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Sean Speer and Taylor Jackson: Canada cannot afford another lost economic decade

Commentary

Canadian-born, U.S.-based think-tank scholar (and past Hub Dialogues guest) Samuel Hammond recently tweeted

It only takes two decades of stagnant GDP growth to go from the economic frontier to a middle-income country. The ‘middle income trap’ is a continuous threat.

Although his main observation was about development economics, Canadian policymakers shouldn’t ignore the underlying point. We’re in the midst of a lost economic decade. Our politics should be focused on avoiding a second. 

Last month’s release of GDP numbers for the fourth quarter of 2023 showed Canada’s real GDP per capita (a measure commonly used to as a proxy for living standards) declined once again. It’s now effectively at the same level as it was in the fourth quarter of 2014. 

Graphic credit: Janice Nelson.

There’s reason to believe that this period of stagnation and even declining economic conditions will persist. Unlike most of our peers, Canada isn’t expected to recover its pandemic losses until 2027. Thereafter the OECD projects that among its nearly 40 members, Canada will experience the slowest real GDP per capita growth out to 2060. Globe and Mail columnist Andrew Coyne has rightly described these trends as a “growth crisis.” 

The risk isn’t necessarily that Canada slides down the development ladder—though our living standards are declining relative to our peers. The real threat is both less far-reaching and more insidious. Slow growth and stagnant living standards represent serious political economy challenges. They’re the long-run conditions for a zero-sum politics that can lead to a negative spiral of polarization, radicalism, and short-termism. The consequences for individuals and the economy as a whole could be significant. 

The Liberal Party’s recent online advertisement—“the economy is not numbers. The economy is people.”—was mocked a bit for its banality. But even if inadvertent, there’s an inherent insight there. Economic growth isn’t merely a statistical expression. It’s the material foundation of a peaceful, stable and ultimately forward-looking society. 

Simply put: Canada needs a dedicated policy agenda to restore economic growth and rescue us from a second lost decade. 

We’ll consider the possible components of a such pro-growth agenda in subsequent commentary for The Hub. But before we can judge the right mix of policies, we need to identify the causes and sources of our stagnation. We need to understand how we got lost in the first place.

At the heart of Canada’s economic malaise is low productivity growth. Productivity is a fundamental driver of growth in incomes and living standards. The interrelationship between productivity and living standards is axiomatic: the more an economy can produce with less, the better off that society will be materially. 

As the economist Paul Krugman famously put it: “Productivity isn’t everything, but, in the long run, it’s almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.”

Canada’s long-standing productivity challenges are well documented. What is less well-known however is that they’ve gotten worse in the past several years. From 2015 to 2022, Canada’s real labour productivity grew by only 4 percent compared to growth of 7.5 percent between 2006 to 2014. 

Our peers, by contrast, generally saw much higher productivity growth. Between 2015 and 2022, U.S. real labour productivity grew by 7.2 percent. The G7 average was 5.9 percent over the same period. 

One consequence of the growing gap between the Canadian and U.S. productivity growth is that Canada’s overall labour productivity is falling relative to the United States. In 1970, Canadian workers were 85 percent as productive as their American counterparts. In 2022, it was 72 percent. 

The question of course is: what happened? What’s behind Canada’s stagnant productivity and declining living standards? 

There are a myriad of factors but a chief reason is low business investment. Capital is the lifeblood of productivity. If the amount of capital that workers have to use increases (what’s sometimes called “capital deepening”), it will generally enable them to be more productive and produce more output. During the Trudeau era, Canada has experienced the opposite of capital deepening. Our economy is now marked by high levels of government consumption and declining levels of business investment—particularly outside of residential construction.

A recent Statistics Canada report for instance suggests that business investment per worker is down by 20 percent from 2006 to 2021, with a significant portion of that decline coming after 2015. While this partly reflects the downturn in investment in oil and gas production following the busting of the commodity cycle in 2014, there are also other factors at play. 

