Thursday, December 21, 2006

Economic Comparisons - Canada versus U.S.

What is seen and not seen. I had a discussion with a somewhat regular reader of this site, and a couple of statements he made piqued my attention. The first was that Canada has outperformed the U.S on many economic measures since 1997, and that the U.S had a higher level of government debt realtive to Canada.

With these two sinppets in mind, I decided to illustrate what I inherenty know, that the Canadian economy and Canadians at an individual level, are lagging their American counterparts and that gap is widening.

This chart (from the Canadian government) shows the relative productivity differences between Canada and the U.S. The paper in question examines the increasing gap in productivity and standard of living between Canadians and Americans.
The key exerpt from this report came at the conclusion of this 2002 report:

Canadian living standards will undoubtedly increase in the next decade, but their average growth rate will probably be less than that of labour productivity due to demographic factors. In all probability, the growth rates in American living standards will continue to outpace Canadian growth rates; this suggests that the widening gap in living standards between Canada and the United States may be expected to continue for some time to come."

This report focues most exclusively on labour productivity and relative standard of living. There are other economic numbers that are related to productivity and standard of living that merit further consideration.
here are also several related charts which helps explains the widening gap for the period. First is combined debt-to-GDP ratios. I use combined because Federal debt only is skewed due to the relative sizes of the Federal and state/provincial governments for the two countries. Provincial governments tax and spend more on a realative basis in comparison to U.S. states, while the Canadian Federal Government spends relativelys less than the U.S. Federal Government, thus the reason for using combined numbers. These numbers show the increase in debt for the G-7 countries, but focus on the relative debt conditions of Canada and the U.S. in both 1974 and 1994.

It should be noted that the Canadian and American debt positions were probably at their worst in 1994, and both countries have improved their fiscal conditions. However, it is safe to say that the total government debt to GDP ratio for Canada is still significantly higher than in the U.S.
The final little snippet of information would be exchange rates. The Canadaan dollar from 1976 to 2002 was on a downtrend for the entire period. The high for this period was $1CDN = $1.3890 U.S on June, 24, 1976 and the low for the period was $1 CDN = $0.6179 on January 21, 2002. Since 2002, the Canadian dollar has recovered to nearly ninety cents, primarily due to strong commodity prices and the weakening U.S. dollar (thank you very much congress for lacking fiscal discipline). However, this strengthening of the Canadian dollar has adversely impacted Canada's non-resource based export industries.
For the periods in question, I think the three statistics are interrelated: high government debt, weakening currencies and declining productivity all play a role in the increasing gap in standard of living between your typical Canadian and American. The fiscal and economic indicators can be attributed to government policy. It is not mere coincedence that Canada's fiscal condition (in terms of a strong national balance sheet and currency) was strongest right before Trudeau and his provincial counterparts ramped up the welfare state, and government interference in the economy?
The gap in standards of living can be attributed to higher taxes, more government regulation, and more rigid labour markets in Canada. The weakening of the dollar from 1976 through 2002 has masked a lot of this. A country can have strong economic performance when its currency is weakening because the growth is measured in devalued currency. A better meansurement is to adjust for currency differences with the currencies of it largest trading partners.
All things being equal, there should be no reason fundamentally for this gap, but government policy has led to Canadian's standard of living declining.


Aeneas the Younger said...

And there you have it ....

A CPC'er trumpeting how much better the US is than Canada.

Canada is different. Our population is smaller, we are richer in natural resources, and we have less access to our own sources of investment capital. Hence the role for government, which has been multi-varied, and consistent theme since the time of the Family Compact. I accept this difference as necessary, for the only alternative is deeper integration into a Common Market and Polity. Becoming Americans just so we can have more "stuff" is not attractive to me, or other more conscious Canadians.

Mark my words: the little foray into Iraq has caused a seismic shift in American economic prospects. It is happening already. Globalisation has made the US ripe for such a disaster, and when combined with the radical changes in demography that are just cresting before us, it is a bad sign.

Mitch said...

The cost of Iraq, in terms of both the US GDP and government expenditures, is inconsequential. If Congress and the White House was interested in fiscal restraint rather than featherbedding, the Federal government would be in surplus.

The greatest economic issue down the highway is the Chinese banking system, which is a house of cards. The current trade relationship is that the U.S gets cheap Chinese manufactured goods, and the Chinese get paper in the form of U.S. Currency/Treasury Notes. This is being fostered by a manipulated currency, and a banking system that has too many under performing loans to former government entities. Think about the Japanese banking problems by a magnitude of ten.

If/when the banking system of the PRC collapses under the weight of its bad loans and crooked lending practices, it will ripple throughout the world, not just the U.S. It has been the U.S. consumer that has sustained the system for so far, but banking panics like this will reverberate throughout the world, showing once again the follies of fiat currencies and government 'management' of banking and currencies.