MINDING THE GAP
No one is calling for a ‘war on income inequality’ despite this election’s preoccupation with economic justice,
Income inequality is the defining, if invisible, issue in the Oct. 19 election.
This campaign will be remembered as one unmatched in modern times for its number and variety of proposed measures to improve economic justice.
With just over two weeks remaining in the campaign, those measures already include big investments in job-creating infrastructure; universal daycare and pharmacare; a boost in CPP payouts for seniors; renewed federal investment in affordable housing, a field of crucial importance effectively abandoned by the feds decades ago; and reinstatement of the federal minimum wage, against which all employers benchmark themselves in competing for skilled labour.
No one is calling for a “war on income inequality.” Yet never before in a federal election have so many contributing factors to the growing gap between rich and poor been addressed, with remedies that are fully costed and with timetables for measuring progress.
The 2015 election is signalling a mood shift in an electorate that is worried about fragile personal finances, lack of job security and the prospect that future generations of Canadians might not fare as well as earlier ones.
Income inequality is a North American crisis, but it’s Canadian politicians who are taking the lead in confronting public unease with an increasingly unfair distribution of income.
The U.S. preoccupation is with national security and undocumented immigrants.
Canadians instead have an acute worry about a shrinking middle class and the hardship inflicted on the working poor by a system of shared prosperity that hasn’t been working properly for at least two decades.
The function of business is to allocate capital and other resources to useful purpose. This includes reinvesting in the enterprise to improve its productive capacity and innovative prowess, and enhancing a company’s ability to attract and retain first-rate workers by paying them a decent living wage.
For a long time now, business has been failing in that core function.
When he was governor of the Bank of Canada, Mark Carney repeatedly warned in the early 2010s that business was accumulating hundreds of billions of dollars in idle profit — or “dead money,” as he called it. That was money, Carney said, that business should have been reinvesting in companies to help spur a recovery from the Great Recession.
As it turned out, tapped-out governments and consumers were left to carry the entire burden of getting the economy moving again. And that explains the country’s sluggish growth rates in household income and job growth.
Almost half a decade after the recession, more than 1.3 million Canadians are unemployed, and the current jobless rate of 7 per cent remains higher than before the downturn began.
That misallocation of business capital accounts more than any other factor for the crisis of income inequality. It is also the root cause of Canada’s chronically laggard performance in productivity gains, putting the country at a disadvantage to rivals in a fiercely competitive global economy.
The explanation for that aberrant behaviour is that about 80 per cent of total pay for CEOs and top executives is now harvested from stock options and stock grants, not traditional salary and bonuses. Highranking executives receive those options and stock grants free of cost from boards of directors that effectively report to the CEO, who has veto power over the appointment of directors. Stock-based pay is a curse. It discourages investment in newproduct development, in new equipment of state-of-the-art efficiency, and expansion into new markets. It encourages short-term value extraction over long-term value creation, an injury to the business and the economy.
Stock-based executive compensation is a powerful incentive to cut corporate costs to the bone, and to use the resulting surplus profits to boost the stock price to which executive pay is tied.
That is done with huge repurchases of the company’s stock, which lifts its price in the short term and executive pay with it. Companies also distribute most remaining profit in dividends to shareholders. Among that group are the executive stockholders, of course, who unlike your pension fund did not pay for their stock.
The proceeds from cashing in stock options at fortuitous moments are a CEO windfall described by Warren Buffett as “a reward for the passage of time.”
U.S. business has been travelling down the same dead-end road. Between 2003 and 2012, 90 per cent of the corporations in the S&P 500 index — the United States’ biggest companies — spent more than half their profits (54 per cent) on buying back their own stock. They allocated 37 per cent of profits to dividend payouts. That left just 9 per cent for reinvesting in the business.
The funds misallocated to stock buybacks alone in that period amount to $2.4 trillion (U.S.).
And “that left very little for investments in productive capabilities or higher incomes for employees,” economist William Lazonick of the University of Massachusetts Lowell wrote in a milestone Harvard Business Review analysis, “Profits Without Prosperity,” published in the journal’s September 2014 edition.
“The very people we rely on to make investments in the productive capabilities that will increase our shared prosperity are instead devoting most of their companies’ profits to uses that will increase their own prosperity,” wrote Lazonick. He calls for an end to “the buyback and executive compensation binges” undermining America’s competitive position.
The social costs of unfair income distribution are incalculable, measured in stress, overwork, “time poverty” for parenting and eldercare and anxiety about the future. A business community that derives its livelihood from a healthy society needs to accept its role in narrowing the income gap. dolive@thestar.ca