The New Economics and Canada, Speech for the Green Party of BC (Victoria -- 26 May 2012)
I would like to thank the Green Party of British Columbia for inviting my wife Taeko and me here today.
I consider it a great privilege and honour to be able to speak to you.
My talk will be divided into two parts.
First, I will discuss the study of economics in broad terms to frame a debate about the relationship between the economy, social and environmental justice as ‘obligate symbiotic’, in other words, parts of the same whole depending on each other for their mutual survival.
If there is one message that I hope to leave it is that economics must be a 'moral enterprise' as much as politics claims to be.
Economic outcomes need to be framed in terms of right and wrong not just efficiency if only because these often align in surprising ways.
Second, I will suggest a few policy ideas for Canada that flow from this perspective.
Why are economic, political, social, and environmental issues framed by sustainability being asked everywhere, and being asked right now?
The ‘why everywhere’ is perhaps easier to answer.
Technological changes allow much of the human race to talk to each other without the filter of religion or government or ruling elites.
This is not new the printing press, radio, and television all played a role in driving economic, political, and cultural change.
Just after the Berlin Wall fell in 1989 I remember reading an interview with an East German housewife commenting about the ease of the regime’s collapse.
She said that any support for the regime had ended for most East Germans a decade earlier.
American TV soap operas.
She said that it was American soap operas illegally beamed in from West Germany which proved that their government had been lying to them about the superiority of communism.
‘How did soap operas do that?’ the surprised journalist asked.
“The refrigerators,” she said, “because when a refrigerator happened to open during a show revealing a bounty of food, Coke, fresh fruit, and T-bone steaks, no one rushed to grab everything they could get their hands on, which is what would have happened in any East German kitchen.”
And these refrigerators she added weren’t even in the houses of the privileged; they were in the homes of teachers, bank tellers, bus drivers, janitors, and even students.
The society collapsed because people were exhausted living a great lie and exhilarated to share in the West’s wealth and openness.
Why are these questions being asked right now?
One reason might be that just as communism failed because it was built on the flawed principle of equality of outcomes, that the current economic crisis and signs of environmental break down reminds us that capitalism built on undelivered promises of equality of opportunity, and savaging our environment, is equally flawed.
Instead of refrigerators that speak the truth there are vast tailing ponds in Northern Alberta and streets full of foreclosure signs.
How did this happen?
We are suffering from a lack of imagination because of the grip market-based economists have had on public policy for 35 years.
In my professional life the nostrums which market-based economists peddle as insightful description and prescription for our economies, our societies, and our environment has never failed to amaze me.
First, the thesis that the market is rational.
A little like flat earth geography.
Then arguments about globalization alone reducing poverty, economies tending to equilibrium, lower taxes and deregulation guaranteeing economic success, liberalisation of financial markets reducing the risk of a banking crisis, and corporations as great environmental self-regulators.
Earlier this year I was asked to speak at a conference forecasting the outlook for 2012.
I was asked to be ‘a little bit funny and educational in an economist sort of way’.
Hmmm, an economics presentation that’s supposed to be a little bit funny; well, how about Allan Greenspan apologising for destroying the American economy or how about the guys that ran the credit default swap team at AIG that lost $61 billion in the first quarter of 2009.
How much is that $61 billion dollars in 12 weeks?
Well, that’s $27 million dollars an hour.
Funny, like that?
In 2008 at a Senate hearing in Washington Greenspan admitted he was “partially wrong” after the tsunami-like consequences of his regulation-light Ayn Rand inspired banking policies and his asset boom and bust monetary regime were tearing apart the global economy.
Yeah, like being “partially pregnant” or “partially dead”.
Is anybody laughing yet?
How does the economics profession get away with this stuff?
Well, it has much to do with financial illiteracy, the willingness to swallow whole the ‘market fundamentalism’ which swept aside arguments for a positive role for the state, the importance of civil society, and the urgent need to balance growth with the environment.
This market fundamentalism, captured by the phrase the ‘market is always right’, was preached with a conviction that would shame even television preachers like Jerry Falwell or Ernest Angley.
Unfortunately, market centred economists have had an exaggerated role in setting the political agenda.
The consequence has been a 35-year fraying of our common purpose while pushing our planet closer to the brink of catastrophe.
We have allowed the market to dominate our societies as our politics became ‘market-driven’, the market became uncontained and now we have the market societies, with the inequity, volatility, and environmental degradation to prove it.
