Canada, Economics, Inequality, Political economy

Bidenomics signals the end of the Third Way in economic policy

Biden’s first 100 days clearly signals the end of the Third Way in economic and social policy. With massive investments proposed in social infrastructure and education, a willingness to take a positive sum approach to budget deficits, and a commitment to fund those investments partly through higher corporate taxes it’s clear that the Third Way is now truly dead.

For those who may not remember (or who have been all too happy to forget) the Third Way was a strategy cooked up by Centre-left parties in the 1990s who hoped to ride the coattails of a highly deregulated economy and booming stock market while also mitigating some of its damage through targeted social spending. It was called the “Third Way” because it sought to distance itself equally from conservatives and from social democrats. This was the policy style that defined Clinton’s “triangulation,” Tony Blair’s “New Labour,” and Jean Chrétien’s deficit-busting mantra.

The cost of these policy failures has become obvious in recent years, as we have witnessed the 2008 global financial crisis, growing inequality, and the rise of populist resentment—not to mention the discovery that cuts to the public health infrastructure may have trimmed a few government budgets over the year but at the cost of thousands upon thousands of lives (and a shuttered economy) today.

Although Joe Biden was a card-carrying member of the Third Way club in his earlier days, given the huge costs of these mistakes, it is little wonder that he has recognized that it is time for a different approach to the economy.

There are at least three key ways in which Biden’s economic policy breaks with the logic of the Third Way, each of which has important implications for Canadian economic policy.

First, Biden has proposed a massive increase in social spending. His Families Plan aims to invest $1.8 trillion over 10 years and includes support for free universal preschool, paid family and parental leave, investment in child care and education. As Adam Tooze has pointed out recently, the theme of investing in families is in fact central to all three of Biden’s major spending initiatives: the $1.9 trillion Rescue Plan, which has already been signed into law, included a significant, but temporary, family allowance system, while the $2.3 trillion Infrastructure and Jobs Plan includes major investments in elder care.

In a few short months, Biden has upended decades of doomed neoliberal efforts to economize on government spending by cutting social spending and offloading on women the cost of what feminist political economists call “social reproduction”—the work of raising children, keeping households going, and caring for the old and the ill—which the formal economy depends on to keep going.

Although women’s double burden helped families to eke out more from stagnant wages, it seriously affected women’s capacity to participate fully in the formal labour market. As Biden, Justin Trudeau and others from the Centre-left have finally recognized, the savings that deficit-busting governments gained from not investing in women and children was therefore always a false economy. As Quebec has made clear, affordable daycare more than pays for itself with the extra tax receipts earned when women are fully active in the workforce.

Second, Biden has finally given up on the Third Way faith in the virtues of balancing budgets and reducing debt. It was always particularly painful to watch Clinton and Obama Democrats, Chrétien Liberals and Blair’s Labour Party cut and cut and cut away all of the programs that they had once helped to create in the belief that this was the only way to get government back on solid fiscal ground. (Of course, Republicans from Reagan onward never believed in balancing their budgets, even as preached the virtues of the “Washington Consensus” on those in the Global South.)

It seems that Biden and his Treasury Secretary, Janet Yellen, like Trudeau and our Finance Minister, Chrystia Freeland, have finally recognized that the zero-sum logic of balanced budgets as an end in themselves is based on a fundamental fallacy. If a country cuts back too much on its spending in the name of austerity, it can create a downward spiral of less consumption, lower investment and increased unemployment, actually slowing the recovery (as we saw in Greece and the UK after the 2008 crisis). On the other hand, the build-up of careful, productively-invested debt can generate decades of growth that not only make a country wealthier but also ensure that the wealth benefits more of its population.

Finally, Biden has proposed that some of the additional spending should be paid for through higher taxes on the wealthy and on corporations. He seeks to double the tax on capital gains and raise corporate tax rates from 21% to 28%. This is a crucial shift after decades in which the Centre-left has gone along with the neoliberal myth that helping out investors and big corporations ultimately trickles down to the rest of us, while raising their taxes only hurts consumers. In fact, as the Tax Policy Centre notes, most corporate taxes in the US are paid for by investors—with 70% paid by the top 5% of income earners.

This is the one area where Biden is clearly ahead of the Trudeau Liberals in challenging the myths of the Third Way. There has been no sign of the current Canadian government wanting to reverse the Chrétien Liberals’ sharp reduction in the capital gains tax or to raise corporate taxes (which were also slashed under Chrétien, and then further cut by Harper). It appears that the Trudeau Liberals are not ready to discard their unhealthy relationship with big business and challenge the Third Way myth of corporate trickle-down.  

Although it’s hard to say how much of this ambitious plan Biden will get through Congress, what is clear is that by challenging the damaging myths of the Third Way, Biden has shown that it is possible to imagine a more just economy, not just in the US but around the world.

