Income inequality, bubbles and COVID public policy
In 2012, Chrystia Freeland, then a private citizen, released her groundbreaking book, Plutocrats: The Rise of the New Global Super Rich and the Fall of Everyone Else. It is a dense and compelling treatise about how income inequality had insidiously become a major challenge for societal welfare in the western world.
The National Post at the time opined that “this is the book that 100 per cent of the 99 per cent should read.”
This comment was a nod to the Occupy Movement that had been all the rage a year earlier.
Plutocrats won several awards and was ultimately seen as the catalyst for Justin Trudeau's 2015 campaign themes that championed the interests of “the middle class and those working hard to join it.”
By the time the 2015 election was over, Freeland had transformed into a politician and found herself as both a member of Parliament and a member of cabinet.
She has since gone on to become deputy prime minister and the first female Canadian to be a federal finance minister.
With the singular exception of the prime minister, it is doubtful that anyone is more influential in public policy circles. The man Freeland succeeded in Finance, Bill Morneau, was himself a low-level plutocrat, having married into one of Canada's wealthiest families.
Morneau started off as a darling of the Davos crowd and even brought in a budget that was hard on people who set up professional corporations — more likely the top five per cent than the top one per cent. One of the great challenges in purposeful wealth redistribution is in extracting more from those who have more to give to those who have somewhat less.
Irrespective of how one feels about various other elements of the Liberal platform, the notion of increasing taxes on the top one per cent in order to give everyone in the second tax bracket a break went a long way toward securing a Liberal victory in 2015. Perhaps it even spilled over into a second, albeit reduced mandate in 2019.
Then, in early 2020, COVID-19 happened. Although it may be fair to say that no western government was truly prepared from either a public-health or job-protection perspective, the response was undeniably swift and effective.
People were sent home, interest rates were essentially slashed to zero and governments of all political stripes began sending out cheques to their citizens, all in order to keep the economy moving. It worked. The combination of a steady stream of government cheques backed by central banks that provided cover by keeping (and promising to keep) interest rates near zero quickly stanched the stock market fall and then reversed the trend in an epic way.
Markets began a swift and steady ascent as asset prices of all kinds reached unsustainably high levels by late spring.
This is the point where I ask you to look back and reflect on what has just happened. Do you see it? We are now living in a world where income inequality is greater than it has been since the late 1920s (anyone remember what happened next?) and that inequality has been reinforced and even exacerbated by government policy.
To be clear, it's not just the federal Liberals. Donald Trump's Republicans were eager to spend unprecedented amounts in the United States in 2020, only to be outspent even more outrageously by Joe Biden's Democrats in 2021.
The point, therefore, is not to pillory the federal Liberals.
Governments of all stripes all around the world did much the same thing and were similarly successful in getting the desired results along the way. The point is to expose the irony.
Perhaps more than any government in the world, the Canadian government is exacerbating income inequality when it has expressly promised to take concrete actions to mitigate the problem.
There are many who believe that stocks, bonds and real estate are in bubble territory right now. Regular readers would know that I am among them. No one really doubts that these ridiculous valuations are a direct result of COVID-motivated government policies.
The response to COVID has had some unintended consequences regarding asset pricing. That new problem (multiple asset class bubbles), in turn, has disproportionately benefited pre-existing homeowners and people with sizable investment portfolios. More than any time in recent history, the rich have gotten richer.
Here's the dilemma: governments want to be re-elected … and many people expect a federal election to be called before Labour Day. For the next little while at least, the federal government will need to keep pouring gas on the fire and keep the economy running hot so that the electorate will be fat and happy come election day.
I believe the issue of Liberal credibility on income equality is one that deserves more attention. Income inequality is a live issue in 2021 and may even be a more troubling problem now than it was when the current government took office.