As Tony Judt so aptly put it, students and patients ceased being citizens and became clients, public utilities like power and transport were returned to private hands.
However disruptive a new technology or trading partner might be, the brunt of the adjustment always fell on the individual while shareholders were bailed out whenever possible.
Robert Wright argued that globalisation has placed a ‘murderous burden’ on our planet and reminds us of the fate of civilisations that consumed themselves into oblivion.
Economists convinced our leaders that the state had no place, no capacity, and risked catastrophe if the state tamed the flow of transnational capital and the pressures generated by the new hyper-competitive global economy that emerged in the last quarter of the 20th century.
Jettisoned was the social democratic belief in the necessity and virtue of collective action for the collective good that is dependent on a critical role for the state and public spending.
Worshipped was the idea of ‘the invisible hand of the market’.
This phrase incidentally Adam Smith never coined, and whose unfettered free market intent a simple review of his writings would show he never even considered, but a phrase that became imbedded in our collective imagination.
What’s been lost is that globalization and democracy aren’t compatible if the brunt of the adjustment falls on citizens and our planet.
Unfortunately, the seizure of political power by market fundamentalists has undermined the centrality of small ‘l’ liberalism as a defining thesis for shaping our societies.
By liberalism I mean the belief that individuals are of equal worth, that citizens are made not born, and that the circumstances of a person`s birth should not be the key determinant of a citizen`s life path.
To make this a reality the state has a vital role in regulating the market and taxing its citizens so that there are no significant barriers to how high someone may rise, a line below which no citizen can fall, a timeless effort made to create the conditions of equality of opportunity for all citizens no matter how imperfect the process, and a balance between economic, social and environmental justice.
Now however the erosion of world class instruments of social justice like education have amplified rapidly rising income inequality while willfully ignoring the relationship between consumption and the environment raising doubt about the sustainability of our way of life just as middle and lower income countries rush to adopt it.
Stripped of its democratic responsibility by market-centred politics political leaders have been less willing to tackle the inequality and environmental injustices that globalisation inevitably creates.
What economists missed is how the power of new technologies set the stage for accelerated unequal outcomes and environmental damage.
The benefits of globalisation have been harvested by fewer and fewer people in the developed world while the rise of a middle class numbering billions of people in poor countries has created rising levels of environmental damage.
While developing countries pollute at an accelerating rate as they catch up with developed countries, market-centred economists have framed the environmental debate about globalisation as a zero-sum game instead of how to use smart incentives that balances a rise in global population and wealth with a shrinking carbon footprint.
What larger challenge do we have than managing the impact of an estimated 30% rise in global population by 2050 while about 2 billion people will adopt the richer lifestyles of present day high income countries and the exaggerated carbon impact that accompanies them?
The debate about capitalism as being too hot, where the market dominates, or too cold, where the state dominates, misses the truth that we must find the balance between the twin virtues of inequality of outcomes and equality of opportunity while managing the environmental fallout.
The trick is how to tax and regulate the economy in such way as to ensure unequal economic outcomes provide the public revenue to invest in instruments of social and environmental justice, namely equality under the law, world class public education and transportation, the science of good health available to all, and best in class environmental outcomes.
Tragically a foul brew of tax and spending cuts were successfully peddled as income neutral and sold to gullible voters as a good thing for the ‘hard working individual’ no matter how incapable people might be in sharing in the wealth the economy created.
This shift in our thinking about the relationship between our democracy and the economy, the former serving the latter, rather than the other way round, has occurred when the speed and the reach and the impact of globalisation accelerated to the economic equivalent of the speed of light.
It is in this context that any conversation about sustainability needs to be put reinforced by the truth that it is very dangerous to leave economics to economists not only for the environment, and our society; but also as the 2007-2008 financial crisis proved, for our economy.
In my professional life, I had the opportunity to start my career as an investment bank economist in a country – Japan – that many foreign investors and professional media did not understand.
My job was to explain first how Japan worked and then to explain how the Japanese economy worked.
I came to the conclusion that this applied to every country.
For example, in the phrase the German economy, there is more information in the word ‘German’ than in the word ‘economy’, as in the ‘Japanese’ economy, the ‘Canadian’ economy, and so on.
The market is a theoretical place where people freely trade their labour and genius for profit while the economy is what geography, history, politics, culture, and personality make of the market.
