It’s time to deal with Canada’s inequality problem

But not the Covid related downturn of 2020 and subsequent upturn. As detailed above, after forty-plus years of austerity economics, the federal government stood by Canadian workers – and what an economic payoff!

(Of course, federal expenditures on employer-based wage and rent subsidies actually exceeded the support for unemployed workers –  but at least in this recession it was close!)

When Covid first hit, Canada’s lockdowns were amongst the most severe in the world. That resulted in the sharpest downturn since the Great Depression— an incredible 17% drop in Canadian GDP in the first two months of the pandemic. Three million people lost their jobs. By the end of January, 2022, 108% of those jobs were recovered. In fact, the jobs recovery in Canada was the strongest, as of the end of January, 2022, in the G7. GDP is almost fully recovered. And even that doesn’t tell the full story, because Canadian households, on average, have more savings and less debt than they had before the pandemic struck. Canadian small business has been remarkably resilient. Again, as of the end of January, the number of bankruptcies are lower than before the pandemic, and there are more active businesses today than before the pandemic.

In contrast, for four decades every new sign of a more vigorous recovery set off a wave of fearful debates: Is demand already running ahead of the supply in place during normal levels of production? Is the economy running too hot with the risk of inflation?

In the recent past, this anxiety led to two failures of thinking: The primary solution it ended up elevating — having the Bank of Canada “put the brakes” on the economy by raising interest rates and the federal and provincial governments ending stimulus too early — does little, if anything, to solve supply and demand dynamics outside of depressing demand. It also ignores the possibility of great news about our economic potential: Demand running ahead of what we’re used to could actually mean we’re finally in the early innings of a boom along the lines of the post-war boom.

A boom, defined more precisely, is more than just faster growth: It’s an extended period when spending pushes against the productive potential of the economy, which creates pressure on employers to increase wages and make capacity-boosting investments. An economy in such a healthy state feels like an unfamiliar, even uncomfortable, idea to many Canadians because for the past forty years, we’ve rarely experience it.

Booms also raise productivity, as higher wages, scarce labor and strong demand create both the incentive and the opportunity for innovation among business owners and executives. They also create a more equitable and fair distribution of income, a welcome development after decades of increased inequality and wage stagnation.

In short, there’s considerable power in having the confidence that you can find a better job.

It will most likely mean higher wages. But it can also mean workers don’t need to put up with sexual harassment. It means that managers who engage in racial discrimination will lose out to those who don’t.

It’s not that quitting a job is a political act (much less a means for discovering a more meaningful life), but more that government giving people the ability to quit is a profound political accomplishment, something that empowers ordinary people in a real-world sense. And note that this is all about expanding demand for labor. It’s the knowledge that employers are hiring and paying good wages that creates empowerment — constraining the supply of labor doesn’t have the same impact. So we should see the current elevated job vacancy rate as a real accomplishment. But the important part is the hiring surge; the record number of unfilled jobs is a complement.

In addition to a coherent pro-jobs fiscal and monetary policy, there are three other key building blocks that must be put in place if Canada is to have sustained progress towards a more equitable, full employment economy: 1) a more sophisticated approach to government economic planning that can, amongst many other things, deal with the micro-economic challenges of inflation; 2) a social safety net that supports upwards wage pressure in the bottom two-thirds of the labour market; and 3) a new collective bargaining model that puts unions back in the game in the private sector.

In the remainder of this post, I will deal with the need for more sophisticated government economic planning to deal with today’s inflation. In a subsequent post, I will propose ideas to strengthen the safety net and get unions back in the game in the private sector.

Fighting inflation in the Covid era: Moving beyond raising interest rates to shaping efficient markets

In these early days of 2022, business and many economists have been loudly calling for the Bank of Canada to raise interest rates to deal with inflation. Inflation is real and the federal government would be negligent if it claimed otherwise. That said, there are other options for dealing with inflation that are more consistent with the twin goals of full employment and higher wages. Dealing with the micro-economic challenges of today’s inflation is just one area that illustrates the need for Canada to develop the capacity to not just “fix” markets but to “shape” them.

