This article was originally published in Maclean's Magazine on October 6, 2008
It's the Economy
The polls tell us the public considers "the ECONOMY" the No. 1 election issue, and so of course it must be. For example, 26 per cent of those surveyed in a recent Ipsos Reid poll said the economy was the issue they most wanted the party leaders to talk about during the campaign, against 19 per cent for health care, and just 11 per cent for the environment.
But what, if anything, does this mean? The "major issue" question is one of those old standbys that pollsters feel obliged to ask, and the public feels obliged to answer. But it almost never turns out to mean much. The public has told pollsters in past elections that "health care" was their single-biggest concern, but is there any evidence that it ever decided their vote? Paul Martin claimed to have "fixed health care for a generation" last time out. Fat lot of good it did him.
Indeed, for all the public's dutiful insistence that the economy is their most pressing concern, it's hard to square with their actual views about the state of the economy. In an exclusive poll for Maclean's, Angus Reid Strategies delved a little deeper into public attitudes on economic matters: on the economy in general, on their own personal situation, and on their expectations of government. The poll found 61 per cent rated economic conditions in Canada today as good or very good; 60 per cent expected the economy would improve or stay the same over the next year; 60 per cent rated their personal finances today as good or very good, while 80 per cent expected their personal situation would improve or remain the same.
There were some notes of caution. Just 23 per cent said that now was a good time to make a major purchase, and 53 per cent expressed some unease about the amount of debt they were carrying. But only 19 per cent were worried about losing their job, and among a list of possible things to worry about, "falling real estate prices" finished dead last. Fully 84 per cent expect the value of their home to be the same or higher a year from now.
And indeed, the statistics support a certain level of public complacency. By most of the conventional measures, the Canadian economy continues to thrive. UNEMPLOYMENT, at 6.1 per cent, is testing lows not seen in decades, while the employment rate, at 63.4 per cent of the working-age population, is at an all-time high. INFLATION has lately nosed above three per cent owing to rising food and fuel prices, but is expected to fall back into the two to three per cent range. The prime rate is below five per cent.
Incomes, after stagnating through much of the 1990s, have been growing again, while taxes have been falling, producing gains of 20 per cent in real disposable income per capita in the last decade. The increased purchasing power of the Canadian dollar has helped to distribute the benefits of the resource boom across the country. Household net worth continues to climb, corporate balance sheets are strong, and the public finances of the country, once among the shakiest in the developed world, are now among the most stable: general government debt has fallen from over 70 per cent of GDP at its peak to less than a third of that level today.
If Canadians nevertheless have the economy on the brain, it may reflect the influence of events south of the border. The turmoil in the American financial system has in recent weeks reached the stage of full-blown crisis, a gathering implosion of confidence that has already claimed several of the biggest investment banks on Wall Street and threatens to take the economy down with it. The situation is so dire that there is broad consensus that a vigorous government response is required, up to and including last week's staggering $700-billion plan to prop up the nation's banks, even as debate rages over its appropriate limits. With the stakes so high, and the policy choices so critical, it was only natural that the economy would come to dominate the U.S. election.
But in Canada? To be sure, we can hardly avoid being side-swiped by any downturn in the U.S. economy. And while house prices here did not balloon to anything like the same levels as they did in the States, the market has noticeably cooled in recent months. But other than a slight tailing off of consumer demand, and some pockets of distress in the manufacturing sector, it's not clear yet that the broader economy is in any serious trouble - and even less clear what governments here could do about it if it were.
So why, exactly, should it be an election issue? How, after all, is it proposed that we should rescue the American financial system? Or never mind the Americans. Suppose the worst happens, and the Canadian real estate market undergoes the kind of correction envisaged in our story this week: what do any of the federal parties propose to do about it? Nada, that's what.
Read the LIBERAL platform, released this week: for all the attempts on either side to portray it as a big deal - as a transformational shift in economic policy, if you're a Liberal, a spendthrift recipe for disaster, if you're a CONSERVATIVE - the document is in fact strikingly cautious, especially for an opposition party. While it proposes $16 billion in new spending, it promises to cut spending by $12 billion elsewhere in the budget to finance it. Most of the $70 billion over 10 years the party has pencilled in for infrastructure spending is put off until years five through 10. Even if you count as spending the $14 billion or so in tax credits the Liberals falsely claim as tax cuts, that is famously offset by the imposition of a new carbon tax: there is no net change in the government's fiscal position - no "stimulus," in the language of unrepentant Keynesians.
