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APPENDIX G

The Business Cycle --
The Rich-Poor Income Gap

 

This Appendix seeks answers to two sets of questions:

  1. Did the rich "exploit" the poor? Is there any evidence corroborating a net transfer of wealth to the richest families, from poorer families? More specifically, did the rich-poor income gap (in constant dollars) increase during overinvestment periods?
  2. What was the government's response to the deterioration in the income gap? Did the average transfer payments per family (in constant dollars) increase during recessionary periods?

 

 

The Business Cycle1
The Rich-Poor Income Gap

 

Chart G-1

OVERINVESTMENTS

DID THE RICH "EXPLOIT" THE POOR?
The income gap between the rich and the poor swelled (arrow
a) before each recession (arrow d). Recently, however, the gap shrunk (arrow e).
Should the rich worry? The gaps between the rich and the middle class (2nd quintile) and between the rich and the lower middle class (middle quintile) have widened after 1982. Both Liberals and Tories have pushed "conservative" or "right-wing" agendas. But, "insecurity," "anger," "distrust," feelings of "betrayal," and "separation anxiety" continue to bedevil Canada, the United States, and other countries.

 

   
Chart G-1   The Rich-Poor Income Gap

The average after-tax income gap between the highest and lowest quintiles (richest and poorest families) swelled from $24,802 in 1976 to $63,732 in 1993 (arrow f). Note that the after-tax income gap between the highest two quintiles (richest and next richest families) swelled from $11,285 in 1976 to $28,794 in 1993 (arrow f').

Sources: Statistics Canada, Income After Tax, Distributions by Size in Canada 1993, Catalogue 13-210, June 1995 (distribution of family income after tax, by size, in constant 1993 dollars); and Statistics Canada, Canadian Economic Observer, Historical Statistical Supplement, 1994/95, Catalogue 11-210, July 1995 (CPI deflator).

[Copyright 1998 by MACROKNOW INC. All rights reserved.]

  

 

The Business Cycle2
Did Overinvestments in Commercial Real Estate Benefit the Rich?

 

Chart G-2

OVERINVESTMENTS

DID THE RICH "EXPLOIT" THE POOR?
Expansions in loans to the commercial real estate sector (arrow
a) were followed by speculative overinvestments and recessions (arrow d). Curiously, the income gap between the rich and the poor swelled (arrow b) just before each recession. These increases provide powerful evidence of a net transfer of wealth to the richest families, from poorer families. Note that the excesses backfired -- the income gap shrunk in 1993 (arrow e).

 

   
Chart G-2   Did Overinvestments in Commercial Real Estate Benefit the Rich? Links Between the Real Average Rich-Poor Family Income Gap and Commercial Real Estate Loans

Sources: Royal Bank annual reports (loans by industry, as at September 30); Statistics Canada, Income After Tax, Distributions by Size in Canada 1993, Catalogue 13-210, June 1995 (distribution of family income after tax, by size, in constant 1993 dollars); and Statistics Canada, Canadian Economic Observer, Historical Statistical Supplement, 1994/95, Catalogue 11-210, July 1995 (CPI deflator).

[Copyright 1998 by MACROKNOW INC. All rights reserved.]

  

 

The Business Cycle3
Transfer Payments to Families

 

Chart G-3

OVERINVESTMENTS

COUNTER-CYCLICAL POLICIES -- THE LINK BETWEEN OVERINVESTMENTS, RECESSIONS, AND TRANSFER PAYMENTS.
The gap between the after-tax incomes of families in the highest (richest) and lowest (poorest) quintiles increased by about $49,941 (362%) -- from $13,791 in 1971 to $63,732 in 1993! To remedy the deterioration in the rich-poor income gap, the government was forced to increase transfer payments to families. The average transfer payments per family in 1993 was $6,971 (up $4,397 from 1971, in constant 1993 dollars). Most of the increases in transfer payments occurred during or immediately after recessions.

 

   
Chart G-3   The Government's Response to the Devastations of the Overinvestment Cycle: More Transfer Payments to Families

Overinvestments in the commercial real estate sector (arrow a) induced recessions (arrow b) -- with devastating social and economic consequences for many. Recessions forced the government to increase transfer payments (arrow c); these increased governmental deficits.

Sources: Royal Bank annual reports (loans by industry, as at September 30); and Statistics Canada, Income After Tax, Distributions by Size in Canada 1993, Catalogue 13-210, June 1995 (average transfer payments, families, in constant 1993 dollars).

[Copyright 1998 by MACROKNOW INC. All rights reserved.]

  

 


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