End A Decade of Lost Opportunities and Invest in the Future

Working age poverty is defined by the Organization for Economic Co-operation and Development (OECD) as the proportion of individuals aged 18 to 65 years with equivalized disposable income less than 50% of the median income of the entire population in a given country. A 2013 study of seventeen countries analyzed by the OECD reported that the three countries with the highest working-age poverty are Canada, Japan and the US. The countries with the lowest rate are Denmark, Switzerland, Finland and Austria. The working age poverty rates in Canada and the US are more than three times the working-age poverty rate in Denmark (the country with the lowest rate). High rates of poverty among working age populations indicate wasted human resources, opportunities, and public spending. The OECD concludes, “failure to tackle the poverty and exclusion facing millions of families and their children is not only socially reprehensible, but it will also weigh heavily on countries’ capacity to sustain economic growth in the years to come.”1

The second largest bubble of the 20th century occurred in Japan. Japanese industry gained a competitive edge by copying Western products, improving upon them and selling them back to the West for cheaper prices. The energy crisis of the 1970s reduced the appeal of the traditional large gas-guzzling American style cars and consumers turned to the smaller more fuel efficient vehicles made by Japanese auto makers. In the 1970s and the 1980s Japan dominated the global electronics industry as it manufactured the majority of the world’s consumer electronics products and introduced new innovative products such as the pocket transistor radio, VHS recorder, and the Sony Walkman. They also dominated in the manufacture of semi-conductor chips used in the manufacture of computers. These economic successes became known as Japan’s ‘economic miracle’.

The combination of Japan’s trading trade surpluses, financial deregulation and the country’s export “miracle” eventually led to overconfidence and over exuberance in Japan’s economy, which became the second largest economy in the world after the USA in just a few decades.  Banks started to take increasingly excessive risks that were partly funded by 186 trillion worth of Yen borrowed from various capital markets. Aggressive speculation in domestic stocks and real estate pushed the prices of these assets skyward. From 1985 to 1989 Japan’s Nikkei stock index tripled and accounted for more than one-third of the world’s stock market capitalization.

The keiretsu (business) conglomerates practice of cross-holding each other’s shares played a significant role in boosting stock prices and cause Japanese corporate wealth to balloon along with stock prices. These firms obtained low interest rate loans and used them to purchase stocks and real estate – creating a Ponzi financial system in which earnings poured in as long as asset prices continued to rise. In 1989 the Bank of Japan became concerned and tightened its monetary policy. The Nikkei bubble burst and by 1992 had plunged from 39,000 to 15,000. The imploding stock bubble popped the country’s real estate bubble, throwing the country into financial crisis and halting the three-decade-old ‘economic miracle’ in its tracks. Japan lost its competitive edge against Asian exporters such as China and South Korea. The government tried to keep unprofitable debt-ridden companies afloat through repeated government bailouts. The near zero interest rates of the past two decades have failed to revive the economy. This economic downturn has become known as Japan’s ‘Lost Decades’.1

Following the collapse of the Internet bubble, a long period of low interest rates was encouraged by the US government to support the ongoing expansion of housing as it became the main driver of the economy. There was confidence that the global economy didn’t require regulation, and could self-correct from any excess. The US banking oligarchy ensured politicians who needed funds for re-election were supportive of activities such as allowing banks to assign their own risk level.

The market was leveraged by bundling regular mortgages with high risk mortgages – creating new and alluring securities that could be bundled together and sold (to pension funds as low risk products) as alternatives to traditional bonds and traditional government bonds. To lure in more borrowers, the sub-prime mortgage with initially low interest rates was promoted – which worked perfectly as long as interest rates stayed low.  It became a Ponzi finance system based on the idea that housing prices would appreciate into the foreseeable future. Homes were used as piggy banks at the height of the real estate boom. People refinanced high-interest credit cards with a low interest second mortgage on their home.2

The economic debacle of 2008 followed years of deregulation and manipulation of  the banking system to maximize profits. When the economy slowed down the housing bubble burst. Subsequently US and European governments had to prop up the banks. Middle class workers lost their jobs, many their homes, and their pensions. Many now have to work longer than planned to shore up their pension funds. The costs of the global financial crisis, which has left its mark on all corners of the world, are not expected to disappear overnight – groups campaigning against poverty and globalization have been making this point for a while.

What are the characteristics of the three counties (Canada, US & Japan) with the highest working-age poverty rates? The answer lies in the fact that half of all employees in Japan under age 39 have part time jobs. These part time workers make about 40% less than full time workers and account for the working-wage poverty in Japan. Japan has experienced the burst of a bubble economy, financial crisis, and more than a decade-long deflation and stagnation. With respect to the West, the housing bubble burst, triggered a financial crisis in 2008, and the Western economies have yet to recover. Paul Krugman notes the Fed is projecting elevated unemployment nine full years after the 2008 economic debacle – on track for a lost decade.3 He claims the recession is greater than that that triggered the lost decades in Japan.

