Sunday, February 28, 2010

Les Maudits Boomers

First, I have a confession to make. I’m part of the problem. I am a boomer though I fall into the category called the SOL (shit-out-of-luck) boomers, those who are in the second wave that graduated from university after 1981.

On average, if you graduated during the recession of 1981-1982, upon graduation, you stood to earn $25,000 less than the maudits boomers who graduated before, and twenty years later, you probably had earned at least $200,000 less over the same time frame.

As a result, although I benefited from the social investments that made going to university ridiculously cheap and a growing population that turned residential homes into cash cows, I was never in the game of conspicuous consumption because I never had the income that would allow me to even enter into the game.

Nevertheless, I am extremely grateful for the social fabric that was provided for me that allowed me as a working- class kid to get a quality university education, which enabled me to attain an enviable quality of life on the cheap.

So, what’s my beef?

Well, I have a bone to pick with the maudits boomers, the most spoiled generation that ever graced the planet, who are so immersed in their own narcissistic self image that they have no idea what a pathetic legacy they are leaving for future generations.

From a financial perspective, they are ringing up a huge tab and are intending to stick future generations with an unmanageable debt load, and from an environmental perspective, they are pursuing a scorched-earth policy, hell bent on extracting as much fossil fuels from the earth as they can in order to maintain their unsustainable lifestyle as long as they can.

Now, that the chickens of the financial-speculation led, global recession have come home to roost, we are witnessing an inter-generational class war when it comes to the struggle to balance the books and to decide how to distribute the collective wealth.

This is where the economy becomes extremely political and we must be sensitive to the questions of social justice, in particular the question on inter-generational social justice, that underlie the debate over the numbers.

At the heart of the no-tax-increase position of economic and fiscal policy is the fact that the refusal to increase taxes coupled with a reduction of social program expenditures other than healthcare outlays benefits the maudits boomers and the silent generation at the expense of everyone that follows.

Here, the positioning to be prudent managers of the economy – remember the cant before the onset of the latest recession that the fundamentals of the economy were sound and that we would have no deficit – is a ruse to cover the collective greed of a large segment of the population and its intent to screw the rest.

Let’s face up to the facts. The huge increase in the quality of material life for post-war North Americans was due to a unique configuration of variables that will never be repeated: oil was cheap and abundant and the rest of the world lay in ruins while we switched our economic focus from the production of armaments to the production of consumer goods.

The maudits boomers had the extreme good fortune of being born into a generation that, through no effort of their own, afforded them the scale of economic opportunities that no subsequent generation will ever see.

The second fact to keep in mind is that there is no empirical evidence to support the claim that increases to the marginal tax rate will impact negatively on economic growth and, as a result, on government revenues.

The reality is that there is no correlation between tax rates and economic growth among OECD countries. Robust economic growth is possible in high tax rate countries like Sweden and Finland and in low tax rate countries like the US and Japan. In short, tax rates are conditioning not determining factors for economic growth.

So, the refusal to raise taxes and the intent to slash expenditures offset by increases in user fees is tantamount to setting up a social system built by and for the maudits boomers and then slamming the door behind them as they head off into retirement, which for many will be longer than the years they participated in the work force.

What kind of legacy is that?

It seems to me that at the very least boomers should leave behind a state of affairs that is at least as healthy as those that greeted them when they were born and that they enjoyed over the course of their lives.

Measures must be taken, other than offloading our collective problems to future generations, to ensure that we leave our children and our grandchildren a world in which we would want to live in.

Importantly, boomers have the democratic weight at the polls to translate our collective desires into the policy options of our choosing.

Since we are just days away from the tabling of the first post-recession beget, I will put questions concerning environmental stewardship aside and return to them in a later post.

To reduce deficits provincially and federally revenues must increase and expenditures must be controlled in a manner that adheres to the principle of inter-generational social justice.

Looking at the revenue side, the imposition of a financial transaction tax as a means to address structural deficits and accumulated debt holds great promise. Potential revenues are huge and the tax is progressive in nature since those who make the most transactions will pay the most taxes.

Moreover, since it has become readily apparent that risk management towards the economy is more important that fiscal policy focused on growth, the imposition of such a tax benefits everyone because increased economic stability reduces systemic risk.

In absolute terms, the benefits accrue on a progressive gradient: jobs for the working and middle class garner more protection and the rentier class is less apt to experience catastrophic losses when financial markets drop significantly, which now includes those who benefit from pension funds.

Second, relatively painless for those who were fortunate to experience economic conditions that led to unprecedented increases in material wealth, estate taxes should be raised significantly.

Collectively, since it is our generation that has benefited the most from the creation of our generous social programs, we should on our exit pay our fair share to ensure that we do not imperil the capacity of future generations to address their collective challenges.

Think of it as a boomer exit tax. It’s progressive by nature and it can be designed so that it balances our desires to leave a heritage to our individual families with the necessity to protect the common good.

On the expenditure side, let’s not get into the zero-sum game of healthcare versus education. Personally, I find it morally repugnant that we allow healthcare expenditures to take up approximately 50% of provincial budgets (supported by federal transfers), do nothing to bring them under control other than making a lame reference to further privatization, and then demand the younger generation to pay more for their post-secondary education, thereby forcing many of them into becoming wage slaves so they can pay down their individual debt while supporting our generous pensions and healthcare system.

If raising estate taxes is the first sacred cow that needs to be sacrifices, the second is the payment-by-medical act-performed healthcare system.

This system is no longer sustainable and it should be modified so that physicians are salaried employees as they are at the Mayo Clinic and the Cleveland Health Center, two of the leading healthcare institutions in North America.

From a deontological perspective, given the well-documented negative effects of income disparity on public health and the revenues physicians presently enjoy, they would be hard pressed to justify why we should continue to maintain their present levels of remuneration relative to the population at large.

