Disparate Models, Desperate Measures: The Convergence of Limits ∗

This chapter was originally written back in 2003 and published in 2005 in the volume edited by David Coates (god father to a Miliband son I think) Varieties of Capitalism, Varieties of Approaches.  The data contained inter alia is by now stale in one sense.  However in another sense the document holds up for its time and place in the early Anglo-American debates on neoliberalism.  The trends I analyzed–rising income inequality, reduced welfare state effort, eroding quality and conditions of work, and a secular decline in productivity growth–across the rich OECD zone regardless of which model of capitalism was being pursued were in fact, as I noted at the time, secular trends.  At the time, 2003, most academics still had their heads in the ground about inequality and the punitive dynamics of neoliberal labour market policies.   Indeed the  hegemony of neoliberalism was so complete at that time most social democratic intellectuals refused or were incapable of acknowledging the state of affairs.  Even worse many were actively crafting and implementing neoliberal policies.

In the above sense I think the chapter still holds up.  Moreover, it also holds up in terms of its main hypothesis that the advanced capitalist zone, despite being populated by nation states with very different institutions and public policy regimes, was producing increasingly poor outcomes for workers and citizens. For A version of the chapter “Disparate Models, Desperate Measures: The Convergence of Limits,” leave a comment to request the document.

∗This article was originally published in David Coates (ed.) Varieties of Capitalism, Varieties of Approaches. New York: Palgrave Macmillan, (2005). The version of the article reproduced herein may be reproduced on a not for profit basis subject to the GNU Free Documentation License and provided proper citation is provided.

The irony of greed: The end game for Neoliberalism?

The global economy is in the toilet and the Boomers’ representatives are chanting: “flush, flush, flush.”  Me? I am eating cigarettes and wine while admiring the remarkable consistency in the myopia of all of it.

In the name of fiscal prudence the whole of the advanced capitalist zone is in engaged in austerity budgeting and calls for more of the same.  Even Martin Wolf, in his otherwise insightful column in the FT online today, felt the need to tap his hat and nod in the direction of the genteelism of supply.  Exhibit A, the conclusion to his incisive intervention:

Reconsidering fiscal policy is not all that is needed. Monetary policy still has an important role. So, too, do supply-side reforms, particularly changes in taxation that promote investment. So, not least, does global rebalancing. Yet now, in a world of excess saving, the last thing we need is for creditworthy governments to slash their borrowings.

As is widely acknowledged, monetary policy has little outside of conciliatory role to play at this time.  In so far as the CBs should not make the mistake of tightening policy as the ECB and the BoC did.  But apart from the role of spoiler there really is not much left for the CBs to do.  The problem is squarely fiscal.  As Wolf himself went to pains to argue.  Why then the conclusion given that further tax reductions are not only going to make the fiscal positions of governments worse they will also likely have the same effect as lowering interest rates at this time:  Nadda, ziltch, rien, nothing?  The problem is that Wolf has to tip his hat to conventional wisdom.  If not; he has no hope of bending the ears of policy makers.  Oh well, that is his plight not mine.

Here, given none are listening we may speak frankly.  The world economy is in the toilet because free trade, tax cuts, deregulation and above all the liberalization of finance over the last thirty years let loose a Tsunami of forces both economic and political.  The liberalization of finance and production allowed for the national gutting and then global whipsawing of labour.  As the profiteers profited and retired workers slept while the assets they had built were being systematically stripped and the fortunes being amassed were then turned to the seedy business (although a time honoured practice if one cares to actually read Smith) of buying off the government–and it must be stressed the intelligentsia too–broadly understood.

We now have the perfect storm.  A generation of public and private sector functionaries has been trained to believe that the market can do no wrong and the government no good.  As a corollary is of course the proposition that monetary and regressive tax policy is everything.

The irony, of course, is that any credible account of the present crisis would have to admit that we are here because free trade, tax cuts, deregulation, the flexibilization of labour markets  and above all the liberalization of finance brought us here.  How odd it is then that we should be treated to more of  the same as the cure for what ails us.

