A current topic that seems to have come to the forefront of late is the fact that Canada is lagging in productivity relative to the United States and other major economies. This trend may even be getting worse lately and suddenly appears to be a problem dogging the media. I find this very curious if not entertaining since I have been concerned about this issue for decades. In fact, I remember discussing Canada’s lagging productivity growth with my political economy professor and former Liberal cabinet minister Eric Kierans in 1976.
Before diving into this topic, one needs to understand what productivity is in relation to economics. Productivity can be an emotionally charged term. Pointing out that one person is more “productive” than another can be very subjective, implying the less productive person is slower, lazier, and less effective than his or her colleague. This is not what is meant by economic productivity, which is simply economic output per man hour or GDP per hour worked. In 2022, Canadian productivity was C$61.10 per hour worked, or about US$47.00. The United States enjoys a productivity advantage of about 30 percent, just over US$61.00. Furthermore, Americans work from 5 percent to 10 percent more hours than Canadians, further widening this gap.This was not always the case. In 1980, the U.S.–Canada productivity gap was between 5 percent and less than 10 percent. Ontario, where I have lived since 1979, was effectively equal to or slightly about the American mean. I remember attending the University of Toronto MBA program at the time. We believed that although Canada was slightly behind the United States, it was probably worth living here since we had much lower crime, cheaper quality universities, and a free medical system with low waiting times.
However, our professors and some of my close colleagues fretted that given the maladaptive economic policies gaining favour in Canada, we would lag behind. In retrospect, we were more prescient than we could have imagined back then. To be honest, I never thought my home province of Quebec’s GDP per capita would ever be statistically tied with Mississippi, America’s poorest state by a significant margin.
Curiously, many politicians either ignore this situation or join many in the mainstream media, insisting that the growing gap between Canada, the United States, and other developed nations is due to the fact we spend less in capital investment per worker than other countries. Canadian entrepreneurs are not innovative enough, the chattering classes of the Laurentian elite insist. If only tightfisted robber barons would loosen their purse strings and invest back into Canada, things would be better. Perhaps the government should either force businesses to invest in research and development or print money and hand it out, preferably in green energy initiatives. Clearly, investors are too dimwitted to voluntarily invest in environmental initiatives if this was up to the free market. This argument is provable rubbish and insulting.
Canada has spent less on research and development as long as I can remember—at least since the 1970s—and yet we were more relatively competitive in 1980 than today. Therefore, this explanation makes no sense. Furthermore, correlation does not constitute causality, and sometimes cause and effect are confused. Canada has less capital investment because the return on capital in this country is poor relative to the United States. This could be for many reasons, but Canada has suffered from high personal and business taxes that punish success and reward failure. Canada also has a burdensome and maladaptive regulatory environment compared to more economically vibrant economies.
Government spending as a percent of GDP has grown, crowding out capital and creating malinvestment. The exact number is debatable since different methodologies are used, but it is too high for the long-term health of the economy. Gross debt to GDP was an already high (in my opinion) 45 percent in 1980 and is about 107 percent today. That figure will rise, especially if we enter a period of economic weakness and also due to soaring interest costs as the federal and provincial governments refinance their debts.
Given the economic environment created by short-sighted politicians democratically elected by voters who favoured immediate gratification over their own and their children’s future, it should be no surprise that Canadians do not invest in dynamic enterprises. After all, why risk capital in a business venture when you can, with a small down payment, buy a poorly constructed condominium that overlooks an expressway and rent it out. Rents keep going up. The cost to buy average condo in Toronto was about $400,000 10 years ago and is now about $720,000. High immigration rates, artificially low interest rates, and restrictions on new housing created this situation, and all three factors are the result of government attempting to take a shortcut to prosperity.
It took decades for Canada to find itself in this prosperity gap. It will take decades to get out of it, but it will take some hard and courageous choice by politicians and belt tightening by Canadians.
