Finance Committee on April 16th, 2013

[The Chair, Conservative, James Rajotte]

I call this meeting to order. This is meeting 113 of the Standing Committee on Finance.

I want to welcome our witnesses this morning.

We have two panels, colleagues, of one hour each. Our orders of the day today, pursuant to the order of reference of Wednesday, June 13, 2012, are for beginning our study of income inequality in Canada. For our first panel, we have four presenters.

First of all, from Canada 2020 we have the vice-president of research, Ms. Diana Carney.

Welcome to the committee.

From the C.D. Howe Institute we have the vice-president for research, Mr. Finn Poschmann.

Welcome back.

From the First Nations Tax Commission we have the chief commissioner, Chief Manny Jules.

Welcome to you also.

We have as well, from TD Bank Financial Group, the senior vice-president and chief economist, Mr. Craig Alexander.

You each have five minutes maximum for an opening statement. Then we'll have questions from members.

We will begin with Ms. Carney, please.

[Diana Carney, Vice-President, Research, Canada 2020]

Thank you for having me. I'm honoured to be here on behalf of Canada 2020.

I want to talk about three things. One is how great a problem income inequality is, the second is how much it matters, and the third is what can be done about it.

Globally, income inequality is an enormous issue. I think two-thirds of the world's population now live in countries in which inequality has widened over the past decade. This widening is largely due to factors that you know about: globalization, the technology revolution, changes in working hours and practices, and issues around families and family formation.

One of the key features of income inequality is that it tends to be self-reinforcing, so that the poorest groups are less able to invest in their children and in their health and education and in other things that make for success, so inequality is typically transmitted from generation to generation. Absent policy action, we can expect income inequality to continue to rise.

But the point I wish to make today is that policy action does make a difference. I am sure you are all familiar with the basic story here in Canada. We sit in about the middle of the OECD rankings in terms of income inequality, but we stand out in terms of concentration of income at the very top end. We are third, after the U.K. and U.S., in terms of the proportion of income going to the top 1%. The Gini coefficient typically used to measure this has risen only a little over the past 10 years. It rose more in the eighties and the nineties, but a good deal of that was offset by taxes and transfers.

The point I'd also like to make is that a Gini coefficient by its very nature doesn't measure changes at the top and the bottom very well. It's good on the middle, but if most of the action is at the top and the bottom, as it is in Canada, this doesn't typically show up in the Gini coefficient.

The question is, how much does income inequality matter? It's our view at Canada 2020 that it matters a lot; our attitudes to inequality go to the very heart of the type of society we wish to build. Income inequality has many effects, and I know you're going to hear from people who are more eloquent on those effects than I am, but I'd like to highlight just a few.

For us, the key one is the link between income inequality and equality of opportunity. Inequality of outcomes—and that's post tax and transfer incomes—is inevitable and to some degree desirable, within limits. But inequality of opportunity and possibilities for economic mobility are quite different. The idea that everyone has a reasonably equal chance of success in life is I think fundamental to our society and our future. There are compelling reasons to believe that in more unequal societies there is less equality of opportunity.

I know you're going to hear from Miles Corak, who produced a great paper for us on this topic. He will show you his “Great Gatsby” curve, which shows the correlation between income inequality and generational earnings elasticity, which stands in for equality of opportunity. There's a lot of discussion around causality and correlation there, but I think we can agree that people's ability to invest in their children and the broader support institutions and structures that exist in more equal and cohesive societies make a big difference to equality of opportunity.

Canada, I'd like to point out, has been a positive outlier in this regard; relative to our levels of income inequality, one would expect possibly lower levels of economic mobility. But there is a question mark as to whether we can maintain this.

Secondly, the public are clearly concerned about this situation. They don't always know the statistics, but polling now shows that they consider this to be a very serious issue, and they do not feel they will be better off in a generation than they are now.

Thirdly, income inequality is not economically efficient, and we don't want to waste human capital.

