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Wednesday, September 16, 2015

Economic Commentary: NDP and Liberals Still Differ on Attitudes Toward Markets

By now, countless articles have been written about how, with the NDP's move to the centre and the Liberals' move to the left, the two parties' economic policies have become very similar. Indeed, various journalists have even mused that the Liberals are now to the left of the NDP. While the scope and objectives of the policies proposed by the two parties are indeed similar, Liberal policies tend to transfer money and then let the market do its work, while NDP policies often attempt to weaken market forces (or quash them altogether) in a populist way. That is, the Liberal economic approach is still much more market-oriented than the NDP one. Below are several major policy planks of the two parties that illustrate this distinction.

Helping the Middle/Working Class
- The Liberals are proposing a new top bracket of 33% that would finance a cut to the middle bracket to 20.5%.
- The NDP is proposing a $15/hour minimum wage that would affect a minority of workers in federally regulated industries.
Both of these policies make the system more progressive. They are obviously not targeted to the same people: the Liberals are targeting the middle (and upper middle) class, while the NDP is targeting the working class. The difference I want to emphasize, however, is that the Liberals are proposing to allow the market to clear under rules that favour more redistribution. The NDP, by contrast, wants to push the market farther away from equilibrium (which will likely slightly increase unemployment) by instituting a higher price floor. Note also the populist element of the NDP policy: nobody's tax is getting raised. However, the populism comes at a price: consumers of the affected goods and services will be paying more regardless of their income.

Family Policy
- The Liberals want to increase transfers to most families and make them more progressive.
- The NDP wants to create a new $15/day national daycare program.
Here again, the Liberals are proposing to make the system more progressive while letting people decide how the money is spent. The NDP's answer, on the other hand, is a brand new one-size-fits-all government program. Once again, the NDP is hiding some of the costs of its proposal by requiring provincial contributions that may not be forthcoming.

Raising More Tax from the Rich
- The Liberals would hike the personal income tax rate for incomes above $200,000 from 29% to 33%.
- The NDP would hike the corporate income tax rate from 15% (to a soon-to-be-specified level, probably not above 17.5%).
The populist appeal of a corporate tax hike is clear. However, most economists would argue that, from an efficiency standpoint, personal income taxes are preferable (however, value added taxes, such as the GST, are even more efficient). Moreover, a hike in the corporate tax rate would hit all shareholders: rich investors, yes, but also anyone with stocks (or stock-based mutual funds and ETFs) in their RRSPs, and anyone participating in a private or public pension plan, including the CPP. The Liberal policy is closer to economists' advice, while NDP policy has more visceral appeal at the price of being less efficient and more poorly targeted.

Deficits and Investment
- The Liberals want to fund a lot of additional investments by running a deficit in the short run.
- The NDP wants to fund some additional investments while maintaining a balanced budget.
The deficit issue is probably the comparison that led some to believe that the Liberals are now to the left of the NDP. However, fiscal policy is only one aspect of economic policy. More importantly, the Liberal proposal is more responsive to current market conditions (i.e. extremely low interest rates), and the proposed deficits are small enough that the debt-to-GDP ratio, which determines affordability, is not projected to increase. The NDP position is once again populist and lacks nuance ("surplus good, deficit bad").

Youth Jobs
- The Liberal strategy mainly relies on grants (other than the direct Parks Canada jobs).
- The NDP strategy relies partly on grants, and partly on a requirement to hire youth on infrastructure projects with federal funding above $10 million.
The NDP approach relies more heavily on additional regulation and on a piecemeal, sectoral approach, focusing on jobs linked specifically with public infrastructure projects - not allowing the market to dictate where those jobs are. It requires smaller grants per job than the Liberal plan, but some of the cost is simply hidden in the requirement put on federally funded infrastructure, which will increase the required budget on those projects.

As illustrated above, the Liberals' and NDP's economic platforms are, in fact, quite in line with the parties' respective economic philosophies. (Of course, one can find individual policies that don't fall in line, but the ones outlined above constitute the bulk of the most economically significant ones.) What has changed is that the Liberals are proposing more than they traditionally do, and the NDP is proposing less. But the kinds of policies they're proposing suggest that neither party has fundamentally changed its economic thinking: the Liberals remain more market-friendly, and the NDP remains more statist and populist.

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