Income inequality is set to widen in Canada in the coming years, a trend that will lead to greater instability and could trigger future financial crises, a new study argues.
Released on Tuesday by the left-leaning Canadian Centre for Policy Alternatives, the paper maintains that repeated financial collapse is the inevitable outcome when a small minority stockpiles capital while everyone else accumulates debt.
“There’s been a lot of attention focused on the growth in consumption at the top end -- people living in monster homes while the homeless are on the street outside,” said study author Lars Osberg, an economist at Dalhousie University. But what hasn't been talked about, he argues, is the impact that the growing savings of the rich are having on the economy.
According to Osberg, it’s these savings -- whether loaned on capital markets to finance consumption or poured into stocks -- that have a destabilizing effect on the financial system.
“If somebody is abstaining from consuming all their income, then somebody else must be consuming more than their income in order for the macroeconomic system to balance,” he told The Huffington Post. “So that’s where you get the financial fragility and the crises.”
He says the recent subprime mortgage crisis and the ensuing global economic downturn are a poignant reminder of the implications of rising income inequality, which after a prolonged period of stability had faded somewhat from our collective memory.
“People got used to [...] thinking of that as the normal picture for capitalist market systems, but most of the economic history isn’t like that at all. You have these big swings and instabilities,” he said.
“These bouts of economic instability, they cause pain and suffering in themselves, but they’ve also historically produced some extremely dysfunctional political responses.”
The notion that inequality caused the recent financial crash has been hotly debated among experts in the U.S. As The Atlantic reported earlier this year, a working paper from professors at Rutgers and the University of California, Davis, challenges this connection. Tracing economic crashes from 1920 to 2008, the researchers maintain that collapses have tended to follow a period of loose lending -- not big upticks in income inequality.
Nevertheless, Osberg maintains Canadians should pay attention to what he sees as the link between income inequality and economic stability.
To illustrate this point, he compares the factors that have influenced income inequality in Canada, the U.S. and Mexico over the last half-century.
Though Mexico remains significantly more unequal than Canada and the U.S., better social programs, improved education and increasing female employment make it the only country in North America where the middle class has gained from growth in recent decades, Osberg says.
Meanwhile, as in many other developed countries around the world, inequality has increased in Canada and the U.S. as the real incomes of the top one per cent of the income distribution have far outpaced those of the bottom 99 per cent.
Unlike in Mexico, which is benefiting from urbanization that developed countries have long since undergone, Osberg says there is no evidence that growth alone will narrow the rich-poor divide in Canada and the U.S.
In these cases, history shows that the only proven vehicle through which to reduce inequality is the political economy, he argues -- most notably in the 1930s in the U.S., when a suite of policies adopted under FDR narrowed the gap significantly, and laid the groundwork for decades of stability, he says.
In this respect, Osberg maintains that Canada’s political system has the means to address the growing divide, but such action is “extremely unlikely.”