So I would say focus on what you can do about it. It's all about institutions, about preserving and maintaining and building the institutions that have served us so well in the past—the health and the education that give everyone a fair chance in life, and child care and early childhood education come in there, too. There are many other things around the working income tax benefit—better jobs, minimum wages, other things—but we at Canada 2020 want to focus on understanding what works best in our institutions, supporting them and making sure we do not lose our edge in this area.

[The Chair, Conservative, James Rajotte]

Thank you very much, Ms. Carney for your presentation.

We will now hear from Mr. Poschmann, please.

[Finn Poschmann, Vice-President, Research, C.D. Howe Institute]

Thank you very much, Mr. Chairman. Members, thank you for your invitation to be here. I’m absolutely delighted to be with you for this launch of the study on income inequality.

I will agree on many fronts with Ms. Carney, but I'll take a slightly different tack, if I may. The initial point of agreement that a lot of us understand is that excessive inequality is a dangerous and socially harmful thing, and that's why this committee is right in launching a study on income inequality. In my comments I'll focus on item 4 of the motion enabling this study. I'll focus a little bit on how best to improve it.

First, some background and thoughts on what drives inequality and why it's important.

In its mildest forms, income inequality makes people unhappy, and that's where some of the polling numbers come in. Being happy is not a small thing; it's an important part of social well-being. What makes us unhappy is the alternative: a feeling of powerlessness, an inability to succeed and share in life as we see it around us. It can breed envy and make us despair, and that's not a good thing either.

Taken to an extreme, income inequality and its regular companion, asset or wealth inequality, lead not only to unhappiness but also to a lack of faith in the institutions, as Ms. Carney described—a lack of faith and trust in the world around us. What follows from that disillusionment can be big, big trouble. Populist uprisings, arising from a lack of faith in institutions, and distress owing to the limits that governments place on us can lead to revolution, can lead to overthrow of governments, and can see those governments replaced instead by superficially egalitarian regimes.

We know there's a tipping point where excess inequality leads to upheaval. The trouble is that there aren't numbers one can assign to it. Political scientists and economists can't say what defines excessive inequality, but we know there is a line that, once crossed, may lead to the upheaval I've pointed to. The result can be disasters, as we see around the world today, and bad, bad outcomes.

This committee, however, is studying inequality in Canada and what we might do about it so that we might avoid the dystopian outcomes we see, for example, in North Korea, where wealth and power belong to the few and poverty, hopelessness, and powerlessness belong to most of the rest.

In thinking about what we might do about inequality, something important to understand is what drives inequality. Why do we see inequality in a society like ours, where we try to make opportunity available to everyone? To see why inequality might come about, I did an experiment in numbers and I presented some pictures, which I believe members have. In my first figure, I have everybody in Canada start out equal. We all start at age 20 and we all get jobs paying $25,000. That's a lot for some people, not much for others. But not only that, we all have the same opportunities and the same skills and willingness to exploit them. We do equally well in work and in life. We all start out equal, and after 40 years we're still equal. The lowest 20% of earners have 20% of the income. The top 20% of earners have 20% of the income; so too for everybody else in between.

I label this figure “Harrison Bergeron”, after a 1961 story by Kurt Vonnegut. He knew what it would take to deliver complete equality: the athletic folks would have to be burdened with weights; if you had good eyesight, you'd have to wear fuzzy glasses; if you're really bright, you'd have to have noise makers in your ears that stopped you from concentrating. That's a dystopian vision, of course, and a vision of hell. So these things matter.

Life, of course, isn't that rosy. That's why, in page 2 of my experiment, I say that skill and effort matter. I randomly distributed these across a population of tens of thousands. Assume that your skill and capacity to deliver on it, to take advantage of it, are independently distributed. What happens? You generate inequality in the first year, you generate more income inequality after 20 years, and more after 40 years.

Then I point out, as we all know, life isn't that fair. We don't all start out equal, we don't all have parents who make sure we finish high school, we don't all recognize an opportunity and grab it. We may not have parents, we may start sniffing glue or gasoline when we're kids—you get a tough break sometimes.

