The U.S. and Canada’s recent willingness to run historically large deficits in order to create good-paying jobs, marks a sea change in policy circles and more broadly in economic thinking.
Most advanced Western democracies shifted away from an economic policy mix that prioritized full-employment after the postwar economic boom. More specifically, the commitment to full-employment ended in the late 1970s with the resurgence of corporate power and the resurrection of free-market ideology and trade policy. As a result, economic insecurity increased for average households in most advanced democracies for a forty-year period under both centre-right and (to a somewhat lesser degree) centre-left governments.
The relief programs put in place in the early months of Covid-19 in Canada (CERB, etc.) were critical to containing the economic damage caused by the virus, but they are also testament to the inadequacy of our existing social protections and automatic stabilizers. Pre-pandemic Employment Insurance, for example, covered far too few of the unemployed and covered them inadequately. In other words, the pandemic has made inescapable the need for long-term investments in public health, housing, child care, long-term care, home care and income supports.
For the past forty years, our governments’ overriding focus on limiting debt coupled with a reluctance to raise taxes, has severely narrowed our sense of what is affordable and therefore what is possible in the way of safety net protections and equitable growth. Numerous polls show that in the waning days of Covid-19, the public generally wants the same things it has always wanted: decent work and wages; access to healthcare; affordable child care; good education and training; income support when we are in trouble; a secure retirement income; safe and livable communities; a healthy environment; and a fair and inclusive democracy. In the 1980-2020 period, however, we became less convinced that a safe and secure future was affordable. In short, fiscal policy at both the federal and provincial levels centred on debt avoidance and tax reduction that constrained government spending, ushered in an unprecedented upward transfer of wealth, and stunted our political imagination.
Then, in the Spring of 2020 with the arrival of COVID-19, everything began to change as the world was confronted with health and economic challenges for which there were clearly no private sector solutions. If governments had to run large deficits to keep families healthy and save badly needed jobs, well, the public was with them. With the progressive Canadian and U.S. budgets tabled this Spring (April 19 in Canada and May 28 in the U.S.) the end of the austerity era was made official.
Gary Gerstle, an American historian at the University of Cambridge, has argued that “the last eighty years of American politics can be understood in terms of the rise and fall of two political orders.” The first was the “New Deal order,” which began in the thirties, when president Franklin Delano Roosevelt established a social safety net that Americans eventually took for granted. This “era” lasted roughly thirty-five years. Next came the “neoliberal order” (starting in the late 1970’s) during which large parts of that safety net were unraveled. The axioms of neoliberalism—for instance, that deficit spending is reckless, free markets are sacrosanct, and the government’s main job is to get out of the way of the private sector—were triumphant.
And then, with the arrival of Covid-19, the “neoliberal era” suddenly collapsed and recently maligned deficit spending became desperately needed “investments in the future”.
Illustrating the new fiscal order, the Biden Administration’s split from recent Democratic presidents on fiscal policy has been dramatic and is evident in the White House’s three major legislative initiatives to date: the American Rescue Plan ($1.9 trillion); The American Jobs Plan ($2.3 trillion) and the American Families Plan ($1.8 trillion).
In his May 28 budget, President Biden proposed $6 trillion in new spending and $3.6 trillion in tax increases on wealthy Americans and big corporations to pay for his plans to combat climate change, reduce income inequality and significantly expand the nation’s social safety net.
For the wealthiest American taxpayers, the proposals would mean higher taxes on their income, the sale of their investments and the transfer of their assets when they die. Starting at the end of 2021, the top American individual income tax rate would rise to 39.6 percent from 37 percent, reversing the Trump administration’s tax cuts for the highest income taxpayers. The new rate would apply to income over $509,300 for married couples filing jointly and $452,700 unmarried individuals.
Taxes on capital gains — the proceeds of selling an asset like a stock or a boat — for people earning more than $1 million would be taxed as ordinary income, effectively increasing the rate wealthy individuals pay on that money to 39.6 percent from 20 percent.
American corporations will also face a higher income tax rate, an increase to 28 percent from the existing 21 percent, as well as a crackdown on profit shifting and the end of tax breaks for energy companies that pollute the environment. A beefed up Internal Revenue Service would be standing watch to ensure that the federal government can afford to chase rich tax cheats.
