The eight-week-old Occupy Wall St. movement has highlighted mounting
anger at a financial system that allowed out-of-control bankers to
plunge the global economy into its worst downturn since the Depression,
only to bail them out with billions in taxpayer money while they
rewarded themselves outlandish bonuses.
Some commentators say the answer is tighter financial rules and an end to billion-dollar bank bailouts.
But would this make the economy fairer? Would it get the protesters to put down their signs and go home?
Such
changes might not be enough, say some economic experts. That’s because,
they say, a deeper underlying cause is behind both the Wall St.
protests and the weak financial oversight: a huge and growing wealth
disparity between rich and poor.
In Canada, income inequality is
by some measures the worst it’s ever been in 90 years of recorded
history, worse even than at its previous peak in the Roaring Twenties,
said Armine Yalnizyan, a senior economist at the Canadian Centre for
Policy Alternatives.
“The system is concentrating wealth in fewer and fewer hands. It’s not a sustainable trajectory,” she said.
In
a study last December, Yalnizyan found that the richest one per cent of
Canadians capture a whopping 32 per cent of all income growth.
That’s a far bigger slice than even in the 1920s, when the wealthiest one per cent took in 17 per cent of income gains.
“Canada’s elite are breaking new frontiers in income inequality,” she wrote in the study.
“Nothing in the course of the previous century resembles what has occurred in the last generation.”
The
excesses of the 1920s eventually resulted in the 1929-32 stock market
crash, which ushered in two decades of depression and world war.
Yalnizyan
predicts growing social unrest and strife in many nations unless
governments make sweeping changes to reverse today’s extreme richpoor
gap.
It means simple policy reforms may not be enough to make the
Occupy movement go away, she said in an interview from her office in
Toronto.
And even if the Occupy tent camps in hundreds of cities
across Canada and the U.S. are forced to close by winter cold or police
arrests, the underlying issues will remain and protest is likely to
continue in other forms, she said.
Various economic heavyweights have made similar predictions in recent weeks.
“Any
economic model that does not properly address inequality will
eventually face a crisis of legitimacy,” wrote New York University
economist Nouriel Roubini in an opinion piece about Occupy Wall St. in
late October.
Roubini famously predicted the 2008-09 market crash.
He now predicts growing unrest if the conditions that sparked Occupy
Wall St. aren’t addressed:
“The protests of 2011 will become more
severe, with social and political instability eventually harming
long-term economic growth and welfare.”
“Globalization, unfettered
financial capitalism and redistribution of income and wealth from
labour to capital could lead capitalism to self-destruct,” Roubini
wrote.
Already, he added, similar problems have sparked unrest
elsewhere in the world, including the Arab Spring protest movement,
riots in Britain in August and anticorruption protests in India.
Joseph
Stiglitz, the Nobel-winning former chief economist of the World Bank,
also weighed in with a speech at the Occupy Wall St. protest in October.
“You are right to be indignant. The fact is the system is not working
right,” he said.
Jacques Attali, former president of the European
Bank for Reconstruction and Development, called the rich-poor chasm in
the U.S. a “scandal” and “extremely grave” in an interview with La
Presse last month.
“We are creating the conditions for violence,” he said. “Never has wealth been so concentrated.”
Armine
Yalnizyan has been writing studies about the growing wealth disparity
off and on for nearly 20 years. It’s never been seen as the sexiest
topic, but now, suddenly, everyone is paying attention.
On
Wednesday, thousands of Occupy protesters in Oakland, Calif., shut the
fifth largest port in the U.S. as part of the city’s first general
strike since 1946.
“It seems like everybody finally gets it in the last month,” she said.
“It
reminds me of a consciousness-changing moment, like the civil rights
and women’s rights movements. It feels like we’re at the beginning of a
similar consciousness-raising.”
Yalnizyan, who has sat on federal
and provincial advisory panels on labour issues, said the Wall St.
protests could usher in major changes that transform societies.
In
response to the 1930s Depression, governments implemented new social
programs and better union rights that buoyed incomes of the middle class
and lower-income people.
They also raised taxes on the wealthy and tightened financial and securities regulations to curb market speculation.
Income inequality quickly fell to modest levels, where it remained for the next 50 years.
Between
the 1930s and ’70s, the wealthiest one per cent of Canadians saw their
share of total income gains remain flat at a tame five to 10 per cent.
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But
this great postwar social pact started to unravel in the 1980s. That’s
when many Western governments began to cut social programs and
deregulate industries such as the financial sector, allowing banks to
effectively police themselves.
They also cut tax rates
dramatically for the well-to-do. In 1948, the top marginal tax rate in
Canada was 80 per cent. Today, the top rate is 43 per cent.
