Bank of Canada targets income disparity

Central bank argues reining in the excesses of free markets and reducing income disparities will strengthen the economy.

March 13, 2012   by The Canadian Press

OTTAWA—The Bank of Canada is urging leaders to enact policies to rein in the excesses of free markets and reduce income disparities, arguing they will strengthen the economy.

In a speech to a business audience in Sao Paulo, Brazil, the bank’s senior deputy governor Tiff Macklem laid out a powerful case that income inequality has been on the rise and needs to be addressed.

Research from the International Monetary Fund shows that countries that decrease income disparity increase the duration of periods of economic growth, he said.

And he argues that globalization, along with technological change, have been leading triggers of income disparity within countries like Canada, the US and much of Europe.

Ironically, those same forces have contributed to the narrowing of the gap among nations—as China, Brazil and others have emerged from poverty to global economic powers.

“In short, market forces have been a powerful mechanism for creating wealth,” he said. “At the same time, however, globalization, combined with technological change, is concentrating wealth in fewer hands within many countries.”

Countries as diverse as China, Denmark, German, Japan, New Zealand, Sweden, the UK and the US have all seen inequality within their borders rise from the mid-1980s, he said. The income gap in the US is now as severe as it was in the 1920s.

Inequality—the spread between the a country’s richest and poorest citizens—has also grown in Canada, but less dramatically, he said.

Still, according to the Organization of Economic Co-operation and Development, Canada has nevertheless gone from 14th in the mid-1990s to 22nd in the latest data in terms of income equality among the group’s 34 member nations.

Macklem’s address is not an attack on the market system—he says it works better than any other in delivering opportunity and prosperity.

But he notes that with the rise in movements such as Occupy Wall Street, markets are under intensifying scrutiny, and agrees with critics that they must be reined in.

“Markets need to be guided by sound policy frameworks with clear rules that must be enforced with consistency and transparency,” he said. “The forces of globalization and technological change that have propelled global growth and driven rising inequality within many countries are not likely to abate. We need to harness these sources of growth while increasing opportunity for all our citizens.”

Previously, Bank of Canada governor Mark Carney has also had some praise for the occupy movement, calling it “entirely constructive.”

Macklem said the world could benefit by studying Brazil’s economic miracle, which has occurred even as income disparity fell. He cited market reforms and fiscal restraint in concert with better social programs tied to education and health as creating a virtuous circle in Brazil.

The comments drew qualified praise from economist Armine Yalnizyan of the Canadian Centre for Policy Alternatives for drawing a link between more income equality and economic growth.

“In a way, he’s provided the litmus test for our own government’s policies … do they help reduce income disparity or increase it,” said Yalnizyan.

A big part of Brazil’s economic miracle, she said, was an income redistribution program to poor families on the condition they keep their children in school and obtain health care.

Macklem said central bankers can mitigate against income disparity by keeping inflation low and stable and protecting the financial system from itself.

He called on implementation of G-20 financial reform measures to broaden the span of regulation and oversight on “too big to fail” institutions and banks.

A Bank of Canada cost-analysis of beefed up capital and liquidity standards shows while there would be a penalty in terms of higher costs for funds, the benefits would be exponentially greater. A two percentage point rise in capital ratios would result in a 13% gain of GDP in Canada, and more for the world, he said.

Macklem said central banker also can help mitigate against income inequality by ensuring that inflation remains in check.

Citing internal research, the bank’s second-in-command said an increase in inflation from two to five per cent shows average consumption by the poor declines by 1.4%, four times more than among the wealthy. Consumption drops by even more, 1.8%, among the elderly.

“Inflation is a tax on cash and the proportion of household assets held in cash decreases as income rises,” he explained. “As a result, the burden of inflation borne by low-income households is significantly higher than for the wealthy.”

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