Guest Blog from Kim Pollock: Stagnation Without End

We are pleased to present this guest commentary from Kim Pollock, a former union researcher based in B.C. and Saskatchewan. Now retired, Kim is investigating various aspects of Canada’s economic performance.  A longer version of this paper will be presented by him at the upcoming Society for Socialist Studies meetings in Ottawa, and can be obtained by e-mailing him at kbpollock54@gmail.com. Thanks Kim for this insightful and provocative analysis!

The Promise of Canadian Capitalism: Stagnation Without End

The Great Recession has ground on for over six years.  Working-class Canadians face unemployment, declining incomes, precarious jobs, reduced savings and mounting poverty.

And there’s no end in sight.  The recession has become a prolonged agony, rivaling the long stagnation following the 1929 crash.

Economic growth has slowed dramatically.  GDP grew by an annual average of 4.8 percent from 2004 through 2008, just 2.1 percent from 2009 through 2013. Over the first five years of recession, the average annual rate of corporate profit declined 11.4 percent, average annual investment spending fell by 21.9 and  the rate of investment (the ratio of investment to corporate profits) 41.7 percent.  Industrial capacity utilization fell from an annual average of 82.5 percent to 79.0 percent.

Why?  Since profitability drives employment and investment, the simple answer is that corporations cannot achieve acceptable levels of profit.  In 2013 the rate of profit was still 14.7 percent below its pre-recession peak. So companies have mothballed job-creation and investment.

And they won’t invest or hire until the profit rate revives.  They’re making profits now – the average annual mass of profit since the recession slightly exceeds that of the five pre-recession years, although it slumped significantly in third-quarter 2014.  But it’s the rate of profit which matters – profits compared to the costs incurred in producing it.  So instead of investing, corporations are paying monstrous salaries to senior managers and lavish dividends to owners and shareholders, buying up their own shares to elevate share prices, investing offshore – or simply hoarding mountains of cash.

Governments are meanwhile constrained by the prevailing rules of the game.  Their only options are to try to drive recovery via Keynesian-style stimulative measures or simply do nothing and hope the economy rights itself.  Both present political risks.  Stimulus requires a confrontation with big business, unthinkable unless governments face serious popular unrest or enjoy unimaginable popular support.  Lacking opposition, the path of least resistance is to balance budgets, cut spending and wait – the strategy dignified as “austerity”.

There will certainly be no stimulus under the Harper Conservatives – even in the depth of recession, they only risked it when threatened with forcible removal from office.  But even a less hide-bound government would likely find Keynesianism disappointing.   Corporations control the levers of finance and production. Government stimulus requires either borrowing or taxation –  either corporations or workers must pay.

But taxing corporations to stimulate investment is as counter-productive as taxing families, then urging them to spend.  Borrowing simply delays the choice, then redirects to banks portions of families’ incomes and non-financial corporations’ profits.  All these strategies risk a fight with business for which no imaginable Canadian government has the stomach.

What does this mean for working people.

For most, it’s more years of just hanging on; for many others, real poverty.  Consider incomes.  Unionized workers’ wage demands are perhaps the key driver of working-class incomes.  And union wage settlements have fallen sharply – wage increases in the first year of Canadian collective agreements averaged 2.9 percent between 2004 and 2008 but 1.7 percent after 2009.  And paradoxically, although workers are less willing to strike, unions must take longer strikes to get today’s modest raises.

In fact, consistent with the view that collective bargaining drives working-class incomes, most workers’ pay has stagnated – even more than union wages.  Over half of Canadian workers have fallen behind inflation.  Average hourly wages rose 2.8 percent per year from 2004 to 2008 (with inflation at 1.8 percent per year) but only 1.4 percent after that (below inflation, 1.5 percent).  And the average employee worked 0.6 fewer hours weekly from 2009 to 2013 compared to the previous four years – a small reduction in hours that costs average families some $2000 a year.

Many families are already precariously employed, their incomes declining or vulnerable – in fact,  the majority.  The Canadian Payroll Association reported in 2014 that 51 percent of Canadians believed they “live pay-cheque to pay-cheque,” up from 47 percent in 2012.  Seventeen percent said things would be “very difficult” should they miss even one pay-cheque.

