issues involves government policies that contain a balance of the left and right approaches.

16W The Politics of Economics LEARNING OBJECTIVES After studying this chapter, you should be able to 1. Summarize the major economic goals of right-wingers, and explain how they believe these can best be achieved. 2. Summarize the major economic goals of left-wingers, and explain how they believe these can best be achieved. 3. Explain why it is generally believed that the most effective approach to economic issues involves government policies that contain a balance of the left and right approaches. This chapter The Politics of Economics can be found on the Companion Website at www.pearsoned.ca/lyons.

2 Chapter 16W Much of this book has been about how markets generate economic prosperity by providing incentives for the efficient and effective use of economic resources. However, as we saw in Chapters 2 and 12, a market system also tends to generate certain problems, which have led governments to intervene in the economy, particularly in the areas of what should be produced and how it should be divided up. Chapter 12 also showed that the fields of economics and politics are closely intertwined. Because they affect people in so many important ways, economic issues often become major political issues, and there are sharply divided views regarding the appropriate role of government in the economy. Often, profoundly different philosophies concerning economic and social matters and values underlie such disagreements. This chapter provides a rudimentary guide to these different philosophies, which are usually described as right wing (or simply right ) and left wing (or left ), and how they apply to economic issues. How Right-Wingers See the World www.fraserinstitute.ca The right-wing view is characterized by a strong belief in free enterprise, the market system, and individual responsibility for one s own economic fate or fortune. Rightwingers tend to believe that, generally, the best solution to economic problems lies in the operation of free markets, along the lines of the ideal of laissez-faire as described in Chapter 9. Through these markets, they see society s prosperity enhanced by free enterprise, competition, and the profit motive. As they see it, consumer sovereignty directs businesses to produce what consumers want, the profit motive induces private producers to operate as efficiently as possible, and competition ensures that the consumer is well served regarding price, quality, and service. And according to right-wingers, the differences in incomes that develop in free markets for labour provide incentives for people and rewards for being effective and efficient. The value system of right-wingers emphasizes factors such as incentives, efficiency, and the creation of wealth. They view free enterprise and private ownership of business as the most effective way of achieving this, largely through the profit motive. Right-wingers are less concerned about how equally the benefits of prosperity are divided; their individualistic philosophy tends to make them believe that one is responsible for one s own share of the economic pie, and that people generally get what they earn in the marketplace. To them, personal responsibility is an important aspect of the incentive system associated with the marketplace. In summary, right-wingers are believers in individualism, economic freedom, the marketplace, and private enterprise. They believe that through the incentives for efficiency provided by these values, a society can best achieve the creation of wealth and economic prosperity. How Left-Wingers See the World www.canadians.org While left-wingers also value economic prosperity as an objective, they do not agree that the right-wing approach is the best way to achieve it. In particular, left-wingers lack faith in free markets as a means of achieving prosperity. They believe that, in a free market, the economically powerful can and do take advantage of the economically

