A unionist’s plea for banks and business
by Fred McMahon
PAPER BOOM: WHY REAL PROSPERITY REQUIRES A NEW APPROACH TO CANADA’S ECONOMY
By Jim Stanford (The Canadian Centre for Policy Alternatives and James Lorimer and Co. Ltd., 473 pages, $24.95)
Imagine this headline: “Canadian Auto Workers call for corporate tax cuts.” Or this one, “Business profits too low, union charges.” Or, even more remarkably, “Workers pocketing excessive share of national income: CAW.” All these messages, directly or indirectly, are in Paper Boom, a remarkable book by union economist and rising CAW star Jim Stanford.
While Buzz Hargrove won’t embrace these ideas any time soon, they are not entirely foreign to the union movement. In the past decade, Irish and Dutch unions have negotiated a combination of tax cuts and wage moderation designed to increase profits and reduce workers’ share of the national income.
Here’s Johan Stekelenburg, chairman of the largest Dutch union organization from 1988 to 1997, bragging about Dutch wages falling behind productivity gains: “In the past 13 years, wage costs per unit of product rose almost 30% in France and even 40% in Germany. Here, on the other hand, they fell by over 1%!” He then talks about the resulting employment and investment boom. A similar phenomenon occurred in Ireland, creating islands of prosperity in the European doldrums.
Mr. Stanford only sautes these themes, with no discussion of the international experience. He has other fish to fry, namely the conspiratorial turn of Canadian economic policy in 1981, designed to favour wealthy investors. This, he believes, led to a boom in the paper economy – stocks, options and the whole galaxy of paper assets. The value of these assets has exploded over the past couple of decades. But, as Mr. Stanford shows, investment in the “real economy” – plants, machinery, training and so on – has stagnated. This point carries a real sting.
Profits must be boosted to spur real investment, Mr. Stanford believes; thus, he advocates cutting corporate taxes for “users of capital” – those who invest in the real economy. He complains that “conservative anti-tax campaigners” have paid a “disproportionate lack of attention” to fighting corporate taxes. “Even radical [measures] like abolishing corporate income tax altogether are worthy of further discussion.”
Mr. Stanford even suggests that workers’ share of national income has grown too large. “The successful effort by workers to extract a greater share of the economic pie from their employers eventually came into contradiction with the continued fundamental dependence of workers on the initial profit-seeking investments of those employers.”
But this is a sideshow to Mr. Stanford’s call to squeeze the paper economy with big tax increases on the income and wealth of “owners of capital.” He seems blind to the fact that Canada’s high tax load, particularly income taxes, slices into profits as surely as corporate taxes. Employers must pay a premium to compensate for Canada’s onerous personal burden. That comes off the bottom line. Canada’s complicated tax code is far from ideal, but the key problem is the overall weight of the burden.
Mr. Stanford’s diagnosis of the paper boom is also questionable. He argues that the root cause – along with paper-friendly taxes – is Canada’s fight against inflation, which he traces to the early 1980s. Mr. Stanford claims anti-inflationary policies caused real interest rates (nominal rates minus inflation) to skyrocket.
That’s silly. Soaring real rates were a worldwide phenomenon. Government demand for financing – particularly U.S. expansionary fiscal policy – drove rates up and squeezed out private-sector borrowers. Monetary policy had only a passing effect. Lenders, spooked by negative real rates in the 1970s, didn’t initially trust the endurance of lower inflation. As fiscal sanity was restored, real rates declined.
The necessary but ill-timed anti-inflation battle by John Crow, the Bank of Canada governor, in the late 1980s again boosted real rates in Canada, but only temporarily. They are now just slightly higher than real U.S. rates, reflecting currency risk.
Even though Mr. Stanford points to the left’s usual economic villains, his book is full of stuff to alarm union bosses. He indirectly demolishes the paranoid, global-conspiracy ravings of Canada’s nationalist left and sensibly argues that Canada’s problems are home-grown, not the result of insidious trade agreements.
He has kind words for Canada’s big banks, writing that they are “one of the strengths of our financial system,” and that they subsidize banking services rather than overcharge for them. The left’s battle against bank mergers, he believes, was ill-informed. Still, he calls for a plethora of new regulations to force banks to act in ways unions would find socially responsible.
There’s plenty of left-wing silliness here to keep the attentive reader amused. Mr. Stanford revives that old chestnut about evil capitalists wanting an army of unemployed and a “permanent recession” to keep wages down. This apparently makes Glen Clark, the architect of B.C.’s recession, a capitalist roader, while Mike Harris and Ralph Klein are tools of the left for implementing policies that spur economic growth and reduce unemployment.
Mr. Stanford’s argument draws upon the idea of a “natural” rate of unemployment, below which inflation will accelerate. Supposedly, heartless central bankers crush economic growth any time too many people get jobs. Yet, unemployment in the market-friendly economies of the United States and Great Britain has fallen below what many economists believed to be the natural rate, without central bank vampires sucking the lifeblood out of the economy.
The great flaw in Mr. Stanford’s book is his briefly sketched uber-solution to weak investment. Here, his distrust of markets comes into focus. From a number of sources – taxes, central bank money printing, pension fund contributions – Mr. Stanford would create a huge “public investment bank.”
These socially liberated funds would be directed by community and sectoral “development councils” which would make wise, productive investments. Mr. Stanford acknowledges the failures of past public interventions, and warns against politicization and the protection of dying industries. But these problems would presumably disappear under his plan because of explicitly stated goals and community-based, goodwill hand-holding. Oh, well.