Krugman pins the tail on the Elephant

Krugman gets it right in both the pith and the substance of the matter on the overcompensated public sector workers in Wisconsin.  Short of it: they are not.  This is a must read.

The Contribution Scam

David Cay Johnston has a terrific piece up about the nonsense of comparing government workers to private-sector counterparts by claiming that the government pays for more of their benefits. As he says,

Dark, Dark Day in Wisconsin: What is the lesson?

The Globe reports:

The Wisconsin Assembly early Friday passed a bill that would strip most public workers of their collective bargaining rights – the first significant action on the new Republican governor’s plan.

Lesson:

There is no compromise to be made and thus centrist pragmatism is for fools.

Note: Wisconsin was once home to the once powerful school of progressive economic pragmatism in the US called the American Institutionalist School.  In many respects Wisconsin was at the centre of the development of new social democratic thought in the US.  So to understand how potent of a symbol this is imagine Saskatchewan became the first province to end public health care insurance.

Money for nothing, gifts for free, I want my CITs

As long as I can remember anything of social significance (since 8I think), corporate Canada has been demanding a little help from its friends with respect to productivity.  The facts are the Canadian private sector has been a world class laggard in terms of producing productivity growth.  Through the eighties and nineties it paid out minor fortunes to the CD Howe and Fraser Institute to pump out reams of varying degrees of plausible hypotheses for the lack of productivity growth.   The usual suspects interrogated were in no particular order of importance: government deficits, strong unions, generous unemployment benefits, generous welfare benefits, the lack of free trade deals, over regulation and lastly (time wise) overly onerous corporate tax rates.

With each campaign eventually corporate canada got what it wanted.  Unions were made prostrate, the eligibility rate and benefit levels of the unemployed and poor were slashed, one free trade deal after another was inked, the deficit was slayed, regulations were either denuded or unenforced and corporate tax cuts were lowered.

Yet after thirty years of eventually getting everything they wanted and economy that is the envy of the world the poor dears need more because as it would seem thirty years down the road productivity growth is worse not better than it was.

We live in a remarkable country, its people reward failure like no other people.  If Egyptians were Canadians they would be sending flowers, not stones and cocktails, to Mubarak and his economists sycophants.

No. 8: We got effeciency here

For some I know this will seem a little too low on the list, but it is low because it really is low. When you are trapped inside GET (general equilibrium theory) reality is your enemy. Inside GET everything is tranquil–like a heroin addict after the needle is in and the payload delivered. In this exotic den of opium everything is tractable (well no really, Nash cooked this dream off like a poet in the night). Take a brave step away and not all that starts well ends well–and here we are not just talking about aggregation problems.

The efficient market hypothesis (EMH) not only claimed that financial markets were narrowly efficient as in they embodied all the relevant information and said information was conveyed in usably due time, but, also, that following Hayek such information was superior to any information that could be gathered and thus regulated by a central authority.

The outside play here was that ay attempt to regulate financial markets was doomed to failure because market participants would necessarily have at their disposal timely and thus superior information than public regulators. This argument got pushed so far that it was even argued that self regulation by private individuals would be superior as private actors would have better information. This logic of course suffered from a begging the question problem as in: if information is rapidly disseminated by market actors why can’t the state access that information and evolve policy and regulations in lock-step? That is to say, if information is efficiently conveyed why can’t regulators access and then use this information to regulate.

Two defences are available to the apostles of EMH. The first would argue that because the state is not a direct player in markets it in fact does not have access to this information. This is likely true, but the problem is that such a defence invites government participation in financial markets precisely so it can monitor and regulate the industry. YET, this conclusion is exactly the one EMH was designed to trounce. EMH was above all about the capacity of markets to auto-regulate. Why after all is the state needed when private markets are already efficient.

The second, and preferred, line of defence is then the argument that markets were efficient but the quality of the information was bad and that in time markets self corrected via what layman have come to call the Great Financial Crisis (GFC). Here the GFC is painted not as a crisis but an updating from poor information to good and is thus a confirmation of the EMF.