The Politics of Economics 3 weak that big business can exploit consumers and employers can exploit workers, so that the distribution of income in a free market will inevitably be unfair. Another aspect of free markets that disturbs left-wingers is the insecurity that accompanies the marketplace the exposure of people to the risk of layoff due to factors such as recession and competition. Again, left-wingers point out, the victims of layoffs are usually the economically weak those with limited experience and skills. Thus, they argue, the free-market system is so biased in favour of the powerful and wealthy that it cannot provide an equitable share of its wealth for the large numbers of people who lack the economic power to wrest it from the marketplace. In the view of the left-winger, the rich and powerful devour most of the economic pie, leaving only crumbs for the weak. To remedy these weaknesses of the market system, left-wingers advocate an active role for government in the economy. In particular, they favour government policies that redistribute income from the rich to the poor, and laws that regulate and restrict the behaviour of the economically powerful, so as to protect both workers and consumers from big business. Such a role for government, they believe, will improve the overall prosperity of society, by ensuring a fairer distribution of economic welfare. To summarize, the value system of left-wingers stresses the collective (as opposed to individualistic) aspects of society, and so emphasizes fairness, security, and an equitable distribution of income. If it can be said of right-wingers that they focus on incentives for the creation of wealth and more or less take the distribution of wealth for granted, it could also be said of left-wingers that they stress a fair distribution of wealth and tend to take the continuing creation of wealth for granted. Because they see the free market as a threat to their objectives of security and fairness, left-wingers advocate a more collective approach to economic questions, with the government using its powers to tax, spend, and regulate in order to overcome the free market s natural tendency toward inequality. As you might imagine, situations in which either extreme right- or left-wing views dominate do not work out very well. The In the News box in this chapter takes a look at the extremes of right- and left-wing ideologies. Right Versus Left on Various Issues In this section, we will illustrate the left and right philosophies by comparing their views on a variety of economic issues. Business Enterprise Right-wingers believe in private ownership of business, with competition and the profit motive as vital incentives for the productive efficiency that generates prosperity. They agree that monopolies are undesirable, but argue that, in a free market, monopolies do not tend to last for long, because monopoly profits will attract competition from other businesses or new products. Most long-lasting monopolies, they argue, are not private enterprises, but rather government-owned (or -regulated) enterprises, which the government itself protects against competition. Right-wingers are generally opposed to government ownership of business enterprises, which they criticize as inefficient because of the absence of competition and the profit motive.

4 Chapter 16W IN THE NEWS The Extremes There are varying degrees of both right- and left-wing philosophies. In the extreme, the right-wing view would leave almost all economic activity to the free market, in which economic decisions would be made almost entirely by individual consumers and businesses. The role of government would be restricted to providing physical security (through the army and police) and a court system for the enforcement of contracts.there would be no government programs to redistribute income or provide economic security, as these would interfere with incentives. Those who wanted to help the needy could do so voluntarily, through private charity, but no one would be forced to do so through taxes. At the opposite extreme, the left-wing approach would replace private enterprise with government ownership of business, or at least of all large enterprises. Through democratic socialism, elected governments would engage in thorough economic planning, which would decide (or strongly influence) the key economic decisions regarding what to produce, the production methods to be used, and the distribution of the economic pie. The distribution of income would be much more equal, or possibly even completely equal. In effect, economic decisions would be made collectively, through the government, rather than by individuals in the marketplace. QUESTIONS 1. What problems would likely exist in an extremely right-wing society? 2. What problems would likely exist in an extremely left-wing society? Left-wingers tend to question the social value of private ownership of business and the profit motive. In private enterprise, they see incentives leading not so much toward efficiency and service to the consumer as toward abuse of businesses market power and exploitation of both consumers and employees. In the view of leftwingers, free markets and private business are basic sources of the problem of the inequitable distribution of income because people are free to exploit other people. As a result, they believe that there should be considerable government regulation of business activities as well as considerable taxation of business profits in order to redistribute income in favour of the poor. Some left-wingers would place government regulations (such as price controls) on larger businesses, or have the government take over ownership of them (nationalization). This is not, however, a simple anti-business bias; rather, its concerns focus on big business and its market power. Generally, left-wingers are considerably more sympathetic toward small businesses, which are usually subject to such strong competition that they lack the market power that concerns left-wingers. This is consistent with the left s tendency to sympathize with the underdog. Profits Right-wingers regard profits in the most positive terms: as an incentive for efficiency, as a reward for good management, and as a major source of funds for capital investment, which provides employment and productivity gains. In short, right-wingers view profits as a key to economic prosperity for society as a whole, and oppose heavy taxation of profits as damaging to prosperity.

