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'They’re repeating the same old tired myths about what caused the current crisis and what should be done.'
By Larry Brown
National Secretary-Treasurer
National Union of Public and General Employees (NUPGE)
Ottawa (26 May 2009) - We’re facing a serious economic recession that has rocked the global financial system to its core, endangering the jobs and incomes of millions of workers in Canada and around the world.
In the battle of ideas arising from this crisis, progressives in Canada have faced two major hurdles.
The first was to convince governments to take action to stimulate the economy. Some governments refused initially, but today most agree that intervention – fiscal stimulus – is required. Many governments haven’t gone as far or acted as swiftly as we’d like. But at least the debate is now on our ground, about what form and extent of intervention is required.
The second hurdle was to convince governments to reconsider the economic assumptions of the past 20 years. If we fail to fundamentally restructure our economy, if we simply tweak a few financial regulations, and if the recovery just takes us back to where we were in 2006 or 2007, we’ll simply be sowing the seeds for the next crisis. So far there’s been little public debate in Canada about the need to restructure our economy in a significant way.
Of course, when it comes to our economic model, the financial and corporate elites want governments to stick with the status quo. It was, after all, the status quo that enabled them to enrich themselves at the expense of the common good. Predictably, to prevent any real change, they’re repeating the same old tired myths about what caused the current crisis and what should be done.
Let’s look at the most commonly repeated myths:
Myth #1: We need more tax cuts to support families and stimulate the economy.
For right-wing politicians, the wealthy and corporate elite, there’s never a time when we shouldn’t cut taxes. Times are good? Cut taxes. Times are bad? Cut taxes. The weather is bad? Cut taxes.
The reality is that tax cuts almost never work as advertised. Many governments have made deep tax cuts a priority for the last decade. If tax cuts were an economic miracle cure then we wouldn’t be in a crisis right now.
Studies show that in tough times any extra money people get from a tax cut is put into savings or used to pay down debt. So how does that stimulate the economy? And how do tax cuts help people who don’t pay taxes because their incomes are too low or they’re unemployed?
Tax cuts have actually been part of the problem. The main beneficiaries are the wealthy and the business sector. Even the OECD says Canada is among a minority of countries where tax cuts have disproportionately benefited the wealthy – so again, how do tax cuts help vulnerable families?
The independent federal budget officer says we wouldn’t have a serious deficit, even in this downturn, if it wasn’t for all the recent tax cuts – especially the Harper government’s foolish GST cuts, done without replacing that lost revenue. More tax cuts will only put our governments in an even deeper hole and damage our long-term fiscal capacity.
When the Harper government took office in 2006, Canada’s corporate tax rates were already well below the U.S. average. Nonetheless, they cut corporate tax rates by a further seven percentage points – even though there’s no evidence to suggest that businesses will locate in a country because of tax cuts. In addition, according to their own calculations, by 2012 the Harper government’s corporate tax cuts will cost $14.8 billion in lost revenue. This is money that can’t be spent on health or other social programs that actually support vulnerable families.
On the other hand, an historical review in the U.S. shows that their economic growth and business investment has been highest when taxes have been higher, and on three different occasions large tax cuts were followed by an economic bubble and then a serious crash. Just compare Bill Clinton’s economic record with the record of George W. Bush.
Actually, Canadians don’t pay a lot in taxes compared to other OECD countries. Out of 30 OECD countries, Canada ranks 11th in terms of the lowest tax rates as a percentage of GDP. At the same time, studies show that we get great value for the taxes we pay. According to a recent study by the Canadian Centre for Policy Alternatives (CCPA), for the average household the direct economic benefit of public services is equal to two-thirds of the household income. That is to say, the average household would have to pay two-thirds of its income to afford the things that their tax dollars currently provide. Other studies show that higher taxing countries have healthier and wealthier citizens with far better public services and a higher quality of life.
Myth #2: Workers must accept lower wages to ensure Canada remains competitive.
This notion is dangerously wrongheaded. One of the most under-reported causes of the current crisis is the huge income inequality that has crept into our system. For example, the top 100 CEOs in Canada made a billion dollars between them in 2007 (an average of $10 million each), enough to pay 20,000 workers $50,000 each.
Over the last 20 years the rich got richer, the poor got poorer, and everyone in the middle stood still. There are no longer any economists who dispute these trends. It’s just not possible. The level of income inequality we’ve reached not only raises profound issues of equity and social cohesion for our country, it’s also bad economics. It’s impossible to sustain a strong economy with high levels of poverty and a shrinking, debt-ridden middle class.
Nobel Prize winning economist Joseph Stiglitz argues the global economy is suffering from a lack of demand caused by mounting income inequalities, the result of deliberate economic policies which led to stagnant or declining real wages for the vast majority of workers.
After World War II, Canada entered a period of unprecedented growth. Thanks to government spending on public services, and investments in manufacturing and infrastructure, Canada built one of the largest and strongest middle classes in the world. It was an incredible cycle of prosperity. The more people who rose into the middle class, the more demand it created for products and services, and the economy just kept growing and almost everybody was getting ahead.
