The Pearson Centre for Progressive Policy

Progressive Dialogue and Policy for a Better Canada

It’s Time for Trickle Up Economics

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May 7, 2020

It’s Time for Trickle Up Economics

By Terrance Hunsley

For many Canadians, the pandemic gives pause to think about family, community and society. We are all in this together, concerned with the victims and heroes of the crisis, our environment and our economy. We talk about a rethink, recognizing what we value most in life.

So I got to thinking about government economic policy. There will likely be a need for an extended period of government stimulus spending as the economy stumbles back to life. The choices made will help shape our economic future. So do we continue down the same economic path with the same policies?

I think about the economic concepts which have guided government policy over the past forty years, and what a rethink might entail. Picking up on a theme that became popular during the Reagan days, what if we were to shift from trickle down, to trickle up economic policy?  

Origins of Trickle Down Economics

Many academics would agree that the narrative that guides government policy in many western nations began in the USA in the mid to late 1970’s.  Before then, governments had been expanding rapidly.  Social programs were being established,  a “war on poverty” was being waged (we lost). Civil, labour and women’s rights were being strengthened. Income taxes were highly progressive. 

Then came the OPEC crisis and the ensuing period of stagnant growth and high inflation.  Business owners and CEOs of major American corporations decided enough was enough. They put aside their differences and focussed their power on stopping government growth and changing the direction of policy.

The Business Roundtable, founded in the mid 1970s, spearheaded a broad movement which aimed not only at specific policies, but also at influencing policy thought.  It started in America, but the movement replicated itself in Canada, the UK,  and other countries.

One need not fall into conspiracy theory. The fact is, during the political and economic challenges of the decades which followed, a cluster of mutually-reenforcing concepts were promoted, and they coalesced into a dominant paradigm. They were adopted by governments of different political stripes.

The prevailing economic goals have been growth and productivity, with GDP becoming the measure of economic health. Resource development, deregulation, tax policy, the removal of protective tariffs on trade, and globalization of finance and production, supported those goals. 

Ostensibly to encourage the wealthy to work harder, taxes on wealth were removed,  and taxes on business and high-income earners were substantially reduced. No OECD country now has a marginal tax rate of 80%, as was the norm in Canada and the USA 50 years ago.  Even Sweden tops out at about 60%.

The notion that making more money available to the rich would result in benefits trickling down through the economy to the  everyday earner, was articulated  in the 1980’s. Some came to rename “trickle down economics” as “supply side economics.”  It had a better sound to it.

Control of labour costs

On the labour market side, government support for unionization faded away, and inflation control became a primary focus of central banks.  The concept of the NAIRU became popular (NAIRU meaning “non-accelerating inflation rate of unemployment”). It doesn’t just roll off the tongue. It suggests that stimulating the economy through low interest rates and money supply should not exceed a point where unemployment would decrease enough for workers to demand wage increases above inflation. It was an indirect wage-dampening measure.  It may not have been necessary because the baby boom and the increasing participation of women in the labour force were providing more workers than really needed. That oversupply also helped to keep wage growth down and permitted employers to choose workers who were overqualified. 

Two related concepts directed government labour market policy. During the trickle down years, many countries including Canada moved to “liberalize” their labour markets, in order to make workers more “flexible” to meet the needs of the market. Employers were given free reign to hire and fire at will, to put workers into part-time positions or declare them to be self-employed contractors in order to avoid making social security contributions.  Minimum wages were permitted to decline with inflation, leading to decreased real wages. The coverage of employment insurance was reduced.

The removal of tariffs on trade also gave employers the ability to reduce their wage costs by moving production to countries where workers could be paid less.  So domestic production wages remained stagnant, declined, or disappeared. Unions which attempted to organize workplaces faced a real potential of seeing the jobs “off-shored.”

