“In both Canada and the U.S., the .01% is fright­en­ingly rich and pow­er­ful.”

Rotman Management Magazine - - CONTENTS - – Daniel Tre­fler,

How would you de­scribe the dif­fer­ences be­tween in­equal­ity in Canada and in the U.S.?

In both coun­tries, at one end of the spec­trum, we have poverty, and on the other, we have the 1%. Ac­tu­ally, I should say the .01%, be­cause that is the group I am most afraid of. In the U.S., this rar­i­fied group of some 10,000 fam­i­lies is fright­en­ingly rich and pow­er­ful, and has in­creased its share of wealth vastly since the 1960’s. That shouldn’t come as a sur­prise to most peo­ple. We’re all used to read­ing about the CEOS of com­pa­nies like Google be­com­ing ex­tremely rich. What is more dis­turb­ing is what is hap­pen­ing on Wall Street: In the last 30 years, its lead­ers’ share of all avail­able U.S. prof­its sky­rock­eted from a mod­est eight per cent to 40 per cent. They now hold some­thing like $15 tril­lion dol­lars’ worth of as­sets. These are ex­tremely pow­er­ful in­di­vid­u­als.

Is this not an is­sue in Canada?

It is much less of a prob­lem here. In Canada, in­equal­ity has grown sub­stan­tially in com­par­i­son to Europe, but it has not grown much rel­a­tive to what is hap­pen­ing in the U.S. I ac­tu­ally just saw some num­bers for China, and in­equal­ity there is now al­most as bad as in the U.S. This is a global is­sue.

How would you frame the in­equal­ity is­sue in Canada?

There are three as­pects to it, and each has to be ap­proached in a dif­fer­ent way. First, we are cer­tainly see­ing a hol­lowingout of the mid­dle class. And look­ing ahead, the down­side of ar­ti­fi­cial in­tel­li­gence (AI) and ma­chine learn­ing is that lots of good white- col­lar jobs are go­ing to dis­ap­pear. Not to­mor­row, and not in a decade, but maybe in a gen­er­a­tion. We have to be con­cerned about that.

Se­condly, there is the is­sue of the poor. Poverty is a hor­rific out­come for any rich coun­try. As much as poverty in Canada is not as pro­nounced as some other coun­tries, it is still at un­ac­cept­able lev­els. In par­tic­u­lar, child poverty in this coun­try is ab­so­lutely stag­ger­ing.

Third, when we look at the peo­ple at the very top, we have to ac­cept that it’s okay to have some ex­tremely rich in­di­vid­u­als in so­ci­ety; what is not okay is for those in­di­vid­u­als to have a larger say in the po­lit­i­cal sys­tem than any­one else. Their views should not count any more than the rest of

In both Canada and the U.S., the .01 % is fright­en­ingly rich and pow­er­ful.

us. What is ul­ti­mately im­por­tant is that the po­lit­i­cal sys­tem be al­lowed to func­tion, shielded from the in­flu­ences of the su­per-rich.

Two types of in­equal­ity are dis­cussed the most: In­come in­equal­ity and wealth in­equal­ity. Which is the most per­ti­nent to the is­sues we face to­day?

The one we should fo­cus on is wealth in­equal­ity — the un­equal dis­tri­bu­tion of as­sets within a pop­u­la­tion. That’s be­cause ul­ti­mately, as in­di­cated, the abil­ity of very pow­er­ful in­di­vid­u­als to sway elections and pol­icy is driven not by what they earn each year, but by how much they build up and sock away in trusts and other tax-shel­tered ac­counts.

Pol­i­cy­mak­ers in ev­ery coun­try must de­cide where to fo­cus their at­ten­tion. If it were up to you, where would the Canadian gov­ern­ment fo­cus?

As in­di­cated, we need three sep­a­rate sets of poli­cies. For the very poor, we ab­so­lutely have to make sure that our ed­u­ca­tion sys­tems are open, ac­ces­si­ble and high qual­ity — for all of our chil­dren. That is es­sen­tial. In large swaths of the poor­est parts of the U.S., mea­sures of ed­u­ca­tional qual­ity in the pub­lic school sys­tem are ab­so­lutely hor­ren­dous. We can’t let that hap­pen in Canada. We need to con­tinue to make sure that there are re­sources avail­able for our most dis­ad­van­taged chil­dren.

