Saturday, November 11, 2006

Canada, the Good News and the Bad

Keywords: Roger Martin; Canadian economy; prosperity gap; Japan, United States; equality; taxes; tuition; higher education; R & D; corporate taxes; claw-backs.

Today I attended a fascinating lecture by (see photo), the dean of the School of Business at University of Toronto. He proceeded by asking us to guess the truth or falsity of a number of propositions about the . His answers were all based on a comparison of the world’s sizeable states, eliminating smaller ones such as Luxemburg (with its population of 400,000), and the Scandinavian countries.

Among the large countries of the world, Canada’s economic rank is second only to the United States.

The bad news is that within the past 20 years, the (in terms of GDP per capita) between Canada and the US has widened. As recently as 1989 we were tied with the US, but no longer. There is a gap of $8700. The after-tax gap is$12,000 per family. Canada would be collecting #112 billion per year in taxes if we could close the gap.

But the surprising good news makes a longer list than the bad. For example, the US and Canada grew at about the same rate during the twentieth century after the Great Depression; the US economy grew 7.07 times, whereas Canada grew 7.02 times. What about the idea that “if the US catches a cold, Canada gets pneumonia?” No, the Canadian economy has been more stable, now less. During the twentieth century the US had nine serious recessions covering 13 years; Canada had four such periods, covering six years.

Canada’s economy is more egalitarian than any of the big European countries and we are far richer than they are. He drew a graph on the blackboard showing the location of a number of countries in a space where is the horizontal axis and prosperity is the vertical axis. Canada’s position is the most favorable. The US is more prosperous, but less equal. Japan is more equal but less prosperous. We have the best balance. All other big countries are less prosperous and less equal than Canada. Twenty-five years ago we still had this excellence, plus a higher income relative to the US than we do now.

Actually, Martin does not think in terms of equality per se, but rather in terms of how well the poor are cared for (and I fully agree). To measure that, you compare the various quintiles of income. Our lowest quintile is as well-off as Japan’s. Also, our second quintile (next to lowest) is also better than theirs. In this respect, Canada is a better country than Japan. Hooray for Canada!

But Martin’s search is to explain the growing gap in prosperity between Canada and the United States. Is it that our about equality get in the way of our competitive success? No, polls show that Canadians and Americans have remarkably similar attitudes. There’s no gap there.

Another theory is that our industries differ, with the US prospering because of its “sunrise” industries (in high tech) and Canada stuck with old “sunset” industries. Actually, our top eleven industries are the same top eleven as in the US. In the US, only 1.96 percent of the jobs are , as compared to 1.64 percent in Canada – a negligible difference. If we had as much hi-tech as the US, there would be only 3,600 more such jobs in Canada – a rounding error in magnitude. Our industries actually have higher wealth potential than in the US – a fantastic potential.

Another myth is that we are being “hollowed out” in terms of global competitiveness. How many big companies did we have twenty years ago? Thirty-seven. How many today: Eighty. We are doing a phenomenally successful job.

What about the notion that we have less investment than the US? No. There’s the same amount of investment per capita.

How about taxation? There really is a difference between Canada and the US, but we’re not nicer to our poor than they are. Our poor pays higher taxes – largely because of “claw-backs” of taxes as their income rises. We give the poor more money but discourage them from becoming more self-sufficient.

Canada’s corporate tax rates are the highest in the world. This discourages companies from investing in efficiency.

How about education? We are way behind in , as compared to the US, and we spend less than the US per student. This under-investment accounts for a major part of the gap.

We assume that high tuition is a barrier to access. This is a mistaken belief. Comparisons show that there’s a strong positive correlation between tuition rates and the proportion of age cohorts that are enrolled in higher education. Germany and Denmark have no university tuition whatever, but there’s only 10 percent access in Germany and 12 percent in Denmark. They are extremely elitist.

In the light of Canada’s outstanding economic success, what are the interventions that could be made to close the prosperity gap in comparison to the United States?

Martin claims that what we are seeing is the triumph of superstition over data. Canadians need to invest more in research and development, and to do this we need to reduce corporate taxes. We should collect taxes on the basis of income, after the corporations' money has been distributed. The countries that do this first will be big winners because this will give them an edge in global competition. Ireland did so a while back. It had been a poor country, with an income level only half as high as Canada’s, but when they cut , their economy took off and they are doing very well now.

So his recommendations for improving Canada’s prosperity are basically only two: reduce corporate taxes (raising income taxes instead), and invest more on higher education.

I can go for those policies, but I suggested them to a friend on the phone tonight and heard some interesting doubts from her. She basically dislikes the idea of increasing prosperity at all, since everything we do to raise income levels involves using up raw materials and energy. We should be satisfied with sufficiency instead of always looking for more.

The conserver attitude is an interesting philosophy, but I prefer to look for more efficient, ways of making a prosperous economy. The “knowledge industry” and the arts, for example, are not wasteful. She believes that there is always a “material through-put” of resources and energy in all money-making enterprises. Well, there’s some truth to that; human beings all have to breathe, eat, and drink water, so as long as we’re here, there will be a “through-put of materials.” But there’s no necessary connection between the amount of material waste in a product and its cost – its contribution to the overall wealth of the country. A good painting uses no more paint than a bad one. A fashionable $5,000 dress uses no more fabric than a $50 dress. A Prius and an SUV require the same amount of material to manufacture, but there’s a huge difference in their effects on the environment. We can have wealth and spend it on culture and sports without wrecking the planet. It’s not necessary to decide to become poorer. That’s my opinion, at least.


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