The most important thing to understand when confronting today’s inflation is that the economy tends not to adapt well to big changes like a shutdown followed by a restart (and repeat) that has been the pattern in the Covid economy. These jolts cause severe supply chain problems which is the primary (although not the only) source of our current inflation. When these stop/start jolts come after decades of shortchanging workers, it is no wonder that in a tight labour market, low paid workers will quit their jobs to seek better opportunities. If and when this begins to translate into sustained wage increases, it should not be seen as a problem but rather as an opportunity to rectify decades of weak (inflation-adjusted) wage growth.

Moreover, given that a large proportion of today’s inflation stems from global issues – like chip shortages (the auto sector) and the behavior of oil cartels – it is a gross exaggeration to blame inflation on a tight labour market and excessive wage growth in Canada.

In short, raising interest rates is not an effective way of dealing with today’s inflation challenge and it unnecessarily hurts workers that have seen their wages stagnate for forty-plus years.

So what should Canada do about Covid-related inflation?

First, the Bank of Canada should make just one .25% increase in its overnight rate in 2022.

Secondly, the federal government should view inflation as a set of discrete, micro-economic challenges and act accordingly.

Here are three areas where Canada can take a more structural approach to inflation: temporary tax cuts to shield vulnerable workers from inflation, using competition policy to deal with excess corporate concentration in key markets, and price controls.

On Feb. 7, the federal government announced that it was launching a broad review of Canada’s competition laws for the first time in more than a decade amid concerns that the country’s Competition Bureau lacks sufficient enforcement power to effectively block monopolistic, anti-consumer practices.

François-Philippe Champagne, Minister of Innovation, Science and Industry, announced that the government will assess ways to improve the Competition Act. Ottawa’s priorities include closing loopholes that allow for harmful corporate conduct and adjusting the penalty structure to serve as a more effective deterrent against anti-competitive behaviour.

According to the government, the review will ensure that Canadians are protected from anti-consumer practices in critical sectors, including the oil and gas, digital services such as Facebook and Google, telecommunications and financial services sectors.

Reforming Canadian competition policy so that it better deals with anti-consumer corporate concentration is a long-term project. However, one short-term action that can be taken immediately is a ban on noncompete agreements in federally regulated sectors. While Ontario recently passed such a law, the Ontario ban does not apply to federally regulated industries with major competition problems, like telecommunications. Ever wonder why Canadians pay among the highest cellphone bills in the world? Hint: it has something to do with the fact that three telecommunications companies in Canada have a 91 per cent share of cellphone market revenue.

Companies in federally regulated sectors have continued to use noncompete agreements left, right, and centre to stifle competition in ways that the Competition Bureau cannot touch. These agreements permit employers to dictate what employees can and cannot do after leaving a job, even when they are no longer employees. Resorting to tools like noncompete agreements presents a simple way of stopping in-house talent from becoming a competitor. Noncompete agreements should be banned at both the federal and provincial levels.

Temporary income tax cut financed by a corporate excess-profits tax: Because creating efficient markets through competition policy is such a long-term project, a temporary excess-profits tax on large corporations that had excessive profits directly related to the pandemic, would be useful. If the revenues raised through these taxes are used to pay for a one-year income tax cut for low to moderate income earners (i.e. the first two tax brackets covering individuals making $98,000 or less), such a tax would be especially useful. This would help average Canadians deal with the temporary increase in prices due to Covid related supply chain issues.

How would an excess profits tax work? Simple. By taxing companies that made windfall profits directly because of Covid.

For example, while thousands of brick-and-mortar stores were closed by government to reduce Covid transmission, Amazon’s Canadian sales sky-rocketed. Cloud computing, which is also an area where Amazon dominates through its AWS subsidiary, also exploded.

Moreover, stores like Walmart and Costco, which compete directly with thousands of brick and mortar stores that were closed to reduce Covid transmission, also saw dramatic sales gains because in most provinces (including Ontario), they were allowed to keep their non-food operations open while their bricks and mortar competitors selling the exact same non-food items were forced to close.