This blog was originally published on the CIPS Blog, May 31, 2021.

Accountability, Canada, Inequality, Political economy

Scrooge in Paradise: Why Private Wealth is a Public Issue

Scrooge

As global inequality grows to “extreme levels” — as revealed in the just-released World Inequality Report — it is hard not to wonder what it bodes for the health of liberal democracy — around the world and here in Canada.

Even though our growing levels of inequality may not come close to those in the United States, recent conflict-of-interest stories about both Liberal and Conservative MPs, a growing reliance on tax havens, and cash for access scandals all raise serious concerns about the influence of the wealthy in Canadian politics.

If money talks, then the rich are now deafening the democratic system. As economist Branko Milanovic explains, “the higher the inequality, the more likely we are to move away from democracy toward plutocracy.”

One of my favourite recent New Yorker cartoons shows two men in business suits looking out from a lavish corner office, as one says to the other, “Part of me is going to miss liberal democracy.”

Although we’re not quite there yet, the dark tone of the cartoon reminds us that the economic “haves” can be just as likely to become disaffected with democratic politics as the “have-nots” often singled out as the source of populist pressures (in fact, elites have historically been the most important factor behind de-democratization, as Charles Tilly notes in a recent book).

Reading that New Yorker cartoon, it is hard not to imagine that at least one of those businessmen is likely to be a good friend of President Trump’s. He’s turning conflict of interest into performance art, talking up his daughter’s clothing line and getting national park gift shops to sell Trump branded wine.

Yet, while Trump and entourage demonstrate a particularly brazen willingness to blur the line between public office and private gain, the problem is a much wider one — with echoes here in Canada.

The Paradise papers revelations, the cash for access scandals, and the use of “loopholes” in ethics screens are all legal strategies for giving the wealthy an unfair advantage in a system where we are all supposed to be equal as citizens. Each of these strategies works in a different way to undermine the democratic culture that makes our political system work. In the process, they further blur the line between public good and private gain, eroding the trust that makes democratic politics viable.

Cash for access is the most straightforward. It takes the existing informal advantage that the wealthy have to ensure that their voice is heard politically and weaponizes it. Why bother voting as an ordinary Canadian when politicians will spend their time listening to someone paying $10,000 for a rubber chicken dinner?

The “loopholes” in ethics screens that various Liberal cabinet ministers have admitted to using, as well as the failure of certain Conservative MPs to disclose business ties to China, work more subtly. They create the possibility that public office holders will be swayed by their private assets as they make decisions designed to serve the public good. Why bother being an engaged citizen when you don’t know whether those making the decisions are pursuing their own interests or ours?

The Paradise papers tell us that many of the public figures who speak and act in the name of the public good use tax havens to avoid paying their fair share. Why bother buying into a democratic system requiring that we all do our part by paying taxes when those with the most power are actively avoiding doing so?

Of course, the line that we draw between public and private in a liberal democracy is always something of a fiction. Liberal political thought tells us that everyone is an equal citizen in the public domain, with an equal right to participate politically. Liberalism is also based on the premise that we should be free to pursue wealth accumulation in our private lives, meaning that we will often be quite unequal in economic terms.

In theory, this private inequality should not affect our formal public equality as voting citizens. In practice, things are rather different, as wealth often translates into a greater political voice — as any government that has tried to put a halfway house into an affluent neighbourhood or to reduce tax advantages for doctors incorporated as small businesses will tell you.

To keep a democracy alive, and to ensure that everyone has a meaningful voice and stake in the political system, we must do two things. We must work to keep those private inequalities from getting too large (via public education, social programs, a progressive tax system, etc.). And we must work to minimize the ways in which private inequalities translate into unequal influence (via election financing laws, conflict of interest provisions, etc.).

In Canada, we have made progress on some of these measures, but we have also fallen behind in many respects. As recent census data shows, earnings inequality has continued to grow in Canada over the last decade, while the top 1% increased their share of total income in 2015.

When trying to figure out how we got here, there is blame enough to go around. The Chrétien Liberals began the trend towards growing inequality when they gutted transfer payments for social programs in the 1990s. Inequality grew under the Harper Conservatives, who also eroded some of the other bulwarks against buying political influence, notably through reversing changes to election financing laws, making parties more reliant on private donors once again.

Although the Trudeau Liberals have clearly stated their desire to reduce inequality, and have begun to tackle some of these problems, their own recent conflict of interest scandals suggest a very long way to go before the political culture in Ottawa starts to change.

As that New Yorker cartoon reminds us, unless we start taking the problem of inequality much more seriously now, we may soon find ourselves thinking nostalgically of the “good old days” of liberal democracy.

This blog post originally appeared on the CIPS Blog on December 19, 2017.

