Review of “Dimensions of Inequality in Canada”

Published in The Tyee, as Divided, We’re Falling:

Book Review of
Dimensions of Inequality in Canada
Edited by David A. Green and Jonathan R. Kesselman
UBC Press
ISBN 0-7748-1208-7
August 2006
http://www.ubcpress.ca/search/title_book.asp?BookID=4518

Review by Marc Lee

A poll last Fall by Environics for the Canadian Centre for Policy Alternatives found that three-quarters of Canadians felt that the gap between rich and poor had widened in the past ten years. Take a walk on the streets of any major city in the country and it is clear that we have the full spectrum from abject poverty and homelessness on one end to astonishing wealth and prosperity on the other.

Most of us are in the middle are just making a living, not a killing. But anxiety is running high. The same poll found that half of Canadians feel that they are but one or two pay-cheques away from being poor. And in spite of good economic times, characterized by low unemployment and interest rates, two-thirds feel that the majority of Canadians have not benefited from economic growth, and that a disproportionate share of the new income created in recent years had gone to the richest among us.

We need to be careful when interpreting polls, which track opinion not reality. But the facts bear out the concerns around inequality that Canadians are feeling. The take-off of the Canadian economy since the mid-1990s has indeed led to a highly disproportionate share of the gains going to the very top of the income ladder.

Which brings us to Dimensions of Inequality, edited by David Green and Jon Kesselman, two well-regarded economists based in Vancouver. Dimensions of Inequality tells the story of growing inequality in Canada over the past couple decades, through a collection of papers authored by a number of the country’s leading academic economists. This book is an essential starting point for anyone who wants to get up to speed on inequality trends and developments in Canada.

The book itself is a weighty tome, at over 400 pages, and many of the chapters are heavy with numbers that may limit their accessibility to the general public. Minimally, those interested in the topic should read the introduction (free download here), which provides a more accessible overview of the book’s contents. Those more engaged in policy on a daily basis will surely want to get the whole volume.

Importantly, the editors are mindful of anchoring the empirical findings in the concept of justice. Pointing to changes in the economy and in public policy that are driving rising inequality, their review of the book’s contents closes: “It is hard to escape the conclusion that these developments have also made Canada a less just society.”

It is rare for economists to make such statements, but they are fundamental to the question of why we should care about growing inequality. Too often, progressive commentators stop with the presentation of jaw-dropping statistics about how much worse inequality has become. But these facts in isolation are not sufficient; they need to be rooted in values for them to have any meaning.

By the standard of the numbers presented, the current situation of growing inequality is a travesty of justice. While the escalating incomes of the rich are largely hidden from view, abject poverty is not, and is becoming increasingly visible and intense. Businesses are now joining the chorus of anti-poverty activists and faith groups in calling for something to be done. But these pleas have so far fallen on deaf ears in Victoria and Ottawa.

One could shrug one’s shoulders and lament that it has always been the case that the rich get richer and the poor get poorer. But this depth of poverty was simply not the case when I was growing up in the 1970s. Most Canadians can remember a time when homelessness was a rarity not an everyday occurrence. And more importantly, there was time over the course of several decades after World War II when inequality did shrink: the share of income going to the very top fell, and the advent of social safety nets and public programs played an important role in increasing the incomes and opportunities available at the bottom.

But the retrenchment of the public sector, since the 1980s and still ongoing today, has cracked that foundation. While most of the analysis in the book goes only up to the turn of the millennium, a consistent pattern emerges that finds a jump in inequality starting in the mid-1990s. This was the time of cutbacks in Paul Martin’s famous 1995 federal budget, and also the rise of the Harris regime in Ontario.

In the final chapter of the book, Keith Banting notes that we have weakened the public mechanisms of economic security just at the time when globalization and technological change have sprung large transitional costs on our society. The policy mantra in response to these changes has been “education and training”. But as Banting points out, this is an incomplete pathway to economic security, and in any event, the rhetoric has fallen far short of the budgeted reality.

More Dimensions than String Theory

The middle chapters of this book demonstrate why it is called Dimensions of Inequality. Serious reflection on inequality posits some important questions about what we mean by inequality, how we measure it, and what the real trends have been. The complexity of the topic reinforces the value of this book.

When it comes to inequality, most researchers focus differences in income. We take a snapshot of the population, rank them from top to bottom in groups, then make calculations about the relationships among those groups. Summary statistics can be calculated in a number of ways, and can be compared to previous snapshots from years past.