What my slide shows is that when skill, distribution, and opportunity are there, you can still do all right. There will be inequality, it will be grow over time, but it arrives.

Now the final part asks if my numerical experiment represents reality. What I did in my last slide was compare this unfortunate course of life with real outcomes, and it does a pretty good job.

[The Chair, Conservative, James Rajotte]

Okay. Thank you Mr. Poschmann.

We'll go to Mr. Jules, please.

[Manny Jules, Chief Commissioner, First Nations Tax Commission]

Thank you.

Good morning. My name is Manny Jules. I am the chief commissioner of the First Nations Tax Commission. I'd like to thank the committee for inviting me to speak on income distribution and disparities in Canada. While I'm here to provide a first nations perspective, it is a mistake to try to understand income distribution by studying one group at a time.

There are two big trends that are impacting all of us. First, most developed countries are aging, more people are retiring, and the costs of health and pensions are rising. Second, productivity growth has been flat. When the retired share of the population rises and productivity remains flat, then incomes fall. This is a mathematical certainty.

If both of these trends continue, our living standards will decline. We will have less money available for government programs. There's nothing we can do about an aging population, but we can raise productivity. If we don't have productivity improvements, no amount of tinkering with the programs or the tax system will stop income declines.

First nations are the youngest population group in Canada. We're the fastest growing part of the labour force. The future of Canada's retired people is dependent on the productivity of first nations youth. However, if we don't participate in the economy, our youth will grow up without work experience. They will be disadvantaged for life. Canada will continue to spend hundreds of millions of dollars on our bureaucratic oversight and to spend billions on poverty-driven social programs for us. This is money that could be spent on education and infrastructure on our lands.

We can no longer afford to maintain a system that wastes money and our potential. The problem is that most people see us as a social problem when all governments are fiscally challenged. They see our problems as impossible to solve because it's hard to reach a consensus between first nations and governments. If we keep trying the same failed approaches, it will be like trying to fix a flat tire by yelling at it, as my father would say.

It doesn't have to be that way. We need to implement first nations-led solutions that are optional and that allow us to participate in the economy and raise our productivity. Here are four ideas.

First, Canada should develop and pass the first nations property ownership act. This will allow us to opt out of the Indian Act, which makes us a ward of the state. It will provide us with the same property rights as other Canadians. It will allow us to move at the speed of business and give us access to capital to start businesses. This is hardly radical; even Cuba knows that private property builds economies.

Second, we need to relearn what we were before we became wards of the state. We've spent generations teaching people about bureaucracies, playing the role of victim, and filling out grant applications and meeting reporting requirements. We need to relearn how to build and run a tax system, build infrastructure, facilitate investment, and to be an entrepreneurial people. This is exactly what we are doing at the Tulo Centre of Indigenous Economics.

Third, we need new fiscal arrangements. Transfers to provinces are growing faster than transfers to first nations. The equalization system rewards provinces for having a large, poor first nations population. We need to raise our own money, so we need to be part of the Canadian fiscal family.

Finally, we need to be part of Canada's resource development boom. Resource projects create billions of new revenues for the federal and provincial governments, but not first nations. Canada and the provinces need to create a fiscal benefit sharing arrangement from resource development that includes us. These revenues should be earmarked to reduce our outstanding infrastructure and service deficit. The First Nations Tax Commission can help in this regard.

These ideas will reduce income disparities. First, they mean more first nations youth will grow up with successful employed role models. Second, they will raise productivity of our lands and improve our access to capital. Third, they will increase our support for resource projects. Lastly, we will become partners in the economy and Canada.

As my ancestors said a hundred years ago, we will help each other to be great and good.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Jules.

We'll now hear from Mr. Alexander, please.

[Craig Alexander, Senior Vice-President and Chief Economist, TD Bank Financial Group]

Thank you very much.

Thank you for the opportunity to speak to you today on this important issue.

