A phony class war

Andrew Coyne on why the Occupy Wall Street movement has it wrong
VANCOUVER, BC - October 15, 2011 - Thousands of "Occupy Vancouver" demonstrators gather in the heart of Vancouver’s financial district to express anger at the current banking and economic structures on October 15, 2011. Several dozen demonstrators also set up tents to occupy the park space in front of the Vancouver Art Gallery for an undetermined amount of time. (PHOTO BY SIMON HAYTER FOR MACLEAN’S MAGAZINE)
A Phony Class War
Photographs by Carlo Allegri

Was there ever a more ersatz political movement than that which purported to “occupy” Canadian cities over the last week? The Occupy Wall Street protest on which it was modelled may betray the same cartoonish understanding of the world, but it at least reflects the genuine despair felt by many people in a country with a number of deep and serious problems: a housing collapse that left millions with homes worth less than their mortgages; a financial sector that, having lent the money to buy these homes to people who couldn’t afford them, then resold the bad loans via opaquely bundled securities to others—then had to be bailed out when the whole house of cards collapsed; high and seemingly intractable levels of unemployment, poverty at a 17-year record, declining social mobility, and a general stalling in income growth. The reasons for these may be debated, but if you lived in the United States, you would have good reason to be ticked.

By contrast, well, let’s just run down the list, shall we? Canada did not have a housing bubble, hence had no housing collapse, nor the resulting epidemic of mortgage failures. Our banks did not get overextended, did not have to be bailed out, and are lending, again unlike the U.S. banks, at a good clip. Unemployment is not rising in Canada, but has been falling steadily for more than two years: at 7.1 per cent, it is still above its pre-recession lows, but remains lower than at virtually any other time since the 1960s. Ditto for poverty: even when measured against a moving target like Statistics Canada’s low income cut-off, it is just off its 40-year low, at 9.6 per cent, from a peak of 15 per cent in the mid 1990s.

The observed stagnation of income growth in recent decades is more a phenomenon of periodic recessions, and associated spikes in unemployment, than a generalized inability to get ahead. Outside of recession years, median incomes have in fact grown steadily. In the long boom from 1993 to 2008, for example, median family income grew by 21.5 per cent after inflation. Indeed, it is hard to reconcile the supposed stalling of living standards with the spread in ownership of a wide range of household appliances that were once affordable only to the few. Since 1980, the percentage of Canadian homes with a dishwasher, for example, has more than doubled, from less than 30 per cent to 60 per cent. Fewer than one in 10 homes had a microwave oven in 1980; today it is upwards of 90 per cent. Washing machines, colour televisions, computers, cellphones and so on: the trend is the same.

The one and only point on which the Canadian protesters could conceivably share a grievance with their U.S. counterparts is indeed the issue that seemed most to exercise both groups: the runaway growth in incomes in recent decades among those at the very top of the heap, the fabled “one per cent,” otherwise known as the “super-rich.” In Canada, that means anyone earning more than about $170,000 in 2007 (not counting capital gains), versus about $400,000 in the U.S.

There is no doubt this is occurring, though again the phenomenon is rather less pronounced in Canada than in the U.S. South of the border, the share of all income going to the top one per cent climbed from about 8.5 per cent in 1980 to a peak of 23 per cent in 2007, dropping back to 20 per cent in the recession. Here, the top one per cent’s share rose from eight per cent in 1980 to 14 per cent in 2007, and 11 per cent in 2009—about where it was in 1945.

The question is what this means. The figures are repeated over and over in tones of escalating indignation, as if it were self-evident what an outrage it is that people should be making so much money—so much more money, that is, than others. But it isn’t self-evident. What exactly is the harm to others if a few people get obscenely rich?

Aren’t we obliged to ask, at a minimum, how they got the money? If executives of public corporations are taking advantage of lax oversight by boards of directors to feather their own nests, that’s one thing. Similarly, it would be fair to object if they were bailed out, or subsidized, or otherwise enjoyed the undue favour of the state. But if shareholders willingly choose to pay their employees so handsomely out of their own money, what business is it of ours?

Likewise, before we condemn people for accepting such exorbitant salaries, should we not also inquire as to what they do with the money? Suppose, like Bill Gates, they give most of it away to charity. Or suppose they invest it in companies that make useful products, creating good jobs in the bargain. Does that not put things in rather different a light than if they spent it all on themselves?

This isn’t to say that the distribution of income is irrelevant. There is, for starters, the question of how to pay for the costs of government, or rather who. Most would agree the rich should bear, not only a proportionate share, but a disproportionate share of the burden, on the grounds that they feel it less (the further you get away from subsistence, the less you need each additional dollar, and the less sacrifice is involved in giving it up). And, in fact, they do. The top one per cent in the U.S. pays 38 per cent of all income taxes; in Canada, the figure would be roughly 25 per cent. If that strikes you as too little, how much should it be? On what principle?

Inequality is a legitimate concern in its own right, of course, quite apart from the costs of government. A society without a middle class, but only rich and poor staring at each other across an unbridgeable divide, is ripe for conflict, among other ills. But that is not in fact what is happening.

