This column was posted on a Toronto newspaper. Donner and Peters are
what I would characterize as 'centre-left' economists.
Paul P.
The Distorted Priorities of Mainstream Economics
Arthur Donner and Douglas Peters, May 2006
There has been a monumental shift in mainstream economics over the past
forty years.
When we studied economics in the 1960s, economists and public officials
who had an economics policy mandate identified a number of important
national goals-full employment, rapid economic growth, a viable balance
of payments and an equitable distribution of income. These goals were
stated in the terms of reference of the Economic Council of Canada and
repeated in the Council’s First Annual Review of 1964, “Economic Goals
for Canada to 1970.”
In policy terms, full employment is rarely taken seriously and the
equitable distribution of income priority seems completely foreign to
current mainstream economics. The issue of a viable balance of payments
has always been the least understood of economic policy objectives and
today seems to be largely ignored, or worse argued that it does not
matter, particularly in the United States. We would argue that Canada is
worse off because of these changes in priorities.
Interestingly, the importance of an equitable distribution of income was
recognized by many giants of economic analysis, both from the left and
the right. The late John Kenneth Galbraith, an original thinker in the
field of economics and a prolific writer, seemed proud of Canada’s
social programs which focused on the issue of income distribution in a
far fairer way than in the United Stares.
He also wrote that “The notion that economic insecurity is essential for
efficiency and economic advance was a major miscalculation - perhaps the
greatest in the history of economic ideas. …In fact, the years of
increasing concern for economic security have been ones of unparalleled
advances in productivity.” (Source the Globe and Mail May 1, 2006, p. S8)
The great economist, Alfred Marshall, wrote in his “Principles of
Economics” in 1890 posed a fundamental question on income distribution “
. . . whether there need to be large numbers of people doomed from their
birth to hard work in order to provide for others the requisites for a
refined and cultured life; while they themselves are prevented by their
poverty and toil from having any share or part in that life.” (p. 3,
Eighth Edition, Macmillan & Co. 1962)
Adam Smith, who is widely thought of as the founder of modern economics,
was both a philosopher (The Theory of Moral Sentiments) and an economist
(Wealth of Nations).
In 1776 Adam Smith described how an economy works and created the
concept of the invisible hand that generates economic well being.
Nonetheless, in the Wealth of Nations Smith observed that “No society
can surely be flourishing and happy, of which the far greater part of
the members are poor and miserable.”
This brings us to the present situation in Canada. The overall economy,
as reflected in such standard numbers as GDP growth, is performing
fairly well. To a far greater extent than in the past, however, the
issue of economic justice and income distribution is off the radar
screen of our Canadian politicians. While the standard of living of
Canadians is rising in aggregate, the system still leaves huge numbers
living in poverty.
Statistics Canada does publish figures on the percent of Canadians who
fall below a low income cut-off level. And their recent survey shows
that the Canada’s recent near boom has shrunk the pool of these people.
But this still leaves a huge number of people living in poverty.
Here are some pieces of fragmentary evidence that trouble us:
Inequality and poverty are two separate but linked problems. Is it fair
to see a small drop in poverty and an increase in homelessness while the
wealthy in our society enjoy a boom in their incomes? All of this in
Canada despite an economic boom and repeated federal government promises
to cut poverty
There is a huge affordablity problem for housing in Canada. Moreover,
despite the eocnomic boom, we see many homeless people on the streets of
Canada’s major cities.
Poverty is rising among children and new immigrants, and more
middle-class Canadians are finding it difficult to pay for education and
housing
Canada’s treatment of Aboriginal Canadians, both on and off reserves and
in the North, is disgraceful. The problems brought on by poverty among
our 1 million Aboriginal Canadians, truly the first Canadians, are
disgraceful. Unfortunately, past federal governments’ policies had
hardly made a dent at setting matters right and there seems little hope
from the policies of the most recent budget.
The current boom is boosting the top salaries and bonuses of the wealthy
CEOs at the expense of the workers at the bottom of the totem pole,
particularly the working poor. We are struck by the enormous CEO and
other executive salaries that are announced, with the huge escalation in
the ratio of the top to bottom incomes. How many times the average
worker’s salary should a CEO or other executive receive? 20 times? 100
times? Or the actual number in the US for the top 10 per cent of
executives, 350 times?
We are also struck by the way in which the minimum wage was deliberately
allowed to fall behind average wages, despite the fact that the minimum
wage plays a key social and anti-poverty role for propping up the low
wage labour market.
Canada was one of the early supporters of the Universal Declaration on
Human Rights. While in biblical terms, “the poor will always be with
us,” surely we can do a better job of developing policies that reduce
the incidence of poverty while attacking the question of a equitable
distribution of goods and services and incomes. Surely we can do better.
Canadian policy-makers should be examining their economic policy
instruments (taxes, transfers, government expenditures, etc.) not only
from the perspective of do they improve the growth of the economy or of
a particular industry, but also the way in which the improved growth and
benefits are distributed among different groups in our society in a more
equitable manner.
All future budgets should be put under this kind of a screening. If this
screening were done before a budget was produced it might mitigate or
eliminate the considerable embarrassment that would occur if the
screening were done only after the budget was presented.
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