The Politics of Economics 5 Left-wingers tend to view profits (at least above a certain level) as evidence of market power that has been used to exploit consumers and employees. To leftwingers, profits are a prime cause of the inequitable distribution of income that concerns them, because the money that profits take from consumers and employees goes to the wealthy shareholders of businesses. So left-wingers would favour relatively heavy taxation of profits as part of a policy of redistributing income from the rich to the poor. Investment Income To right-wingers, investment income (interest, dividends, and capital gains) provides an incentive to people to save and to invest their capital in business enterprises, which provide employment and prosperity for society at large. They regard such investment income as earned and well deserved, not only because of the risks undertaken by the investors (especially shareholders) but also because of the contribution their capital makes to the general economic prosperity of society. Left-wingers tend to see the labour of workers as the basic source of economic wealth, and take a dimmer view of investment income, which they see as less productive and not earned in the same way wages are earned. Also, because investment income mostly goes to higher-income people who have money to invest, left-wingers tend to see investment income as adding to the problem of an inequitable distribution of income. Capitalism is the unequal sharing of plenty; socialism is the equal sharing of misery. A FAVOURITE OLD SAYING OF RIGHT-WINGERS. Rugged individualism makes ragged individuals. A FAVOURITE OLD SAYING OF LEFT-WINGERS. The Distribution of Income Right-wingers accept inequalities in the distribution of income quite readily. They regard high incomes as a way of encouraging people to become educated or trained, and to work, save, and invest. To right-wingers, higher incomes are earned by those who receive them, and reflect their contribution to society, as measured by the marketplace that is, by the willingness of others to pay them for their services. Right-wingers are generally not very sympathetic to the working poor, believing that they should do more to help themselves. Left-wingers view the income-distribution process and its results quite differently. They see the issue mainly in terms of market power the ability of some groups and individuals to extract from society, through the marketplace, an excessively large share of the pie, leaving only a small share for the less powerful. To left-wingers, incomes do not measure people s contribution to the economy and to society so much as their ability to take from the economy and society, through their strong bargaining power in the marketplace. As a result, left-wingers generally regard the poor as the victims of an economic system that allows some people to take advantage of others. Social Welfare Right-wingers tend to see social welfare and income-redistribution programs in terms of their effect upon incentives. They are concerned that excessive redistribution of income will have negative effects upon the incentives of all concerned that the rich will be taxed so heavily that they will lose their incentive to work, save, and invest, and that the poor will receive such generous social welfare benefits that they will learn to rely on welfare rather than help themselves. Right-wingers are skeptical regarding the propriety and the value of government programs to redistribute income. The following is an excerpt from a famous 1880s speech by a U.S. preacher named Conwell.The speech was given 6000 times and earned a total of $8 000 000. Its popularity derived from the fact that it reflected attitudes that were widely held at the time. To secure wealth is an honourable ambition and is one test of a person s usefulness to others. I say get rich, get rich... Ninety-eight out of a hundred of the rich men of America are honest.that is why they are rich. I won t give in but what I sympathize with the poor, but the number of poor who are to be sympathized with is very small.to sympathize with a man whom God has punished for his sins, thus to help him when God would still continue a just punishment, is to go wrong, no doubt about it.

