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Neoliberalism and the Canadian Economy

Marc LeeSenior Economist

Presentation to PSAC June 15, 2010


• The sum total of the work we do collectively to produce goods and services, but also how the proceeds are distributed

• The economic problem: how to allocate scarce resources to this end- One extreme: Profit-seeking enterprises or “free

market”- Another: Full coordination of the economy by

government- Most countries fall somewhere in-between

• Canada has a mixed economy, with about one-third of activity in the public sector

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What is the economy?

www.policyalternatives.ca 3


Historical Recap

• Prior to the 1930s, the economy was much more of a free market. Moreover, people believed that this led to the best of all possible worlds:- the market (aka capitalism) was self-regulating- government intervention could only make things

worse• Then ...• Workers began to win better wages and working

conditions through unions- threat to capital of the Soviet example

• Great Depression: prolonged slump with high unemployment- Keynes: framework for government intervention

• WW2: huge gov’t mobilization 4


What is neoliberalism?

• Slowdowns in the 1970s• Neoliberalism is a return to the idea that

“market knows best”- “get government out of the way”- unions need to be broken

• Objective: create a beneficial investment climate• Prescriptions:

- Tax cuts- Privatization of public services- Deregulation- Free trade- Low inflation

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Tax Cuts

• Beginning in the mid-1990s, tax cuts have become a favoured policy of almost all federal and provincial governments

• Successful because wages have stagnated• Gloss over who benefits most from tax cuts• Shift away from income taxes (progressive) to

consumption taxes (regressive)• Tend to ignore that taxes fund public services:

today’s tax cuts are tomorrow’s public sector cuts

• Particularly important in smaller communities

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Total incidence of taxes, 1990 and 2005

Total Tax Rate as Share of Income, 1990 and 2005

15%

20%

25%

30%

35%

40%

Bottom10%

D2 D3 D4 D5 D6 D7 D8 D9 Next5%

(P90-95)

Next4%

(P95-99)

Top 1%

income group (deciles)

percent

1990

2005


Impacts

• Tax cuts have had more benefit to highest-income earners (who also gained most in market incomes)

• Most of the action is at the very top of the distribution:- In 2005, top 1% had lower rate than bottom 10%- Top 1% had lower rate, by six percentage points,

than upper-middle deciles

• Tax system less progressive at bottom - Role of household debt at bottom?

• Corporate income tax cuts are hidden upper-income tax cuts


•


Privatization

• Create opportunities for new profit-seeking enterprise

• Outright privatization of Crown corporations: Air Canada, Petro Canada, BC Gas

• Has proven difficult to move more aggressively in core service areas

• Subtle privatization: lease-back on public buildings; contracting out of back-office functions (BC Hydro, ICBC

• P3s: hospitals; road infrastructure; transit• All cost more, and open to cronyism

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Deregulation

• Regulation exists because bad things happen:- Worker protections; environmental standards;

consumer; financial markets- These place costs onto business

• Several waves of federal deregulation since the 1980s

• Recent: 2007 Cabinet Directive on Streamlining Regulation places hurdles in front of regulations

• Latest: Red Tape Commission; deregulation of environmental assessments for large energy projects

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Problems with neoliberalism

• The Growing Gap- smaller government; weaker unemployment

insurance; gutted social assistance programs

• Environmental degradation- costs imposed on local residents or the public sector

• Financial deregulation- global economic crisis and deregulation of financial

markets

• Foreign ownership- reliance on foreign investors; de-industrialization

• Recessions- Without large deficits, they turn into depressions

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Conclusion: Renewing the Public Sector

• Climate change is a collective action problem that requires structural changes- transportation and urban planning; regulation; carbon

taxes; technology investments

• Eliminating poverty requires that governments set higher minimum wages and provide transfer income

• Reducing inequality requires progressive taxation for the richest, and unionization of the low-wage service sector

• Reinvigorate public services: “social wage” - preventative health care spending; early childhood

education and care; seniors’ care

• The good news: Canadians have progressive values and support public services over tax cuts

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Resources

• Alternative Federal Budget• CCPA: www.policyalternatives.ca• Progressive Economics Forum: progressive-

economics.ca• Jim Stanford, Economics for Everyone:

economicsforeveryone.ca

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