Wednesday, July 23, 2014

How Inflation is Killing off the Canadian Middle Class

Some recent research finds that while inflation remains relatively low, the benefits of rising prices are going to business and the top one per cent while everyone else gets poorer. (CBC)
If it feels like you are getting poorer despite relatively low inflation, new research indicates that's because you are.

This week, new figures from Statistics Canada show annual inflation hit 2.4 per cent. That's up from 2.3 per cent last month, the ninth month in a row of a rising inflation rate. And while the things you buy are more than two per cent dearer (three per cent if you live in Ontario) than they were a year ago, wages have not been keeping pace.

Over the same period, StatsCan data shows that Canadian wages rose only 1.9 per cent. In Ontario, where prices were up three per cent, wages rose a mere 0.7 per cent. That means if you live in Ontario and spend what you earn, you are effectively 2.3 per cent poorer than you were only one year ago.
'If we value the prosperity and stability associated with middle-class society ... then we should really pay attention to what generates that middle-class affluence'-
Jordan Brennan, York University economist
And according to York University economist Jordan Brennan, that is bad for the Canadian middle class. Brennan represents a new kind of economist who rejects the traditional story that he learned in Economics 101 and once believed wholeheartedly.

"If we value the prosperity and stability associated with middle-class society — the things that we ascribe to Canadian citizenship — if we value those things, then we should really pay attention to what generates that middle-class affluence," says Brennan.  "And letting the free market rip does not seem to the main generator of that affluence."

Brennan says his latest research confirms what others have also discovered, that while inflation remains relatively low, the benefits of rising prices are going to business and the one per cent while everyone else gets poorer. 

Today's Canadian numbers confirm it. And in slightly different words, that's exactly what U.S. Federal Reserve chair Janet Yellen said earlier this week: that the returns of the U.S. economy are disproportionately going to capital, with less going to labour.

20 years of restrained wages 

"Over the long term, the earnings margin of corporations are inflationary and so are the wage gains of workers," says Brennan. But since the 1980s, he says, the two have not risen at the same rate.

"In the last couple of decades," he says, "What we've seen is that worker wage demands have been radically restrained through anti-inflationary monetary policy. But that in effect has meant business now is sort of driving inflation processes and they are overwhelmingly the distributive winners from even the mild inflation we do have."

An exclusive interview with Bank of Canada Governor Stephen Poloz  this week on CBC Radio's The Current is worth listening to if just for his text book definition of Dutch Disease (at the 12-minute mark). But his main point was that interest rates would likely have to stay low to liberate the "excess capacity" in the Canadian and global economy.

He was far more worried about deflation than inflation. And that is the current conventional view to which most economic commentators, including me, subscribe.

Low interest rates, like low wages, are supposed to liberate the power of capital, stimulating business and thus the whole economy. And, by the traditional view, all boats, including those of the poor and middle class, are lifted by the rising tide.

But shrinking wages and low interest rates have not stimulated investment. In fact new research out this week from the C.D. Howe Institute shows Canadian companies continue to sit on their cash piles.

Why is it always labour's fault?

Brennan rejects the conventional analysis, or at least calls it incomplete. In the 1970s, politicians blamed organized labour for pushing up inflation.  Brennan, who also works for the Canadian trade union Unifor, says that as the number of people belonging to unions fell, so did wage rates for the "99 per cent," a trend that continues to this day.

His historical research both here and in the United States (to be published soon) shows a direct correlation between a strong middle class and what he calls "union density."

Poloz has warned that current inflation may be just a flash in the pan driven by short-term factors. But price inflation is cumulative. And unless an economy stalls altogether, prices always rise. The two per cent you lose now, you will never get back.

Even workers with unions are losing out. The Globe and Mail, organized by Unifor, is getting one per cent, two per cent and two per cent over three years in its latest contract. At current inflation levels, Globe workers who live in Ontario are still a lot poorer than they were last year. But Brennan's research show non-unionized workers are getting increments far lower.

How can middle class get ahead?

It may be that as employees watch their incomes erode over time they will become more radicalized and more inclined to organize. Workers may feel lucky to be employed after the recession, but unemployment rates are now not far off what they were during the boom of 2007. With three per cent inflation, certainly it is hard to imagine Ontario civil servant unions being willing to accept Ontario Premier Kathleen Wynne's zero-increase budget.

As Brennan says, inflation consists of both wages and prices. But when both are rising, the only way to overcome increasing inequality, is for wage inflation to outpace price inflation. Anything else just leaves workers poorer.

If that happens, Poloz's worries about deflation will disappear. But as he pointed out in his interview on The Current, a move to higher inflation and the resulting higher rates of interest, will not be painless.

"So much debt has been taken on during the course of this downturn that every uptick in interest rates that we get is going to hit the cash flow of ordinary people," Poloz says.  But if Brennan is right, engaging in a fight for higher wages is the only way to save the Canadian middle class.

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