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Livio Di Matteo: Canada’s economic future is looking grim—especially when compared to the U.S.


Canada’s per capita GDP has yet to return to its pre-pandemic level. Indeed, it has been declining. The implications of this lack of productivity growth for our long-term standard of living are dire—especially when compared to the United States, our primary trade partner and economic competitor.

Indeed, relative to the United States, the latest decline is but the most recent installment in a moribund performance that is part of a trend going back decades. Figure 1 plots per capita GDP for Canada and the U.S. in inflation-adjusted USD from 1981 to 2022 along with the ratio of Canadian to US per capita real GDP. The result is striking.

While both Canadian and U.S. real GDP per capita have grown over time, there is a persistent gap between the two countries. Real per capita GDP in Canada since 1981 has grown by 59 percent, while the increase has been 98 percent for the U.S. As a result, the gap between the two countries has grown. In 1981, Canadian real per capita GDP was nearly 90 percent that of the U.S. whereas by 2022 it was just over 70 percent. 

Graphic credit: Janice Nelson.

This relative decline appears to have occurred in three phases: a fall from 1981 to the mid-1990s, a levelling off at about 80 percent from the mid-1990s to about 2014, and then another decline to the present. 

Moreover, while Canada’s real per capita GDP has always lagged the U.S., the trend since 1981 reverses one of historical growth relative to America. From the 1870s to the early 1980s, Canadian real per capita GDP relative to the U.S. grew from about 70 percent to peak at nearly 90 percent. In the span of four decades, we are now back to where we were in the 1870s. However, it should be noted that there are regional differences in performance. Alberta, Saskatchewan, and Newfoundland and Labrador have tended to do a bit better as a result of their natural resource sectors. As well, when one looks at major urban centres more recently, Quebec City, Vancouver, and Montreal have seen larger real per capita GDP increases than Toronto, Calgary, and Edmonton. Nevertheless, the national environment is one of decline relative to the United States.

The reasons for this can be summarized across five areas: population growth differentials, capital investment, investment in research and development, structural economic issues, and, finally, the policy environment. Figure 2 provides background on what has recently become the most popular reason for explaining Canada’s real per capita GDP performance: high population growth. As a result of increased immigration levels that also include numerous international students and temporary workers, Canada’s population growth is at the highest rate since the 1950s. In the third quarter of 2023, Canada’s population was estimated at 40.528 million people—up a record one million people from 2022, which was already a year of record growth. 

Graphic credit: Janice Nelson

Economic growth can be of two types: extensive or intensive. An increase in the total size of the economy or GDP is extensive growth, whereas an increase in GDP per person is known as intensive growth. For intensive growth to occur, inflation-adjusted GDP must grow faster than population. And all other things given, if Canada’s population grows faster than the U.S., then it will be a factor in a growing per capita income differential. As Figure 2 shows, that has indeed been the case for a long time, as illustrated by an increase in Canada’s population as a share of that of the U.S. 

Between 1960 and 2022, Canada’s population increased by 117 percent while that of the U.S. grew 85 percent. As a result, Canada went from 10 to 12 percent of the U.S. population. We are becoming bigger relative to our southern neighbours, which should have the benefit of increasing our domestic market size and creating economies of scale. And as immigrants are generally younger, the recent population growth also helps address the labour shortages associated with an aging population. More people can indeed fuel extensive economic growth. However, unless the stock of capital grows alongside to boost productivity, intensive economic growth will not follow.

Oddly enough, Canada’s recent performance in capital investment—investment in buildings, plants, machinery, and equipment—seems respectable relative to the U.S. when examined only as a share of total GDP. Our investment to GDP ratio is currently about 23 percent while the U.S. is at 21 percent. However, as with GDP, investment spending per capita is also a relevant measure, and here Canada’s deficiency becomes apparent. With a much larger per capita GDP in the U.S. than Canada, it can devote more spending per person to investment. Here Canada has also fallen behind the U.S., as illustrated in Figure 3. 