Meanwhile,
wages for the average Canadian stagnated as many corporations moved
manufacturing jobs to low-wage countries and unionization rates fell.
All
this was good news for the bank accounts of well-heeled Canadians. In
the 1980s, the richest one per cent of Canadians captured 11 per cent of
total income growth.
In the 1990s and 2000s, their portion shot into record territory, climbing to 32 per cent.
Some
economists call it the “great u-turn.” Yalnizyan calls it the start of
“Canada’s neo-gilded age” – a throwback to the “gilded age” of a century
ago when robber barons and tycoons enjoyed opulence and wild excess.
Today’s
new gilded age saw “a flip from decades of steady declines in income
inequality to its opposite: a steady increase in inequality, in good
times and bad,” she said in her study.
“Economic growth no longer paved the path to widespread prosperity. But for a select few, good times never seemed so good.”
In
the U.S., income inequality is even worse. The richest one per cent of
Americans accounted for a remarkable 65 per cent of total income growth
between 2002 and 2007, up from 45 per cent in the 1990s, according to a
2009 study by Emmanuel Saez, an economist at the University of
California, Berkeley.
But Canada’s wealth disparity is growing
faster than that of the U.S., said a Conference Board of Canada study in
September. Canada now ranks 12th of 17 developed countries for
inequality (the worst in 17th place being the U.S.), earning it a “C”
grade – the only nation of the 17 to see its grade slip since the
mid-1990s.
Regardless of who is worse, Yalnizyan said, the
rich-poor gaps in both countries have translated into greater political
power for the wealthy and the businesses they control, leading to
further financial deregulation.
“Corporations captured the policy
agenda. Their interests are reflected in our democratic institutions and
in our pattern of economic growth,” she said.
The widening
disparity has also led to greater economic instability as the affluent
pump their gains into market speculation, fuelling asset bubbles such as
the dot-com mania of the 1990s and the housing boom of the mid-2000s.
Meanwhile,
the economy becomes less resilient in coping with the inevitable market
busts, as decades of stagnant income growth have left Canadian and U.S.
consumers too anemic to pull the economy out of its current slump.
And a tattered social safety net is less able to play its traditional role of providing a lifeline to lower-income people.
Ermanno Pascutto is sympathetic to the Occupy protesters.
He
is a Bay St. lawyer who was director of the market policy division at
the Toronto Stock Exchange. He then went on to be executive director of
the Ontario Securities Commission.
“The great surprise for me is that Occupy Wall St. didn’t start two years earlier,” he said.
“Financial
institutions that gambled with other people’s money were bailed out by
average Americans and made lots of money. I can really understand why
Americans are so angry.”
The institutions “basically fleeced the
American public for hundreds of billions of dollars. It was outrageous,”
said Pascutto, who is now executive director of the Canadian Foundation
for Advancement of Investor Rights.
Pascutto said the 2008-09
economic crash was “clearly the result of financial deregulation. They
took down barriers that had been in place since the Depression.”
“The
crazy thing is the Tea Party says there is too much regulation. (But) a
lot of the problem (behind the crash) was deregulation and a government
corrupted and controlled by the financial system,” he said.
In
Canada, the Harper government allowed mortgage insurers to offer risky
new products like nodown-payment, interest-only mortgages, which helped
fuel soaring house prices.
In the U.S., deregulation went even
farther. Depression-era regulations were lifted that had prevented
banks, investment firms and insurers from moving into each others’
businesses.
The move allowed banks to move into highly speculative
investments without a requirement to keep enough money in reserve to
protect deposits.
Banks charged into commodity speculation and the
high-flying U.S. real-estate market, shoving high-risk loans at
consumers without much care about whether they could afford them.
But
when U.S. house prices started to collapse in 2006, eventually falling
30 per cent, some of the biggest U.S. financial institutions like Lehman
Brothers, Fannie Mae and insurer AIG went bankrupt or had to be bailed
out by Washington.
Canadians were heavily exposed, too. Many
Canadian financial institutions also tried to cash in on the U.S.
housing frenzy. And when the mania started to come undone, Canadian bank
share prices went into free fall, with the S&P/TSX financial
services index losing 60 per cent of its value between 2007 and 2009.
Meanwhile,
collapsing U.S. housing prices also caused the Canadian corporate loan
market to suddenly seize up in 2007. No one wanted to hold corporate
loans anymore because it wasn’t clear how much exposure the debt may
have to the unravelling U.S. real estate market.
That forced
Canadian financial institutions to freeze $32 billion in commercial
loans for 17 months. It was the most complicated financial restructuring
in Canada history, resulting in substantial losses for investors.
