BUSINESS

Robert Reich, Ex-Clinton Cabinet Secretary, Warns Canada Following U.S.'s Inequality Path

11/24/2014 09:06 EST

Canada is “moving towards exactly the same degree of income and wealth inequality” as the United States, says a former cabinet secretary in the administration of President Bill Clinton.

Robert Reich, who served as Clinton’s secretary of labour from 1993 to 1997 and now teaches economics at UC-Berkeley, told a Toronto crowd last Thursday that Canadians are deluding themselves if they believe the inequality problem doesn’t exist north of the border.

Reich’s comments come as a new study from TD Bank warns that Canada is at risk of seeing further growth in income and wealth inequality, and urges reforms to the tax system to prevent it.

Speaking at a fundraiser for the left-leaning Broadbent Institute, Reich said Canada is facing the same inequality-growing “structural problems” that the rest of the developed world is facing. Those two structural problems are globalization and automation, he said.

He noted that businesses in the digital era require far fewer employees, citing the example of WhatsApp, the messaging app bought by Facebook. At the time it was purchased for $19 billion, it had 450 million users and just 55 employees.

“This is the new economy,” Reich said.

A new report from TD Bank cites the same two factors as being causes of growing inequality, but also notes that Canada used to do a better job of equalization through taxation.

“Although Canadians take pride in the country’s more equitable outcomes [than the U.S.], Canada does less income redistribution than many think. Canada’s ranking on income equality falls from 9th place in the OECD on the basis of [income before taxes] to 19th place on the basis of after-tax and transfer income.”

That has a negative impact on Canada’s economy, says the report from TD chief economist Craig Alexander. It cites data from the OECD showing that a one-per-cent increase in inequality reduces economic growth by 0.6 to 1.1 per cent.

Growing inequality “can impede skills development for the disadvantaged and prevent individuals from achieving their potential. It can smother innovation and risk taking,” the report argues.

Canada has recently been spared the worst of growing inequality thanks to the housing boom and high commodity prices, Alexander writes, but “commodity and real estate booms do not last forever.”

The report argues that “there are opportunities to make the tax and transfer system more progressive and redistributive. … If Canada is to retain its economic and social model, policymakers are likely going to have to lean more against rising inequality.”

All the same, Canada faces a “competitive challenge” because the U.S. tolerates a relatively high degree of inequality, TD Bank notes, paying its high-skilled workers more than they are paid in Canada, while allowing low-skilled workers to earn less.

The report suggests Canada reform its tax system to address inequality -- because that’s the one aspect of income and wealth that is fully in the government’s control.

But the report notes changes to taxation can only go so far; it recommends government invest more in education, improve access for low-income youth to professional programs like law and medicine, and expand recognition of foreign workers’ credentials.

The report comes amid conflicting new data on income inequality trends in Canada.

Data from StatsCan indicates the share of income taken by Canada’s top one per cent of earners shrank slightly in 2012, to 10.3 per cent of all income, down from 10.6 per cent a year earlier.

But that still leaves inequality considerably wider than it was a generation ago.

And a survey from Swiss bank UBS and Wealth-X estimates that Canada’s super-rich (those with assets of $30 million U.S. or more) are growing faster in rank, and are seeing their wealth grow faster, than the super-rich in the U.S.

The ranks of Canada’s super-rich swelled by 6.5 per cent, to 5,305 individuals who hold $635 billion U.S. in wealth between them. The ranks of the U.S.’s super-rich grew by 6.2 per cent, and their total wealth ($9.6 trillion) grew by 6 per cent, the UBS/Wealth-X report said.

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