One is the secular shift towards investment in intangible assets such as algorithms, data and software. Firm spending on intangible assets as a share of total fixed assets jumped from 8 percent in 2006 to 17 percent in 2021. Another is a notable decline in entrepreneurship. In 2006, the entry rate for new firms into the Canadian economy was 12 percent. By 2021, it had fallen to just 7 percent. 

Canada’s poor record on investment extends to total spending on research and development. It’s the only G7 country that spent less on research and development as a share of GDP in 2021 compared to what it spent in 2000. We’re now the second lowest spender on R&D in the G7 besides Italy.

A final factor behind Canada’s declining GDP per capita is its rapid population growth that’s now outstripping business investment and economic growth more generally. Canada’s population growth between Q4 2022 to Q4 2023 was over 3 percent, which is similar to that of countries like Somalia, Uganda, and Tanzania. 

While immigration can have a positive long-term effect on a country’s economic growth trajectory, there are serious questions regarding the absorptive capacity of Canada’s economy to account for the extraordinary rate of growth that we’ve experienced in the past two years. Economists Stéfane Marion and Alexandra Ducharme of National Bank have gone as far as to say that Canada is now in a “population trap” in which the country lacks the infrastructure and capital stock to absorb current population growth and still improve living standards. 

Which brings us to the role of federal policy under the Trudeau government. It’s fair to say that the government’s economic policy agenda has done little to abate the twenty-first century trends of slow and sluggish growth and has arguably exacerbated them. 

The Trudeau government has advanced an economic strategy of what Lakehead University economist Livio Di Matteo calls extensive growth—that is, a set of policies (such as high immigration and deficit-financed increases to cash transfers) that have grown the total size of the economy but contributed to stagnant and even declining living standards. 

Immigration policy is a good (or bad) example. It’s not just that the government has increased overall immigration. It’s also shifted the composition towards lower-skilled newcomers which can distort business investment decisions and depress productivity. There’s a long-run risk here that if business investment doesn’t rise and immigration levels remain high, the Canadian economy will transition to a more labour-intensive one that has lower productivity and living standards relative to our peers. Government policy, in other words, has contributed to an economic imbalance: it’s shifting the economy from a capital-intensive model to a labour-intensive one.

At the same time, high population growth is causing demand to outstrip supply in key areas such as housing, health care, and childcare. So, too, are the Trudeau government’s well-intentioned yet ultimately flawed policies like the $10-a-day childcare subsidies that have increased demand in a sector over which the federal government has little regulatory authority to similarly boost supply. One of us can attest to how bad the situation has gotten after recently being quoted waitlists of one to two years for childcare in downtown Toronto. Similar challenges have been reported across the country. 

It’s increasingly clear that Canada needs to shift from state-centric economic development under the Trudeau government that has relied on government consumption and population growth to eke out marginal growth to a bold supply-side agenda that pulls investment into the economy to boost supply in key areas and ultimately increase productivity and living standards.

We must move our overall growth model from one of extensive growth (driven primarily by government consumption and high levels of immigration) to one of intensive growth (which is dependent on capital investment and rising productivity). One might think of the difference as stimulative versus sustainable growth. We’ll be back in the future with some policy ideas that ought to form the basis of such an agenda. 

But the first order of business is to understand the magnitude of the challenge and the risks of not confronting it. Canadian living standards are now what they were in 2014. That amounts to a lost decade. The overwhelming imperative of our politics and policy must be that it doesn’t extend to a second decade. We cannot afford to learn of the consequences.  

The Weekly Wrap: It’s time to have the private health-care conversation

Commentary

This week‘s edition of The Hub’s Weekly Wrap reflects on some of the past week’s biggest stories, including what the upcoming federal budget might bring, new polling showing increasing support for private health-care options, and recent criticisms from both the Left and the Right.

Will a desperate Trudeau double down on class conflict to save his skin?

This week we learned that federal Finance Minister Chrystia Freeland will table the budget on April 16, which is one of the latest budgets outside of an election or some other extenuating circumstances in forty years. 