But then the rules of the game changed. Smaller government, corporate globalization, financial deregulation, and weaker domestic policies to protect the incomes of the middle class were the name of the game. Wages stagnated, the middle class got smaller, and Canada became a radically less equal society.
We got into the current crisis in large part because for the vast majority of workers their wages stagnated or declined, and income inequality soared, over the last 20 years. Lower wages are not part of the solution. They are a big part of the problem.
Myth #3: Labour rights are expendable when the economy is in bad shape.
It’s no coincidence that when the economy was going gangbusters in the decades following World War II, the rate of unionization in Canada was also rising. The corporate leaders and right-wing ideologues who got us into the current mess refuse to accept this reality.
From the beginning of the current crisis, labour rights have been under attack. The Harper government tried to eliminate the right to strike, impose wage controls and destroy pay equity, in their infamous ‘economic update’. When they were challenged the only thing they backed down on was the right to strike. The BC government recently announced there will be no wage increases in 2010, with an implied threat of legislation to achieve this. One of the leadership candidates for the Conservative party in Ontario wants to roll back the newly negotiated collective agreement in the public sector.
A renewed attack on labour rights at this stage is a triumph of ideology over common sense. The ILO has shown that countries with good labour rights do better in world markets. The OECD has shown that countries with high levels of unionization have less of an income gap between rich and poor than countries without strong unions.
One of the first things U.S. President Roosevelt did when he came to power in 1933 was to strengthen unions, and set a floor on wages, because he saw that increasing wages and purchasing power was one of the things necessary to get out of the Great Depression.
Former U.S. Labour Secretary Robert Reich argues that stronger unions can help get the current U.S. economy back on track. He says “the way to get the economy back on track is to boost the purchasing power of the middle class … and one way to do that is to expand the percentage of working Americans in unions.”
Myth #4: We can’t afford social programs in tough times.
One of the causes of the current crisis is that we haven’t been spending enough on our social programs. The lessons of history have taught us that, in tough economic times, social programs act as fundamental supports for both the economy and society.
In the last recession, over 80% of workers who lost their jobs got Employment Insurance (EI). Now it’s fewer than 40%. This is a pure destabilizer for the economy, exacerbating the recession and ensuring that tough times are prolonged unnecessarily.
The unlucky majority that can’t get EI will have to burn through their savings, even though about 60% of Canadian households were in debt before the recession began. After EI runs out and their savings are depleted, people have to rely on welfare benefits which provide barely enough money to buy food and pay the rent. Does it really make sense from either an economic or moral view to slash these social programs further and throw families into the street? In tough times our governments need to offer a helping hand to vulnerable families, not a swinging foot.
Our social safety net has been shredded to the point that the independent federal budget office says our public programs, designed to help people and at the same time stabilize the economy, are only half as effective today as they were in the 1980 recession. The OECD has found that part of the growing gap between rich and poor in Canada can be explained by the fact that our governments tax less and spend less on social programs.
Public sector jobs and services not only add to our quality of life, they also act as an economic stabilizer. When the private sector engine of the economy falters the public sector engine can rev up to take up the slack. But our overall public sector is much smaller than it used to be. In 1994 government spending was 50% of our GDP. Now it’s down to 34%. Does anyone really believe it makes sense to cutback the public sector engine when the private sector engine isn’t working?
The fact is that shrinking the size of government and cuts to social program spending have been part of what led to the current crisis and are part of the reason for the crisis continuing.
Myth #5: More free trade will help solve the problem.
Canada had lost over 350,000 good paying manufacturing jobs in the few years before the current crisis even started. A major contributor to these job losses was free trade deals that are deliberately designed to allow companies to manufacture in low wage countries and sell the goods here in Canada. Workers everywhere are hurt by this process.
It would be hard to find a period in the last century more defined by open markets and free trade agreements. Yet in the face of this free trade fixation, the financial collapse has been breathtaking and the scope and speed of the international collapse has far exceeded that of the Great Depression. So in the face of this, on what conceivable basis can anyone argue that the solution is more free trade, more corporate globalization?
The old saying is that those who refuse to learn from history are doomed to repeat it. If our governments don’t learn the real lessons from this economic crisis – specifically that we need to make a big break from the economic assumptions of the last 20 years – then history will certainly be repeated and we’ll continue to lurch from one crisis to the next.
But there is another old saying: “Fool me once, shame on you. Fool me twice, shame on me.” We’ve been fooled before by the financial and corporate elites who told us they had the true path to prosperity for all, when what they really had was a way to line their own pockets at our expense.
The current crisis offers us an unprecedented opportunity to reform our economic fundamentals, create a more equitable economy and ensure everybody is getting ahead. But progressive Canadians need to move this reform debate to the forefront of the public agenda. We need to say loud and clear that the other guys had their turn. We tried it their way. It didn’t work. Now it’s our turn!
NUPGE
The National Union of Public and General Employees (NUPGE) is one of Canada's largest labour organizations with over 340,000 members. Our mission is to improve the lives of working families and to build a stronger Canada by ensuring our common wealth is used for the common good. NUPGE