Getting economics right is vital not only to our economic health but to our political, social and environmental health because political institutions weave themselves with economic ideas giving them full expression with consequences that cascade through our populations and through the ages.
No economy is created the same but there is evidence that with the right incentives economies and societies can be steered to sustainability.
Eric Beinhocker in his important book The Origins of Wealth demonstrated that economics got off to very bad start in the later part of the 19th century from which it is now just recovering.
Over the past couple of decades economics conceived in terms of Darwinian natural selection – evolutionary biology -- which was the alternative model rejected for Newtonian physics in the 1880s has now become a model for thinking about how economies actually work.
Just as the process of ‘differentiation, selection, and amplification’ has driven the ecological process which results in mind numbing natural diversity, monopolies of species, and great extinctions in the natural world so it is in the economic world.
Economies are in a constant state of adaptation, and the most successful economies have one thing in common, no equilibrium.
Brian Arthur calls the economic research that falls into this body of work 'Complexity Economics'.
He argues that the economy and the society are in a constant flux of boom and bust driven by innovation.
But unlike the fictional intelligent design of the natural world in the economic world much depends on human intervention that may or may not be very intelligent.
Economies can be steered to different outcomes with strategic intervention changing the Darwinian process from natural to calculated evolution.
Unfortunately, arguments against investing in social justice are framed in terms of the moral hazard that this creates for individuals who are better off ‘on their own’ without the help of an intrusive state.
Similarly framed incentives to create the conditions for environmental justice are also met with derision as needlessly corrupting just market driven outcomes despite ample evidence to the opposite.
For example, deeply imbedded in the cultural make-up of the United States is the belief that there is no such thing as a ‘hand up’ only a ‘hand out’ except in the case of citizens that have served in the military.
However, the OECD has shown that among the developed economies, the US has one of the worst records of inter-generational mobility.
This belies the argument that the US rewards hard work and enterprise, and that where you start in life is not as important as how hard you work.
The evidence grows that the American combination of economic insecurity, social inequity, minimal welfare support and environmental violence is proving to be a model incompatible with competing in the present day global economy.
The persistent underinvestment that the US has made in primary and high school education has left the country with an estimated shortage of 2 million skilled workers while those without skills are stuck in a permanent unemployment limbo.
The United States has begun the process of losing part of a generation of economic growth while doing little to counter the risk of global warming.
Complexity economics gives us a framework to understand the subtleties of how economies work in a way that market-centred economists miss.
For example, the consequence of immigration is greater than a multiplier of the number of people.
The evolution of the economy and our society is helped immensely by immigration because of the invigorating introduction and weaving of different languages, skills, customs, tastes, and philosophies.
Not only do immigrants patent at a higher rate than the native rate but there is evidence that there is a spillover effect as per capita patents increase in response to rising immigrant flow.
As innovation author Jonah Lehrer puts its “ages of excess genius are always accompanied by new forms of human mixing.”
More subtly perhaps is the twin of ‘the invisible hand of the market’ that I call the ‘invisible hand of social justice’.
Can it be that striving for equality of opportunity however imperfect the process not only benefits the individual but creates benefits for the society that are unintended but wonderful?
A few weeks ago the Economist reported that a Professor at MIT had quantified that an infusion of hope made possible by a small monetary incentive can make a huge difference to the lives of the wretchedly poor.
It was demonstrated that the effects of some anti-poverty programmes go beyond the direct impact of the resources provided because they make it possible for the very poor to imagine a life beyond mere survival.
This created an incentive to live a safer and more productive life.
The invisible hand of social justice weaves citizens into a common place brought together, not by privilege or invitation or class or ethnicity, but by shared experiences.
People learn to help each other leading to better outcomes for everyone where trust not money is the most important social currency.
My wife Taeko will never forget being shown how to write a cheque for the first time – an uncommon practice in her home country Japan – at the first day of a neighbourhood spring baseball sign-up by a kind stranger shortly after having moved to Canada.
And for a couple with Canadian and Japanese cultural instincts the contrast for us when we lived in the United States for a couple of years was frankly, soul destroying.
There was a quiet desperation in the eyes of the check-out attendants at our local grocery store that I have rarely seen in Canada and a general mistrust among people that made living in the US uneasy.
Americans we concluded are afraid of their government and too often of each other.
