Not at all. Thank you for the invitation.
Next week I'll be presenting to the pre-budget consultations on economic growth. As an economist, I believe the order should be the other way around. One addresses the fundamental problem of economic growth first and then decides on how to divvy up the pie.
Arthur Okun, the chair of the Council of Economic Advisers under President Johnson, wrote a book entitled Equality and Efficiency: The Big Tradeoff. That tradeoff still exists. If we emphasize redistribution issues too much, we neglect the incentives needed for growth.
The risks are heightened in the current environment of chronic slow growth throughout the advanced market economies. The most powerful anti-poverty program is rapid economic growth. This was true of Canada over the last two centuries, as our standard of living reached levels unimaginable in the early 19th century, and remains true for rapidly growing emerging market economies such as India and China, whose development has lifted billions of people out of poverty.
Before getting into the weeds of specific social programs, it's worth taking a look at the overall impact of income redistribution in Canada. Our tax and transfer system has become increasingly progressive over time, as noted in a paper I wrote for the Macdonald-Laurier Institute in April 2015. Without getting into the details, the big conclusion is that the two highest income quintiles fund redistribution to the majority of the low- and middle-income people in this country, with 80% coming from the highest income quintile. Most of this progressivity comes from transfers, not taxes. Several changes in the budget likely increased this progressivity, notably the Canada child benefit and the middle-class tax cuts.
We may be reaching the limits of redistribution via the tax and transfer system. The government had proposed funding its middle-class tax cuts with a tax on higher incomes; however, the Department of Finance calculated that this would not generate anywhere near the money the government had hoped for, which is consistent with findings from academics, such as UBC's Kevin Milligan, that marginal tax rates over 50% yield little additional revenue.
It is also noteworthy that governments have increased transfers and lowered taxes more for the middle-income quintiles than for lower incomes. We are increasingly using the tax and transfer system to enhance the living standard of the middle class, not to prop up the lower income earners. The 2016 budget continued this trend of using the tax and transfer system to boost middle-class incomes instead of creating conditions where it is the growth of income earned in the marketplace that drives middle-class incomes.
Given the limits to the redistribution of incomes, only the latter is a sustainable source of growth. To the degree that reconfiguring the tax and transfer system becomes a crutch for middle-class income growth, instead of adopting policies that would boost economic growth, it may even restrain the long-term growth of incomes.
If we pursue redistribution policies forcefully, we risk further dampening economic growth. In turn, slow growth carries its own risks. It drives down interest rates, which encourages people to make more risky decisions when investing in the stock market and the housing market.
Low income in our society is no longer so prevalent that society-wide measures are needed. Chronic low income is concentrated in specific groups, such as elderly women who never worked, single mothers with children, the disabled, and recent immigrants who lack language skills. These can be targeted by government programs.
Having said that society-wide measures to tackle low income are largely unnecessary, I note that the track record shows that changes to specific programs can be effective tools to reducing low income. Probably the greatest success was in changes to our pension system, which lowered low income among the elderly from 44% in 1961, to less than 10%. However, the reverse is also true. Sharp cuts to social assistance in the mid-1990s did not lead to the increase in low income that many people had predicted.
There are several ideas currently circulating on how to further reduce the incidence of low income in Canada. These include a guaranteed annual income, higher minimum wages, an expanded CPP and other changes to the pension system, and raising the Canada child benefit. I'll comment briefly on a couple of these.
The government is to be congratulated for dismissing hikes to the minimum wage. As Professor Pierre Fortin of UQAM said on Monday, a sharp increase in the minimum wage would be the economic equivalent of detonating “an atomic bomb”—his words, not mine—in the business community, leading to the increasing exclusion of youths and people with low skills whose jobs are already vulnerable to automation.
Higher minimum wages are likely to harm the very groups they're intended to help. Raising minimum wages in an economy that is struggling, such as the Alberta government is doing, will only worsen an already bad situation.
The expanded CPP government agreed to in the summer will do little to address low income. Indeed, this is why Quebec refused to join. The expansion is designed to help a sliver of middle-class workers who are possibly facing a large drop in income—although it's hard to believe forecasts decades ahead—but not large enough to push them into the lower income. The increase in benefits will not occur for years.
Meanwhile, we have clear evidence that there is a group of elderly people who could easily fall through the cracks of the current pension system—old women who have never worked. When their husbands die, the survivor benefits are not enough to live on, and they often do not have other pension or income sources to fall back on. There is no good reason to not expand benefits for this group, especially since the phenomenon of women who never worked will largely pass in the next decade or two.
I look forward to your comments.