For the mid­dle class, as I’ve said, we have to worry about the po­ten­tial swing away from the kind of jobs that they are cur­rently hold­ing. I don’t think any of us quite knows how to ap­proach that. Then, at the top end, we have to ex­am­ine the laws around cam­paign fi­nanc­ing. We have to strengthen the role of the Com­mis­sioner of Elections Canada, whose power was di­luted through the Harper gov­ern­ment. It’s one thing to vi­o­late cam­paign fi­nanc­ing laws; it’s an­other to be able to do some­thing about it.

We also need to force the Trudeau gov­ern­ment to do what they promised dur­ing the elec­tion, which is to move to­wards pro­por­tional rep­re­sen­ta­tion. The cur­rent sys­tem al­lows for a mi­nor­ity of 35 per cent of the pop­u­la­tion, rough- ly, to have a ma­jor­ity in gov­ern­ment. That means that, for the most part, the ma­jor­ity is not rep­re­sented by their own gov­ern­ment, and that is un­for­tu­nate, be­cause it pro­vides a win­dow for wealthy fam­i­lies to ma­nip­u­late the po­lit­i­cal sys­tem. I’m very con­cerned about that.

You have said that Canada’s bank­ing sys­tem has a sort of ‘quid pro quo’ with the fed­eral gov­ern­ment. Please ex­plain.

First, let me de­scribe what the U.S sys­tems looks like, to in­di­cate the stark­ness of the dif­fer­ences. On May 27, 2009, in the depths of the fi­nan­cial cri­sis, Pres­i­dent Obama called in the top 13 bankers in the U.S. to the oval of­fice for a chat. His open­ing line was some­thing like, ‘The only per­son who stands be­tween you and the pitch­forks is me.’ By the time the meet­ing was over, you would think Obama would have ex­tracted some enor­mous con­ces­sions from the bank­ing in­dus­try — and that’s ex­actly what the bank­ing in­dus­try was ex­pect­ing. But when those bankers walked out, they looked at each other and asked, ‘What just hap­pened in there?’ He ba­si­cally let them off the hook.

That was a lost op­por­tu­nity, and it would never hap­pen here. In Canada, ei­ther the Min­is­ter or the small num­ber of reg­u­la­tory bod­ies that gov­ern the bank­ing and fi­nan­cial ar­chi­tec­ture of this coun­try would have called our most pow­er­ful CEOS, who would have all nod­ded their heads and said, ‘We will im­ple­ment what you are ask­ing for.’ The rea­son is sim­ple: At the end of the day, banks make a lot of money in our so­ci­eties, for two rea­sons. First, we live in a so­ci­ety where the rule of law is pur­chased, paid for and de­vel­oped by tax­pay­ers; so, the banks have em­bed­ded them­selves in a tremen­dously pow­er­ful frame­work that al­lows them to func­tion. This frame­work al­lows in­vestors to trust that if they give them their money, the bank can’t walk off with it — which al­lows the banks to grab all the more de­posits, and in­vest them for even more prof­itabil­ity.

The sec­ond thing is that our banks re­ceive ‘rents’, be­cause they are reg­u­lated. You would think reg­u­la­tion would put a damper on bank­ing ac­tiv­ity; but in fact, the banks are

of­ten reg­u­lated by and for them­selves, and that trans­lates into mo­nop­oly prof­its. In Canada, peo­ple rec­og­nize that there are a small num­ber of very large, reg­u­lated char­tered banks that are earn­ing huge prof­its. But we live with that, be­cause we be­lieve they are de­liv­er­ing some­thing for those prof­its. And what they de­liver — not to share­hold­ers, but to Canadian so­ci­ety — is fi­nan­cial sta­bil­ity. As a so­ci­ety, we have said that we are will­ing to pay for that.

The U.S. bank­ing sys­tem has never at­tempted this ap­proach; in your view, could it solve some of its prob­lems?

