Blogs & Comment

Why the middle class can’t get ahead

The most popular article on the Canadian Business website currently is a beautifully researched and written piece called Squeezed, authored by Rob Gerlsbeck. It takes a look into why the middle class in Canada seems to just be scrimping by.
Steve and Krista are a typical middle-class family struggling just to make ends meet, exceedingly apprehensive about being unable to save for a rainy day or retirement. Why is this? The classic explanation is that Canadians are spendthrifts.
Gerlsbeck takes issue with this old nostrum. Instead, a significant factor, he argues, is the explosion in the cost of government. Taxes are the fastest growing — and now biggest expense — of Canadian families. This is worth another articlein itself. He also identifies the soaring cost of carrying a mortgage, due to the upward spiral in house prices.
I am in agreement on these two factors but a third raised by Gerlsbeck Im not so sure about. He citesDalhousie University economics professor Mathieu Dufour who claims the middle-class squeeze also reflects measly gains in wages. Apparently, corporations have expropriated the gains in worker productivity for themselves; if they paid labor their fair share, wages would be $10,000 higher. The prescription is to raise taxes on corporations, hike minimum wages, and make it easier to get Employment Insurance.
This is standard unionist dogma, in my view. As always, the problem with the unionist line is that the proposed policies have unintended negative consequences for the creation of national wealth. Higher taxes on any segment of society create disincentives to produce and invest. Minimum wagescreate involuntary unemployment. Generous Employment Insurance creates voluntary unemployment.
Instead of the corporations-versus-workers perspective, a more appropriate distinction would be between market power and free markets. It seems to me the government apparatus in Canada is more about granting and preserving the interests of rent seekers than optimizing the common good or efficient allocation of resources.
The result is that many groups inside Canada charge way much more than what their services are worth. Get rid of this endemic privilege and the middle class would enjoy a much more affluent lifestyle with a lot fewer financial worries. Lets offer some examples of groups in society charging others more that what they would be entitled if market forces were allowed more play.
As noted in a July 22 Financial Post article, chartered accountants (CAs) in Ontario have enlisted the help of the provincial government to prevent other accounting designations, such as certified general accountants, from conducting audits of public corporations; in other provinces, the CAs dont have a similar monopoly.
As argued in Lawyers: Another conspiracy against the laity?Law Societies in the 13 provinces and territories, appear to function more like cartels than as guardians of the public interest. A recent demonstration was the Law Society of New Brunswicks attempt to keep non-lawyers from proving title search services.
In Milking the Canadian Consumer, it was noted how supply management has made Canadian milk prices among the highest in the world. Supply management is also used in many other agricultural industries.
The real-estate industry restricts competition and maintains fess of 5% to 6% through the Multiple Listing Service (MLS). As discussed in The Real Estate Cartel, the Canadian Real Estate Association uses “minimum service” to prevent flat-fee brokers from listing on the MLS.
Not all workers suffer from capitalist exploitation. Of note are workers who belong to unions with the right to strike in monopolistically supplied public services. The article, In School for Thought, cites studies making this claim of the public school system in Canada (the same could be said of other public monopolies).
Yes, some corporations do earn monopolistic profits because they have too much market power. The banking system in Canada is arguably a cartel — thanks in large part to government support (see A better deal for consumers). Of note, is the legislation that keeps foreign competition out of Canada by requiring banks to be widely owned on a Canadian stock exchange. Then the banks benefit from a variety of government programs that socialize risk while letting them privatize profits examples are CMHC mortgage insurance (which allows the banks to grow a virtually risk free and lucrative business in mortgage lending) and CDIC deposit insurance (makes bank accounts/GICs the safest assets in which to save, lowering the interest premium that has to be paid out).
We could go on with other examples. Suffice it to say that it is too simplistic to divide the world into corporations versus workers. Some corporations, operating in competitive industries will not have excessive profits while corporations in cartelized or monopolistic industries will have excessive profits. Similarly, workers who enjoy immunity from free market forces, be it due to the nature of their industry or membership in another legal monopoly, i.e. unions, are likely to be receiving their fair share, if not more.
Over the decades, politicians have catered to the squeaky wheels, granting them protection from market forces at the expense of the general public. But each concession to the interest groups siphons off another bit of wealth from the general public, and over time the burden becomes quite onerous indeed. Moreover the widespread and persistent suppression of market forces results in a highly inefficient allocation of resources and accordingly, a much lower level of wealth than would otherwise exist.