The wholesale rejection of fiscal austerity isn’t the only thing that has changed dramatically in the U.S. So has the underlying analysis (at least on the centre-left) of what has been driving the dramatic growth in inequality in that country.
The Clinton and Obama administrations tended to view widening inequality as a kind of natural phenomenon—the inevitable result of structural changes in the economy, led by greater automation and increased global trade and competition. The Biden team views inequality much more as a function of wrong-headed government policies—policies that over the past 40 years have weakened workers and strengthened the corporate sector’s marketplace leverage. To a greater degree than Obama’s and especially Clinton’s teams, the Biden team believes that generating widely shared prosperity isn’t possible without aggressive government intervention.
When president Biden touted his economic plan in his recent speech to Congress, he spotlighted an unusual fact: “Nearly 90 percent of the infrastructure jobs created in the American Jobs Plan do not require a college degree; 75 percent don’t require an associate’s degree.”
It’s hard to imagine Clinton or Obama highlighting such a fact, much less touting it as a benefit. Both former presidents centered their economic agenda on the belief that many jobs considered “low skill” were doomed to disappear, because of either automation or global economic competition. The key to sustaining middle-class incomes, they believed, was to train more Americans for higher-paying jobs in advanced industries. That conviction undergirded their support for free-trade pacts such as Clinton’s North American Free Trade Agreement and Obama’s (never realized) Trans-Pacific Partnership, which they portrayed as levers to create such jobs. “We cannot stop global change,” Clinton declared when he signed NAFTA in 1993. “We can only harness the energy to our benefit … Every worker must receive the education and training he or she needs to reap the rewards of international competition rather than to bear its burdens.” More than 20 years later, Obama distantly echoed those remarks when pushing his Asian (TPP) trade deal.
In short, the skills explanation offered both Democratic administrations an excuse to largely ignore what was, in fact, the real cause of growing inequality: namely a policy framework that led to ever greater bargaining power for corporate America – at the expense of American workers.
More specifically, the skills-gap theory couldn’t account for two key trends: the rising share of income and wealth concentrating in the top 1 percent, and the slowdown in wage growth even among university graduates, who were supposed to benefit from the digital revolution. The skills gap also carried an unpleasant whiff of blaming workers for their stagnating wages, with the implication that they could solve their problems if they just pulled up their socks and devoted themselves to obtaining more education.
Perhaps the most important thing to understand about the present moment is that the center-left (including the Trudeau government and the Biden Administration) has totally abandoned, and appropriately so, the skills and education gap framework for understanding wage stagnation and inequality. What has replaced it is much greater attention to the huge increase in employer bargaining power over the past forty years that came at the expense of workers.
The end of the austerity era in Canada
The April 19 Canadian budget was historic in terms of its scale: the federal government is planning on an additional $102 billion in spending over the next three years. However, the economic picture has improved substantially since the 2020 fall fiscal update, leading to an additional $70 billion in tax revenue over those years.
As a result, while the spending in the federal government’s 2021 budget is historic, the federal deficit is actually projected to decline rapidly. It will be halved by next year, halved again the year after and halved a third time by Year 4. To boot, we’ll be spending less on national debt payments than we have in a century, despite the COVID-19 pandemic and all new spending initiatives (adjusted for GDP).
The budget is also historic in terms of its commitment to the “care economy”. Generations of child-care activists are sighing a huge breath of relief — finally, the federal government is moving on a national child-care plan. Secondly, the pandemic forced us to deal with terrible mortality rates in long-term care, and it looks like national standards are on their way, although not for another year.
The national child care plan announced in the budget is the most ambitious and potentially transformative child-care plan in Canada’s history. This plan is twice the size of the plan promoted by former Progressive Conservative prime minister Brian Mulroney in 1987, seven times larger than the 1993 Liberal Red Book plan and four times the size of the 2005 plan by former Liberal prime minister Paul Martin (adjusting for GDP). The focus of the 2021 plan is also on child-care fees. The fee reductions are ambitious, if achievable. Obvious gains should come fairly quickly for parents by 2022. A focus on new spaces and improved worker wages plays a secondary role, but they are there. A focus on non-profit providers as the key to affordable expansion is also present.
