime, as they did a few decades ago. So that private sector pensions become part of a compensation package once again.



2. From Scott in Newmarket, Ontario: 

What level of income is required to be in this group (the 1%)?

Amanda: In Canada you land in the top 1% with an income of $191,000 a year (based on the government's household survey from 2012). That's seven times the median household income for that year, but it's also not a great deal of money. As the lovely doorman at a Toronto hotel noted to me the other day, a household can be described as wealthy, but if it's because someone is working 14 hours a day, at two jobs, it's not exactly the picture of a yacht-dwelling lay-about. The concern with the conversation about the 1% for me is it captures a great many types of workers (lawyers, doctors, accountants, even some journalists) who are far from rich, AND are the type of worker you wouldn't want to over-tax. These '1%-ers' don't hoard their cash in offshore accounts, they spend it. Their wealth is good for the economy, and for growth. The real problem is at the very top end of the 1% - the 1/10th of 1%, or the uber rich. And there aren't that many of them. Too few for taxation to really solve the problem, in the view of many. In fact, because there are so few (remember, 85 people in the world have the combined wealth of the bottom 3.5 BILLION), it wouldn't make much of a dent unless you taxed at rates that would be extreme. Instead the solution may lie in thinking about WHY the extremely wealthy are so wealthy, and in my view, that has more to do with how we tax investments. Remove the incentives on investments, and tax capital gains and dividends as straight income, and you'd reach that top quintile pretty quickly. To be sure, you'd also hit the lower parts of the 1%, who also invest, but that's okay. Taxes should be about ideas, not a cash grab. If the point is to re-distribute wealth, we also need to be thoughtful about how and why we do it. In other words, always driven by principle, not a desired outcome. We could slap a one-time tax on the uber wealthy of 75%, but the principle would be unfair (how to justify it other than that we need the money? Which is the same justification for robbing a bank), and the consequences severe, since those same people have much better options about where their capital flows and stays than most of us.


3.  From Daniel Liba: 

When unemployment is high, should we really be bringing in so many immigrants? More people searching for work and fewer jobs available will lead to wage stagnation, won't it?


Amanda: There is no evidence that immigration hurts economies - far from it, the evidence in countries like Canada who have been so open to immigration (and I'm on the list of many who say thank goodness, or I'd be European right now) is that immigrants contribute to the economy. That's despite the fact that first generation immigrants have worse economic experiences than native-born Canadians. Furthermore, there is some evidence that Canadians are unwilling to do some jobs. You could argue that should mean wages for those jobs go higher until we ARE wiling to do them, but for many generations, the gap in the market has been filled by hardworking new Canadians, and that has been a benefit to us all. Rather than shutting immigration down, policies directed at making the immigrant experience better might be a better idea - recognizing foreign credentials, for instance. The other important thing new Canadians bring to the table is a deep knowledge of their own previous home's market. As a nation that needs to export, new Canadians are a resource to business in Canada.


4. From Mason van Dyk in Victoria, B.C. : 

As more and more jobs are automated, replacing a larger and larger portion of the workforce over time, do you think implementing a form of guaranteed income would be feasible in Canada?

Amanda:
The guaranteed annual income (GAI) is an idea that's been around for a long time, and it has its merits. Some progressive nations (like Switzerland) are at the forefront of the discussion. It's not clear that it's the solution for Canada, since one issue with GAI is dis-incentivizing people to retrain or relocate or generally remain flexible in the labour market (including on wages). Having said that, if the most extreme predictions of automization are true, we may have to look at some drastic measures. There is one view of the future that sees corporations become more and more efficient through the use of labour-reducing technology, and profit going higher and higher, while jobs disappear. It's what happened at the dawn of the industrial revolution (which is why the Luddites wanted to break the machines) but one scenario has it happening in an exponential way in the decade or so ahead. In that scenario, many jobs (including mine) could disappear, replaced by very intelligent machines. In that case, we really would have to find a way to force those corporations (reaping the benefits of these advances via technology and higher profit) to support the broader population. What that mechanism looks like may be one of the biggest public policy questions we face. In the end, more profitable business should benefit us all. If it doesn't, or stops benefiting us all, we may need collectively to think about what to do about it.



5. From Evan Guest: Given that the 1% list is just the current snapshot (i.e. Bill Gates was not always in the top 1%) could you please tell us what percentage of Canadians can expect to move into the top 1% during their lifetime?



