More “truthiness” from the John Ibbitson

Yesterday, the CCPA released a study on inequality filled with statistics about how life has changed for families with children. John Ibbitson shrugs his shoulders and responds with a polemic. He provides some “balance” by trashing right-wing think tanks, too, but in typical Ibbitson fashion provides not a shred of evidence for anything he says.

Here’s the column and some comments from yours truly:

Think tanks need to think again

A new study suggests that Canada has become a mean and brutal place, in which the wealthiest are becoming ever wealthier, while the rest are barely hanging on.

Who would want to live in such a society? I would, and so should you.

From Ibbitson’s privileged perch, how nice it must be to dismiss the plight of homeless people, folks struggling on welfare, and the army of the working poor. Canada has become a richer country, but the top is pulling away from the rest of the pack. In an echo of Margaret Thatcher, Ibbitson cries “there is no alternative”. We obviously disagree, given the evidence of history and experiences of other countries.

Most think tanks in Canada are a waste of time. Those on the right twist and distort data to prove the country is overtaxed and underproducing. Those on the left use the same data to prove that society is increasingly unequal and unjust.

The Conference Board of Canada, the Institute for Research in Public Policy, the Public Policy Forum, the Canada West Foundation and a couple of smaller shops offer good value. They ask a question, conduct research, and reach a conclusion.

Excuse me, the Conference Board of Canada? This is an organization that only does research for hire, usually from government or big business. Their work on interprovincial trade in support of agreements like TILMA is so shabby it is embarassing. See this report by myself and Erin Weir for a peek. I’d never heard of the Public Policy Forum before. Here is their “bio”: looks to me like yet another pro-business meeting table, this one rooted in the oil patch and chaired by the Executive VP of EnCana.

Most of the rest simply troll statistics in search of numbers to buttress their prejudices, which is why we should dismiss the latest study from the Canadian Centre for Policy Alternatives.

The study observes, correctly, that the gap between the wealthiest and the poorest is three times what it used to be a generation ago. The 10 per cent of Canadian families with the highest incomes make 30 per cent more, adjusted for inflation, than they did 30 years ago. Just about anyone making an above-average income is doing better. But for the bottom half, income levels have been flat for a generation.

The Centre for Policy Alternatives blames “an economic system that is failing the majority while disproportionately benefiting a select few.”

Hugh Mackenzie, an economist at the institute, blames an inadequate minimum wage, the decline of union power, the hollowing out of the manufacturing centre and an increase in contract or temporary work.

His conclusions are (a) correct and (b) an invitation to disaster.

Governments that took this report at its word would increase upper-income taxes, raise the minimum wage, bolster union rights, and increase subsidies to manufacturers.

Throughout the 1970s, 1980s and early 1990s, governments did all those things. In the process, inflation, unemployment and deficits grew, while recessions came and went and came again.

There might be a story in here that some inflation came about through wage increases that led to price increases that fed back to wage increases, and so on. But a glaring absence from Ibbitson’s story is the oil price shocks of the 1970s, when the price of oil, at the time a much more important input to production than today, went from about US$2-3 a barrel at the start of the decade to almost $40 by decade’s end (see this graphic). This is a much more compelling explanation for the stagflation of the 1970s.

Desperate, governments began cutting taxes, reining in inflation (through the central bank) and balancing budgets. The results were spectacular. Growth took off, along with the incomes of those who were responsible for that growth: entrepreneurs and highly skilled workers who added the most value to the economy.

A sweeping generalization that is not actually true. According to the federal government’s fiscal reference tables, table 56 on page 63, we see that Canada is an exception in budgeting. On average the G7 did not ever go out of deficit over this time frame. The UK had surpluses for precisely four years (1998-2001) and the US for three (1998-2000) before reverting back to deficits. But let’s not let facts get in the way of Ibbitson’s argument.

The left-wing think tanks ignore this reality. For the Centre for Policy Alternatives, economic growth is some mystical phenomenon, and the duty of government is to ensure that its bounty is equally shared, before the good times disappear. They would never concede that growth is impossible unless capital gets a return on its investment, and upper-income workers are free to keep at least half of what they make.

It certainly is the case that economists who have tried to find the keys to economic growth through statistical means have generally come away humbled. Ibbitson has not done such work, and I suspect he has no grasp of the literature whatsoever, so he is not so humble. I review what we know here, and it is a much more nuanced story than Ibbitson’s simplistic interpretation.

Ibbitson has clearly never been exposed to the fact that other countries have made great strides to dramatically reduce poverty and inequality while still having competitive economies. If Ibbitson would look to the World Economic Forum’s Global Competitiveness Report (see post here), he would find that many of the top countries practice significant redistribution via the labour market and by government transfers, even though by his assumptions they should be complete basket cases. And since the CCPA study was about families with children, this post is of interest, which cites a recent UNICEF study on child well-being that places the same countries in the WEF report at the top of their rankings.

Here’s another explanation that Ibbitson misses completely: interest rates. The period he characterizes as “bad” (due to progressive policies) was one where high interest rates amid a monetarist obsession with eliminating inflation did have negative macroeconomic impacts. Since interest rates have been reduced, after the mid-1990s, growth has bounced back to levels of the post-war “golden age”. But unlike that era, our report points out, growth has not been shared equitably.

The ideologues of the right are just as blinkered. Since a modest loosening of constraints on the wealthiest produced growth, they cook the data in an effort to prove that releasing those constraints completely would benefit everyone.

Except the data show that, for the bottom 40 per cent of families, earned income actually fell between 1976 and 2004. After-tax income held steady only because of government supports, especially for children.

So some redistribution was necessary, to keep incomes stable among the bottom half of income earners. Rising tides don’t lift all boats; some boats need pumps.

You might conclude this: Those with better education, higher skills and more capital will, unless deterred by taxes, generate growth, which will benefit them more than those who have less of those things.

Another “gut” assumption that taxes deter the work effort of highly skilled workers and entrepreneurs that is not borne out by the evidence.

But since this is a necessary condition of growth, it is tolerable, so long as sufficient supports are in place to ensure that the poor don’t become absolutely poorer. That said, middle-income manufacturing jobs do appear to be getting relatively scarcer, which we all need to think about.

This, of course, is just another conclusion based on a selective interpretation of data. But at least it’s not coming from a think tank.

Of course, I work for the CCPA, so if you do not want to take my word for it that inequality is growing and it is unjust, then I recommend Dimensions of Inequality, by two top-notch economists, David Green and Jon Kesselman (overview chapter online here). I have a book review on that book just about to be published, so I will follow up with more in a subsequent post. The best part: at least it is not coming from an overpaid pundit who is better at mouthing off opinions than doing research.

One comment

  • It is interesting to note that even the OECD Economics Deparment now concedes that a “reasonable” minimum wage and widespread collective bargaining are not obstacles to growth – see the recently released “Going for Growth” report – nicely covering off Hugh’s two key recommendations for bringing up the bottom ( which I would agree with.) I think the more tricky issue policy-wise is how to stop the very top growing away from the middle and the bottom – the Nordic lesson is more the feasibility of a high overall tax level than the feasibility of a very steeply progressive income tax (and that’s a teaser for our PEF panel at the CEA meetings.)

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