Unfortunately, only one-third of the spending in this budget will still be there in the third year; most of it winds down rapidly. In the short term, there will be extensions to business support programs, unemployed worker supports, housing and homelessness, hard-hit sectors (like the arts and tourism), and students (employment and student loan deferrals). The major measures to survive outside of a few years will be child care, long-term care and some business support measures, a portion of which will be for clean fuels and climate resiliency.
Workers and businesses will see continued short-term support until September (enhanced EI, employer wage subsidies, etc.), although longer-term change in those areas is harder to assess.
Finally, the budget gave an important boost to the Canada Worker’s Benefit (CWB) and increased the federal minimum wage. The CWB is an income-tested wage supplement. The budget proposes to make enhancements to the CWB starting in 2021, including raising the income level at which the benefit starts being reduced from $13,194 to $22,944 for single individuals without dependents and from $17,522 to $26,177 for families. Also helping low income workers is an increase in the federal minimum wage to $15/hr. from $14/hr..
What more needs to be done?
First, there is an enormous amount of work still to be done in implementing the $10/day child care program and the reform of long-term care. Moreover, both the federal and the provincial governments have been relatively silent on the issue of home care. As in the US budget, home care in Canada should have equal standing with long-term care in ensuring our seniors have a safe, nurturing and affordable home in their final years.
With respect to child care, federal-provincial agreements must still be negotiated to determine provincial contributions (as well as many other things) to Canada’s new $10/day child care program.
National long-term care standards promised in this budget are also critical. Any federal standards must obviously come with new funds and accountability for how that money is spent. Federal/provincial discussions are continuing on national standards for long-term care and need to be wrapped up quickly so that badly needed funding can flow to long-term care homes to improve the level of care.
The pandemic has also taught us how inadequate Canada’s Employment Insurance program was and how much better it could be after experiencing the Canada Emergency Response Benefit (CERB). Some of what was learned will be extended, particularly coverage of the self-employed. But many other important changes will have to wait further study and consultations. On the positive side, there does appear to be a commitment for the continued low entrance requirement of 420 hours no matter where you live.
While not a budget item per se, it is absolutely imperative that the labour market floor be gradually raised through regular increases in the minimum wage and the strengthening of other labour market standards (at both the federal and provincial levels). Moreover, in order to begin to level the playing field between employers and workers, a new collective bargaining paradigm needs to be implemented to allow unions to once again become a force in the private sector. This can be done by gradually moving away from the Wagner Act bargaining model (i.e. enterprise level collective bargaining) and towards some sort of sectoral model of collective bargaining.
Last, but certainly not least, is the question of how we pay for these improvements. The government is borrowing at historically low interest rates, so while the deficit is far larger than normal, these aren’t normal times, and the deficit is manageable — especially if governments implement progressive, long-term tax reform.
However, unlike in the US, Canadians saw few fundamental tax changes in our most recent budget. There is the new luxury car/boat/plane tax and a corporate income tax (of sorts) for foreign digital giants, but a wealth tax, an increase in the corporate tax rate (as in the U.S.) or new top individual tax brackets are nowhere to be found.
The truth is that taxing the very rich can raise a lot of money, but it cannot raise enough money to create a fully adequate full-employment, welfare state for either the United States or Canada.
To get there requires popular support for at least some broad-based tax increases that would hit the middle class as well as the very rich. That said, it is likely that public opinion is not there yet in Canada, and it’s probably wise of the Trudeau government to shy away from broad-based tax increases at least until after the expected Fall election.
At a May 27 event at Cuyahoga Community College in Ohio, Biden said:
“When it comes to the economy we’re building, rising wages aren’t a bug; they’re a feature. We want to get — we want to get something economists call “full employment.” Instead of workers competing with each other for jobs that are scarce, we want the — the companies to compete to attract workers.
That kind of competition in the market doesn’t just give workers more ability to earn a higher wage, it gives them the power to demand to be treated with dignity and respect in the workplace. And it helps ensure that in America — when you walk into work, you don’t have to check your right to be treated with respect at the door.”
A new, progressive era is upon us and those calling for a return to fiscal austerity in Canada (eg. the Business Council of Canada, the Canadian Bankers Association and the Canadian Chamber of Commerce) need to be seen as cranky, marginal voices on the far right.
It’s the economy, stupid, and those who understand the fundamentals of equitable growth are firmly in charge – on both sides of the border!