The minister was generally circumspect about the budget’s priorities, though she did nod to the anticipated inclusion of pharmacare. National Post columnist John Ivison wrote that it’s likely to be a free-spending budget in light of the government’s struggle for its political survival. 

But the budget’s real story may not be new spending. It may instead come in the form of new taxes targeting big business and wealthy individuals. The Trudeau government might just try to survive by appealing to class warfare.  

The Hub published an article this week by the Business Council of Canada CEO Goldy Hyder that warned about growing rumours that the government is considering an excess profits (or “windfall”) tax on large corporations. 

The basic details are somewhat unclear, but the Trudeau government has previously imposed excess profits taxes on banks and life insurance companies and threatened them on the grocery sector. The implication here is that they could be extended to other parts of the economy. 

The negative effects of such a policy in terms of employment, investment, and wages could be significant. A report last year for the European Parliament for instance warned that windfall taxes can create big distortions—particularly in a globalized economy. The result could be a lot of economic damage without much revenue upside. 

The same goes for the persistent rumour that the government is thinking about using the budget to signal a new wealth tax that would draw an outstanding NDP proposal and popular thinking within progressive circles. One estimate is that such a tax could generate as much as $30 billion in federal revenues—though it must be said that these estimates depend on high “exit taxes” and even the imposition of strict capital controls. 

A wealth tax on high net-worth individuals would thus face broadly similar economic problems as a windfall tax on corporations. There are also some technical challenges that cannot be overstated. 

But technocratic arguments against these proposals sort of miss the point. The government won’t move forward with them based on economic or fiscal considerations—it’s not like the Trudeau government is now suddenly concerned about deficits after effectively doubling the national debt. 

Prime Minister Justin Trudeau listens while meeting with senior citizens at a community centre in Richmond, B.C., on Tuesday, February 20, 2024. Darryl Dyck/The Canadian Press.

The true motivation here would be to use tax policy to precipitate class conflict in our politics. Its main political purpose is to effectively wedge Pierre Poilievre and the Conservatives into defending large corporations and wealthy Canadians. This isn’t evidence-based policy or high-minded idealism. It’s cynical politics and naked populism. 

It may not be as politically propitious as the government might think either. Although polls indicate that Canadians generally favour higher taxes on corporations and high-income earners, there’s also compelling evidence that people are more concerned about fairness than equality. They’re even prepared to live with higher levels of inequality if they’re satisfied that the economy is fundamentally meritocratic rather than tilted in favour of certain companies or individuals.

It’s possible therefore for Pierre Poilievre and the Conservatives to be strongly in favour of eliminating foreign ownership restrictions or tax preferences that disproportionately benefit high-income earners or other measures that would level the playing field when it comes to the market’s distribution of income and wealth and still oppose these potential tax hikes which are ultimately about leveling outcomes rather than enhancing fairness. 

If next month’s budget contains some combination of windfall and wealth taxes, Conservatives shouldn’t take the bait. They should call it out for what it is: a desperate move that won’t do anything to help Canadians because that’s not the point. 

It’s time to have the private health-care conversation

Ipsos released a new poll this week that found, contrary to popular political commentary, a sizeable majority in favour of private health care for those who can afford it and greater private delivery within the public insurance model. This is a big deal. 

Think about it: nearly two-thirds of Canadians say that they’re in favour of “two-tier” health care which no politician is actively proposing. It signals that the political class is well behind the public and represents the conditions for an enterprising politician to advance a more ambitious agenda. 

We certainly need it. Not only are general wait times at an all-time high, but we’re now increasingly encountering on a daily basis excruciating stories of 20-hour emergency room waits, large-scale hospital overoccupancy, and adverse health consequences, including avoidable deaths. 

The facts overwhelming point in the direction of some kind of market-based reform. Polls show that Canadians instinctively understand it. Yet too many politicians dogmatically cling to the status quo even as the system collapses around them. 