In addition, many Canadians lost savings or pension income, risked losing their homes or went deeper in debt.  Thousands faced the even more fearsome challenge of losing their jobs. Unemployment ballooned, as did employment insurance claims.  The monthly average number of unemployed Canadians was 1.1 million from 2004 to 2008, 1.4 million since 2009.

Yet because government evaluators tightened the screws, it became harder to even collect EI. The Toronto Star reported that of 867,000 unemployed Canadians who contributed to EI in 2011only 545,000 worked enough to qualify –  62.8 percent, the lowest qualification rate since 2003. The average annual number of claimants rose by 6.1 percent, disqualifications by 28.9 percent.

Those who exhaust their benefits or can’t collect EI likely wound up on welfare.  Canadian welfare recipients averaged 1.68 million from 2004 to 2008, 1.79 million over the next four years, an average annual rise of  6.5 percent per year.  Food Banks Canada found monthly food-bank usage in 2013 was 25 percent above 2008 – usage fell by 2.2 percent per year between 2003 and 2008 but rose at 4.5 percent per year in the recession.

In other words, it is now far easier to fall into poverty than to get out.  From 2004 through 2008, StatsCan data shows the number of persons in families defined as “low-income” fell 4.2 percent per year.  Over the next four years the trend reversed:  each year on average 3.5 percent more people lived in poor families.

Poverty is growing particularly rapidly among already-vulnerable groups, starting with children.  According to a 2014 UNICEF report, “one-third of food bank users were children, despite representing less than a quarter of the total population.”  Canada’s overall incidence of poverty was 8.8 percent in 2011 but 17.3 percent among off-reserve aboriginal peoples, 18.4 percent for recent immigrants, 19.7 percent among single parents, 23.5 percent for persons living with disabilities and 34.8 percent for middle-aged unattached individuals.  UNICEF concludes: “In Canada, diminished job security, growth of temporary work, lower wages, rising costs for education and record student debt levels are dampening the economic security of a generation…”

The relationship between poverty and falling wages actually works both ways.  Rising unemployment and an expanding “reserve army of unemployed” make it harder for unions to organize or strike.  Conversely, when unions face obstacles, wages fall, the mass of impoverished people grows.  The farther wages fall the more poverty increases – and vice versa.

Consider manufacturing, historically high-paying but where falling pay has accompanied job loss and reduced unionization. Average hourly manufacturing wages were 4.5 percent above the national average in 2004, 2.8 percent higher in 2008 – but by 2013 five cents an hour below the national average.

In short, Canadians’ incomes are falling or stagnating.  The longer the recession lasts, the more they’ll fall.  Union wages are rising at slightly above inflation; most workers are losing ground.  Thousands are becoming impoverished while those already poor fall deeper.

What would end the recession?

On capitalism’s owns terms, only a higher profit rate.  But that depends on corporations’ ability to increase the hours workers produce for them rather covering the costs of  wages and benefits.  During the boom , this so-called “rate of exploitation” (corporate profits divided by employee compensation) fell as companies hired more workers and expanded.  When profit-making began to slow, the rate of exploitation fell too.  From an average of 32.0 percent from 2004 to 2008 it fell as low as 21.6 percent, averaging just 26.7 percent in the five post-recession years.   Stated bluntly, with the rate of exploitation at 26.5 percent in 2013, workers were producing for their employers just over one hour in four compared to over one hour in three nine years earlier.

The labour-costs-to-profit ratio is a major managerial preoccupation, yet after five years of recession it’s still depressed. That is what a recession is all about – and there won’t be much hiring or new investment until the profit rate recovers.

Even before the petroleum-price slump Canada appeared headed for another recession; falling oil prices virtually guarantee it.  And the long-anticipated US recovery seems to have again gone south:  economists now say “wait until 2016.”  China – many Canadian firms’ other great hope –  remains trapped in recession and sitting on stockpiles of key commodities.  The government recently reduced coal imports to support struggling Chinese mines.  Globally, the International Monetary Fund cut 2015 growth forecasts to 3.5 per cent from October’s  3.8 per cent.