During the 1980’s and 90’s, unemployment was constantly high because of the rapid increase in people entering the labour market, especially women and younger workers. To keep them on their toes, OECD governments introduced “active labour market policy.” The goal was to keep people actively seeking jobs, or taking the minimum amount of training that would help them to move quickly into a job, even if it paid less than their credentials should justify.  

To ensure that even low end wages were an attraction,  social assistance support for non-working employable people was reduced dramatically in both Canada and the US.  The US, under Clinton, paired the social assistance cutbacks with an increased Earned Income Tax Credit, to encourage low end work. Canada cut social assistance during the Martin administration. Later when Jim Flaherty became Finance Minister, a very modest Working Income Tax Benefit was introduced. (Stories are told that he was sold the idea using the acronym for the benefit “WITB – pronounced “Whitby”, his riding.)

Overall Impact of Policies in last 40 years

It is difficult to assess the overall effects of the economic policies, and the concurrent processes of demographic change, globalization and technological advances. The creativity and vitality of capitalism has been given free reign. The results are a complex mix of social, economic, environmental, and geopolitical changes. 

On the up side, 

There are wonderful new products and there are great opportunities for interesting and creative work. The scope for entrepreneurism is almost unlimited. Society is globalizing, with difficulty, and many people can decide to work and live anywhere in the world they wish .

Global poverty has been significantly reduced, mainly by shifting production to China and other parts of Asia. Economic growth in those areas has been rapid, and a large, developing middle class promises continued global market growth, even as it slows to a creep in North America and Europe. 

Global markets and instant communication gave entrepreneurs and businesses opportunities for quick success and massive revenues. The numbers of wealthy and the size of their assets increased dramatically. Their helpers – managers, specialists, marketers, lawyers and financial managers, are enjoying a share. Performers, entertainers, athletes, who make it to the top of their game, join the cadre of the “working rich.” The new technology offers new scope for startups and to transform old businesses like transportation, logistics and retail sales.  Occupations which are protected by government and permitted to self-govern, like lawyers, doctors, accountants, dentists, have been able to protect their pay scales, thereby rising with the tide.

On the downside:

The planet’s natural resources are being depleted. Consumer and industrial activity is accelerating climate change to the point of a global environmental crisis. 

While production workers in North America lost jobs and status, many new jobs have been created, especially in services. Many of them are good, well-paying jobs. Many of them are underpaid precarious work. Economic growth continues at a modest pace, but in Canada, the overall rate of productivity growth since the late 1970’s has been about half the prevailing rate of previous years.  

As well, with the clarity of hindsight, we can see that the benefits of trickle down policies did not trickle down all the way. Most were absorbed by the rich and the top third of income earners. A few droplets made it to the middle.

Especially in North America, and in some European countries,  there is a point somewhere around the median income, where wage trends bifurcate. The top half have enjoyed increases, proportionately larger as they get higher. The bottom half have stagnated or lost ground. 

However …

Earnings inequality doesn’t show up in daily life as much as we might expect. 

The reasons are first, most families now have two earners (or more) where in previous eras, most had one. So families have more money by working far more hours, resulting in the well-documented stress of raising a family with two working parents. Second, Canada redistributes more income to lower levels than does, for example, the USA, although less than the OECD average. Third, the older part of the population is growing, and that part tends to have more equal incomes, especially in retirement (which also accounts for a large part of the redistribution by government.) Universal and free health services also have an equalizing effect on living standards. 

These things have mitigated the effects of earnings inequality, but only partially. The underlying forces are still at work. For example, the OECD points out that Canada has about 21% of the work force earning less than 2/3 median wage, which is their definition of low wage workers.  In contrast the OECD average is about 16% with several European countries around 10%. Canada also has the highest poverty rate among non-standard (temporary, part time, contract) workers in the OECD.

Impact of the 2008 events

When the Great Recession hit in 2008, governments felt the need to act quickly. Canada was somewhat sheltered from the financial collapse of banking caused by the unregulated US financial industry. The US and several European countries felt they had no option but to bail out the banks with public taxpayer dollars.  The automobile industry and other major industries lined up for subsidies as well. Some analysts labelled the process “socialism for the rich, capitalism for the poor”. 