Initially Canada appeared to be riding out the storm – banks with less exposure in 2008 and spade ready projects in place in 2009. Today the Canadian economy is now limping along amid weakened demand for many of the country’s major exports. Part of the reason, says governor of Bank of Canada Poloz, is that the country lost about 9,000 exporting companies in the aftermath of the 2008-09 recession (this doesn’t include 1000 jobs loss in the potash industry and the 1700 from Bombardier announced since December 2013). Other factors include changes in trade advantages for Canada’s main trading partner: an increase in the number of right-to-work states in the U.S. that have brought down labour costs; a shale oil and gas revolution; and low gas prices that have decreased energy input costs for many U.S. manufacturers.4 

In the mid-1990s Japan turned to short-term workers – disproportionately young. Under the old system of life-long employment, firms invested in training their workers. Now with the switch to short-term contracts, the firms are no longer interested in investing in the human capital of their employees. Thus young workers accumulated fewer skills and have poorer wage prospects whether in their current jobs or the outside labour market. Japan’s traditional manufacturers have become commoditized relying for profit on low-cost production based in low-income countries. One year after Japanese Prime Minister Shinzo Abe launched abenomics in Japan driven by government infrastructure spending and increased real estate purchases prior to a sales tax increase, the Japanese economy remains tepid.

Canadian federal conservatives pride themselves in management competence. The present Canadian federal government no longer supports the long census with tax forms, so just when the requirement for better data to target programs on poverty, pandering to the speaking points of less government carries the day. Their job training program provides grants to companies to train workers often for jobs companies would need to do this anyway – part of the corporate welfare system.  This government spends millions in advertising dollars to promote the success of the program. This includes spending money to advertise jobs that do not exist.5 Over the last decade Canada’s social safety net has been degraded – now more than 11% of working-age Canadians live in relative poverty.

The supporters of small government and minimal regulations – trickle down economics – in the US rely on the social program of job creation to address poverty. This means waiting for the markets to respond, or complaining for the need for less regulation to encourage job growth. Paul Krugman a representative of progressive policies, also embraces job production to fight poverty. His solution is to borrow money and invest in immediate massive government jobs program rebuilding infrastructure. The conservatives in the US Congress believe that not renewing long-term unemployment benefits is the right decision as it will force workers to work in minimum wage jobs to survive rather than being able to wait the a better job, (and in the process challenge Japan for the highest rate of working-age poverty).

In Canada and the US care is seen as parental responsibility with government intervening only to support the labour force participation of low-income families. The availability of the care and its quality tends to be of secondary concern, particularly when the objective is the employment of single mothers. In contrast, the Scandinavian countries have built an extensive network of income supports and public services to facilitate women’s economic and social contribution. A childcare system can only exist in the presence of a public policy framework developed on a national basis.

The Conference Board of Canada notes the debate about the most effective way to reduce poverty revolves around striking the appropriate balance between a ‘benefits strategy’ and a ‘work strategy’. The debate hinges on the apparent trade-off between ensuring adequate income assistance for those in need, while providing incentives for people to work and be self-sufficient. The relationship between social spending and poverty rates is striking. Among the working-age population, relative poverty rates are lowest in countries where social spending  (as a percentage of GPD) is the highest.6

Countries that have reduced poverty rates have turned away from passive, benefits-only poverty reduction approaches in favour of national anti-poverty strategies that incorporate a number of ‘active’ policies. Active policies are social policies that integrate strategies across governments, departments and service providers to reduce poverty, and increase self-sufficiency.  For example active job policies may be set up to help people overcome obstacles to get jobs through a combination of funding job training, providing childcare, introducing tax incentives for lower paid workers. The answer lies in funding ‘real’ job training, providing childcare, and tax incentives to reduce working-age poverty.

The majority of the elected politicians in the Canadian Parliament and the US Congress are proponents of meritocracy and argue that it is more just and productive, allowing for distinctions to be made on the basis of performance. Meritocracy is a concept that eventually turns into an oligarchy.  Chris Hayes notes, over time, a society will become more unequal and less mobile as those who ascend its heights create means of preserving and defending their privilege and find ways to pass it on across generations.7 The consequence is that income inequality has been growing in Canada and the US for the past 40 years. During the same period social mobility decreases while the new elite uses the dogma of small government and minimal regulations to defend their success.

The small government and minimal regulations mindset has heralded the globalization of indifference that prevents progressive government initiatives to address the issue. Under globalization countries compete for the world’s investment capital, which removes traditional government accountability – affecting the ability of elected leaders in democratic countries to make decisions in the interests of the workers. This creates a lack of ability of those affected by decisions to protect their legitimate rights and interests. The consequence of this economic policy, exacerbated by the economic debacle of 2008, is a decade of lost opportunities for many workers in Canada and the US. The question is how to end this indifference. Governments need to be more accountable to the people. The success of the top countries in maintaining low working poverty rates is attributed to a universal welfare policy that has been effectively combined with job creation strategies that support gender equality and accessibility. This is about investing in the future.

1Colombo, Jesse. (4 June 2012) “Japan’s Bubble Economy of the 1980s.” <http://www.thebubblebubble.com/japan-bubble/>.

2 Horsman, Greg (2012) Objectivism Lost: and an Age of Disillusionment. p 163 

3Krugman, Paul. (13 Dec 2012) Lost Decade Watch. http://krugman.blogs.nytimes.com/2012/12/13/lost-decade-watch/?_php=true&_type=blogs&_r=0

4 Canadian economy missed expectations in 2013. Will 2014 perform better? (1 Jan 2014) http://business.financialpost.com/2014/01/01/canadian-economy-missed-expectations-in-2013-will-2014-perform-better/ 

Curry, Bill. “Government spends millions on ads for ‘Economic Action Plan’ that ended two years ago.” (25 Jan 2014) http://www.theglobeandmail.com/news/politics/federal-ad-spending-exceeds-projections/article16503725/ 

6Working Age Poverty http://www.conferenceboard.ca/hcp/details/society/working-age-poverty.aspx?pf=true

7Hayes, Christopher. Why Elites Fail. http://www.thenation.com/article/168265/why-elites-fail

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