The Conservatives, for their part, are making a virtue of how little they propose, either in new spending or tax cuts, as an appropriately cautious response in a time of "global economic uncertainty." Even the NDP, by far the most lavish of the three main parties, has proposed to date no more than $30 billion in new spending. That sounds like a lot, until you realize it's over four years. In that time, the 2008 budget proposed to spend $925 billion. And again, whatever stimulative impact this might be imagined to have is avowedly and fully offset by the corporate tax hikes the party proposes. Even the NDP has given up on deficit finance.
This is what confounds attempts to make this an election "about the economy." The things that might do some good - namely, fixing the U.S. financial mess - are out of our hands. And the things we do control, the traditional levers of FISCAL AND MONETARY POLICY, have little impact in the short term. Possibly monetary policy - the jealously guarded preserve of the BANK OF CANADA - can have some impact, at least in providing stability if not in stimulating growth. But fiscal policy? Deficit spending? Let's just say we've run that experiment.
The same dilemma finds expression in our poll. While a solid majority assert their belief that the federal government "should step in to save jobs or stimulate growth in Canada now," the consensus breaks down once you get into specifics. Just 13 per cent would support running a deficit "to stimulate the economy," though 31 per cent would tolerate it as the temporary by-product of a recession. Only 23 per cent favour assistance to industry to save jobs, though 47 per cent would support it in the name of helping Canadian companies "to be more competitive."
If the economy is not especially weak, if the public is not especially concerned about it, and if there is nothing the parties can or would do to help matters, does that mean the economy is not an election issue? Or that it should not be? Hardly.
Even in the short term, while there may not be much that governments can do to make things better, there is plenty they could do to make things worse. In that sense the Tory "first do no harm" message may have captured the public mood best.
But it's in the long run that the economy really is an issue, and ought to be discussed. As sound as the macroeconomic "fundamentals" of low inflation and balanced budgets may be in the short term, there remain deep-seated weaknesses and fundamental challenges that must be addressed in the longer term - problems that, as it happens, government can do something about. If the job of political leaders, as it is sometimes said, is to represent the future to the present, now would seem a good time to start.
Begin with Canada's anemic productivity growth - the subject of innumerable after-dinner speeches, it is true, but no less true for being trite. Figures from the Centre for the Study of Living Standards tell the story. Since 2000, the productivity of Canadian labour - measured by the amount of output per hour worked - has grown by less than one per cent per year, on average. In the same period, labour productivity in the United States grew more than 2½ times as fast.
Nor is this a recent phenomenon. For most of the postwar era, Canadian and U.S. productivity levels seemed to be slowly converging. By the middle 1980s, the average American worker produced just 10 per cent more per hour than the average Canadian. Since then the trend has reversed itself: the gap has widened to almost 25 per cent - 35 per cent, if you take just the private sector.
Inevitably, this difference in productivity levels is reflected in living standards. Per capita incomes in Canada are now just 80 per cent of America's; after tax, just 70 per cent. And it isn't only the Americans we are falling behind. From 2001 to 2006, Canada's productivity growth placed us 22nd out of 29 OECD countries. We used to think of ourselves as among the very richest countries on earth, second only to the United States and perhaps Luxembourg. We're not anymore: Norway, Switzerland and the Netherlands are all richer than we are now. Sweden, Iceland, Finland and Ireland are close behind, and growing faster.
There are worse things than relative decline, of course. But now look, not around, but ahead - to the demographic crunch that looms in our future, 20, 30, 40 years from now, as the baby boomers retire and age, and go on aging, long after previous generations would have been pushing up the daisies. Again, perhaps you've heard about this already: how instead of five workers for every pensioner, as at present, there will be only three, and so on. But perhaps you haven't heard just how serious the problem is.
It is commonly reported, for example, that the CANADA PENSION PLAN has been put on a sound footing, after the near doubling of premiums the nation's finance ministers engineered a decade ago. Not so. True, the reforms avoided an immediate crisis. And yes, the plan is now partly "funded," meaning it has built up an investment nest egg whose returns should help defray the cost of future pensions. But it is still far short of having enough in the till to pay the benefits it has promised. How short? Try $813 billion short - more than the entire national debt (the one that shows up on the public books), all levels of government combined. That's the "unfunded liability" of the Canada (and Quebec) Pension Plan, based on calculations by the federal actuary.
