The Inequality Trap: A Meaner Canada

“Inequality is corrosive. It rots societies from within. The impact of material differences takes a while to show up but in due course competition for status and goods increases; people find a  growing  sense of superiority (or inferiority) based on their possessions; prejudice toward those on the lower rungs of the social ladder hardens; crime spikes and the pathologies of social disadvantage become ever more marked.  The legacy of unregulated wealth creation is bitter indeed. “   Tony Judt

The Conference Board of Canada is the latest to sound the alarm.  Inequality in Canada is growing at a rate even faster than in the  U.S.   The wealthy are capturing an ever-increasing share of our economic growth.  We see inequality growing.  We see and feel its consequences.  We know that inequality, if allowed to just keep growing, gradually erodes  trust,  divides us,  dampens aspirations.   Yet we seem unable to reverse course.   And the longer we wait the further we fall into the inequality trap.

We opt out or act out

Too much inequality undermines our sense of fairness, and whether in a firm, an organization,  a country, when things are unfair, we opt out or act out.  Here, the “ultimatum game” is instructive.  This experiment, developed by behavioural economists, was intended to test how we make decisions.  It’s an experiment  you can try at home.  All it takes is two willing participants and ten bucks.  Tell the participants that you will give one of them the ten and it is entirely up to that one to decide, without negotiation,  how to distribute the money between the two.  If the other accepts the split, both get to keep the money.  If, however, the second person does not accept, they both lose everything.  Those who argue that we are driven by profit maximization would predict that the “decider”  will keep most of the money, say 8 or 9 dollars, and share only 1 or 2.  After all, the “receiver” is surely going to take something over nothing.

Well, that’s not how things actually turn out.  There are of course cultural and social differences in how people decide, but most people distribute the money more or less evenly and, more interestingly, if they do not, if the recipient is offered too little, they will often refuse the money – and everyone loses.   Why refuse?  Because they believe the distribution to be unfair and they would rather opt out entirely, refuse the meager money, than be party to an unfair transaction.  And everybody loses.

Fairness is not some secondary consideration.   When citizens feel excluded or unfairly treated,  they too retreat, they don’t vote, they don’t participate, they give up, they act  out.   The certainly don’t want to pay taxes to “a system” that they think is rigged.  And everybody loses.

A divided society

When Warren Buffett argued that the rich should pay more than they do (heck, even Adam Smith believed in progressive taxation), across the U.S. media we were told what a dangerous idea this is. Why would we penalize productive folk only to give the money to the unproductive?  Why do we penalize success, they ask?  Here, in Canada, the language is softer.  Why would we tax so-called job-creators?  Of course there are important economic considerations in how much and whom we tax – but “job creators”? As though they  do not benefit from earlier generations more willing than us to sacrifice and pay taxes to build and defend a country of opportunity? The rest of us somehow do not contribute to the growth in the economy through our labour, consumption and creative ideas?

We are most of us job creators when we have the money to buy goods and services, the skills and education to work productively and the confidence and support to pursue innovation and entrepreneurship. These justifications for endless tax cuts on the rich and powerful aren’t economics – they flow out of a blinding sense of superiority or narrow ideology.

But in an extremely unequal society the very rich and corporations gain too much influence.  In the competition of ideas, money always talks – but with extreme inequality money talks even more loudly.  And undoubtedly that has an impact on how we see problems and what solutions we can imagine.  We  start to internalize the talk.  At worst, some begin to think of themselves as inferior,  that others are the job and wealth creators.   Many simply feel increasingly powerless and come to view government as a foreign thing, serving  its own interests or the interests of the powerful few.  They lose faith. And they lose hope.  And the inequality trap is sprung.

If we lose trust in government,  we may cut ourselves off from the very things that might help to turn things around – progressive taxation, greater opportunity and a hand up for the poor, excellence in education, healthy  and culturally vibrant communities.   And inequality grows.

This is the rot that Judt is talking about.   In a society with just a few winners and many losers, a case can be made that everybody truly loses.   When he argued for higher taxes on the rich, Buffett also said  that the rich people he knows are generous and giving and want what’s best for the country and their kids.  They too then pay a price when they live in gated communities, when they live in fear, when the distance between us turns us into caricatures or turns us against each other.

And of course we are all losers when too much inequality hurts our economic competitiveness. We know that extreme inequality throttles demand for goods and services, constrains the supply of skills and talent, and drives up household debt.   Working families increasingly struggle from paycheck to paycheck and turn to borrowing and credit to maintain their quality of life.  The super rich don’t pour their abundant and increasing levels of cash into the mainstream economy but rather drive up costs in niche luxury markets  and invest in increasingly speculative ventures often far from home.  And the human costs of inequality  – poor physical and mental health and a host of pathologies  – are expensive.  They inevitably divert capital that could be better used for investment in our betterment and savings to strengthen our resiliency.  And pretty much everybody loses.

And as inequality grows, unchecked, we become a meaner place.

Breaking out

Breaking out of traps, we all know, is harder than getting in.  But the clues for what to do are out there.   If we do not act now, it  will be harder and harder to reverse course.  Generation after generation of Canadians have found the answers that fit the times.  Our prosperity and quality of life are built on their efforts.  We now must rise to the challenge.

When governments say, as they often do, that they will focus on the economy, they will surely fail if that does not include a focus on inequality.

We have to be as demanding of our politicians to justify tax cuts and tax breaks as we are for spending.   We need to ask of all government proposals – how will they help reduce  growing inequality – or will they make things worse?

We cannot opt out – we have choices to make about the Canada we want.

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