Graphic credit: Janice Nelson

Real per capita investment in Canada has generally been lower than that of the U.S. And whereas U.S. investment spending per capita recovered after the 2007-08 Great Recession, ours has essentially been flat. In 2022, real per capita U.S. investment spending per person in 2010 constant U.S. dollars was 11,601 but 10,424 in Canada—an amount ten percent lower. Canada needs to increase per capita investment spending by an additional 1,117 dollars just to match the U.S. in per capita investment spending. Doing so would raise our overall investment spending to GDP ratio from 23 to 26 percent. Needless to say, given our population growth rates, in order to get investment spending per person well above U.S. levels, we would need to devote nearly 30 percent of our GDP to capital formation. That has not happened in Canada since the wheat boom era of the early 1900s—incidentally also the era of Canada’s fastest population growth.

And of course, it is not just the quantity of investment that matters but the quality and composition, and here it turns out that Canada’s spending on research and development as a share of its GDP has been declining for the last two decades relative to the U.S. and its G-7 counterparts. Indeed, as a share of GDP, Canada spends about half that of the U.S. and also spends less than all the other G-7 countries, with the exception of Italy—though they have been catching up and are likely to surpass us soon. As well, much of our productivity-boosting investment and research has historically occurred in our natural resource sectors, which we have recently demonstrated a definite lack of commitment to reprising.

Two other factors are also important in Canada’s productivity lag. To start, despite population growth and a market size now topping 40 million, we remain, compared to the U.S., a relatively non-competitive and closed business market dominated by duopolies and oligopolies, particularly in transportation and telecommunications. Witness the most brazen example yet when Canada’s two major airlines essentially carved up Canadian service territory in a manner not much different from crime lords carving up the proceeds from gambling or drugs. It is no coincidence that airfares have soared in the aftermath. Despite the country’s population doubling over the last forty years, our markets are apparently still “too small” to allow for more competition and we remain a captive market for oligopolistic firms including retailers. Combine this with provincial and federal implementation and regulatory environments that have raised the cost of starting just about anything and you have a recipe for long-term economic ossification.

The final shoe to drop explaining our productivity malaise is a Canadian policy environment which can be described as anarchic federalism. At its best, Canadian federalism is a cooperative enterprise that allows for policies and practices tailored to regional preferences with consultation and coordination of economic policies to promote overall Canadian economic performance. At its worst, Canadian federalism can be a petulant collective of myopic jurisdictions operating at cross-purposes that frustrate any attempts at national coordination. Over the last decade, Canada’s provinces and the federal government have become increasingly prone to bickering. Even infusions of federal cash at the individual and governmental levels seem to have become insufficient incentives to get things done aside from communicating what seems to be a federal preference for consumption spending over investment spending. 

Think of this as Canadian federalism in action: Ottawa controls the levers of immigration and has used this power to increase the population to address aging populations and labour shortages but without thinking much about the consequences on health services and housing stock. The provinces control health and education services but in the wake of rising population and demand both sectors are highly stressed and finding it hard to cope. Then there are the municipalities which essentially control the key levers for land zoning and housing construction and yet despite what seems to be a roaring demand for housing are moving slowly if at all. It seems like Canada’s economic strategy has simply been to increase population—indeed a tool for promoting extensive growth—while assuming that anything needed to boost productivity—intensive growth—would simply descend from the heavens. 

As a result, we are now in a situation of having a growing population and a bigger market but with less competition resulting in higher prices and less convenient services. We have more spending on health and education but hallway health care and students with declining test scores. And, the coup de grace, a generation of Canadians unable to afford a home even if they have good high-paying jobs. This is not good. Is it any wonder that economic growth is lagging given that the environment needed to support more business investment seems to have disappeared in a quagmire of finger-pointing and discord? 

The long-term implications of Canada’s falling real per capita GDP and a growing gap with the U.S. are simple: a declining standard of living and ultimately out-migration of the best and brightest. Since 2010, Canada’s annual growth rate of real per capita GDP has averaged 0.9 percent while the U.S. has averaged 1.5 percent. At those rates of growth, in a quarter century, Canada’s real per capita GDP will be 60 percent that of the U.S. We are on track to becoming a relatively poorer country with a more fractious political system that seems unable to get things done. Is this really the country we want for our children? 

Patrick Luciani: Who is the greatest economist of all time?


In the latest Hub book review, Patrick Luciani reviews GOAT: Who is the Greatest Economist of all Time and Why Does it Matter? by Tyler Cowen (2023) which assesses the cases of some of the top economists in history to determine who can lay claim to being the greatest among them.