6 Chapter 16W By contrast, left-wingers see redistribution of income as one of the most essential functions of government. Because the marketplace results in an unjust division of the pie, they believe it is the responsibility of government to promote social justice by redistributing income from the rich to the poor, through both taxation and transfer payments such as welfare. Labour Unions Right-wingers generally view labour unions with great mistrust. To them, unions tend to reduce productive efficiency and prosperity in various ways: by interfering with management s right to make decisions, by opposing efforts to increase labour productivity (because unions tend to regard efficiency as a threat to workers job security), and by reducing the amount of business profits available for capital investment in improved facilities and equipment. Right-wingers tend to worry about Canada s historically bad strike record and its possible effect upon the willingness of business (both Canadian and foreign) to invest and create jobs in Canada. On the issue of public-service strikes, such as postal strikes, right-wingers can become quite agitated; many would remove the right to strike from all government employees. Left-wingers are generally supportive of unions, which they see as organizations of workers trying to protect themselves against exploitation by employers, who enjoy more market power than individual employees. One value that unionists and leftwingers share strongly is economic security the desire to be secure against both the marketplace and arbitrary decisions of management. Philosophically, left-wingers are sympathetic to labour unions, and organized labour has traditionally supported Canada s left-wing political party, the New Democratic Party (NDP). However, when the NDP has been in government, it has not always automatically supported labour unions. Left-wingers believe that government should protect the public from the economically powerful. Usually, the economically powerful are big business; however, some labour unions also have considerable economic power. If the interests of powerful unionized groups are seen to be in conflict with the broader public interest (such as strikes that are having serious effects on the public), left-wing governments will intervene on the side of the public interest. The Role of Government in the Economy Not surprisingly, right-wingers believe in a smaller role for government in the economy. They believe in the market system as the best way to handle most economic decisions, and are skeptical about the value of government intervention in the economy. They regard big government as the main threat to economic prosperity because it pre-empts economic resources (through taxation and borrowing) that would be better used for private consumption and especially private investment. Also, they believe that government damages incentives to work, save, and invest, through its tax and welfare policies and through over-regulation of the business sector. Also, right-wingers tend to be very concerned about government budget deficits and debt, which they would deal with by cutting government spending rather than by increasing taxes. Generally, rightwingers see less government (taxation, spending, borrowing, and regulation) as a key to solving many economic problems. Left-wingers have exactly the opposite view. Because they are not confident that free markets promote prosperity for all groups in society, they believe in a large and

The Politics of Economics 7 activist role for government in the economy. In particular, left-wingers favour government policies to protect workers and consumers against business, and to redistribute income from the rich to the poor, through a combination of higher taxes on the rich and transfer payments to the poor. Unless government actively plays these roles, they believe, the economically powerful will increasingly enrich themselves at the expense of the less powerful. Left-wingers tend to be less concerned about government budget deficits and debt, placing a higher priority on maintaining government programs to help those in need than on balancing the budget. Should it become necessary to reduce the government s deficits, most left-wingers would prefer to do this through higher taxes on business and on people with higher incomes, rather than through cuts in government spending. Politics The views of left-wingers and right-wingers regarding politics are interesting, because each seems to think (or at least fear) that the other is in control of the political process. Right-wingers fear that democratically elected governments tend toward left-wing policies, because there are more lower-income voters than higher-income ones. As a result, right-wingers fear a continual growth of government and policies to redistribute income and regulate business (socialism), together with ever-higher government spending, taxes, borrowing, and debt, with very damaging effects on the economy in the long run. Left-wingers are often equally cynical about politics, but for a different reason. They tend to see big business and the wealthy and powerful as exercising undue influence on governments and their policies. The result, according to left-wingers, is that government policies (especially tax exemptions and deductions) tend to favour big business and the rich, and government programs, on balance, do far less for the poor than they could or should. The Need for Balance Most people intuitively feel that the most effective approach to economic issues generally lies in a reasonable balance, or blend, of the left and right approaches, rather than an extreme of either one. Indeed, both extremes hold real dangers. A society that goes too far toward the right-wing approach, or laissez-faire, would rely very heavily upon free markets to make its economic decisions and resolve its economic problems. In such circumstances, some powerful private-interest groups (both businesses and labour unions) would be free to use their market power to enrich themselves at the expense of others. There would be no protection for groups that lacked the economic clout to take care of themselves, such as consumers or unskilled non-union workers; nor would there be social welfare programs for those who lacked an income due to unemployment, accident, illness, disability, or old age. The result would be a very unequal distribution of income; the rich might tend to stay rich over generations, inheriting both wealth and access to educational and career opportunities, while the poor would have difficulty getting out of the poverty trap, having no access to either money or education. In the extreme, the poorer classes could even strike back at the establishment, causing social instability. Another possible problem could be economic instability. With income so heavily concentrated in the hands of the wealthy few, the economy would lack the

