Productivity and taxes
by Fred McMahon
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25/04/1999
The Moncton Times and Transcript, The Halifax Daily News
That demon word “productivity” is back again. Just a few days ago, the media uncovered an internal federal document that lambasted Canada’s failing productivity performance, and suggested worse to come.
“Not only are we trailing the U.S. and other major trading partners, but the gap is widening,” says the report, Sustaining Growth, Human Development and Social Cohesion in a Global World.
This appears to be pretty much what everyone is saying about Canada these days. Through the 1990s, Canadians’ became poorer while the rest of the world advanced. Our standard of living has plummeted to ninth place, from third, among the industrially advanced nations.
You may think of Mississippi as a desperately poor U.S. state, and it is. On almost all measures of prosperity and economic success, it ranks at the bottom or very near the bottom of all U.S. states.
Canadians’ after tax income is lower than Mississippians. Of course, we have superior schools and health care, among many other things, but if Mississippi continues to get richer, and Canada poorer, that too may change. Rich Mississippians will find it easier to fund these services than poor Canadians.
So, does it get frightening to think where we’ll be after the first decade of the new millennium? Yes. A recent report from the Organization for Economic Co-operation and Development (OECD) predicted Canada was set to fall even further behind. Canada, the OECD said, has the worst record among the seven leading industrial nations.
That’s optimistic next to what Sherry Cooper had to say in a recent study. The Nesbitt Burns chief economist says Canada is the only nation in the industrialized world with falling productivity this decade. But that’s just topping off a miserable quarter century. Canada, she says, has weakest national productivity record over that whole period.
With all this, it was quite a shock a couple weeks ago when a Statistics Canada report announced to the world – in contradiction to other StatsCan reports – something dramatically different. Not only was Canada keeping pace with other nations, we were leaving them in our dust, particularly the United States.
Unbeknownst to everyone else, we had outpaced U.S. productivity growth over the last 25 years, and had double the United States’ rate of growth in 1997.
The federal government quickly muckeled on to that. Liberal polling had already shown that the government’s attempt to create a “productivity agenda” was a political landmine.
And, to politicians, politics is more important than productivity which, after all, only determines our standard of living. Politics decides who gets to be called “Prime Minister” or “Minister,” with a chauffeur and a nifty travel plan.
The polling had revealed that many Canadians interpreted increased productivity as just another way of saying “work harder” or “job loss.”
Nothing could be further from the truth. The greatest increase in productivity in world history happened in the golden three decades after the second world war. Never was job growth stronger or unemployment lower.
All too often in Canada – and with a pathological persistence in Atlantic Canada – we try to protect jobs that no longer do anyone any good. This cuts growth and, in the end, it destroys rather than saves jobs. The unproductive jobs slowly disappear anyway, but at great cost on the way out. These costs and distortions hamper the economy’s ability to create jobs in new, more productive activities.
Economic growth and job creation are generated by dynamic economies, not ones roped by fear to the past. While Cape Breton struggled to protect its old coal and steel industries, its unemployment rate soared. Yet, the steel industry has virtually disappeared from Pittsburgh – once known as steel town – and yet Pittsburgh once again thrives as on new, more productive economic activities.
Productivity means we produce more with less effort. That’s why we are vastly richer – usually working fewer hours – than our parents or grandparents. That’s not quite true if you’re young. Your parents may be richer. Young people have been trapped by Canada’s falling productivity, and thus our falling standard of living.
What about the rogue StatsCan report? Productivity is notoriously difficult to measure directly. Differing methods produce differing results. Sometimes productivity is best measured indirectly. Canada’s falling standard of living – while other nations advance – speaks volumes about what is happening to productivity in Canada.
I won’t try to get into the solutions to our productivity problems. That’s complicated though most economists call for tax cuts, a more flexible labour market, and freer inter-provincial trade.
The important thing is that we not let the productivity debate move off the front-burner, otherwise we do a great disservice not only to ourselves but to the next generation – the generation that will inherent any productivity problems we create while being called upon to support us in our old age.