This second line of defence of course suffers from the obvious wrinkle that it boils down to the proposition that markets get things hopelessly wrong and that they can do so for such a prolonged period of time that the whole economy (not just finance) gets sucked into the vortex of ignorance. Presented as such the second line of defence is rather effervescent. For if the updating process takes such a long time and is capable of spreading bad information across a whole host of different markets from housing through to food and energy then the case for government regulation would seem strong.

But alas no! No because we only need to default back to defence one which is that the state does not have any better information than markets. But this only begs the question about the role of the state not just in terms of the regulator but in terms of a participant. In principle there is nothing that stops the state from becoming a significant player in financial markets: taking in information and then asking prudential third party questions.

In a nutshell those who would defend EMH via the second stratagem did so to avoid increased state involvement but then they have to defer to stratagem one in order to salvo the second. But stratagem one begs the question.

None of this is gainsaid by the obvious blooper that calling something efficient which demands that entire economies suffer the pain of “updating” is incredibly glib. Auto-regulation ought to imply smooth processes of adjustment. IF what EMH boils down to is that good information is turbulent which is eventually self-correcting after long period of pain then we really are back to the debates which raged before and after the Second World War.

My bet is this: Diamond and Fama will never win the Swedish bank prize but many economists will retain the ontological model in the back of their heads and demand no less from their graduate students.

A pity really.

IMF research paper: “Inequality, Leverage and Crises”

A recently released research paper coming out of the IMF is worth your time. Particularly so if you find yourself making what you take to be a serious argument about the link between inequality and macroeconomic stability but can’t seem to get any respect. Over thirty years of neoliberalism it has been constantly argued that inequality was good for growth and economic stability; this IMF paper argues the opposite and has the neat feature that it is based in evidence rather than in elegant counter intuitive theory.

Below is the abstract for the research paper by Michael Kumhof and Romain Rancière (hat tip to Andrew Jackson over at PEF)

The paper studies how high leverage and crises can arise as a result of changes in the income distribution. Empirically, the periods 1920-1929 and 1983-2008 both exhibited a large increase in the income share of the rich, a large increase in leverage for the remainder, and eventual financial and real crisis.

The paper presents a theoretical model where these features arise endogenously as a result of a shift in bargaining powers over incomes. A financial crisis can reduce leverage if it is very large and not accompanied by a real contraction. But restoration of the lower income group’s bargaining power is more effective.

Finance Minister Flaherty beams sunshine out of his cake hole: Labour market tells a different story

So there is this graph of harmonized unemployment rates comparing select advanced capitalist economies:


Click for crisper image

Then there is this quote from the Finance Minister Flaherty:

“We’re punching above our weight – far above our weight. And now the heavyweights are coming to us for lessons,” he said. “Leaders of the world [are] looking at Canada and our economy with envy, saying: ‘We want to be Canadian.’”

Well Jimmy they are not knocking on our door for advice on unemployment and I could drag out equally dis-confirming productivity stats to bring the hammer all the way down on the anvil but that would take thirty more minutes of my time.

More interesting it would be nice to know what advice Jimmy has been giving the heavy weights: engage in premature austerity and celebrate pyrrhic victory? No wonder Jimmy is getting invited over to all the cool finance ministry cocktail parties around the globe.

As an aside, it would be nice if the journalists over at the Globe would at least challenge the veracity of the claim. But I guess that is what unpaid bloggers do for a non-living.

The Limits to the NDPs War on Consumption Taxes: and the Crisis on the Left

Usually the NDP frames their stance against the Harmonized Sales Tax as not being one of anti-tax but one of being anti-regressive taxation. This is a view I am sympathetic to. However, some real-politic concerns have slowly started to change my mind. I say slowly because back in Grad School I was willingly to put up with a never ending series of accusations that I was a petite bourgeois tax renegade by no less than my supervisor and 8 years later I have not been fully convinced. But let me indicate the three most important arguments that have been moving my mind however glacially on the subject.