Valerie Cerra, an IMF expert on dealing with economic crises, suggests in a Social Canada repost, that the way that governments bailed their economies out of the 2008 great recession, relying on feeding the existing business hierarchy, has resulted in increased inequality.  It also contributed to a backlash against globalization and a decrease in trust in government. She goes on to report IMF research indicating that decreased inequality could lead to greater growth and economic stability over the long term. .

Give trickle up a try?

To come out of this crisis, we will need an extended period of economic stimulus, because many businesses will not bounce back. Some that do will reduce their labour needs through automation or transforming work arrangements. Many of the people we hailed as heroes during the crisis will return to subpar and precarious work.

So what if we decide to adopt trickle up economics as a guide?

Healthy families, lifestyles, communities  and environment could be a starting goal for government economic policy, rather than economic growth. With a fresh look, we could stimulate the economy while building a sustainable and caring society.  The rich and entrepreneurial people are smart and will still wind up getting their share.

We could provide a modest basic income stipend for everyone, as a universal taxable transfer. It would stimulate consumption and bring up the bottom half of the income scale. 

As well, we could decide to eliminate low wage work with a guaranteed working income of perhaps three-quarters of the median wage in the economic region. That is not much above poverty lines, but would push the low wage scale upward. Until the economy grows and minimum wages catch up, low earnings would be supplemented by the Workers’ Benefit. This would help to avoid a flight of independent workers into the underground economy.

If employment is slow picking up, we could establish upper limits on working time until everyone has decent work. Then adjust it upward as needed.

We could invest heavily in educational technology and teacher training, to make Canadians the best in the world, and the Canadian education system an economic driver, building on its current success in attracting foreign students.

We could invest in community trust housing for the elderly, people with special needs, and affordable housing options with the best environmental technology. As the current situation highlights, we clearly have to boost efforts in this area.

We could provide a subsidy program to ensure that every community has capacity to meet its own needs in a crisis, including environmental disasters –  local food production, health care, medical technology, personal protective equipment, etc.

In response to the decades in which governments devolved responsibility to the private sector without appropriate support, we could review the social and economic role played by the community nonprofit service sector. Such services include food banks, emergency shelters, meals on wheels, home visiting services, crisis lines, and many other social and health services that hold our society together. Ensuring that their funding is adequate to the tasks we entrust them, including pay equity with other sectors of the economy, would go a long way to help close the gender pay gap. (Women make up the majority of nonprofit workers.)

Child care services should be universally available and subsidized because that subsidy gets returned to government through more wages being earned and more taxes paid, as Quebec has demonstrated. The federal government could also leave in place the increased Children’s Benefit.

Street routes for bicycle commuting could be opened for much of the year, reducing pollution and fossil fuel usage and improving health.

Paying for all this?

As the economy sputters back to life, marginal tax rates can be increased moderately but progressively on the top third of income earners.

A modest but progressive wealth tax could be created and made payable regardless of where assets are located. A progressive estate tax could be created, and also applicable to holdings anywhere in the world, similar to how the United States makes Americans subject to income tax assessment, regardless of where they live.

The carbon tax could be increased and levied on imports as well as sales in Canada. 

Global businesses should pay taxes proportional to their total sales in the country, moderated by the number of living wage jobs they maintain in the country. 

What could be achieved?

The money spent will go directly into the economy and have an immediate impact on local economies everywhere in the country. 

People throughout the income scale could feel that they benefit from economic progress and good government. 

The federal government would get to keep its promise made three years ago to cut the level of poverty by half by 2030. 

The readjustment of incomes will trickle up to business owners through expanded markets and profits. High income people will continue to enjoy their prosperity with the security of knowing that they have forged a bond of mutual respect and trust with the people who saved them from the ravages of the pandemic.