Canada, Economics, Inequality, Political economy, Theory

Rebuilding the middle class: The Liberals have a chance to rectify their past economic mistakes

As the new Liberal government starts to put its economic plan into action, its commitment to paying attention to the evidence (unlike its Conservative predecessors) should provide them with both comforting and cautionary tales.

On the one hand, there is ample evidence to support the Trudeau government’s plan to allow for short-term deficits in order to reinvest in infrastructure and rebuild the middle class. On the other, the data also points to a rather more inconvenient truth: the trend towards growing inequality actually started on the Chrétien Liberal government’s watch.

A recent report by TD Economics notes that while the top 20% of income earners have gained 30% since 1976 (most of that since 1994), the middle 20% have only seen an increase of about 5% in that time. More tellingly, the report suggests that it was only in the mid-to-late 1990s that the level of inequality in Canada began to take off “when governments stopped leaning against income inequality.”

During the campaign, Justin Trudeau demonstrated his willingness to take on board new economic thinking and break with the old Liberal Party’s obsession with paying down the debt at any cost. Although the Trudeau Liberals’ willingness to run a small fiscal deficit in the short-term was ridiculed by the Conservatives and challenged by the NDP during the election campaign, it is actually entirely consistent with much mainstream economic policy thinking today.

A recent discussion note by economists at the International Monetary Fund (not exactly known as a bastion of left-wing thinking) warned governments like Canada against imposing austerity measures in order to pay down their debts more quickly. The authors note: “While debt may be bad for growth, it does not follow that it should be paid down as quickly as possible.” In fact, “If fiscal space remains ample, policies to deliberately pay down debt are normally undesirable.”

Or, to borrow former NDP leader, Jack Layton’s, well-known phrase (as noted in a column by Andrew Coyne last March) there is little point in paying down your mortgage faster when your house is falling down from badly-needed repairs.

This reminder of Layton’s common-sense wisdom should tell us two things. First, and most obviously, the NDP lost its way in its efforts to seem economically credible enough to govern. While there is no question that the party had far less political leeway than the Liberals to challenge what has become a Canadian obsession with balanced budgets and debt-reduction, by setting aside the more hopeful ambitions of Layton’s NDP, Mulcair and his advisors ended up in the odd position of being more conservative than the IMF (not to mention Andrew Coyne).

Second, we need to remember that it was the Chrétien and Martin Liberals, not the Conservatives, who made debt reduction a centrepiece of their economic policy in the 1990s and early 2000s.

The first cuts made in the 1990s were designed to reduce what had become a genuinely unsustainable deficit. Back then, Canada faced a milder version of Greece’s recent dilemma, with bond markets increasingly suspicious of the government’s credit-worthiness.

Yet what started as a strategic response to external pressures soon became an end in itself: the running of surpluses to pay down the debt became a mantra—part of the brand of the Liberal Party itself.

As we now know, that policy had its own very serious human costs.

I remember well the moment when the Liberal government stopped leaning against inequality and started to dismantle the same social policies that Pierre Trudeau’s government had built. I was a parliamentary intern in the House of Commons from the Fall of 1994 to the Spring of 1995 (in fact, one of my fellow interns was Arif Virani, who has just been elected as a Liberal MP for Parkdale-High Park). I watched a Liberal party that had campaigned on the left move sharply right. I watched smart, progressive politicians like Lloyd Axworthy overseeing the erosion of our social infrastructure, and I tried to understand why.

That experience shaped the rest of my career. I decided to go back to university and become a professor of international political economy in order to try to understand why countries like Canada could believe that they had to destroy their social fabric in order to survive economically—and how we could prevent this happening again.

In the twenty-plus years since I first sought to understand how Canadians can foster a caring and just society in a competitive and often unstable global economy, I have not come up with any easy answers.

But I do know that a Liberal government that is genuinely open to learning from the evidence, and committed to paying attention to inconvenient truths, will not reproduce the same mistakes that it once made.

Rising inequality hurts all of us. Recent research has shown that more unequal societies don’t grow as quickly, as many members of society find themselves unable to invest in their education and training, decreasingly overall productivity.

As the TD Economics report notes, the factors that allowed us to avoid the more radical hollowing out of the middle class seen the United States in recent years can no longer be counted on, as the commodity boom comes to an end and the hot housing market starts looking increasingly like a bubble about to burst (or at best deflate). Without creative government action, we are at risk of falling into a vicious cycle of lower growth, cuts to programs, further inequality and even lower growth.

While some might argue that the Bank of Canada’s recent downgrades to the economic outlook should push the Liberals back into their old austerity mode, that zero-sum game no longer holds water. As middle-class jobs come under even more pressure, leaning against inequality can help us all.

This was originally posted on the CIPS Blog.