I think one of the core issues is that across the entire industrialized countries, we've been seeing rising income inequality. This is a product of the capitalist economic system, which has been demonstrated to be the most efficient system for generating a rising standard of income. The challenge is that the economic model does not create equal opportunities for all. That's where there is a role for public policy to play. This is why we have a progressive tax system in Canada. This is why we have the social security system.

Now, in terms of economic literature, economics has traditionally focused on income inequality in terms of playing down its role as a problem. It tends to focus on it in terms of an incentive to work and invest, or the product of uncertainty around income and volatility of income. However, like most things in life, excess brings consequences and negative, very powerful forces. Moderate income inequality actually can be healthy. Excessive income inequality can actually create enormous social, health, and economic strains.

A growing body of economic literature emphasizes this. A number of books that have been written, including The Spirit Level and a variety of other works, emphasize the negative forces that are created by income inequality. One of the core challenges with a lot of these studies is that correlation isn't always causation. Nevertheless, even when you look at work done by the IMF, it does argue convincingly that elevated income inequality can be economically damaging.

In the wake of the financial crisis, it isn't surprising that we're seeing increased attention focused on this as a pressing issue. If you look at the unemployment rates in Europe, if you look at the poor labour market outcomes in the United States, you can understand why this is a growing and pressing issue.

In Canada the story about income inequality is one that's a little more nuanced than what we're seeing in some of the other nations. If we look at it in relative terms, income inequality in Canada is the second lowest in the G-7. Canada has relatively good social mobility. It's the highest in the G-7. But it is true that income inequality in Canada has in fact been rising.

When we look at the Gini coefficient, which is basically the best overall benchmark of what's happening to the economy as a whole, you can see that income inequality was rising in the seventies and eighties in a very gradual rising trend. Then we had a big jump in inequality in the mid-nineties, which seems to correlate with when governments were tackling their deficits. In the mid-nineties we saw a big cut in transfers to individuals, and that seems to have created a very sharp increase in income inequality.

After the nineties, we see that the Gini coefficient is broadly flat. It might have a slight upward slope, but it's extremely small. It's almost negligible. This is surprising, given the public attention on income inequality.

As Diana Carney emphasized, the Gini coefficient isn't very good at telling you what's happening at the tails of the distribution. There's no question that top income earners are receiving a greater share of income. The top 1% has gone from about 7% of national income in the eighties up to 11% of national income in 2010.

Work done by people like Michael Wolfson has emphasized that if you actually look at it, half of the increase in income at the high end of the income scale is actually not just the 1% or the 0.1%; it's actually the 0.01%. So what you're really talking about is a very small number of individuals getting a larger share of income.

There is also a broader structural story taking place, and that broader structural story is around the fact that the economy is shifting towards more high-skilled, higher-waged jobs. This is a healthy outcome for the Canadian economy, but it does mean that it can lead to higher income inequality.

I would stress that I think the focus really should be on removing barriers to opportunity for people at the low end of the income scale. If you look at the bottom 20% of income earners, they earned a market income of only $3,100 in 2010. Our social security system and tax system, transfer system, will bring their income up to $15,200, so it is working to try to reduce income inequality and provide support, but understand: try living on $15,200.

What we have is a problem at the low end of the income scale that there are barriers to growth. We have 9% of Canadians living in poverty. That's three million Canadians. It is costing the economy a lot of money. In Ontario the estimate is that it takes $32 billion to $38 billion a year to basically combat poverty and forgone tax revenues.

The numbers of seniors and children in poverty has actually diminished because of actions taken by government, but at the same time the percentage of poor—they are classified as working poor because they have someone working in the household—is now 40%.

There are areas of weakness or vulnerable populations—aboriginals, recent immigrants, people with disabilities—but I would caution about looking just at silos. We have real, fundamental problems with high marginal tax rates on people coming off income support programs: an inability to accumulate assets; poor literacy skills and essential skills, which are the foundation for growth, and many workers lack the skills that businesses need.

I'll stop there because I've gone over my time. Thank you very much.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Alexander, for your presentation.

We'll begin members' questions with Ms. Nash, please.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Thank you, Mr. Chair.

