The myth of income inequality

Capitalism lifts all boats

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Roslyn KuninVANCOUVER, BC, Jun 19, 2014/ Troy Media/ – Capitalism has been getting a lot of attention lately, not all of it favourable.

Capitalism in the Twenty First Century, a recent book by the French economist Thomas Piketty, has often been compared to an earlier famous book, Capital, written by Karl Marx and released in 1867. Marx predicted that capitalism contained the seeds of its own demise. His thesis was that the exploitation by the capitalists of everyone else would lead to violent revolution, the rise of communism and the end of the capitalist system.

History has proved him wrong. Capitalist economies have displayed growth and rising standards of living even for working people. Not so with communism.

Undeterred, Piketty search for the seeds of the failure of capitalism today finds them in growing income inequality.

His thesis is not as obvious as one might think. On the global level, the numbers and percentages of the very poor (living on less than $2 per day) have been declining rapidly. In fact, for the first time in history, more people on earth suffer from obesity than malnutrition.

But narrow your focus to very recent times in what is still the world’s richest economy, the United States, and the gap between the very rich and the rest of society is growing. However, it is relative, and not absolute, income levels that are changing: growing inequality is consistent with rising incomes for everyone if the incomes of those at the top are increasing faster.

Mark Carney, governor of the Bank of England and former governor of the Bank of Canada, has now weighed into debate and added his voice to those using inequality to attack capitalism as it currently operates.

At a conference organized and attended by one percenters, Carney defined inclusive capitalism by three components:

1)    relative equality of outcomes

2)    equality of opportunity and

3)    fairness across generations.

Unfortunately, not all three components are necessarily attainable. There is the famous line that contractors offer their customers: good, cheap, fast – pick two.

Fairness across generations is attainable, but not easily.

For the young, society must insure that it maintains its infrastructure so that they do not inherit failing power systems and crumbling bridges. The current generation must also pay for these public goods so the next generation is not burdened with its debt.

With the removal of compulsory retirement, seniors have taken a great step forward in achieving fairness because they now have on-going access to the labour market and earned income. But at some point most Canadians will have to live on fixed incomes and/or savings and inflation could quickly reverse that trend, so society must make very sure it is kept moderate.

Equality of opportunity starts with basic education. Unfortunately, it is difficult to analyze how effective we are in this area as there are no measures of, or accountability for, student outcomes. On the other hand, with certain exceptions in agriculture and some professions, Canada does have relatively open access to jobs and the freedom to start and operate businesses.

That leads us to the third component: fairness across generations and our desire for some sort of equality of outcomes.

To give Carney his due, he did say relative, not absolute, equality of outcome. Presumably, this means taxing those at the top to provide for those at the bottom, a sentiment Thomas Piketty would heartily agree with.

However, the devil is in the details. Taxing the rich too highly will result in less wealth, jobs and tax revenue. Subsidizing the poor too generously will discourage working and the independence it creates. The optimum levels of taxation and subsidies are very hard to determine.

This does not mean that the rich should not be taxed and the poor should not be helped, which Canada does well now.

If we look at gross incomes in Canada before taxes and government transfers, there is indeed growing income inequality. But if we look at what Canadians actually have to live on, after taxes and government transfer payments, unlike in the United States the income distribution is unchanged.

Maybe capitalism in Canada is already inclusive enough.

Troy Media BC’s Business columnist Roslyn Kunin is a consulting economist and speaker and can be reached at www.rkunin.com.

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