Public space designed to help individuals has the unintended consequence of creating empathy making our community and economy better.
So what might all this mean for Canada?
I would like to argue that Canada has a tremendous opportunity to move forward while so much of the world is moving backward.
How to break the shackles of market-centred fundamentalism, the fallout of 120 years of falsely conceived economics, and an intrusive all-knowing state, the legacy of 20th century liberalism?
Within the framework that a strong economy, social justice and environmental responsibility are mutually dependent, I would suggest we consider the following package of tax reforms: first, eliminate all corporate taxes (minus $35bn); second, eliminate all taxes on the first $20,000 of personal earned income (minus $25bn), third, adopt a guaranteed annual income based on Milton Friedman’s idea of a negative income tax; fourth, establish a Canadian carbon tax (plus $15bn), and fifth, raise the GST to 10% with no exceptions (plus $90bn).
The case for eliminating corporate taxes recognizes the fact that when you tax a company you actually tax people, the owners, the employees, and their customers because tax is a cost.
In the rapidly globalising economy of the 21st century the ability to host strong and profitable companies will be even more important to take advantage of technological disruption.
Nothing can match well regulated and profitable companies for providing the pathway to personal and national prosperity.
Moreover, with no corporate taxes, there are no write-offs and the expensive bureaucracy -- private and public -- required to manage it.
Paraphrasing Richard III: ‘The first thing we do, let's kill all the accountants’.
One simple step to end poverty is to provide a basic income to every Canadian if only because of the high cost of persistent worst in class education, health, community and economic outcomes that poverty breeds.
The idea of a guaranteed annual income in Canada was first floated in the 1930s and a pilot project in Manitoba in the 1970s demonstrated that some of the fears about work disincentives proved false while the positive impact on health proved true.
This is an issue that cuts across political lines as Conservative Senator Hugh Segal and economist Glen Hodgson of the Conference Board of Canada are strong advocates of a guaranteed annual income.
Building on the ideas of a guaranteed annual income, negative income tax, and earned income tax credits, I have rephrased this as the ‘Canadian Citizenship Wage’.
The Canadian Citizenship Wage is based on the idea that with citizenship come rights and obligations.
The Canadian Citizenship Wage would confirm the right of every Canadian citizen to a sufficient income for a minimum standard of living albeit low.
The obvious direct benefits are that income poverty would be eliminated immediately and the cost of delivering anti-poverty programmes would be reduced dramatically.
This is the reason that uber-market centred economist Milton Friedman, who came up with the idea of a negative income tax, argued that if you were going to assist the poor rather than building up a huge and expensive public sector bureaucracy to manage the moral hazard of welfare better just to write a cheque as part of the tax process.
Again paraphrasing Richard III: ‘The second thing we do, let's kill all the welfare workers’.
The indirect benefits might also include the removal of market distorting policies like the minimum wage, can provide an income platform from which citizens that want to improve their lives may do so, and will twin the extension of social justice with the obligations of citizenship.
This may also break us from the dangerous import from the United States that citizenship is divided into two categories, tax payers and everybody else.
Poverty is not usually a choice for adults, and never for children.
There are four classes of people that live in poverty: first, people that cannot work for physical and often mental reasons; second, people that work but are still poor; third, people that want to work but are unemployed; and fourth, people that can work but do not want to.
The standard objection to a guaranteed annual income is that it provides a disincentive to work.
There is truth in this.
There will always be a subset of people that do not want to work and are prepared to live their lives at the poverty line.
Still, it has never made much sense to me to refuse citizens the means of the most primitive Canadian life on the premise that they can take of themselves but then extend access to the most expensive health treatments for problems bred by poverty that were preventable in the first place, not to mention prisons, the annual cost per inmate of which is more than sending someone to Princeton University, poverty of course being the best predictor of crime.
It may also be true that the Canadian Citizenship Wage will encourage people that are working today to leave the workforce and live at the poverty line.
But by focusing on this subset of people the consequence is to make it more difficult for people who want to improve their lives to do so.
Currently, our social income policies are so complicated that they deal ineffectively with poverty and compound the costs to our society in terms of economic and social health.
A more sophisticated objection to a guaranteed annual income is that it will not encourage people to move beyond the income level set by a Citizenship Wage.
However, this problem is easily corrected by not clawing back earned income until a higher threshold is reached.