Welcome, and good morning to all of the witnesses.

It's certainly a very important topic, one that has been signalled by many international organizations as the pressing issue of our time—the concern about growing inequality. I even had the opportunity recently to hear the outgoing CEO of TD Bank, Ed Clark, raise this issue of income inequality and express concern about growing income inequalities. It is an issue that has caught so many people's attention, and it was mentioned even during a period of economic growth during the 1990s. Sadly, we saw greater inequality in Canada, that we had fallen down the ranking of the OECD on our income inequality.

Let me ask the first question to you, Ms. Carney. It seems that the 1990s was a period of tremendous growth in our economy, and in many economies around the world, yet Canada did fall further behind, and is falling in the OECD ranking of income inequality. Can you comment on some of the factors that might be involved in that fall, even at a time when the economy was growing?

[Diana Carney]

I think Craig mentioned that the transfers were reduced at that time. It's interesting, if you look at the difference between the market income and the post-tax and transfer income that is offset in Canada relative to other countries—and the OECD is the oracle on this—we're actually quite close to the middle on that.

I think the issue is that income inequality everywhere has been rising. Canada has swept up at the top, but we have maintained a relatively steady place within the OECD. We're not an outlier in terms of leaping up the rankings. Everyone was dealing with these issues. I think the interesting point is that we haven't gone up in the last while, which is when it grabbed the public attention and the attention of politicians like yourselves. It's a conundrum to understand why this is the case. There are lots of reasons around economic insecurity and a general feeling of insecurity, as opposed to the numbers that back it up—the Gini coefficients changing and things like that.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Surely the loss of so many middle class jobs has been a huge factor in generating the insecurity for people here in Canada, and the insecurity of conditions in the remaining jobs for many people. Part of the concern that has given rise to the issue of inequality and related instability, both economic and social, has been the creation of intergenerational inequality. This is something certainly that Nobel laureate Joseph Stiglitz and many others have spoken about.

Would any of you like to comment on the rise of intergenerational inequality and the challenge that the loss of middle class jobs in Canada presents for the future?

[The Chair, Conservative, James Rajotte]

There's a little over a minute, so perhaps one of the panellists could respond.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Mr. Alexander, perhaps you'd like to start.

[Craig Alexander]

In the United States there really has been a very deep hollowing out of the middle class. In Canada we also see signs that there has been weaker growth in employment for middle-skill, middle-income jobs. It's less pronounced than the United States. I think part of that is a function of the strength in the resource sector. I think part of it is a function of the middle-skilled jobs that are attached to the resource sector in the 30-year unemployment rate that we got to before the recession.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Nobody does income inequality in developed countries like the U.S. does, so....

[Craig Alexander]

But what you can see is that we have had a shift in employment. There's been a drop in lower-skill and middle-skill jobs and an increase in high-skill jobs. This has also been reflected in wages. It's contributing to some of the income inequality that we're seeing. As more people are graduating with university degrees, as they go into higher-skilled positions, this is actually putting upward pressure on income inequality in our system.

There are challenges to middle-skill jobs. It was a manufacturing recession. While we've created a lot of jobs during the economic recovery, they haven't been created in the industries that lost them. Manufacturing employment is very weak and it reflects some of the legacy of those structural changes in the economy and the impact of the recession.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Ms. Nash.

We'll go to Ms. McLeod, please.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

Thank you, Mr. Chair.

I also would like to thank the witnesses. It's been a great start in terms of our important study on income inequality.

I have to start by directing many of my questions to Mr. Jules. Mr. Jules is from Kamloops. I think since 2008 I have been having conversations with him, but also with many of the chiefs who are in our communities, certainly in British Columbia, and of course a few across the country.

I want you, perhaps for the people here, to talk a little more about the first nations property tax act, and how you see that being very important in terms of this issue of income inequality.

[Manny Jules]

Ms. Nash was talking about generational poverty. First nations have had it ever since the introduction of the Indian Act. The federal government owns all Indian reserves, so we don't have the same rights as anyone else in the country. It's only mentally handicapped individuals, minor children, and first nations living on a reserve who can't own property.