Amanda:
Not sure it's easy to calculate a precise number, but I think the point you make is essential. Mobility is one of the most important elements in a healthy society - that is, regardless of the lottery of your birth, and your parent's economic situation, that we all have a roughly equal shot at bettering our lot. And on that front, the news is extremely good in Canada. Because we have universal access to both health care and education, it's much easier here than in the US to rise above your parent's economic status. It's also better to be poor here, which is an important quality in a just society. The question is, is mobility reduced over time (a generation or two) if the middle class sees its lot stagnating? If incomes don't keep up with other costs, will it be harder for a hard working Canadian family to put their kids through university? Which, while heavily taxpayer subsidized in Canada, is still not cheap? If that is the case, we really could see a reduction in mobility. And then the really ugly circular outcome begins: with a lower tax base (stagnating middle class income equals stagnating tax base) and a lower economic growth trajectory (stagnating middle class spends less and GDP growth adjusts lower) ultimately there is less to spend on both health care and education. THEN you could see a more striated economy (like the US) where there are two health care systems, rich vs poor, and two education systems, rich vs poor. That is surely an outcome to be avoided.

6. From Adam Moring:

 I've been wondering: do you think one of the big reasons for the "middle class squeeze", apart from the obvious, is that the "baseline" of what's considered Basic Domestic Living is a lot higher than it was, say, thirty years ago?

 Internet, online subscriptions, multiple cell phones and cable tv packages, all with their attendant monthly fees, simply did not exist then. Yet it would be almost unthinkable for a family to do without those things today. Wages and incomes simply can't rise fast enough to absorb all the extra fees we trowel onto life.

Amanda:

 I think its true that what we consider 'necessities' has changed a lot over time. Having said that, an automatic dryer is hardly a luxury, but would have been considered one at one point not too long ago. Cell phones and internet access may well fall into the same category. The fact is it's better to be alive today in most countries (even the very poorest) than at any time in history (with the obvious notable exceptions around war and extreme events). We are collectively wealthier and have more at our disposal in the form of applicable innovations than ever before. If we can't afford to pay for the new necessities (and we can debate which those are), that's a sign wages haven't kept up. The question might be, why is that? Is there a market mechanism for wages that used to work, and stopped? Or do we need actual government intervention (think of that like citizen intervention and it sounds more palatable) to set wages? Higher minimum wage is one place we see that happen, but it may also be governments should take a view of what private sector benefits should look like too. One of the privileges of our system is we can collectively decide how we want it to look. The 'market' (even for wages) isn't some magical machine - its one designed by us, for us, and one we can alter at will.


7. From Rachel T Scott:

A.    Taxing the rich at 70% for income over one million per year along with stock options would be a deterrent but wouldn't it be better if that money was circulating in the economy?  

Amanda:
When it comes to taxes I really think its incumbent on us all to remember what taxes are for, why they are the levels they are, and above all, what is fair. It's tempting to tax the rich simply because in our view, they can afford to have a little less. But remembering what is fair is important. The 1% is predominantly filled with people who have earned their money, not inherited it. And the top echelon of the one percent is full of people who have contributed hugely to the rest of our lives. This whole q&a exercise wouldn't be possible without a dozen people who invested sweat equity to create the internet, Apple, Microsoft, Cisco, Google, Twitter...and a bunch I can't even name because they are in the background. When someone creates something of huge value to others, they have earned their wealth. We levy taxes because we understand that a) they couldn't have done what they did without some support from society and investments that came before them and b) because we have collectively agreed that we want to care for one another. But there is also a level of taxation that isn't just bad economically (discouraging investment or the creation of a business) but also simply unfair. Why should one person pay 70% and another 30%? The principles need to be clear.