If ever there was a time to think creatively about how we are to deal with our collective challenges, the time is now, especially since we are at the beginning of a demographic transition of which we have no idea of our public institutions capacity to adapt.

What is desperately needed is some exemplary leadership from boomers, so that we can properly assume our roles of stewards for future generations.

Monday, February 15, 2010

Evidence-based Economics Finally Arrives in Canada

Orthodox economics is based on simplifications that so distort the real world as to make it unrecognisable, yet its basic tenets are credulously repeated on an almost daily basis in national newspapers and on television news. A genuinely evidence-based approach to economic policymaking would not produce a system remotely like the one we have. (Andrew Simms)

Something has changed. No longer are we obliged to follow the dictates of the high and mighty school of orthodox economics. For example, the Canadian Government is actually contemplating changes to the rules governing home loans that would make it more difficult for some prospective home buyers to obtain a mortgage. Instead of putting down 5% of the purchase price, they would be required to put down 10%, and the time period in which the mortgage could be amortized would be shortened.

Two years ago, such talk would have been considered economic heresy. However, since the near collapse of the global financial system and the onset of a global economic recession, regulation is no longer a mortal sin. In fact, it should now be recognized that we have moved out of the economic discourse where the debate concerning less versus more regulation ruled the day, and we have moved into a discourse where the discussion now concerns the effectiveness of the proposed regulation. Pragmatism has triumphed over ideology.

Two years ago, there was precious little talk in the mainstream media of asset bubbles forming and then bursting. That was before the millions of foreclosures and underwater mortgages in the U.S. As a result, it seems only prudent that the Minister of Finance would muse publicly about the possibility of a similar housing bubble taking shape here in Canada. After all, interest rates are at a historic low, the return on debt securities is meagre, and the equity markets are flat. Given this context, residential real estate looks very good. Where else can we find a 50% return on the initial investment upon a successful flip of a residential property?

Yet, as recent experience in the U.S. has shown, an overheated market not only drives up home prices but brings into the market buyers who do not have the capability of meeting their financial obligations if the market goes flat or begins to decline. In short, the growing influx of the Ponzi investor engenders systemic risk within the housing market and possible severe economic fallout if the housing market experiences a sudden and precipitous drop.

So, if we connect the dots with regard to what the Minister of Finance is thinking, we can see that he is actually placing greater value upon stability within the housing sector than on the quick fix to the economy that a real estate bubble would most likely bring about. In other words, in this instance, sustainability trumps rapid economic growth.

Now if we could only get the Finance Minister and the Prime Minister to think systemically about the stability and resilience of the economy within the context of climate change, maybe, just maybe, Canada could regain its cherished international reputation.

Monday, February 1, 2010

Will Deficit Politics Lead to Greater Economic Inequality?

Although the leaders of the two leading federal political parties would have us believe we can address the deficit and the problem of our accumulated debt by growing the economy, the pesky Parliamentary Budget Officer, Kevin Page, has said otherwise convincingly.

In reality, our deficits have become structural, and we face the tough choice of either raising taxes or cutting spending. Certainly, bringing home the troops from Afghanistan will reduce expenditures, but not nearly enough to address the approximately $60 billion hole we have dug for ourselves. If we are to cut expenditures, who will be targeted? Let’s hope it’s not going to be the already disadvantaged.

One thing that distinguishes Canada from the U.S. and the U.K. is that we have less economic inequality because we transfer more wealth from the upper to lower classes. As a result, we have a healthier society for as Richard Wilkinson and Kate Pickett point out in a recent article:

Greater equality improves the quality of life for everyone – not just the poor. Whatever your income or education,living in a more equal society means you will be likely to live longer while being less likely to suffer violence or have a problem with obesity. In turn, your children have a better chance of doing well at school and are less likely to use drugs or to become teenage parents. This is about the quality of life for all of us.

Unequal societies, on the other hand, do worst on child wellbeing and badly on teenage births, imprisonment, drug abuse, trust, obesity, social mobility and
mental¬illness, which engender significant social costs for those who live in poverty and financial costs for those who pay for the social and health programs.

Forget trying to raise the GDP by 3% a year because what we have seen over the last thirty years is that increased economic growth has, in fact, reduced the medium income in Canada, the U.S. and the U.K., which is hard factual evidence that demonstrates that economic inequality is growing.

This should be cause for concern because if we are to reduce expenditures we will have to inevitably reduce demand on our health and social care systems. Looking at the empirical evidence from other OECD countries, we can reduce the burden on the public purse if we reduce the gap between the rich and the poor since most of the social determinants of health are affected negatively by economic inequality, keeping in mind that health-care expenditures represent the largest portion of provincial budgets.

From a global perspective of promoting public health and not sticking future generations with a tab that they will have great difficulty paying, it makes more sense to reduce economic inequality than taking measures to increase economic production.

We should follow Obama’s lead and increase taxes on the rich. As well, we should pass legislation with the objective of reducing executive compensation. Furthermore, there should be a tax on all financial transactions, which could be used for eliminating the deficit and paying down the debt.

Think about it next time you go to an automatic teller and withdraw cash. You are charged $1.75 to make a withdrawal and another $1.75 from your financial institution to release the funds. Imagine the millions of transaction that are made each day and that rather than making billions in profits exclusively for the shareholders of our five major banks, part of this enormous wealth is transferred into a national account benefiting the general population.

We could do the same for the trading of securities, which would protect our real economy from the ravages of financial speculation, real estate transactions, which would make housing more affordable for everyone, and for the exchange of Canadian dollars, which would give us a more stable currency.

Yes, such measures would reduce the income and wealth of the top one percent of revenue earners, and that’s exactly the desired result if we are to have a healthier society and a population that experiences greater well-being.