The message nobody hears

National Post

January 29th, 2005
By Terence Corcoran

The Liberal caucus spent the week in Fredericton grinding through the chaff of the Canadian political scene—same-sex marriage, foreign aid, military issues. Not much attention, it appears, was paid to the machinery that gets wheat through the system and bread on the table. If the politicians gave any thought to the state of the economy, where the money is generated to prop up their Robin Hood careers, nothing made it into the media reports. Tax cuts? The role of government in stifling productivity? Out-of-control spending plans? No news.

The caucus and the country would have been much better served if the politicians had been forced into a lockup with Roger Martin, dean of the Rotman School of Business and chair of the Institute for Competitiveness and Prosperity. Instead, the dean was off in Davos, Switzerland, where yesterday he presented the institute’s latest summary of the mess the politicians back in Fredericton have been making of the economy over the last 20 years.

Exactly why this report of stagnating national prosperity was delivered to the celebrity blowfish in a Swiss ski resort town is a bit of a mystery, especially since nobody back in Canada is paying the slightest attention to the forces behind the country’s poor economic performance.

The prosperity gap, as Mr. Martin calls it, grew during the fiscal disaster created by the massive explosion of government activity during the last half of the 20th century. Measured in GDP per capita, Canada began to trail the United States in 1981. Then, Canadians and Americans shared a similar economic profile, worth $30,000 per person. Within a decade the Americans had jumped ahead by almost $8,000. The gap is currently around $7,200. “If Canadians were able to overcome this prosperity gap, the average Canadian household annual after-tax disposable income would rise by $15,000,” said the institute’s report.

Well, forget it. Nothing is happening in Ottawa that will even begin to close the prosperity gap and help put more after-tax cash in the hands of Canadians. The minority Liberal caucus cares not a bit about Ottawa’s role as the producer of growth-killing programs. The Tories claim to have answers, but we won’t know what until their March policy convention. The provinces, led by the worst government in the country, Dalton McGuinty’s Ontario Liberals, are mostly holding on to the status quo. Cities think they have found a new spending bonanza in federal transfers.

The size and scale of government across Canada is on the rise, propelled by new spending and rising taxes. That’s the reality that makes Mr. Martin’s modest pleas for better policy sound like distant cries from a Swiss mountaintop. Mr. Martin and his prosperity team aren’t radicals who want to roll back the state. It would, in my view, be better if they were. All they want is some little bit of action on the worst elements of the tax system and on some of the most destructive policies and programs.

The Martin report pokes and prods at a range of areas in which Canada doesn’t quite measure up. Canadian business, for example, tends to invest less in machinery, equipment and software. The weak Canadian dollar is likely a factor.

The educational achievement of Canadians appears surprisingly underwhelming, considering the billions dedicated to that area. Among managers, 50% of Americans have at least a bachelor’s degree compared with 30% in Canada. People with degrees earn more in the U.S. than in Canada.

Governments in recent years have been shifting spending from capital investment to current consumption, with health care leading the trend. Unbeknownst to the Robin Hoods in Ottawa and the provinces, new wealth and prosperity is created through investment in productive stuff, not by redistributing wealth from one group of Canadians to another.

Urbanization, for unclear reasons, has been lower in Canada, depriving Canadians of the dynamic benefits of denser forms of economic interaction. The cost of lagging urbanization is estimated at $3,000—the largest negative contributor to Canada’s productivity gap. The proposal is that governments in Canada stop creating policies that prevent and discourage people from moving to cities, a policy shift that is not imminent.

The biggest productivity motivator of all, of course, is money. If people think that most of what they earn is going to be consumed by government and shuffled around the country for who knows what ends, then the incentive to earn money diminishes. The Martin report revisits the high marginal tax rates that plague provinces such as Ontario, where just about everybody who earns more than $30,000 is in a 50% marginal tax bracket. And that’s before the McGuinty Liberals get through their tax plans and other programs and policies that will hamper progress in the province.

The institute’s paper also reviews some of the lengthy list of perverse programs and disincentives that hamper competition and market forces. Subsidies here, trade and market protections there—it all conspires to undermine Canada’s ability to be as productive and prosperous as it could be.

But so what? While you can read more about the prosperity gap at http://www.competeprosper.ca, you won’t hear about any of it in the reports from Fredericton or any other political gathering place.