Slow growth in real income is old news for most in the Canadian income distribution. Even before the onset of the Great Recession, there was not much growth at the bottom, or in the middle, of the income distribution of either Canada or the United States. Since the 1980s, growth in annual incomes has been very concentrated at the top. This phenomenon pulls up average income, because large percentage gains by the very affluent are applied, year after year, to large base incomes, and therefore have a disproportionate impact on GDP per capita. A 4 percent income gain by a millionaire adds $40,000 to Canada’s GDP. But the 0.4 percent annual growth rate, which has been normal for the median Canadian family, only increases GDP by about $280.

When incomes at the very top grow more rapidly than the incomes of everyone else, the share of total income received by the top 1 percent must rise, and increasing income inequality is an inescapable consequence of unbalanced income growth. In both Canada and the US, lowerand middle-income households were able, for many years, to paper over their stagnant real incomes with increasing layers of consumer and mortgage debt. As long as rising household debts can be offset by increasing real estate values, lenders have little reason to worry. But the net worth equation looks very different when housing prices start to fall.

Although rising consumer debt in the middle and at the bottom of the income distribution has enabled the inequality of consumption to grow less rapidly than the inequality of income, increasing household debt and stagnant incomes are not a long-run sustainable combination. The household debt to income ratio is one of those economic numbers that just cannot rise forever. And as the US has already learned — and as Canada is likely soon to find out —  the financial leverage that looks so good when house prices are rising becomes a nasty underwater trap when the real estate market turns soft.

When a financial and housing price bubble bursts, and households have to pay off their debts, they come under pressure to reduce their spending. In a market economy where each person’s spending is the income of somebody else, simultaneous expenditure restraint by households, firms and governments adds up to less aggregate demand in total and slower economic growth. The legacy of unbalanced growth, rising economic inequality, increasing debt leverage and financial fragility is a financial crisis and a long and painful recession. The historical record is not pleasant reading.

Unbalanced growth leads to economic instability.

Unbalanced growth leads to economic instability, and it has many unpleasant implications for longrun social and political stability. A macro-economic policy that simply returned Canada to the imbalances characteristic of the last 25 years would have to also expect a return to the consequences of those imbalances. The challenge therefore is not simply to restore growth in GDP per capita, it is to produce growth in the real incomes of those who have not shared much in prosperity for the last quarter century: the lower and middle parts of the income distribution.

Faced with the challenges of the Great Depression in the 1930s, Franklin Roosevelt’s New Deal successfully tilted the balance of US growth toward the less advantaged, by instituting Social Security, regulating financial markets, encouraging trade union organization and increasing corporate taxation and the progressivity of income taxes. Unfortunately, faced with the challenges of the Great Recession, Canada’s current government has gone in exactly the opposite direction.