8 Chapter 16W consumer-spending support of a broadly based middle-income class, such as exists today, and would therefore be more vulnerable to economic downturn, or recessions. Without social welfare programs, economic insecurity would be a much greater problem even a disaster for many people. Probably the left s favourite horror story about such matters is the United States economy before and during the Great Depression of the 1930s. During the 1920s, passive governments watched benignly as the top 5 percent of income earners received 33 percent of total personal income, and a largely unregulated business and financial sector erected very unstable financial structures that contributed to the collapse of the stock market in late 1929. Once the Depression had started, even with more than one in five workers unemployed, the government took years to come to grips with the problem and attempt to alleviate it. The U.S. economy of that era graphically demonstrated the major flaws of the laissez-faire approach: extreme wealth for a few, but poverty and insecurity for many, together with general economic instability. On the other hand, societies that go too far toward the left tend to wind up with problems that, though different, are no less severe. Socialist governments can become so big, so costly, and so interventionist in the economy that they erode incentives to work, save, and invest. Very high taxes on business and higherincome individuals can have this effect, as can excessive government regulation of business. Excessive government borrowing (or even, in extreme cases, printing) of money to finance its heavy expenditures tends to generate high interest rates that depress capital investment spending and slow economic growth. As incentives and capital investment are undermined, productivity and living standards stagnate. The government s preoccupation with redistribution of wealth and income can thus interfere with the creation of wealth, to the disadvantage of society generally. Right-wingers revel in discussing their own favourite horror story, that of Great Britain after the Second World War. In Britain, left-wing governments built a massive welfare state centred on income redistribution and free government services to the public. However, the financing of all this extensive government spending required such heavy taxation of business and higher-income earners that incentives were seriously affected. Business investment languished, productivity performance was weak, British producers lost competitive ground to imports, and unemployment rose as a result. Capital in the form of business investment, personal investment funds, and the human capital consisting of its younger, more skilled, aggressive, and able people left the country and went to nations that offered greater opportunities. Many observers believe that Britain s leftist economic policies were primarily responsible for the nation s economic decline in the post-war period. Trends The foregoing section reinforces the argument made earlier that the most effective approach to economic policy-making should involve a balanced blend of the left and right approaches. However, it is much easier to agree on this concept in principle than it is to agree what the most appropriate blend actually should be in practice. As a result, there will always be an ongoing debate on whether getting to this ideal balance requires moving toward the left or toward the right regarding any particular issue.

The Politics of Economics 9 Over the long term, the trend has been toward a larger role for government, as illustrated by Chapter 12 s account of the growth of Canada s social welfare system. This trend gained momentum after the Great Depression of the 1930s dramatized the flaws of the market system and the need for government to assume a larger role in the economy. Similar trends occurred in most other industrialized countries, at different paces and with different timing. According to some observers, Canada s situation was complicated by its perception of being positioned between Europe and the United States. Many European countries had extensive cradle to the grave social welfare systems, with heavy tax burdens to pay for them. The United States, on the other hand, had lower taxes and a correspondingly lower level of social welfare spending. Many Canadians admired Europe s social welfare programs, and wanted to emulate these with Canadian programs that would involve heavy government spending. However, when it came to paying the taxes required to finance such programs, many Canadians preferred to follow the American example. According to this view, the situation allowed Canadians seemingly to enjoy free benefits for a while; however, it also led to Canadian governments borrowing increasingly heavily in order to finance the benefits that they had granted to their citizens, accumulating the serious debt burden described in Chapter 12. As noted earlier, most industrialized nations expanded their social welfare programs considerably in the three decades or so following the Second World War. This trend continued for so long that many observers came to regard it as permanent in nature. However, by the late 1970s second thoughts were beginning to develop. As the performance of most industrialized economies stagnated, disillusionment with big government and the welfare state began to grow. These ideals did not seem to have achieved the great economic promises that had been held out for them growth was slow, unemployment was high, taxes were high, and productivity and living standards had practically stopped rising. Rightly or wrongly, increasing numbers of people came to blame the size and the policies of government for many of these problems, and the pendulum began to swing back toward the right. In Britain and the United States during the 1980s, governments placed renewed emphasis on the old virtues of incentives, work, investment, profits, and productivity. Attempts were made to rein in the growth of government, to reduce or at least control spending on social welfare programs, and to ease the regulatory and tax burden on business, in order to promote business investment and improve the productivity and international competitiveness of their economies. By the mid-1980s, Canadian governments gradually joined in this trend, as the federal government attempted to get its budget deficits under control while improving incentives, especially for private business investment, which was hailed as the engine of growth and provider of jobs for Canadians. However, only minor changes were made to the social welfare system, and spending and borrowing continued to grow. By 1993, a serious debt crisis forced Canadian governments into major reductions in program spending, suddenly and sharply reversing the longterm leftward trend toward more government spending. More fundamentally, it forced Canadians for the first time to consider very seriously the extent of social programs that they wanted for their society, and were prepared to pay for. In particular, Canadians had to decide how to use the budget surpluses of their federal government. In making these policy decisions, Canadians would decide the balance of left and right that they wanted for their society. In the early years of the new millennium, Canadians continue to grapple with these most basic and difficult questions.