My graduate supervisor’s point, and one which I was sympathetic to, but just not enough to bring me around on the issue was about the tax base. His argument was that as long as progressive income taxes were in the political firing line progressives would need to fight to keep the tax base and that meant consumption taxes. Indeed Swedish social democrats used largely this strategy to maintain funding for a high quality and efficient social democratic welfare state. Note: Sweden has both higher income taxes and higher consumption taxes than Canada.

The second argument which has started to move me around on this issue is over the question of broader political strategy. Just how will the Carole James NDP in BC, if it were to gain office, manage to raise taxes of any form after having thrown the party’s lot in with what can only be described as Vander Zalm’s petty populist tax revolt? By ranging themselves against consumption taxes does the NDP really think that to the median voter that is a green light to raise their income taxes? So whatever the truth of the NDP’s position against regressive taxation it does not mean they are going to get progressive taxation. I dare Carole James to make increased progressive income taxes the centre piece of the next campaign. Simply put the discursive consequences of being against regressive taxes probably are equivalent to being against taxation in general. In my mind this is the strongest argument against the NDPs war on consumption taxes.

The third argument is the Pigou argument. Simply stated economic activities involving demonstrable negative public externalities ought to be taxed. Tax what you don’t want and redistribute to what you do want. In principle I get the logic here, where it breaks down is getting a political consensus on what we do want and don’t want.

The reality is that there is simply a massive public aversion to higher taxes of any form and there does not seem to be strong consensus on redistribution. So even when we can find an example of where a government has been able to increase regressive taxes there has been only tepid nod to redistribution. Exhibit A would be the last budget in Quebec.

There is a good article, Fueling the Tax Revolt: What’s Wrong with the NDP’s Anti-HST Campaign by Matt Fodor, in The Bullet on all of this including the NDPs various predicaments. I will quote at length the conclusion:

Ironically, the U.S. and Canada in fact have more progressive tax systems than Denmark and Sweden. Taxation rates are higher in the Scandinavian countries at all income levels. Thus the highest earners pay a higher level of income tax, but so does the working class – the ratio between the top bracket and what an average worker pays is smaller in Scandinavia. In 2004, the combined level of personal income taxation and social security contributions for an average production worker was 24.1% in the U.S. and 25.1% in Canada – compared to 33.7% in Sweden. And the average production worker in Denmark (44.1%), along with Germany (44.5%), paid the highest among OECD countries.

All countries use taxes and transfers to counter inequality, but the Nordic social democracies mainly rely on transfers. Transfers as well as taxation, have a role to play in terms of reducing inequality. In a paper for the Ontario Fair Tax Commission – which was established by the Ontario NDP government as a means of exploring tax reform – Lars Osberg stressed that transfers must also be taken into account when one speaks of progressivity:

“In practice, the tax and transfer systems are inevitably closely linked – indeed, it can be argued that transfer payments are ‘negative taxes.’ The net impact of taxes and transfers on individuals is the difference between payments made to and payments received from government. This net impact is relevant for equity purposes. Although some tax choices (such as a value-added tax) may be regressive, taking a higher percentage of the income of the relatively poor, the tax/transfer system as a whole may be progressive, if expenditures benefit primarily the less affluent (as in Sweden).”[11]

It should be stressed that progressive taxation must remain on the agenda for the Left, and that the shift away from progressive taxation (including in Scandinavia) over the past two decades remains a concern. In Canada, the case for far more progressive taxation remains especially compelling. Jackson points out that the income gains of the 1990s went disproportionately to the wealthiest 10 per cent of Canadian families – and these income gains were more pronounced the further up the income ladder. And while the effective income tax rate for most Canadian taxpayers declined only slightly, it declined much more sharply for the very wealthy. The phenomenon of rising incomes at the top, Jackson observes, can only be effectively countered by progressive taxation:

