Worthwhile Canadian Initiative

More on the ineffectiveness of minimum wages as an anti-poverty measure

The most recent issue of Canadian Public Policy has this short note:

Minimum Wage Increases as an Anti-Poverty Policy in Ontario: In this article, we consider the possibility of alleviating poverty in Ontario through minimum wage increases. Using survey data from 2004 to profile low wage earners and poor households, we find two important results. First, over 80 percent of low wage earners are not members of poor households and, second, over 75 percent of poor households do not have a member who is a low wage earner. We also present simulation results which suggest that, even without any negative employment effects, planned increases in Ontario's minimum wage will lead to virtually no reduction in the level of poverty.

I've blogged on this before, but it's worth doing so again.

Economic policy advice for the NDP, Part V: Give money to low-income households

Here is what I would like some staffer to ask next time NDP strategists are kicking around ideas for goods to subsidise or services that governments to provide at a discount in order to advance their agenda of reducing poverty and inequality:

"Why don't we just give low-income households money and let them spend it on what they need most?"

Because one you start asking yourself this question regularly, you're less likely to come up with policy proposals that are inefficient, inegalitarian and regressive.

Economic policy advice for the NDP, Part I: Inequality

One of the themes being played up in the NDP's convention is its attempt to 're-brand' (up to, but not quite, including dropping the 'New' from its name), and part of this is apparently an attempt to develop a credible economic platform. The NDP has historically been pretty consistent in its refusal to take advice from professional economists, so on the off chance that the NDP is serious about this endeavour, I'm starting a series of posts on the economic analysis behind some of its core themes. Below the fold, I'll do a brief survey of what is probably the most important economic issue for the NDP: inequality.

An overlooked anti-poverty strategy: giving money to poor people

Kevin Milligan of the University of British Columbia and Mark Stabile of the University of Toronto asked themselves "Can income transfers to poor families help children?" Here's a summary of the answer they got:

Since the 1990s, many countries have reformed their systems of transfers to low income families with an eye toward improving work incentives. This column shows, using Canadian data, that well-designed income transfers can not only help families make their way back to employment, but also improve the educational, mental health, and behavioural outcomes of the next generation.

This sort of scholarship makes me despair of the Canadian Left. Instead of focusing attention on targeted transfers, it wastes its time on arguing for higher minimum wages (a policy that is at best pointless), or on making the case for universal programs that favour the well-off. ([1], [2], [3])

When the Canadian Left does consider the idea of targeted income transfers, its response is invariably dismissive. A typical reaction to the Working Income Tax Benefit (our equivalent of the US Earned Income Tax Credit) is to describe it as a handout "so that employers can continue to pay poverty wages." Not all reactions on the left are so negative, of course. But if this piece is anything to go by, the Canadian Left's support for the idea of giving money to poor people can be at best characterised as 'tepid'.

It's getting harder and harder for me to come up with charitable explanations for the disconnect between the policies that the Canadian Left advocates and policies that serious scholarship says will actually help reduce poverty and inequality.

The progressive politics of pricing publicly-provided products

Whenever I make the points summarised in this post, someone invariably counters with the following median-voter argument:

• A policy in which only low-income households benefit will not command majority support.
• Making the program universal will ensure a more stable electoral base.

This argument is not without merit, and it's pretty convincing in certain contexts. But it doesn't work in all contexts: there are several important cases in which the traditional progressive preference for universal programs leads to regressive outcomes.

A fiscal stimulus proposal that should be implemented, but won't be

A recession is here, the Bank of Canada is running out of bullets, and it's time for  a fiscal stimulus. The problem is that the worst possible signal has been sent out to the usual gang of well-connected, media-savvy interest groups: "We're giving money away, and we really don't care who gets it!".  This has resulted in a contest in which those with the sharpest elbows and the best PR campaigns win.

This is not a game in which the most marginalised elements of society do well, so I was glad to see this proposal to increase the Child Tax Credit and the GST rebate. (The only thing I'd add would be a proposal to increase the Working Income Tax Benefit.)

Sadly, no political party is interested. Not even the NDP.

The Liberal-NDP childcare policy: The state as malevolent troll

The Liberals and the NDP have recycled their promises of a national daycare program:

Liberal Leader Stéphane Dion said if elected, his party would scale up spending on child care spaces to reach $1.25 billion in four years time, money that he said would fund 165,000 new spaces...

NDP Leader Jack Layton made a similar promise, vowing to create 150,000 spaces across the country within the first year of a mandate at a cost of $1.4-billion.

Both parties offer the same choice to parents. Call it the Rumpelstiltskin model: they are willing to provide money, but you must surrender your child in return. I realise that it is unfair to compare the Liberals and the NDP to a villain of a fairy tale. Unfair to Rumpelstiltskin, that is: he at least brought something - his ability to spin gold from straw - to the table. The Liberal-NDP position is based on reallocating gold spun by taxpayers.

This is not an exaggeration. Remember Scott Reid's "beer and popcorn" crack in 2006? It was a gaffe in its purest form - the inadvertent revelation of the truth. And when I listened to Olivia Chow insist on 'publicly-provided, not publicly-funded' daycare, I wondered if it had ever occurred to ask herself why.