But that's only the start. Those aging pensioners are going to need a lot of expensive health care. How much? The economist William Robson of the C. D. Howe Institute has calculated the probable increases in costs for "demographically driven" programs like health care, education and family benefits, netting the additional costs of treating the elderly against the savings expected from having fewer children about. His figures show the cost of these programs rising from 14 per cent of GDP today to nearly 20 per cent by the middle of the century, all of it driven by health care. That's an additional annual cost of $75 billion in today's dollars - "more than total provincial personal-income tax collections ... and more than double Ottawa's revenues from the Goods and Services Tax." Add it all up, and that's an estimated future liability of $1.4 trillion. With a T. On top of the unfunded liability in the CPP. On top of the official national debt.
All told, our real national balance sheet, taking into account the taxes those pensioners will pay as they draw from their RRSPs and private pension plans, would show a net liability of nearly $2.5 trillion, or about 160 per cent of GDP. How on earth are we, or rather they, going to pay for all this?
By increasing productivity, that's how. Just raising taxes on future generations isn't going to do it, even assuming they did not rebel or move to another country. But taking steps now to ensure future generations are richer - much richer - than we are will make the burden easier to bear. Just a half-point increase in average annual productivity growth, Robson calculates, would be enough to cut that future liability in half, relative to GDP.
And how to do that? Well, naturally, that's a subject for debate. But since you ask ...
Go back to that record high employment rate. Believe it or not, that's part of the problem. In recent decades, Canada grew, not so much by raising productivity - output per worker - but by increasing the number of workers. To raise productivity, we need to give each worker more and better machinery to work with, which means more investment. One reason the United States has such higher productivity than us is that they invest more per worker: 12 per cent more, according to the C. D. Howe Institute.
Where to get the money? Higher national savings would help: household savings rates have plunged, from 12 per cent of GDP a generation ago to less than two per cent today. But realistically, much of it will have to come from abroad.
To attract footloose foreign investment, and to attract the skilled labour we also need - for demographic change will also mean, increasingly, a shortage of labour - we're going to have to get serious about cutting the top tax rates on capital and labour, as Ireland, Sweden and other countries have done. Though rates have come down in recent years, we still have among the highest rates of tax on investment in the developed world.
And we'll have to be willing to accept higher levels of foreign ownership in protected sectors. While Canadians often fret about foreign direct investment (FDI), the OECD rates us as among the more restrictive regimes in the developed world. Many of the countries that are overtaking us have higher levels of FDI than we do. Ireland's stock of FDI is four times as high as ours, relative to GDP; Sweden's is twice ours.
But to really goose productivity, it isn't enough just to give people more capital to work with. You also have to give them an incentive to use it efficiently. That means exposing Canadian firms to the maximum amount of competition - foreign or domestic. This is a constant in the literature on productivity: the importance of intense local competition. Yet again, some of our most critical sectors - telecoms, finance, transportation, electricity, to say nothing of public services like health care and education - are enclaves of monopoly and protection.
Are any of the parties talking about any of this? Actually, yes. The Conservatives have put in place quite substantial cuts in corporate tax rates; the Liberals say they would go further. And while the Tories focused their personal tax cuts on the GST, the Liberals would also cut personal tax rates by a percentage point or more. The Tories also introduced in their recent budget tax-prepaid saving plans - sort of like RRSPs in reverse (you get the tax break at the back end, when you withdraw, rather than up front).
In the course of the campaign, the Conservatives have proposed to loosen foreign investment rules, slightly, for the airline sector. And the Liberals' infrastructure plan could potentially improve national productivity in other ways, for example by alleviating transportation bottlenecks. Most intriguing of all: the curiously underplayed report, two weeks into the campaign, by way of the Globe and Mail's London bureau, that Canada and the European Union are to enter negotiations on a free trade agreement. The talks are reportedly to kick off three days after the election.
Is this how we are to debate this issue - in dribs and drabs, by means of stray policy proposals and half-suppressed reports? Or can we please have a national conversation about the productivity/demographic challenge that confronts us? Before the election, not after?
Maclean's October 6, 2008