This is why I would propose eliminating all taxes on the first $20,000 of earned income because it would provide an incentive to earn more than the guaranteed annual income and help shift taxation from income to consumption.
In the end the most powerful incentive for the poor to get out of poverty is a real chance to participate in all that modern Canada has to offer.
And the obligations?
At the judge's bench economic victimhood would cease being a defence for crime and there would be a valid claim of the society on the citizen for living a responsible life that may extend to public service particularly for youth.
But the core benefit is to give citizens who want to improve their lives the opportunity to do so without the stigma of being on welfare so that all citizens are treated equally, under the law, and with the means to live a basic life, with hope and dignity.
Canada must lead the development and dispersal of new environmental technologies helped by establishing a Canadian carbon tax.
Given the shock that market-centred economics have suffered since the global financial crises there has never been a better time to dismantle the argument against taxation as an incentive to create a more carbon friendly economy.
The sad irony is not only has the economic success claimed by market centred economists been proven wrong but without the intervention of the state potentially catastrophic outcomes were avoided, at least for now.
The question remains whether the consequences go beyond economics, and as Tony Judt has asked, whether there is a moral catastrophe in the making symbolised in part by environmental collapse.
It has been estimated that a $40 a tonne Canadian carbon tax would raise about $15 billion in revenue.
I would argue that the tax should be raised in $10 annual increments to $100 a tonne and the revenue targeted at reducing Canada’s carbon footprint beginning with investment in high speed rail, smart roads, and leading edge environmental science.
We have the means to use economic incentives to steer consumption and innovation towards best in class environmental outcomes.
Finally, raising the GST to 10% would make the tax system more efficient, and despite concern about being regressive, a 10% rate would put Canada far at the bottom of the table of the most progressive countries in the world that depend on a consumption tax to fund sustainable instruments of social justice.
University of Toronto economist Michael Smart has recently shown that raising the GST to 10% without exceptions would raise about $70 billion in revenues.
We should speak plainly and often to Canadians about the damage done to the country’s finances by the Prime Minister’s politically motivated but economically irresponsible cutting of this tax, dumb because the revenue loss was so large that it baked in a deficit once the economy slowed, and dumber because it made the tax system less efficient.
In conclusion, don’t believe what market-centred economists tell you, that the market is like a McDonald’s hamburger, the same wherever you go, impervious to politics and culture, and where market driven outcomes are always fair.
Capitalism is not the problem; the problem is what we do with capitalism.
The consequences of the market are what we create and can be an expression of our wildest dreams or become our greatest nightmares.
Canada with the right incentives can help create the conditions to steer our economy to be profitable, as well as socially and environmentally responsible, in the hyper-competitive global economy of the 21st century.
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Twin Virtues: Inequality of Outcomes & Equality of Opportunity©
Ultimately, the most successful societies find the balance between the twin virtues of inequality of outcomes and equality of opportunity.
The new politics must marry the twin virtues of unequal outcomes and equality of opportunity.
When too few get too much everybody loses.
Feminism is about women living their lives on their own terms, marshaling the resources of the society to make that possible, and men embracing this as vital to a successful society and their own liberation.
Can it be that striving for equality of opportunity however imperfect the process not only benefits the individual but also creates benefits for the society that are unintended but wonderful?
Economics must be a 'moral enterprise' as much as politics claims to be. Economic outcomes need to be framed in terms of right and wrong not just efficiency if only because these often align in surprising ways that are good for society and the economy.
My vision of Canada is that any Canadian child from a family of limited circumstance can expect to have a chance at lifetime of unlimited opportunities.
Tax policy should be founded on the principle of generating steady tax revenues sufficient to maximise environmentally sustainable economic growth in order to fund fair government.
Public policy should be designed to decrease inequality before the law and increase equality of opportunity.
Capitalism is not the problem; the problem is what we do with capitalism.
Content is always more difficult to argue than conspiracy.
Let the state regulate and the market operate (most things).
Welfare strategies are best designed as a hand up, not as a hand out.
Political debate should not be fact free fighting.
Explanation lasts longer than eloquence.
Always favour empowerment over dependency.
The most enduring public figures are embraced for the causes they fought for and not the concept of themselves they hoped others would remember them by.
Find your voice and don't be the echo of somebody else.
It is possible to operate on two different levels: the practical, cautious and conservative; and the realm of ideas, open, free, and radical.