Remarkably, the federal government appears to be taking the first (baby) steps towards implementing an excess profits tax. Ottawa will soon be increasing the corporate tax rate on bank and insurer profits over $1 billion by 3 percentage points to 18 per cent. The government has also announced a vaguely defined, temporary Canada Recovery Dividend to be levied on large banks and insurers because they’ve bounced back quicker than other industries. The measures would raise a combined $10.8 billion over the next five years, according to the Liberal Party platform.

Price controls: With the advent of World War Two, Prime Minister Mackenzie King was determined to avoid the problems of greed and inflation which had plagued Canada during the First World War. In 1939, he established the Wartime Prices and Trade Board, with the aim of stopping prices and wages from spiralling out of control.

Initially, the Board did relatively little, putting on partial limits on rents, coal, sugar, timber, steel, milk and a few other goods. But in 1941 the cost of living began to rise sharply. In a radio broadcast, King announced a freeze on prices and the setting of levels for wages and salaries.

The Board built up a huge structure of 13 regional offices and 100 local offices, whose staffs were not always popular. Controls resulted in the shortage of certain goods and some poorly-made products reaching Canadians. But the cost of living, which had risen 17.8% from 1939 to 1941, increased only 2.8% from 1941 to 1945, the most successful record among all the major nations in the war.

Canada’s only experience in peacetime with broad-based price controls occurred 1975-78 in response to the exceptionally high inflation rates of 1974-75. The federal Anti-Inflation Act established a 3-year controls system. Wage guidelines were binding on all firms with 500 or more employees, on all federal employees, and (with the agreement of the majority of provincial governments) on most other public-sector employees. Profit-margin controls restricted the price and cost markups of large firms. Although the magnitude of the effect of the legislation is debatable, empirical analysis has generally supported the claim that the controls program did reduce inflation below the level that otherwise would have prevailed.

That said, across-the-board price controls are not the answer to today’s inflation. The federal government simply doesn’t have the expertise to impose such controls effectively. However, Canadian governments do have a track record of successful price controls in selected sectors that carry on to this day and government should not be shy in using them. Moreover, in a few sectors, these controls should even be strengthened and broadened.

For example, prices at the gas pumps are a major contributor to today’s inflation. The Canadian government has the constitutional authority to regulate gasoline prices only in an emergency. However, provinces and territories can regulate gas prices, and Quebec and the Atlantic provinces do so. Provinces without gas price regulation regimes should look closely at gas price regulation in the eastern provinces and implement gas price regulation regimes tailored to their provinces.

The federal government does have the authority to regulate drug prices and has done so for many decades.

The Patent Act establishes the Patented Medicine Prices Review Board (PMPRB) with a mandate to regulate the prices of patented medicines sold in Canada to ensure that they are not excessive and to report to Parliament annually through the Minister of Health.

On Dec. 23, Health Minister Jean-Yves Duclos delayed the implementation of new rules to lower the price of drugs. The new rules, meant to reduce patented drug prices that are among the highest in the world, will now come into effect on July 1, 2022 rather than on Jan. 1, 2022 as previously scheduled. The name brand pharmaceutical industry has long fought this new drug price regime and they always will. The government should ignore the industry lobby and implement the new rules as soon as possible.

Whether through a temporary income tax cut paid for by a windfall profits tax, competition policy reform and enforcement, or price controls (or all three), it’s important for the federal government to do what it can to prevent hugely-profitable monopolistic corporations from raising their prices. Otherwise, responsibility for controlling inflation falls entirely to the Bank of Canada.

The postwar period in Canada involved a widespread public consensus that Canada ought to develop a mixed economy, strive towards full employment and gradually implement key elements of a comprehensive welfare state. The achievement of unemployment insurance, child benefits, the CPP and OAS, and publicly-funded healthcare and education were justly celebrated. Unions, too, were assumed to play an ongoing part in the Canadian economy – in both the public and private sectors.

In the 1980-2020 period, this postwar consensus fell apart and Canada, along with many other advanced, capitalist democracies saw deepening inequality.

Then Covid-19 hit and the urgent need for bold government action began to chip away at the flawed orthodoxies of the past forty years.

In a subsequent post, I will deal with the need to expand the social safety net and create a collective bargaining framework that will allow unions to get back in the game in the private sector.