In the U.S., the bankers reg­u­late them­selves. The great­est ev­i­dence of that — and this speaks, I think, to the big­gest prob­lems that we are go­ing to face with Pres­i­dent Trump — is what is hap­pen­ing with the elim­i­na­tion of Dodd-frank. It is clear that we need some form of more ex­ten­sive cap­i­tal re­quire­ments for banks. We can ar­gue about the de­tails of what that should look like, but we need more of it, be­cause there has proven to be far too much fi­nan­cial in­sta­bil­ity.

If Dodd-frank goes, ba­si­cally, noth­ing will have changed be­tween 2007 and now — ex­cept for the fact that the big banks have ac­tu­ally got­ten big­ger. By try­ing to get rid of Dodd-frank, Trump is cav­ing in to spe­cial in­ter­ests, and this, I think, is what we should fear the most about his ad­min­is­tra­tion on the eco­nomic side: By ex­am­ple, he is say­ing ‘I am not go­ing to di­vest my­self of my own in­ter­ests. I am go­ing to make po­lit­i­cal de­ci­sions that will en­rich me and my fam­ily, and that’s okay’. That mes­sage per­co­lates out to the rest of the econ­omy, and it’s the same mes­sage Wall Street is hear­ing.

The first piece of leg­is­la­tion that Congress passed un­der Trump was get­ting rid of the re­quire­ment for fidu­ciary re­spon­si­bil­ity of bro­kers to their clients. So, the first thing the Trump ad­min­is­tra­tion did was say, caveat emp­tor — buyer be­ware. That is a men­tal­ity that harkens back to the crash of 1929: The first piece of leg­is­la­tion that was im­ple­mented in 1933 un­der Roo­sevelt was one de­mand­ing more trans­parency, not less.

Do we com­pare the U.S. and Canada too much when we’re talk­ing about in­equal­ity?

It’s great to un­der­stand and cel­e­brate our dif­fer­ences, but it’s also im­por­tant to rec­og­nize that through­out his­tory, there has al­ways been a bat­tle be­tween in­cum­bent in­ter­ests who want to take con­trol of gov­ern­ments, ver­sus en­tre­pre­neur­ial, in­no­va­tive new sec­tor play­ers. The in­cum­bents don’t

want any com­pe­ti­tion, so they’re go­ing to use any method they can to block it — and one of their favourite meth­ods is gov­ern­ment. We have seen this through­out his­tory, and no coun­try in the world is im­mune to it — in­clud­ing Canada. So, to look south of the bor­der and see this process pick­ing up steam should serve as a no­tice for all of us to be on guard.

In terms of tack­ling in­equal­ity, what key lessons can we learn from his­tory?

One les­son is that the pol­i­tics of in­equal­ity is a sys­tem with its own mo­men­tum, and once it starts rolling down the hill in a neg­a­tive di­rec­tion, there’s al­most no stop­ping it. So, each and ev­ery one of us has to stand up and say, ‘This is un­ac­cept­able’.

One of the great ironies of my view of the United States is that it is both head­ing in a hor­rific di­rec­tion and the great­est coun­try on earth. When you look at the free­dom of the press in the U.S., and the abil­ity for cit­i­zens to protest what is hap­pen­ing in Wash­ing­ton, it’s re­ally un­par­al­leled. We’ve seen great pe­ri­ods in Amer­i­can his­tory where the vox pop­uli has been very ef­fec­tive in peace­ful ways: We had the power of the press in the muck­raker move­ment; we had pop­ulism, New Deal­ism; we had the 60’s; and we had the missed op- por­tu­nity of Oc­cupy Wall Street.

Call me naïve and overly op­ti­mistic, but I firmly be­lieve that there will come a time in the not-too-dis­tant fu­ture when the pop­u­lar voic­ing of dis­con­tent will have an in­flu­ence in Wash­ing­ton, and we will see a ma­jor re­set­ting of the pol­i­tics of in­equal­ity.

The pol­i­tics of in­equal­ity is a sys­tem with its own mo­men­tum.

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