10 Chapter 16W Chapter Summary 1. Right-wingers believe that economic prosperity is best promoted by free markets, with minimal government interference. This view emphasizes private enterprise, incentives, efficiency, and the creation of wealth. (L.O. 1) 2. Left-wingers emphasize the importance of economic security and a fair distribution of income. They believe that to provide real prosperity and equality, the government must actively intervene in the economy, particularly in order to redistribute income from higher-income earners to lower-income ones.(l.o. 2) 3. Theory and evidence both suggest that neither the leftist nor the rightist approach in itself will ensure good economic performance. Rather, some blend of the two, intended to retain the advantages of the free market while remedying its disadvantages, seems to be the most effective approach. (L.O. 3) 4. The long-term trend has been toward the left, but in more recent years there has been a shift in policy back toward the right in the United States, Britain, and, latterly, in Canada. (L.O. 3) Questions 1. What would a staunch right-winger and a staunch left-winger say about (a) the Ontario government s 22-percent reduction in welfare benefits in 1995? (b) the best use of the federal government s budget surpluses? (c) deregulation of university and college tuition fees; that is, fees to be set by colleges and universities rather than by the government? (d) user fees for medicare; that is, the charging of a small fee for each visit to the doctor? (e) a tightening of the employment insurance program, including more restrictive eligibility rules and a general reduction of benefits? (f) a surtax on investment income (interest, dividends, and capital gains) in order to finance subsidized daycare centres for the poor? (g) tax reductions on corporate profits? (h) the bailout by government of a near-bankrupt corporation that employs many people in the Atlantic provinces? (i) the removal of rent controls? (j) the replacement of the progressive income tax with a flat tax of 15 percent of all income earned by everyone, regardless of income? (k) the removal of the postal workers right to strike? (l) the sale of Crown corporations such as Canadian National to private buyers? 2. This chapter mentions the fact that in the United States in the 1920s, 5 percent of the people earned 33 percent of personal income. To get an idea of what this means concerning the division of the economic pie, work through the following exercise: You have $100 to divide among 100 people. If 5 percent of the people receive 33 percent of the dollars, what is the average amount received by each of them? What is the average amount received by each of the rest of the people? 3. In recent years, considerable media attention has been given to the large increases in the amount of food distributed by food banks. How might this be viewed by a staunch left-winger and a staunch right-winger? 4. As they grow older, do most people become more left-wing or more right-wing? Why?

The Politics of Economics 11 5. Explain, with reasons, what you think would be the likely political leanings (left or right) of each of the following: (a) a factory worker who is a union member, (b) a self-employed small business owner, (c) a sales representative who sells his or her company s products to other companies, and (d) a social worker.