We May Look Rich, But We Aren’t Rich

Statistics Canada released an interesting but utterly misleading technical paper last week on Canada’s supposed “Reversal of Fortune.”  They examined Canada-U.S. comparisons in national income (a concept that is subtly but importantly different from GDP, as I’ll explain in a minute), and decided that Canada has become the star economic performer of the continent.  Since 2002, our real national per capita income has grown by 15.6 percent — almost twice as fast as the Americans.

This sunny report made the front pages of several newspapers, and seemed to feed into the recent sense of economic invincibility that has infused recent comments from policy-makers in Ottawa.  Combined with low unemployment rates and record government surpluses, it seems to suggest that the country has indeed entered a new, prosperous era.

The full study, by Ryan McDonald, is here:

http://www.statcan.ca/english/research/11F0027MIE/11F0027MIE2007048.htm

A summary was in the Daily.

It is worth reading the study, just to learn more about some of those alternative measures of national output and how they are calculated.  Here are the adjustments that are made to GDP to get to real national income:

  1. add in terms of trade gains
  2. add in net foreign investment income
  3. adjust for depreciation (I think you deduct it, but the paper is not clear on this one)

Let’s think about what those adjustments actually mean, from the perspective of an actual human being (as opposed to a national accounts sheet).

Terms of trade: the exports you sell are worth more compared to the imports you buy.  But who is “you”?  An oil company gets the full value of higher oil prices.  And a retail importer gets the full savings of lower import prices.  Do individuals get any of that gain?  Only if the export revenues show up in their personal incomes, and the lower import prices show up in their personal consumer prices.  We know the latter has not happened very much (except for the cross-border shoppers).  The former doesn’t happen directly either — though there is definitely some (partial) trickle-down from huge resource rents into the rest of the economy (through various channels).

Net foreign investment income: there’s been a stunning change in this component of NI in the last few years.  Since 1997, Canada has been a net foreign investor abroad (reversing our traditional dependence on foreign capital).  Personally, I don’t really see this as a good thing in the first place: it’s evidence that Canadian companies are fleeing for more profitable jurisdictions faster than foreign companies are coming in.  (The trend has reversed a bit in the last 2 years with all the resource takeovers.)  Now the flow of net foreign investment income is set to reverse itself, too.  We still have a small deficit on this count (presumably because foreign-owned projects here are more profitable than Canadian-owned projects abroad???).  But it’s way smaller than in past years.  And the reversal on this score is a major reason why Canada’s NI is growing much faster than its GDP.  But again we must ask, who benefits from this?  Corporations with foreign subsidiaries, and the investors who own those companies.  Again, it’s not the whole “nation” we are talking about here.

The depreciation adjustment doesn’t make nearly as much difference to the NI-GDP comparison.  It is worth keeping in mind that as Canada becomes more capital intensive, the relative size of depreciation expenses (which are included in GDP) gets larger, offsetting a portion (but certainly not all or most) of the gains that are produced by more capital accumulation.

On the GDP front, Canada’s performance has been ho-hum (and worse than the much-maligned Americans).  On the productivity front, we have been absolute laggards.  And on the real personal income front (especially labour income), these are not nearly the boom times that the StatsCan report and other analyses might suggest.  (It is certainly the case, however, that personal incomes are growing, and real labour compensation is up for the first time in a long while.  We shouldn’t ignore that.)

I think the StatsCan report has accidentally touched on a couple of the factors why business profitability has expanded so stunningly in Canada in recent years: export-driven resource rents, and profits on foreign investments abroad.  (The first of these is by far the most important.)  But to conclude that this means the whole “nation” is now in economic la-la land, is way too much of a stretch.

PS: Has anyone else detected a bit of a cheerleading tone in some of StatsCan’s recent analytical work?  This is the third recent piece which I found to be less than neutral, and highly rose-coloured, in its overall tone.  The study they released on changes in the auto industry last year was utterly off-base in expressing its view that the industry as a whole has nothing to worry about (it’s just the Big Three that’s in trouble), and that the Japanese are just as committed to Canadian content as anyone — the same line as is trumpeted by the anti-union auto analysts.  And the study they did a few months back writing off all concerns about Dutch Disease (arguing that manufacturing’s problems were entirely due to China, and had nothing to do with our own resrouce boom) was similarly one-sided.  Now this one.  I doubt it’s a question of intended bias from those folks at StatsCan.  More likely it just reflects a failure of some of their own economists to look far enough beyond the superficiality and sound bites of the daily headlines.

I wrote in more detail on this in my recent Globe and Mail column; see below for the full thing.

Resource Boom Not All It’s Cracked Up To Be 

by Jim Stanford 

            Let the good times roll.  That was the gist of a startling Statistics Canada report that hit the front pages last week.  For the first time in decades, “real national income” is growing faster in Canada than in the U.S. – up by 15.6 percent since 2002, versus 8.6 percent in America.  Thanks to record global commodity prices, the soaring loonie, and the Western oil boom, we’re no longer the continent’s poor cousin.

            Statistics Canada’s conclusion was as cheerful as it was blunt: “In three years, real income levels have returned to the levels of the mid-1980s.  Much of this has been due to the much maligned resource economy.”

            But can three years of runaway commodity prices really reverse an entire country’s economic destiny?  If this sounds too good to be true, maybe it is.  Much as I hate to interrupt a good outbreak of national chest-thumping, this rosy conclusion needs some serious second thought.