Canadian workers should harbour no illusions.  The wealthy will ride out a long recession; few workers can.  For them, the status quo means things get worse.  And there’s little to suggest it won’t – StatsCan counts over five job seekers for every available job while wages stagnate. There’s little on offer but more hard times.

In addition, workers find themselves essentially on their own to face the crisis – if falling incomes, rising poverty or high unemployment were problems for the wealthy, they’d have been addressed long ago!  And most middle-class Canadians find environmental issues more compelling than job creation.

The right wants balanced budgets.  On the centre-left, worries about environmental impacts trump concern for the social impacts of the crisis.  Even New Democrats choke on the words “working class”.  Working people and vulnerable groups either have to “live with it” or develop their own solutions, strategies and demands, perhaps even their own political organizations.  If they do, they’ll find themselves on unfamiliar ground, forced to think outside the box, form alliances and raise hell in unprecedented ways.

Perhaps it’s time.

4 comments

  • The “right” wants balanced budgets, as you say. Or at least what they say they want. Of course this is just a shibboleth, used to gull the innocent.

    What we really need is a balanced economy, and a “balanced budget” has little or nothing to do with that.

    A healthy and well balanced economy with full employment generates balanced government books virtually automatically.

  • “Government stimulus requires either borrowing or taxation – either corporations or workers must pay.”

    A common view the which bears examination. Following the financial crisis of 2008, the U.S. federal government did not wait to tax or borrow before bailing out big banks and corporations. The money was made available immediately. Scott Pelley of 60 Minutes interviewed former U.S. Reserve Chairman Ben Bernanke:

    http://www.economonitor.com/lrwray/2014/10/04/understanding-modern-money-guest-post/:

    Interviewer Pelley asks Federal Reserve Chairman Bernanke:

    Is that tax money that the Fed is spending?

    Bernanke replied:

    It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed.

    Yes fiat money is created by marking up accounts with a computer! When the economy has stagnated and there are unused resources, the government does not need to borrow nor tax nor does it have to wait for the rate of corporate profits to increase. The government can spend on Main St. immediately just as it spends on Wall (or Bay) St! We are no longer on a gold standard.

    But though a government with a central bank issuing a floating, non-convertible currency can never “run out of money,” except by self-imposed restraints, this doesn’t mean that it should spend without limit or overspend and cause inflation, or that government should spend any sum unwisely. But it does mean that the coffers can never be bare, and that so-called scarcity of funding can never excuse inaction on alleviating poverty, creating employment or protecting the environment.

    For more background, see Progressive Economics Forum: A Trillion Dollar Coin for Canada?

    See Toronto Star letter, “Ottawa’s cupboards can never be bare” at http://www.thestar.com/opinion/letters_to_the_editors/2015/05/15/ottawas-cupboards-can-never-be-bare.html

    For Job Guarantee, see http://mmtincanada.jimdo.com/policy-issues/job-guarantee/

  • The discussion of “stimulus” is missing some stuff, I think. Governments are currently busy doing the opposite of stimulus (depression?), through ongoing austerity. Nick Rowe’s conservativish position for 2012 was that “balance” was a deficit of $27 billion (http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/11/600b-debt-x-2-inflation-25-real-growth-27b.html). That’s a lot of foregone spending every year. That spending would already make a significant difference to demand and have a significant effect on unemployment and economic growth (and maybe give us a chance to get out of fossil fuels), non? And then to keep the non-governmental sector from having to run deficits, the government has to make up the trade deficit too. Which is to say that the government can and actually has to get moving in the economy to keep us all in the same place. That’s the place I think we need to look.

  • Rising prices are too blame, I would be able to live on minimum wage which is the law if we had across the board deflation. Its a fools errand to think wages will rise with prices as they post-WW2. Wage led inflation in the past worked when prices were far lower in the great depression. Finally if we get higher wages/incomes for hypothetically ever Canadian; you know 100% of the population, what will stop prices from rising faster then nominal prices today or tomorrow?

    Inflation is the problem the solution is to allow prices to fall below the minimum wage, and allow companies to fail as their prices fall fors goods & services.

Leave a Reply

Your email address will not be published.