Who is the greatest of all time, or the GOAT, among economists? It’s a fascinating question but an odd one as well. One would think that the greatest would depend on one’s political stance. Tyler Cowen, a well-known professor of economics, best-selling author, podcaster, polymath, and co-founder of the highly successful Marginal Revolution website, has released a 350-page book, available for free online, that tries to answer the question. It was his COVID lockdown book that kept the inveterate traveller busy at home. 

When I started reading, I was hooked. It was fascinating getting a refresher about critical economic ideas but also the personalities behind them. Every page carried new information. Cowen achieved the impossible, turning the history of economic thought into a page-turner, bringing to life the ideas of six economists who have shaped the world we live in. 

Cowen lays down a few criteria for a proper evaluation to get past the problem of political bias. Any candidate for the GOAT prize must be original, of great historical importance, a carrier of essential ideas, and know lots of micro and macro theory and empirics. Finally, any candidate must not be “too wrong” on the “substance of issues.” In other words, you might be a great thinker, but if your ideas can’t survive the test of time, you’re off the list. 

The shortlist of great economists who get their own chapters are Milton Friedman, F. A. Hayek, John Maynard Keynes, John Stuart Mill, Thomas Malthus, and—no explanation needed here—Adam Smith. The surprise is that Karl Marx didn’t make the final six. For all his fame and disruptive influence, the 1917 Russian Revolution made him famous, not his economic intelligence. 

Another surprising omission was Paul Samuelson, the first American to win the Nobel Prize in economics. His 1948 textbook Economics has gone through 16 editions and sold over four million copies. That book has educated more students of economics than any before or since. Samuelson was a brilliant economic modeller and was primarily responsible for bringing deep math to the science of modern economics. But according to Cowen, Paul Samuelson didn’t understand economics

Here’s some evidence: Samuelson got the Soviet Union wrong. He insisted that the Soviets would catch up and overtake the United States and believed a socialist command economy could “function and even thrive.” Samuelson also got the 1970s and ’80s recessions wrong and insisted that wage and price controls were the way to fight inflation. Despite his brilliance, Samuelson’s arrogance stopped him from considering that the Chicago school under Milton Friedman might be on to something. 

Here’s a summary of Cowen’s final six. 

Friedrich August Hayek

As a fan of Austrian economics, Tyler Cowen claims that Hayek’s three best articles are superior and more important than the top five articles of any other economist. High praise, without a doubt. Hayek argued that knowledge of how the economy works doesn’t reside in the minds of policy experts but is dispersed as “bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.” 

The message is that we can never fully know that “knowledge.” And we weren’t going to find that knowledge with sophisticated econometrics. Therefore, allocating resources by economic planners to solve economic problems is doomed to fail. The best we can do is “find the best decentralized mechanism for improving opportunities.” That insight has changed how we think about economics today, with profound implications for growth and prosperity. One weakness was Hayek’s skepticism about modelling or deep data analysis to address economic problems. 

John Maynard Keynes

Keynes certainly meets most, if not all, of Cowen’s criteria. There’s no question that Keynes was the most attractive economic thinker of the lot. He’s the one that Cowen would choose to spend time with because his world went beyond economics and into the arts and diplomacy. Keynes was a man of culture as a member of the Bloomsbury Group with Virginia Woolf and E.M. Forester, who pursued his varied sexual relationships with “true ardour,” which made him stand out from the crowd of boring bureaucrats and professors. 

As an economist after the Second World War, his influence on international and domestic policy was enormous and unimaginable without him. Great as he was, Cowen tells us he wasn’t that good an economist. His famous book, The General Theory, “is riddled with microeconomic mistakes and ambiguities, such as confusion between movements of curves and shifts along curves.” He had poor terminology, was unclear about elasticities, and confused average and marginal rates. 

According to Cowen, Keynes never nails microeconomics. By those standards, Keynes would have flunked an intermediate microeconomics exam. Keynes was a big-picture guy who never quite saw the deep complexity of an economy, and his simple models couldn’t solve messy real-world problems. Keynes was also an avid supporter of eugenics, an antisemite. He also suggested in his German translation of his General Theory (yes, Cowen also reads German) that his investment theory was closer “with totalitarianism than with laissez-faire.” 