“Canada needs to pay much more attention to income tax progressivity given the steep increase in top incomes, which is now the key driving force of rising income inequality in Canada and other ‘neoliberal’ advanced capitalist countries. Transfers counter inequality by raising the lower end of the income distribution, compared to the middle and the top, while progressive income taxes counter inequality mainly between the top and the middle and the bottom of the distribution. If inequality is now being largely driven by the growth of the income share of the very top, progressive income taxes must play a larger role in our redistributive policy arsenal.”[12]

In spite of the NDP’s denunciation of the ‘regressive’ HST for taxing ‘ordinary Canadians’ rather than corporations and the wealthy, it has failed to put progressive taxation back on the agenda. Besides symbolic gestures opposing the latest round of tax cuts by Liberal and Conservative governments, the NDP has been unwilling to call for increased income taxes for those with the highest incomes. By failing to do so, claims that the party is not “anti-tax” just “anti-regressive tax” ring hollow. The declining progressivity of the Canadian tax system remains a core concern, and an issue that certainly should be taken up by the NDP. However, the key lesson of Nordic social democracy – that a well-financed welfare state necessitates the use of consumption taxes and other so-called “regressive” taxes – remains essential.

There in fact is a compelling case for consumption taxes on socialist and ecological grounds. Social democrats, include those in Scandinavia, have been rightly criticized for pursuing ‘shared austerity’ policies that redistribute income within the working class/middle class while having abandoned policies that target capital. That being said, socialists ought to defend policies that redistribute income from higher-income workers to low-income and unwaged workers on solidaristic grounds. As the Nordic social democracies have shown, this is done through sales and turnover taxes. There is also a ‘public goods’ argument. The taxation of private consumption can fund the provision of public goods (such as parks, public transit, public housing, etc.) that are more ecological than private goods. Furthermore, public goods provision has the effect of decommodification which is as important as progressive taxation in terms of moving toward socialist relations in capitalist societies.

The global economic crisis has resulted in a hard-neoliberal turn toward fiscal austerity and public sector wage restraint and cutbacks. Such an anti-austerity campaign necessitates at the minimum reversal of the Harper government’s cutting of the GST from 7 per cent to 5 per cent, a move that was opposed by the NDP but goes against the spirit of the anti-HST campaign. As Mel Hurtig observes, Canada already ranked number 27 out of 30 OECD countries in terms of taxation of goods and services in 2003. While “someone buying expensive jewellery or new Bentley will save a bundle…a 1 or 2 per cent saving on even inexpensive household items represents only pennies. Yes, pennies to a poor person are important, but 2 per cent of the cost of a million-dollar house could pay for a big pile of groceries for many poor families.”[13]

The GST cut costs the national treasury billions of dollars per year. The restoration of the GST to 7 per cent alone would significantly offset the cuts to the public sector. Further increases to the tax are essential components to the improvement and expansion of public services. Transfers to low-income households could be significantly increased as well.[14]

The building of an anti-austerity campaign that makes the case in support of expanded public services is not likely to come from the NDP leadership, given its opportunistic stoking of anti-tax politics on behalf of so-called “working families,” as well as its muted opposition to current attacks on public sector unions. It is a matter of some urgency to re-imagine what a new anti-neoliberal alliance will look like in Canada. The union movement in Canada is, for the most part, providing almost as little leadership in social struggles. Public sector unions in alliance with users of public services ought to take up the leadership here, but they will only be pushed to do so to the extent a new left begins to emerge inside the wider union movement. But it could be argued that private sector unions and social movements – anti-poverty, feminist, environmental, and other organizations – are in an even worse state of disorganization. This speaks – like the debate over the HST as a whole – to the wider crisis of the left in Canada. An anti-austerity campaign needs to be equal parts a fight against neoliberalism and building a new left. •

Is it too much to ask that Simpson check his basic facts before he opines on Quebec no less?

Sadly the brief answer is probably yes. There is so much wrong with Jeffrey Simpson’s column on Quebec, Quebec’s pay-everyone social programs are draining its purse, and on so many levels it is hard to know where to begin. Rather than make a catalogue let me just make two interventions: one on audience and one on accuracy.

