For those trying to understand the reasons for increasing poverty and
economic inequality in North America...
Dennis R.
Date: Sat, 18 Sep 1999 15:26:56 -0400 (EDT)
From: jim stanford <[log in to unmask]>
Subject: Facts from the Fringe #13: Upside-Down Thinking
Dear Friends;
Here is the latest installment of Facts from the Fringe.
Past editions can be viewed at http://www.caw.ca/fringe/index.html.
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Upside-Down Thinking
Canada's economy has been governed for almost two decades by a doctrine of
"permanent recession." Interest rates are deliberately managed to ensure
that unemployment never falls too LOW, producing wage increases, falling
profit margins, and feared inflation. Economists have recently debated
precisely how much unemployment is desirable–the Bank of Canada used to
favour 8.5 percent, now it favours 7 percent–but the underlying philosophy
remains the same.
Permanent recession thinking has turned economics upside-down.
Unemployment is a good thing, because it restrains inflation and disciplines
the labour force. Too much employment is a bad thing. So are wage
increases. Yes, most Canadians support themselves through wage income, and
hence real wage increases are the main source of improvements in our
standard of living. But wage increases might mean lower profits and higher
inflation.
In short, an outbreak of prosperity is to be avoided at all cost.
As evidenced by the recent comments of Bernard Wolf, a business professor
at York University, upside-down thinking is alive and well in Canada. Wolf
was commenting on the possibility that auto workers in Canada–bolstered by a
booming auto industry and record profits for automakers–might make
significant compensation gains in their current round of collective
bargaining.
Inflation in Canada has averaged 1.3 percent over the last five years.
Canadian living standards have been hammered this decade by a decline in
real per capita incomes–which have fallen by 3 percent before taxes and
government transfers, and by 7 percent after taxes and transfers.
Productivity has grown faster than real wages. If there was ever a time for
workers to get a raise, this must be it. But vigilance in the holy war
against inflation can never be relaxed.
Indeed, according to Wolf, the Canadian economy could be tipped into
recession if the auto workers negotiate "an inflationary wage settlement."
The Globe and Mail described Wolf's dire prediction as follows: In a
"worst-case scenario," a wage increase for auto workers would spark "a
ripple-effect of wage increases across other industries, with dramatic
ramifications for the Canadian economy." The Bank of Canada panics,
interest rates rise, the economy crumbles–and it's all Buzz Hargrove's fault.
Wolf's perverse view of the economy is widely-shared among economic and
financial analysts. Consider the following pearls of wisdom gleaned from
the upside-down archives:
*** "Good news puts stocks in tailspin," cried the banner headline in the
July 20, 1995 edition of the Toronto Star. North American stock markets had
tumbled in the previous day's trading on news that jobs were being created
too rapidly in the U.S.
*** The same worldview is evidenced repeatedly in financial headlines:
"Wall Street soars on low employment figures" (Globe and Mail, August 3,
1996). "Good news on employment front sinks Dow" (Globe and Mail, July 6,
1996). "Growth a potential peril" (Financial Post, April 29, 1998). "Can't
get enough of that bad news" (Financial Post, September 15, 1995). Perhaps
the gold medal for upside-down thinking should go to a headline in the
Financial Post on (appropriately) October 31, 1995: "What we really need now
is a serious jolt of despair."
*** Financial analysts rival the headline-writers in their upside-down
acumen. Consider the wisdom of Arve Bendiksrud, an analyst at Toronto
Dominion Securities, concerning the outlook for financial investors late in
1994. "It looks like the investment fundamentals are deteriorating more
rapidly for Canada than we thought. Growth is a fair bit stronger and
capacity utilization is increasing rapidly." God help us all.
*** Elected officials, for fear of losing their jobs, have to put the
matter somewhat more delicately. For example, Finance Minister Paul Martin
once wrote that "the government's reforms [to unemployment insurance and
other social programs] are aimed at making sure that we never repeat the
experience of the late 1980s." Between 1985 and 1990 employment grew by 2.3
percent per year, labour force participation rose, real per capita GDP
climbed by 8 percent, and the poverty rate fell by 2.3 percentage points.
But inflation increased from 4 percent to 4.8 percent. Thank heaven that
the guardians of financial stability will protect us from ever experiencing
a catastrophe like that again.
*** U.S. central banker Alan Greenspan summarized the economic benefits
of
unemployment and insecurity in famous testimony to the U.S. Senate in 1997.
How could continuing low wages in the U.S. be explained, in light of growing
productivity and falling unemployment? "Heightened job insecurity explains
a significant part of the restraint on compensation and the consequent muted
price inflation." Despite relatively low unemployment, most workers still
fear being thrown into the streets–and with little to fall back on in the
way of social benefits, this fear is well-justified. This "fear factor"
allows Greenspan to tolerate lower unemployment without increasing interest
rates. But the moment workers start feeling a little more confident about
their place in economic life, it's no more Mister Nice Guy for the central
banker. "Suppressed wage cost growth as a consequence of job insecurity can
be carried only so far," Greenspan warned, and he promised to boost interest
rates as soon as wages start to grow.
Financial investors hate risk and insecurity–but for workers, it's
economically "efficient." No matter how much average Canadians have
tightened their belts, and no matter how well their employers may be doing,
they can't be allowed to share in economic prosperity. That would defeat
the whole point of the exercise.
********************************
Jim Stanford
Economist, Canadian Auto Workers
205 Placer Court Toronto, Ont. M2H 3H9
1-800-268-5763 (416) 497-4110
fax (416) 495-6552 email [log in to unmask]
.............................................
Bob Olsen, Toronto [log in to unmask]
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Where a great proportion of the people are suffered to languish
in helpless misery,
That country must be ill-policed and wretchedly governed:
A decent provision for the poor is the true test of civilization.
-- Dr. Samuel Johnson, 1770
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Dennis Raphael, Ph.D.
Associate Professor and Associate Director,
Masters of Health Science Program in Health Promotion
Department of Public Health Sciences
Graduate Department of Community Health
University of Toronto
McMurrich Building, Room 101
Toronto, Ontario, CANADA M5S 1A8
voice: (416) 978-7567
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