Milton Friedman

 Although without the charisma of Keynes, Friedman has all the ingredients of a GOAT. His scholarship is, without a doubt, Nobel Prize-level stuff, a prize he won in 1976. His historical study of the Monetary History of the United States, with Anna Schwartz, was a landmark in helping us understand the Great Depression. In the real world, he also led the reforms against the military draft and supported floating exchange rate policies that have proven essentially correct. He seems vindicated in advocating vouchers to improve public school education levels and advocated a negative income tax to help the poor, an idea now picked up by the Left. He has also influenced the Federal Reserve’s attention to money supply and prices. He has spread the gospel on the values of freedom and free market principles, along with his macroeconomic ideas, which are on par with Keynes’s influence. Cowen’s criticism seems to centre on Friedman’s position that economic problems are easy to resolve and simple to understand. He had little time for government programs to help the poor and blamed the state for the poverty that existed. Cowen was also miffed by Friedman’s attack on complex modelling, insisting that their predictive value counts even if the assumptions aren’t realistic. 

Malthus and Mill

I admit I was surprised to see Thomas Malthus and John Stuart Mill as among the six best economists on Tyler Cowen’s list. I never considered them economists in the strictest sense. If Cowen says they belong, they belong. 

On Malthus, I would have thought his prediction that population growth would always outstrip food production and lead to widespread famine has proven to be one the biggest gaffs in economic thinking. He completely missed the boat on the role of agricultural innovation and technology. But Cowen reminds us that Malthus was right for 99 percent of human history, and we shouldn’t be too hard on him because he missed that one percent. Today, Malthus’s ideas have worked their way into how we think about environmental sustainability. The word “Malthusian” is part of our vocabulary when we talk about protecting the earth and husbanding its resources. For that, Thomas Malthus deserves a place in the top six. 

Cowen also gives high praise to John Stuart Mill, better known as a political philosopher than an economist, though his economic writing is extensive. He regards Mill’s The Subjection of Women, which is not usually considered a book on economics, as “an excellent tract on women and the economics of gender and discrimination” and campaigned strongly for complete legal equality for women. Mill knew more economics than anyone in his time and was “all-encompassing in a way that no other GOAT contender can claim.” According to Cowen, Mill’s argument for liberty relied much on economic concepts such as “decentralization, anti-paternalism, and externalities,” ideas developed decades before Hayek and Friedman. However, it was strange to learn that Mill, who was a utilitarian first and a progressive second, favoured capital punishment and argued as much. Cowen holds high admiration for Mill’s learning and broad education and considers him the most profound thinker of them all. 

 Adam Smith

I would have guessed that Adam Smith would walk away with the top prize as the greatest of all time. Or is he? His contributions to economic theory are well-known even by non-economists, such as his articulation of the division of labour, economies of scale, and how a free-market system based on self-interest drives the betterment of society by an unplanned “invisible hand.” He saw the deep flaws in mercantilism and understood the power of open trade to advance national wealth and how the price system transfers information to increase or decrease production. 

Cowen reminds us that his thinking went beyond these concepts to argue that the division of labour also applies to national defence and the necessity for countries to protect their liberty and prosperity with well-trained standing armies. Smith’s two books, The Wealth of Nations and Theory of Moral Sentiments, together stress the need for individuals to break from “being excessively narrow, short-sighted, and obsessed with local information.” Here, Smith parts ways with Socrates, who saw teaching as the duty of elites, while Adam Smith saw a role for state subsidies to support the study of sciences and philosophy for everyone. Smith was a wide-ranging thinker beyond his reputation as an economist. 

The verdict

So, who is the GOAT? 

In the final chapter, Cowen summarizes the pros and cons of the six finalists. Without looking at the last section, my bet was on Milton Friedman. Cowen takes us on a journey of economic ideas without coming down on anyone as the Greatest Economist of all Time. However, he chose—to my surprise—John Stuart Mill as his informal winner and was his clear favourite as a thinker. Consolation prizes go to Milton Friedman as the best economist and Adam Smith as the most original and foundational economist.

Tyler Cowen ends by lamenting that we will never see the likes of these thinkers again because the scholarship of economics has fundamentally changed. Economists are now smarter and better trained but are no longer the “carriers of ideas.” Instead, they have become clever testers of hypotheses. Long gone are the thinkers who can imagine beyond their specialized fields. Pity.