But
because no Canadian bank went out of business, Ottawa didn’t see fit to
introduce financial or market reforms in response to the financial
crash.
“We didn’t learn anything,” said Bruce Livesey, a Toronto
journalist who is writing a book about the crash called Thieves of Bay
Street, due out next spring.
“The Canadian banking industry got a pass. The system is pretty much the same as it was five years ago.”
Livesey
embarked on his book to investigate the common belief that Canada’s
financial system is overseen better than that of the U.S.
“It’s totally untrue. In many respects, we’re worse,” he said.
“Canada is the place in the Western world to rip off investors,” he writes in his book.
He
unearthed a 2006 U.S. study that compared records at the leading
securities watchdogs in both countries – the Ontario Securities
Commission and the U.S. Securities and Exchange Commission.
The
study found that the SEC prosecutes 10 times more cases for securities
violations and 20 times more insider-trading violations than the OSC
when adjusted for the size of the stock market.
The SEC’s insider
trading fines are also 17 times higher. The OSC didn’t file one insider
trading case between 1997 and 2000, while the SEC filed 110.
“The current regime is generally disastrous. It’s run by and for the industry to a great extent,” Livesey said.
A
big reason, he said, is that regulators are too close to the firms they
oversee, partly because of a revolving door of personnel between the
two sides.
That kind of coziness has helped fuel the Occupy
protests, he said. “There is a sense that the financial industry is part
of the problem of inequality. The banking industry has become symbolic
of the enormous shift of income from the middle class and poor to the
wealthy,” he said.
Pascutto agreed that Canada’s regulation of financial markets is poor.
“Our system for preventing and prosecuting fraud is hopeless. It doesn’t work. The system is completely dysfunctional,” he said.
The
U.S., in contrast, passed a sweeping financial reform last year in an
effort to reign in some higherrisk financial activities.
But those
reform efforts have run into withering opposition from a $1.3-billion
lobbying campaign of legal and political challenges, paid for in large
part by the very financial institutions that received billions in
bailout cash.
Despite all this, Yalnizyan remains excited. She finally sees some hope for reversing the rich-poor gap.
She
advocates measures such as an industrial strategy to create value-added
jobs, rebuilding the social safety net, taxing stock transactions and
raising tax rates on higher-end income (which would help claw back some
of those multimillion-dollar banker bonuses).
And it certainly wouldn’t hurt to improve oversight of financial markets and institutions.
“What triggers it, I don’t know,” Yalnizyan said.
“There might need to be more crisis for there to be change. It’s up to the richest one per cent – it’s their call.”
Alex
Roslin is president of the board of the Canadian Centre for
Investigative Reporting. The centre provided a grant to journalist Bruce
Livesey for his book, which is mentioned in this story.
BOOM FOR THE FEW, BUST FOR THE REST: VOLATILE TIMES REMINISCENT OF EARLIER ERA
1920s and 1930s: boom times and tough times, and rising inequality
The
share of income held by Canada’s elite dropped in the early 1920s
because other people started making big gains in their incomes.
Industrialization
took hold and the population of waged labourers grew. Mass migration
from country to city saw more Canadians earning more than they had when
their livelihood depended upon agriculture. By 1925, these trends
reversed. The share of income held by the top one per cent rose, first
because Prairie droughts triggered an economic slowdown, then because of
the stock market crash in 1929.
That trend continued through the Great Depression, as unemployment soared.
The
excesses of the 1920s, which triggered the collapse, were followed by a
new wave of public policy, one that helped redistribute prosperity
through taxation and fair wages.
Second World War and postwar growth: the great equalization
The richest Canadians saw a dramatic drop in their income during the Second World War (1939 to 1945).
From
1946 to the end of the 1970s, as mass consumption of private and public
goods expanded and more women joined the workforce, Canadians
experienced growth both in the share of the population that was employed
and in unionization. The migration from country to city continued, and
the majority of Canadians saw a rapid rise in income during this period.
The trend over these decades was toward greater equality.
Post-1980: the “neo-gilded age”
A
century ago, the “gilded age” – the era of robber barons and
extravagant tycoons that defined the height of North American opulence –
came to an end. Today, as then, Canada is awash in money generated by
an emerging new global economy: the “neo-gilded age.”
Two profound
recessions in as many decades displaced millions of workers and put
huge downward pressure on the wages of the majority.
By the
mid-1990s, Canada’s place in the global supply chain had grown more
important and the economy entered a decade of unbroken growth, even as
the strength of the manufacturing sector faltered. This sustained
expansion was unlike anything Canada had experienced since the 1960s.
However,
in comparison to the 1960s, the benefits of growth were not as broadly
shared. The share of income accrued by the richest Canadians grew at a
faster rate than any recorded period in our history.
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