One of the opening chapters begins by questioning the official numbers. It describes how traditional phone surveys have led to statistics that substantially overstate the incomes of the poorest in society. Using more comprehensive data from tax returns and the census, Marc Frenette, David Green and Garnett Picot find that the standard surveys, even with large sample sizes that should put them on solid ground statistically speaking, undercount the poorest. Thus, inequality is worse than the official estimates have been telling us.

This should not be much of a surprise: the poorest of the poor do not have phones. But for mainstream researchers this is a bombshell. Strangely, this story garnered not a single bit of media attention. In contrast, a story last summer that the official inflation number might have been miscalculated by a teensy 0.1 percent made the front page of the Globe and Mail. The inflation rate forces important decisions about monetary policy and interest rates that affect the paper’s business readership. But higher inequality due to greater poverty at the bottom? Whatever.

Snapshots of the income distribution are but one aspect of inequality, the editors point out. Commentators on the right might well argue that university students are poor but then later may be rich, so the standard approach of comparing snapshots over time misses out on the dynamism that happens over the course of someone’s life.

Charles Beach, in a chapter loaded with matrix algebra, turns the crank on the extent to which people are mobile through the income distribution over time. He finds that there is some “churning”, but most people tend to stay put in their original earnings category. Moreover, the situation has worsened: the likelihood of staying in the same category increased in the 1990s when compared to the 1980s. This finding is at odds with the notion of equality of opportunity, which many conservatives would support.

Other chapters contemplate different aspects of the inequality question. Thomas Crossley and Krishna Pendakur look at inequality based on how much people consume, rather than their income. They find a slight decline in inequality on this measure over the course of several decades, but an increase since the mid-1990s.

Lars Osberg asks how much of the difference in inequality across countries simply reflects longer work hours and different choices with regard to leisure time (which is uncounted but valuable). He finds that the poor in the US work longer hours for less income than their counterparts in Europe, while Canada is an intermediate case.

Other chapters look at inequality in terms of political participation, in gender terms, across ethnic groups, and outcomes for children versus adults. One notable omission from the list of topics is wealth inequality (see work by Steve Kerstetter for the CCPA). Another is some fascinating research that peeks more closely at the very top of the income distribution and finds that most of the gains of the top 10% have in fact gone to the top 1% (see a study by Emmanuel Saez and Michael Veall).

What Now?

The main finding of the book accords with what most people might guess: inequality has worsened in recent decades. The editors are optimistic that as more data come in, some changes in public policy like the enriched National Child Benefit will serve to reverse the trend. But they also acknowledge that growing inequality has largely been driven by market forces and these may outweigh the relatively smaller changes in public policy.

The much bigger question of what we do about inequality depends on one’s worldview. The authors stop short of putting forward a policy package to address the injustice of growing inequality. They take us as far as good academics can, having answered a plethora of questions about what we know and do not know about inequality. They highlight one well-known but fairly obvious response: increasing investments in public education. But where does this leave us?

Returning to philosophy, it can be argued that inequality should be tolerated if it leads to improvements for all over time that are greater than would be the case if the situation is more equal. This is the Rawls Difference Principle, and it has been hijacked in the past as a justification for trickle-down economics: everyone will be better off in the long run by policies that, in the short run, benefit the richest among us. In practice, this has failed to be the case.

Commentators on the right might also argue that rising inequality is itself just, as a reward for hard work and sacrifice that is simply compounded by big forces like globalization and technological change. CEOs have a rare gift for maximizing profits, and simply get paid what the market will bear. In this view, progressive taxation is a confiscatory grab that undermines incentives for working and saving by taking from those who earned it to give to those who would rather be surfing.

Those on the left, like myself, do not find these explanations compelling. Hard work deserves a reward, but lots of people work hard all their lives and never get to the end of the rainbow. Luck is an essential part of the story – it matters what resources your parents had, what genes got passed down to you, or whether you just happened to buy that condo right when the real estate market was taking off. Skyrocketing CEO pay is not just supply and demand, but a reflection of economic power and personal connections.

If unacceptably high levels of inequality are the outcome of the economy (even after accounting for reductions in inequality arising from taxes and transfers and publicly provided services), then we need to question whether we have the right economic model. Inequality and poverty are not inevitable; they are a political choice. Other jurisdictions, such as the Scandinavian countries, have demonstrated that competitive economies can be compatible with more egalitarian outcomes. And our own history in Canada shows that when we were relatively poorer than we are today, we had a more inclusive society.

The notion that we must tolerate rising inequality in order to have a strong economy is nonsense. Dimensions of Inequality does not answer this call about breadth of choices we can make as a society. But that should not diminish the book’s achievement of putting under one cover an essential guide to the latest academic literature, contextualized by a strong philosophical understanding of what inequality means. The results suggest that we have become a less just society. Many Canadians will agree with that assessment.