Statisticians looking at these questions typically divide the population up into quintiles—the top 20 per cent, next 20 per cent, and so on. Over the last 30 years, to be sure, the share going to the top quintile has increased: from about 45 per cent in the late 1970s, it rose to about 52 per cent by the end of the last decade, where it has remained. That’s pre-tax income, note: factor in the effects of taxes and transfers, and the growth in the top quintile’s share is tempered, from 41 per cent to 44 per cent. The system has indeed become more redistributive over time. Thirty years ago those in the top quintile earned on average 33 times what the bottom quintile did, before tax—a ratio that has since widened to 44. Yet after taxes and transfers the gap between top and bottom quintiles is about the same now as it was then: a multiple of 9.1, versus 8.3.

As I say, that’s looking at the top quintile. But drill deeper into the numbers, and you find something quite remarkable. It turns out it isn’t the top 20 per cent of the population whose share of the income pie has grown. It’s all in the top one per cent: the bottom 19 per cent of the top 20 per cent, that is those in the 81st through 99th percentiles, have seen no increase in their share.

Drill further, as the economist Mike Veall of McMaster University has done, and the results are even more striking. Even among the top one per cent, the lion’s share of the gains are concentrated in the top 0.1 per cent, those earning more than about $620,000. Their share of total income climbed from about two per cent in 1980 to roughly 5.5 per cent, while those below them among the top one per cent saw little increase in their share. Same if you drill into that top 0.1 per cent: the gains go mostly to those in the top 0.01 per cent, those earning more than about $1.8 million. We’re not talking about a broad stratification of society into rich and poor, in other words. We are talking about a few hundred people earning exceptionally high incomes.

Who are these people? Bankers and chief executives, certainly. But also people at the top end of a good many occupations, from medicine to entertainment to sports: in Canada a number of them would be hockey players. The phenomenon is hardly unique to the U.S., or Canada. The same pattern, of rising income shares at the very top after many decades in which they were stable or falling, has been observed in a great number of developed economies, with vastly different social and economic policies: from Singapore to Spain to Sweden.

Why this is happening is not well understood, but one thing it does not appear to be about is “casino capitalism.” To be sure, a rising stock market (when stocks were rising) has fuelled some of the growth in incomes among the very rich. But for the most part what’s driving it, at least in Canada, is increases in salaries. That’s new. In the Canada of 60 or 70 years ago, Veall’s figures show, the richest of the rich derived the bulk of their income from owning capital. Today more than 70 per cent of it comes from salary.

A further clue to what might be going on is found in another of Veall’s findings. Salaries among francophone Canadians have not increased nearly as rapidly as among anglophones. Indeed, the escalation in top salaries is most pronounced in the English-speaking countries generally, whose shared language makes for a high degree of mobility between them. Could it be that what is bidding up top salaries is simply the worldwide competition for talent—and that the fiercest competition of all is in the United States, always the magnet for top talent in every field? Could it be, in other words, that what is behind all this is what we all profess to want: meritocracy?

At any rate, it’s not clear what can be done to stop it, even if we were of a mind to. Hike taxes on the rich? But we know the effects this will have on incentives, if not to earn income, then certainly to declare it. The top marginal rate was twice as high 40 years ago as it is today, and the rich paid less in taxes, not more: 20 per cent of incomes among the top quintile, versus 24 per cent in 2007. The economist Stephen Gordon has calculated that a 10-point increase in tax on incomes in excess of $500,000 a year would yield at most $4 billion, and probably half as much. Cap executive salaries, then, as the NDP leader has proposed? So long as the competition for talent dictated a higher rate, companies would simply find other ways to pay them: in stock options, or company cars, or other perks and benefits.

It’s still not clear why so many should be so upset that so few are so rich—other than the obvious reason: envy. It’s worth noting that to be in the top 10 per cent of earners in Canada you only have to make about $65,000 or so. That would include most of the media covering these events, and a good number of the protesters, or their parents. The sight of the near-rich casting covetous eyes at the rich—all in the name of denouncing “greed”—is, you’ll forgive me, a bit rich.

If inequality is our concern, I suggest we’d do better to look in the other direction. The gap that ought to trouble us is not between the top one per cent and the other 99 per cent, but between the bottom 10 per cent and the rest of us. Whatever harm may be imagined to arise from people being too rich, there is ample research on the harm that comes from being too poor, especially to children: poor, not only as a matter of absolute privation, but of relative inequality.

Across a wide range of development measures—health, behaviour, math and reading ability, participation in sports and other activities—the evidence shows consistently worse outcomes among children from poor families than others. And part of the reason appears to be a sense of being marginalized from mainstream society, from the ordinary expectations of what life has to offer. So yes, inequality matters: but inequality relative to the norm, not to the super-rich. What concerns a single mother on welfare isn’t that she can’t afford a yacht. It’s that she can’t send her kids on school field trips, or buy them a basketball, or a hundred other everyday things.

And while there’s little we can do about inequality at the top, there’s quite a lot we can do about inequality at the bottom: mostly by giving poor people more money. The National Council of Welfare has just released a report estimating the cost of lifting every Canadian out of poverty in 2007 at $12 billion. It’s not as simple as that, of course: but it gives a sense of the scale of the task. To put it in perspective, $12 billion is about what you’d get from another two percentage points on the HST.

Alas, that calls upon us to show compassion, rather than resentment; to give, rather than to take. Which may explain why there was so much talk about the rich this past week, and so little talk about the poor.