The postwar period in Canada involved a widespread public consensus that Canada ought to develop a mixed economy under the auspices of Keynesian economics and the development of a comprehensive welfare state. The achievement of unemployment insurance, child benefits, public pensions, and publicly-funded healthcare and education were indicative of this more inclusive, egalitarian Canada which also invited unions to play an ongoing part in the Canadian economy.
After 1980, this consensus began to fall apart and Canada (along with many other advanced, capitalist democracies), entered a period of growing inequality. Inequality is corrosive. It rots societies from within. Competition for status and goods increases; cultural narratives devolve into vapid claims of superiority; and reality for many people becomes untethered from knowledge thereby threatening the very foundations of democracy.
Perhaps we might start by reminding ourselves and our children that Canadian capitalism didn’t always require so much inequality. There was a time in the not so distant past when the actions of our governments allowed us to order our lives differently.
The leaders who brought us neoliberal globalization, deregulation and the financial crisis in the decades after 1980 accomplished very little relative to an earlier generation of leaders. That earlier generation won World War II, helped to rebuild Europe and Japan, and built the mixed economy and welfare state that now define Canada. They also presided over four decades of economic growth that flowed to all income groups.
By contrast, governments of the last 40 years produced four decades of stagnant wages for most workers and inequalities of income and wealth not seen since the 1920s. They brought us financial deregulation and the financial crisis of 2008.
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.
After forty years of austerity politics, the federal government appears to be slowly tacking back towards an updated version of the postwar consensus. This post will explore two essential elements of such an updated consensus: a new commitment to a high wage, full employment economy and a micro-economic approach to fighting inflation. A subsequent post will explore ideas to get unions back in the game in the private sector and to strengthen Canada’s social safety net.
Harnessing fiscal and monetary policy towards the goal of full employment
So, what has changed in Canada in the past two years that represents a shift back toward the postwar consensus that dominated economic policy from 1940-1980?
The most important change is that the federal government has begun to re-orient fiscal and monetary policy towards the goal of full employment.
Transitioning from an economy in which workers compete for employment — to one in which employers compete for workers — is a more radical change than many realize. If workers win higher wages, some low-wage, low-productivity employers will go out of business. Which isn’t to say that workers’ gains will be zero sum. A high-wage economy will also be one replete with demand for businesses that don’t depend on cheap labour to make ends meet. And it will also encourage more investment in automation and thus advances in productivity.
The April federal budget (including the unprecedented Covid related spending) is a good indication of how quickly things have changed in only a short time.
The April 19 budget was historic in terms of its scale: the federal government added an additional $102 billion in spending over three years on top its unprecedented Covid spending. There are many worthwhile initiatives in Chrystia Freeland’s budget (first and foremost the establishment of a national $10/day child care system) but for the purposes of this article, I will touch on just one: Repairing Employment Insurance.
The pandemic has taught us how inadequate Canada’s Employment Insurance program was and how much better it could be.
In 1990, the federal government stopped contributing to the program, making it financed entirely by worker and employer contributions. In 1996, the program was renamed Employment Insurance under the Chretien government and entrance requirements were increased substantially, more than doubling in some instances. Finally, coverage dropped to around 50 per cent of the workforce – down from almost 95% in 1971 under the government of Pierre Trudeau.
And things went downhill from there – until Covid hit.
As of the Spring of 2020, EI coverage was down to about 39% of unemployed Canadians. As a temporary measure to support those who lost their jobs because of Covid, the Trudeau government created first the Canada Emergency Response Benefit (CERB) and then the Canada Recovery Benefit (CRB). The CRB, was designed for the unemployed who do not qualify for Employment Insurance (EI) and was extended until October 23, 2021. The CRB included most people who are self-employed or are independent contractors, sometimes called gig workers. Neither are eligible for regular EI benefits.
On Dec. 16, the Canada Worker Lockdown Benefit (CWLB) was passed into law providing temporary income support to employed and self-employed people who cannot work due to a COVID-19 lockdown.
Those eligible receive $300 ($270 after taxes withheld) for each 1-week period. The benefit was backdated for eligible recipients to October 24, 2021. The benefit is scheduled to end on May 7, 2022. The CWLB is the major source of support for the tens of thousands laid off because of the Omicron wave.
We rarely admit that Canada’s high level of income (and ultimately wealth) inequality is a policy choice that we make. In recent recessions, the federal government response was inadequate and left business and (especially) workers on their own.
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.
Contrary to what many people seem to believe, the U.S. Federal Reserve and the Bank of Canada don’t have a magic wand to bring down inflation quickly and painlessly. They can’t unclog the ports, increase oil production, build more affordable housing, or procure more semiconductors for cars. Their limited tools—interest-rate changes plus purchases and sales of government bonds—can directly affect credit conditions in the economy. But these changes affect prices and wages only indirectly, and do so gradually over a considerable time period. What the Federal Reserve and the Bank of Canada do have the capacity to do fairly quickly, if they get things wrong, is crash the housing market, the stock market, and the economy.
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.
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