The awfulness of the Liberal-NDP position is not restricted to its unapologetic paternalism. (Will I get through this post without using the expression "nanny state"? Apparently not.) It is also inegalitarian, regressive and inefficient.

From an editorial in the Toronto Star:

The Harper government has taken creative licence to an extreme in dubbing the $100-a-month cheques it sends to families with young children a "universal child-care benefit."

It may be universal for children under age 6 (although the fact it is taxable means some families keep very little of it). But with a single day of infant care in some licensed daycare centres costing $70 or more, it doesn't even begin to cover the staggering child-care costs that burden many families.

Let's do a little back-of-the-envelope arithmetic. According to this editorial, the total cost of sending $100 cheques each month is $2.4b/yr; that works out to 2m children. The NDP program calls for $1.45b to finance 150,000 daycare places, which works out to about $800 per month. That's certainly an improvement over the existing $100/month - but only if you happen to be one of the 7.5% of families who will benefit. The other 92.5% will see nothing. This project is profoundly inegalitarian: it will create a small class of insiders who have generous access to public funds, and it will do absolutely nothing for everyone else.

If those 7.5% were families at the very bottom of the income distribution, that could be sold as a progressive policy. But it's not; it's being sold as a step towards a universal daycare program. If the aim of the policy is to help out low-income parents, our experience with the Quebec model isn't very encouraging. As explained in great detail over here, the average subsidy to families in the highest income quartile is more than twice that received by families in the lowest quartile.

And then there are efficiency considerations. It is well known that cash transfers are a better way of redistributing income than providing in-kind goods and services.

A lesson for the Liberals and the NDP: if you want to help low-income families, give them money. It really is that simple.

Canada's income redistribution strategy: take from the rich, give to the median

There have been any number of MSM stories based on StatsCan's recent release on earnings and income. Median earnings from market income for individuals in 2005 are pretty much the same as they were back in 1980, and market income inequality has - by any measure - increased over the past 25 years.

This isn't really news - at least, not in the sense of 'revealing previously unknown facts'. Here are plots of average and median market income for unattached individuals and for for economic families of two or more people; the data are taken from Statistics Canada's Cansim Tables 202-0202 and 202-0203:

Although median market income in 2005 was the same as it was in 1980, it hasn't remained constant: the recessions of 1983 and especially 1991 reduced real median incomes considerably, and it's taken ten years to recover. And the widening gap between the average and the median indicates increasing inequality during this time; something we knew about already (see this post, and this one, among others).

Inequality in market income doesn't bother me much in itself; what really matters is inequality in income after taxes and transfers. If policy-makers are responding to rising inequality by improving its programs for redistributing income, then the effect on inequality of disposable income will be a wash.

Unfortunately, that's not what has been happening in Canada. Here is how net transfers have changed; the data are taken from Cansim Table 202-0704:

Net transfers to the highest quintile have decreased; income growth has been concentrated at the top end of the income distribution, so their tax payments have grown in proportion. But the main beneficiaries are not those with the lowest incomes; the increase in net transfers has been concentrated on the middle income groups.

Here are how the shares of (gross) government transfers have changed over the past generation:

The share of transfers to the lowest quintile has decreased since 1980, as has - albeit to a lesser extent - that of the second quintile. The winners in this reallocation are the middle and fourth income quintiles.

It's not hard to imagine an explanation for this; the median income group is likely to include the median voter. So every political party will be happy to sacrifice the lowest income group's interests (that group is either taken for granted or written off entirely) in order to gain popularity at the centre.

On the political economy of a basic income

The idea of a basic income - it's generally referred to as a Guaranteed Annual Income in Canada - has been floated again. My initial reaction was that this is such a good idea that it's hard to figure out why we don't have it already.

For some reason, there doesn't seem to much in the way of a formal modeling exercises that work through the general equilibrium implications of a BI (I will be happy to be corrected on this point), so I decided to set up a blog-sized version. It turns out that although the BI is still a good idea, it's not quite the slam-dunk I thought it was.

The gory details are below the fold.

Gini coefficients in Canada, the UK and Sweden: 1980-2005

The national statistics agencies of Canada, Sweden and the United Kingdom have annual series for gini coefficients going back to 1980 or so. Although cross-country comparisons of the levels should be taken with a grain of salt, the trends in these three countries are remarkably similar:

It is a Well-Known Fact^TM that inequality has been increasing over the past couple of decades, but it would appear that the greatest part of this increase took place before 1995 or so. Over the past ten years, inequality in market income has remained fairly stable.

Update: My initial, off-the-top-of-my-head conclusion was that these inequality patterns were driven by technology (eg., the familiar skill-biased technical change story) rather than country-specific things such as trade patterns, labour market structure, etc. But since I didn't have anything stronger than an off-the-top-of-my-head impression to back it up, I didn't mention it. But this study offers some support to this notion:

[T]he causes of rising inequality are primarily structural and related to new technology rather than to trade or institutions.