            Let’s start with some definitions.  Most economists focus on gross domestic product (GDP).  That’s the value of what we actually produce each year.  On this score, Canada has nothing to boast about.  Canada’s GDP per person, adjusted for inflation, is up 6.9 percent since 2002, versus 8.4 percent in the U.S. (still faster, despite their numerous problems).

            So how did Statistics Canada construct such a different, happier ranking?  They focused on an alternative, unconventional measure of prosperity, called “real national income.”  This requires two key adjustments to the GDP numbers.  First, it incorporates the rise in Canada’s international terms of trade: the value of our exports, compared to what we pay for imports.  Since prices for our oil and minerals have soared in recent years (thanks to China, OPEC, and the Middle East), our terms of trade have improved.
            But while this looks good for the “nation,” whether it benefits individuals or not depends entirely on whether lower import prices are passed through to consumers.  As the 4 million Canadians who went shopping in America last month can readily attest, this has not occurred.

            Secondly, Statistics Canada folded in profits which Canadian-based companies and financiers have pocketed on investments in other countries.  There’s been a $30 billion turnaround in this net investment income flow since 2001, mostly thanks to booming foreign investments by Canadian-based companies.  This outflow of investment actually undermines our economy here at home.  But it generates a positive entry on the national income scorecard.

            So if you own an oil company, or have big investments in a foreign subsidiary, you’re doing much better than the GDP numbers make it seem.  But if you work for a living, you still must earn your prosperity the old-fashioned way – by producing it.  In other words, Canada’s true prosperity depends on what we make, how efficiently we make it, and what we get paid for it.

            Sadly, Canada’s productivity performance during the resource boom has been abysmal.  High-productivity industries like automotive manufacturing are shrinking rapidly, battered by the loonie.  Meanwhile, the efficiency of resource extraction itself is deteriorating, as companies are enticed by inflated prices to exploit lower-quality deposits.  Statistics Canada has confirmed that relative to the U.S., Canada’s productivity performance is plunging.  Our economic star can’t possibly rise for long, with our productivity heading quickly the other way.

            Meanwhile, real incomes for working Canadians are barely inching along.  Adjusted for consumer prices (the ones we actually pay, not the mythical terms-of-trade), compensation per employed worker is up 5.8 percent since 2002 – one-third as much as real national income per capita.  It seems, then, that your share of this amazing resource boom depends totally on which side of the national tracks you inhabit.

           In the real economic race, using a one-time resource windfall to boost performance is akin to using steroids to win a 100-meter dash.  We might look good, for a while.  But in the long run, our national wealth depends on our real economic muscle, not on the fluctuating price of whatever is buried in the dirt beneath our feet.  And by this measure, we are still very much in the slow lane.

3 comments

  • Yes, of course, depreciation is deducted from the income measure in Ryan MacDonald’s estimates. It is because depreciation allowances are part of GDP that it is “gross national product”; otherwise it would be “net national product”.

    I really don’t think it is fair to accuse Ryan Macdonald (not McDonald) of boosterism because of his articles. This blog makes no mention of the fact that System of National Accounts 1993, the procedures manual produced for national accounting agencies by the EEC, IMF, OECD, UN and the World Bank, recommended expanded definitions of national income in volume terms should be calculated.

    The most important of these, the adjustment for gains from terms of trade, was recommended by the distinguished Irish economic statistician Roy Geary half a century ago in 1957, along with his Australian colleague R.W. Burge. Many countries regularly publish estimates of the GDP adjusted for gains in terms of trade, including the United States, France or Britain.

    Statistics Canada never officially endorsed the SNA93 recommendations with regard to expanded income measures and has never produced regular estimates of any of these series, not even of GDP adjusted for trading gains.

    Without endorsing every aspect of his methodology, I believe that Ryan should be commended for keeping these measures alive. Hopefully his monographs will lead Statistics Canada at some time to start producing such real income measures on a regular rather than an occasional basis.

    The one adjustment that Ryan did not make that was recommended by SNA93 is the adjustment for net transfer payments, including immigrants’ remittances to their relatives abroad. This is for sure not as important an item for Canada as gains from terms of trade, but the flows involved are still substantial, and make a difference to our incomes measured in volume terms.

    The blog’s “Cui bono?” remarks missed the point of Ryan’s paper. It wasn’t written to discuss distributional issues, who benefits from growth, and so forth. It’s not that this is an unimportant topic, it’s just that it’s a different topic. The point is that it makes a huge difference whether one evaluates our economic performance based on GDP or expanded income measures and we shouldn’t concentrate obsessively on the GDP measure alone.

  • Something is going on in their research shops. More or less pass the research mega phone over to the politically flavoured shop. It comes down to what shops get the money and which do not. The boys at the top realize who is on the hill and have adjusted the research shop’s budgets and handed out the pens accordingly. It is significant, and not just Jim being paranoid. Ivan had been pretty progressive over the liberal years, but like any lap dog, he has to accommodate the master. The arm’s length status is exactly what it is, attached to somebody.

    Anonymous

  • I have not read the paper in question, although I have read other Statistics Canada work along similar lines. It seems that, roughly speaking, GDP measures Canada’s aggregate output and Macdonald’s “national income” measures Canada’s aggregate purchasing power.

    I do not think that GDP is necessarily superior to national income. A limitation of both measures is that they are silent regarding distribution.

    Higher commodity prices have, in fact, generated a great deal of prosperity. Fully accounting for this prosperity may be an important precondition for debating how to (re)distribute it.

    That said, it would be nice if Statistics Canada would address the distributional question more explicitly. While I have immense respect for its good work, I tend to agree with Jim that an element of boosterism sometimes influences the presentation.

Leave a Reply

Your email address will not be published.