B.    Would it work to tie CEO incomes & bonuses etc. to lowest paid employees?

Amanda: This is an idea I really like actually...with a small adjustment. Would love to see some economists really test it out and see what the possible outcomes would be to tying the top executives pay (I say top executives because while we focus on the CEO, the most highly paid employees are sometimes unnamed people down the food chain, like traders at an investment bank) to the median employee pay. I think it could work extremely well. You wouldn't want to tie top pay to lowest pay (there is a very good reason a janitor makes less than a senior manager), but the median captures that lowest salary and still allows for some highly paid folk in the top ranks. A ratio (and you'd have to set it individually, by company or sector, it's not the kind of thing you'd want government to set) would keep management and boards honest. If today the CEO of a bank makes 60 times the median pay, and it is determined a fair ratio is more like 15, that company has two options - it can raise pay down the foodchain (good for the economy) or it can reduce pay at the top. AND it creates a benchmark for the future, so CEO and other top salaries can't increase at exponential rates, but have to rise at the same pace as salaries over all. There is something very appealing about this idea, as long as it is implemented by businesses themselves and not regulators or government.



8.  From Jason Hanson in Saskatoon

: What does Amanda think about the recent NASA-backed study that suggested a society with serious economic disparity will collapse much faster than an egalitarian one? Can/should economists start thinking about the importance of equality in more than just financial terms?

Amanda:
They are already thinking in these terms, especially economists who know their history. There are two reasons for it. First, an economy that isn't increasing the earning (and therefore spending capacity) of its middle class is one that will begin to stagnate. Those at the very top will be insulated from this phenomenon for a period of time, but not indefinitely. Remember Henry Ford's notion of paying his workers enough so they could afford to buy a Model T - that's the kind of progressive thinking that is missing from too many modern corporations. The second factor is political. When the decision-making becomes concentrated in the hands of a few powerful people, history has shown bad outcomes. If wealth comes to equate political power, the society is often on the decline. That isn't the case in Canada, but you could make a strong argument that the US qualifies.

9. From Dave Enns in Cornwall, Ontario: How can anyone on this planet possibly think we have a meaningful "progressive" tax system (in any country) if the top 85 have as much wealth as the poorest one half of the world's population?



Amanda:
I truly think the emphasis needs to be less on the wealthy, than on what I think of as the investing class. That Oxfam stat captures people who have made enormous contributions to the planet, and nobody could gainsay their achievement. Think about Bill Gates. He's one of those 85. Should we have extracted some massive proportion of his wealth from him at some point? When? Before he create his foundation and dedicated himself to Third world issues? Before he began a movement among the uber rich to leave all of their wealth in the form of charity? But if you look at when the real gap between rich (remember, that's not the uber rich but the '1%' which are lawyers, doctors, accountants and even farmers) and the middle class began, it was the 1980s. What happened in the 1980s? Deregulation of financial markets...and with it, enormous wealth creation for people who knew how to play that deregulation. Many people have since benefited form the ability to invest capital with others, and earn a return. Even the standard 8% over time is a lot more than our great great grandparents could ever have hoped to achieve in savings returns. So wealth creation became part of the legacy for a swath of the population. The catch is, its just the upper portion. The working poor don't invest. The middle class invest, but they have far less available capital to do so than the rich. The rich invest, and earn handsome returns that are taxed more favourably than other forms of income. And they take the tax-advantaged returns and...re-invest them. I believe the conversation shouldn't be about rich versus poor, but investor class versus non investor class. We need to incentivize businesses (and therefore investors) to pay workers more. That should have the effect of growing the overall economy, and corporate profit, and guess what, investment returns. So the investor would still win. Henry Ford's model still seems like the right one to me.

10. From Keith Stringer in Hamilton, Ontario: 

Where do you see this ending in the long run? I can only see two possible outcomes of the ever increasing gap in the incomes of Canadians. One would be a slave / master society and the other revolution. Am I being too extreme?

Amanda:
I hope so! I think one of the beautiful things about a robust democracy is we can have the conversation and debate before it's too late. No one has to storm the bastille here, we can be thoughtful and careful about what kind of world we want to create. That no one should be destitute or live in abject poverty, that anyone who wants to work hard should be able to better their lot and the lot of their family, that wealth is to be celebrated as a symbol of creation, that the economy is not a zero sum game but one that can expand to create more for all - these are important concepts that I believe are deeply held in Canada. Income inequality is a global phenomenon. It's happening the US, but also in China, in Brazil, in Nigeria. As wealth grows more rapidly, the gap between the super rich and the middle class and working poor is more pronounced. That's not a healthy thing - never has been, throughout history. How we respond is up to us, but we have the luxury of good governments, strong civic institutions, and a well educated population. If any country in the world can make a thoughtful and meaningful adjustment to solve this problem, it's ours. We just need to get to it.

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