The Past Speaks

Michael Bliss, who is one of Canada’s most accomplished historians, has published a piece in the Globe and Mail calling for Canada’s system of taxation to be made more progressive. I really admire Bliss’s work as a historian and he makes an interesting case in this op-ed piece, but there are some ideas lurking in his piece that I cannot let pass without comment.

Bliss writes: “Inequality of compensation has soared in our time, as the rich have become much richer and much less taxed. Higher taxes on high incomes would begin to narrow the immense chasm that has opened up between the über-rich and the ordinary North American. If properly applied, they could put an end to the frustrating debate about the obscene salaries and bonuses that we pay not only to flailing financiers but to mediocre professional athletes.”

There is no such country as North America. Canada and the United States are very different countries when it comes to inequality. One common measure of income inequality is the Gini coefficient.  The most egalitarian society in the world is Denmark, with where the Gini coefficient is 24.7, according to the UN stats. In Canada, the Gini coefficient is 32.6. This makes Canada’s distribution of income somewhat more egalitarian than in France, Australia, the United Kingdom and far more egalitarian than in the United States, where the Gini coefficient is 40.8. Moreover, while the level of inequality in the USA has increased dramatically since the 1970s, it has remained roughly the same in Canada. Anyway, the divergence is partly a function of different economies producing different distributions of pre-tax incomes (there are lots of well-paying jobs for male high-school graduates in Canada) and partly because of different tax regimes (read Geoffrey Hales’s excellent book on this subject). Executive compensation is also lower in Canada than in the USA. My point is that we can’t say that the same trends are at work on both sides of the border.

“From 1945 to the 1960s, the United States and Canada experienced what appears to be a golden age of affluence, growth and, by our standards, increasing social equality.”

The  relatively egalitarian distribution of incomes in the US between the New Deal and the 1973 oil shock was due to a conjunction of factors that simply aren’t present today. Tax policy is just one of them. The world is more globalized (as workers in Flint, Michigan will tell you), the labour movement and the big Chandlerian corporations have declined, technology has automated certain formerly well-paying jobs out of existence, there is more immigration from low-wage countries, and gender roles are massively different. Bliss’s piece reminds me of Paul Krugman’s nostalgia for the relatively egalitarian society of the United States of his childhood. As critics have pointed out, Krugman’s “nostalgianomics” overlooks important flaws of 1950s American society (very limited immigration, women being kept out of a workforce).

We watched an episode of Mad Men last night. Neither I nor my wife would want to live in the society Krugman and Bliss appear to regard as some sort of golden age.

Canada’s egalitarianism is generally a good thing (it makes muggings less common), but it also has some drawbacks that we should acknowledge too. For one thing, it probably makes university students less competitive.  I also suspect that it is one of the reasons why the expected rate of return on investment in a university degree is lower in Canada than in the United States.

Update: I have been asked by a reader to back up my claim that the ROI on a university degree in Canada is lower than in the US. This OECD data shows that the present value of a degree is lower, which certainly suggests that the ROI is lower.

2009 OECD Report on Education, “Education at a Glance” Chart A8.1. Economic returns for an individual obtaining upper secondary or post-secondary non-tertiary education, ISCED 3/4, and for an individual obtaining tertiary education

“The chart depicts the present value of an investment’s future cash flows net of  the initial investment,  discounted by 5% interest rate. Investments in tertiary education generate substantial financial rewards in most OECD countries. Male students in Italy, Portugal and the United States can expect to gain more than USD150 000 over their working lives by investing in tertiary education. The returns for female tertiary students exceed USD 100 000 in Korea and Portugal. With few exceptions, the returns for investing in a tertiary education are higher than for upper secondary or post-secondary non-tertiary education… For males the returns are USD 81 000 compared with USD 40 000 and for females USD 51 000  compared with USD 26 000. Incentives to continue education on a tertiary level are thus strong for males and females in most countries.”

The other interesting stat I would like to share is that ROI on a university education appears to be increasing. I know the cost of education has gone up a bit, but the earnings premium of college graduates has skyrocketed, at least in the United States. As globalization has accelerated and more manual labour jobs have been sent offshore, the gap between what a university graduate can earn and the earnings of high school graduates has opened up. Let me quote a recent report from the US College Board:

“The earnings premium for college education has increased over time:
Among men, the earnings premium for a college degree increased from 19 percent in 1975, to
37 percent in 1985, 56 percent in 1995, and 63 percent in 2005.
The earnings premium for women is larger—70 percent in 2005. It was 47 percent in 1985, but
has not increased since 1995.”

Anyway, I should get back to work….