The obvious needs to be pointed out; namely, that when writing in the Globe and Mail you are writing for an Anglo Canadian audience much of which is waiting to have its ignorant view of Quebec confirmed. So fact checking is kind of essential even when all you want to do is present a one-sided, single sourced position. Simpson’s opinion reminds me of the racist joke teller that can’t even get the intended target’s ethnicity right.

This brings me to accuracy. Here is the glaring claim:

Forty per cent of Quebeckers do not pay income tax, as young economist Mathieu Laberge has noted. One result is fierce opposition to program cuts by people who are not taxed to pay for government services. Another result is that, with only 60 per cent of the population paying income tax, it’s hard to raise big new revenues.

Sounds pretty desperate. So few people pay income tax in Quebec they cannot raise significant revenue through income tax increases. The way it is phrased it makes it sound as though this is unique to Quebec. Thus playing into the dominant stereotype of Québécois(e),lounging around in their English Canadian equalization payment paid for Swedish style welfare state. Indeed troll through the comments section of Simpson’s column and it would appear that Simpson’s mission is accomplished.

Here are some examples of the bile Simpson (in)advertently(?) encourages:

This is why the Quebec referendum threat is complete BS. They can’t afford to leave as they would no longer get transfer payments to subsidize their socialist spending problem. If you don’t give “less fortunate” members of society any reason to make a go at bettering themselves, why would they bother?

Quebec should deal with their own problems and stop crying for subsides from the RoC.

Clearly Simpson’s article, and the data provided by the young Mathieu Laberge, simply serves to stoke the image that the Quebecois(e) do not work as much as other Canadians and are unjustly rewarded for their lack of initiative. Having grown-up in BC and lived at the centre of universe for 10 years I can attest that this is pretty common stereo-type about Quebec.

I have one simple question are the percentages of Québécois(e), paying income taxes lower than in the rest of Canada? Or even out of line with any of the major English Canadian provinces? One caveat: I do not know how Laberge derives his figure that 40% of Québécois(e), do not pay income tax. It would seem he is just equating the employment to 15-64 year population ratio in order to get his number. And indeed in Québec the employment to population ratio is 60%. I would have thought a more accurate guestimate would have taken the labour force participation numbers as a percent of of the population between 15-64 (termed the participation rate). Unemployed workers have paid or presumably in the near future pay income taxes as they are in the paid labour market. The participation rate in Québec is 65.5% implying only 34.5% of Québecois(e) will not pay income tax this year.

However whether or not you use Laberge’s (and Simpson’s) somewhat exaggerated measure or mine the fact is that Quebec’s numbers are good as they compare with BC’s at 61% and 66% or Ontario’s at 52% and 67.5% respectively. Quebec hardly is a case of a low income tax paying province. And Quebec’s numbers compare favourably with its Atlantic Canadian neighbours. So if there be a problem with the percentage of income tax paying citizens to non-income tax paying citizens then it is a Canadian story with a western Canadian wrinkle (Alberta and Sask have high participation rates).

That is we could have made the same alarmist sounding claims about BC, Ontario and all of Atlantic Canada. So whatever the story is here it is not about L’exceptionnalisme Québecois(e).

Moreover, it is fine list of programs that Simpson presents from cheep affordable and quality post secondary education through to universal drug plans and by although no means universally accessible affordable day care. Hence it is hardly a surprise that we pay higher income taxes in Québec than almost anywhere in North America: Duh! because we have more public services. It is not a glitch Jeffrey and Mathieu, it is a prerequisite.

Look it is not like progressives have not seen this film before. First you attack universalism under the guise that you really want the rich to pay their fair share; then you start with an anti income tax campaign trying to get the public to internalize the idea they are over taxed; then you destroy universality and give the bulk of tax reductions to the very rich people you made the chumps think you were originally targeting. And in the interim destroy l’esprit égalitaire that Laberge so detests.

Simpson is right though in the sense that Charest is certainly attempting a re-run of this film in Québec and I suspect he will be successful.

All the data for this post can be obtained from Statistics Canada for free here.