It’s borrowing, not sound policy, that’s propping up the middle class

JUSTIN TRUDEAU APPEARS TO have pressed all the right buttons in his meeting this week with U.S. President Donald Trump, which included touching on one of his favourite topics: the plight of the middle class.

Trudeau made the fate of the middle class the central piece of his election campaign. There’s been much rhetoric since then. Likewise, workers and their futures were a key component in Trump’s ascendancy to the Republican nomination and, ultimately, the presidency.

But, as with past leaders, there’s been much more talk than action when it comes to actual improvements in the lot of middleclass workers.

In decline for decades, our standard of living has been propped up by massive amounts of borrowing – i.e. smoke and mirrors. Long gone are the days when rising productivity in the economy was shared among pretty much everyone – that was when the “rising tide lifts all boats” arguments still held water – replaced by most of the benefits going to the few. The resultant long-building anger is what Trump tapped into. Elsewhere, particularly in Europe, other political movements are doing the same.

While it’s true we have much more stuff than was the case in the moreprosperous postwar years, that’s an illusion brought on by there simply being more stuff to have. And readily available credit to buy it, and buy it now, patience no longer being a collective virtue.

That it’s an illusion is clear in the numbers. Average incomes have been more or less stagnant for more than 30 years. Debt levels, however, have exploded. Quarter after quarter, we hit new levels of indebtedness, both total household debt (which includes mortgages on increasingly out-of-reach homes) and consumer debt (i.e. credit cards, lines of credit). By the middle of last year, for instance, total household debt surpassed the entire national GDP for the first time ever. Canadians owe more than $1.70 for every dollar of disposable income.

Borrowing up, savings down – the trend isn’t new. Most alarmingly, we’re borrowing for everyday expenses – unable to pay the bills – not just for big-ticket items or even trinkets. Likewise, we’re raiding what savings we do have to cover day-to-day expenses, as noted in an RRSP survey released last week by BMO Financial Group.

Though showing funding a home purchase remains the top reason Canadians withdraw money from their RRSPs (30 per cent), they continue to dip into their retirement savings for living expenses (21 per cent) and debt repayment (18 per cent).

According to the study, Canadians withdrew an average of $17,213 from their RRSPs this year, an increase of $1,305 from last year ($15,908) and 38 per cent of Canadians have withdrawn money from their RRSP before age 71, an increase of four per cent from last year (34 per cent).

And this is no short-term blip, BMO notes. Despite three quarters (75 per cent) being very concerned over the consequences of taking money from their RRSP and 73 per cent saying they are familiar with the tax penalties or rules for repayment (in the case of a homebuyers withdrawal) when withdrawing from their RRSP before age 71, one in five do not expect to ever pay it back (19 per cent).

Fueled by more than our consumer society’s lust for trinkets, the debt load is increasingly tied to everyday purchases as we try to deal with our sinking standard of living.

Studies have repeatedly indicated a trend, with more than half of indebted Canadians borrowing just to afford day-to-day living expenses like food, housing and transportation. For these people, there is little hope for improved financial condition. Singleparent families, retired Canadians, and those with annual household income of less than $50,000 face a bleak financial situation.

This is no accident, however, as the middle class has been under assault for ages.

Studies in Canada and the U.S. show parents today are increasingly convinced their children will be less well off than they were. The figures back up that sentiment, as the great prosperity that flowed out of the postwar years in particular succumbs to constant attack.

The majority of us have seen real incomes decline. Studies show the gap between rich and poor is growing, even during the best of economic conditions. Canada’s richest one per cent are taking more of the gains from economic growth than ever before in recorded history.

The 1%ers have become the rallying point for a renewed look at inequalities and inequities in our economic system. Little wonder, as from the beginning of the Second World War to 1977, the income share of the richest one per cent dropped from 14 per cent to 7.7 per cent; by 2007 they’d made a comeback, as the richest one per cent held 13.8 per cent of incomes; since the late 1970s, the richest one per cent has almost doubled its share of total income; the richest 0.1 per cent has almost tripled its share of total income; and the richest 0.01 per cent has more than quintupled its share of income.

The average earnings of the richest 10 per cent of Canada’s families raising children were 82 times that earned by the poorest 10 per cent of families. That is approaching triple the ratio of 1976, when the ratio was around 31 times. The after-tax income gap has never been this high in at least 30 years, and it has been growing faster than ever since the late 1990s.

That trend has continued in earnest, as little was done to curb the excesses and outright criminality of the deregulation that spawned the 2008 global economic meltdown. The financial sector resumed business as usual, as seen by the large increase in the

derivatives market – aka speculation. Instead of regulating the industry, eliminating some of the most egregious practices, governments in effect handed a blank cheque to those who caused the meltdown. What little was done is at risk of being rolled back in the U.S. by Trump, who’s hinted he’ll go beyond that in eliminating consumer protections, for instance.

As with drops in cor- porate taxes and shifts to consumer taxes, the goal is to shift the burden to you. This will continue transferring wealth to those already making the biggest gains while contributing to the debt loads of middleclass Canadians trying to maintain their position as real incomes – both preand after-tax – continue to fall.

Short of countering that trend, talk of helping the middle class is just so much lip service.