What we're proposing with a number of proponents is that the federal government transfer its ownership of reserve lands to first nations in perpetuity, so that individuals can have indivisible title and begin to build their own homes, build up equity, start businesses, and have the same kind of footing as other individuals here in this country enjoy. That means the creation of first nations institutions, whether they be for land title registries or other institutions to facilitate tax jurisdiction and new fiscal arrangements with Canada, including the provinces.

That is one of the areas that the federal government has to look at to empower individuals and first nations governments, because without the creation of that institution we will see many other generations into the future being dependent on the federal government. As an example, with housing, the Assembly of First Nations says we need 80,000 homes to be built right now. The federal government says about 30,000 homes. So under the current system it's going to take either 250 years or 800 years to catch up to the existing backlog. Without the creation of individual property rights, that will never happen.

Also, as I mentioned in my brief, when you see resource extraction happening within our traditional territories, many first nations individuals can't access the benefits of those developments because we have no access to capital. We have no method to be bonded, no means to start our own businesses.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

What do you say to some of the first nations communities that are concerned about your proposal? You certainly hear people who have expressed concern. I know that the chiefs who have come to me on a pretty regular basis over the last few years have said it is voluntary; it is a decision of the band.

Could you talk a little bit more about that piece? I know there is certainly some expressed concern in the aboriginal community in terms of the proposal.

[Manny Jules]

It's true with any change. There were concerns in the 1950s that we would become citizens of Canada. There were concerns in the 1980s that we shouldn't be part of the constitutional process. We saw it recently with the Idle No More movement, that there shouldn't be any changes or tinkering with the Indian Act.

You have a philosophical divide in the country that leads to a situation where there cannot be a complete overhaul of the Indian Act. Because there's no consensus to get rid of the Indian Act, as the Prime Minister said a couple of years ago, you can't get rid of the tree; its roots are too deep.

That leaves Canada with a dilemma about how to deal with a complete lack of modern institutions for first nations. The only way around that, in my view, is to create optional pieces of legislation so that first nations can make choices on their own and not be forced to do that. Indeed, what we're proposing is just that. It has to be optional legislation. There has to be free and informed consent by the membership of the community, meaning there has to be a vote in order to do it.

Also, one of the concerns first nations have expressed is that we're repeating what happened in the United States through the Dawes Act. This is completely separate. We're not part of the United States, for one, and this is legislation that's being led by first nations.

[The Chair, Conservative, James Rajotte]

Thank you very much. Thank you, Ms. McLeod.

We'll go to Mr. Brison now, please.

[Scott Brison, Liberal, Kings—Hants, NS]

Thank you, Mr. Chair, and thank you to each of you for appearing before us today.

Recently, Ms. Carney, I attended a Canada 2020 event with Zanny Minton Beddoes on this issue of income inequality. She said we ought to focus particularly on public policy around young people, and in fact the younger the better in terms of education and early learning.

Which countries are doing the best job on that? She had referenced some Nordic countries, as an example. In your view, what can we learn from those countries in Canada, and how should we be working with the provinces to advance early learning in Canada?

[Diana Carney]

You mentioned it. We always hold the Nordic countries up as the model of this, particularly in the early childhood area or in the facilities for child care.

I think there are two issues. One is giving the kids a good start in life and the other is giving the parents, particularly mothers, an opportunity to work. So investing at that level serves a dual purpose.

The interesting thing about Canada is that we score quite highly, as you know, in OECD rankings on our education systems. There is some variation across the provinces, but we do quite well.

I think the concern for us is maintaining that edge and making sure we do not let our institutions atrophy while this is happening. One of the things we need to do, I would argue, is make sure the whole population keeps engaged with those institutions.

I think one of the key differences between us and the U.S. is the rich, the plutocrats that Chrystia Freeland talks about, have disengaged. There isn't a public health system, but they have also disengaged from public education, so they are not invested in those things.