Federal health minister Mark Holland for instance recently said that “we’re not going to allow that [greater private delivery] to happen.” This isn’t an expression of evidence-based policy. It’s a quasi-religious statement. 

Holland and to be fair a lot of politicians—including some conservatives—are seemingly prepared to trade off worse health-care outcomes in exchange for a false fidelity to the principle of equality—even if it ultimately means equal misery and suffering. 

Conservatives often get accused of being ideologues in today’s political climate. But is there anything more hyper-ideological than defending a system that’s self-evidently producing such bad outcomes and that a majority of Canadians say requires fundamental reform? It’s like persisting in the view that the earth is flat long after it had been proven otherwise. 

Some day people will no doubt look back on the past 30 years of health policy debates in Canada and think that we were crazy. We’ve collectively accepted an egalitarianism of poor outcomes even though various other jurisdictions have matched our commitment to equality without people dying because of rationing and scarcity. 

The Ipsos poll tells us that this attachment to a failed system isn’t an example of the public wagging the dog. It’s a case of elite failure. Hard-core ideologues in politics and universities (including law deans and medical school chairs) have substituted their own political preferences for the rest of us. The outcomes have been tragic in some cases. 

Here’s the good news: last year, many health-care reform proponents were disappointed that the Supreme Court of Canada wouldn’t take up the Cambie Case which sought to invoke Section 7 of the Charter of Rights and Freedoms to open the door to reform to Canada’s single-payer model. It seems increasingly clear that we won’t need jurisprudence to produce much-needed reforms. They’re increasingly attainable through the democratic process. 

On ordered liberty, neoliberalism, and profoundly missing the point

One of the consequences of being engaged in the world of ideas is that it inevitably comes with both criticism and mischaracterization. This week we received both—including from the Left and the Right. 

Left-wing social media personality David Moscrop wrote in The Tyee about a recent Weekly Wrap that was favourable to Conservative leader Pierre Poilievre’s support for restrictions on online pornography for minors. In particular, he criticized the intellectual basis for such a policy position—what we termed “ordered liberty”—as an oxymoronic and ultimately politically-motivated crackdown on “historically marginalized individuals and groups.”

There are various problems with his line of analysis. A big one is that the idea of “ordered liberty” is neither my ideological formulation nor one conceived by Stephen Harper or Jason Kenney. Edmund Burke, the father of Anglo-American conservatism, wrote in 1774 that the only true liberty is “a liberty connected with order: that not only exists along with order and virtue but that cannot exist at all without them.” The conservative tradition since its founding has been rooted in an ongoing dialogue between liberty and order. 

The bigger problem though is an apparent lack of self-awareness. Moscrop, a self-avowed socialist, accuses Poilievre of intellectual inconsistency for generally being pro-freedom but calling for government intervention in the particular case of online pornography for minors. Yet his entire worldview is replete with inconsistencies between a maximalist view of human freedom and a vision for a socialist state. How else does one describe his support for adolescents to change their gender without parental consent on the one hand and large-scale public ownership or confiscatory taxes on the other hand? The only connective tissue between this combination of unconstrained social autonomy and economic statism is the kind of radicalism that Burke observed in France. 

Not to be outdone: Financial Post columnist Terence Corcoran wrote a sharp critique this week of my recent Hub essay on the growing intellectual and political challenges to neoliberalism. I thought the essay (“We need neoliberalism now more than ever”) clearly set out my own criticism of these trends and made the case broadly in favour of free markets and supply-side economics. Apparently not. 

Corcoran bizarrely claimed the opposite. He wrote that I believe that free trade has “produced deleterious outcomes” and therefore favour “the diminution of markets and an elevated role for the state.” There’s one problem: these quotes (which are taken from the essay) aren’t a reflection of my own views. They’re my description of the views of neoliberalism’s critics. 

I’ll take for granted that the cause of the confusion was my dense prose rather than a deliberate mischaracterization on Corcoran’s part. One lesson though is that we both evidently could use some more editing.