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.”Â 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.Â 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.Â 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,Â is here:
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.Â Here are the adjustments that are made to GDP to get to real national income:
- add in terms of trade gains
- add in net foreign investment income
- 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.Â But who is “you”?Â An oil company gets the full value of higher oil prices.Â And a retail importer gets the full savings of lower import prices.Â Do individuals get any of that gain?Â Only if the export revenues show up in their personal incomes, and the lower import prices show up in their personal consumer prices.Â We know the latter has not happened very much (except for the cross-border shoppers).Â 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.Â Since 1997, Canada has been a net foreign investor abroad (reversing our traditional dependence on foreign capital).Â 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.Â (The trend has reversed a bit in the last 2 years with all the resource takeovers.)Â Now the flow of net foreign investment income is set to reverse itself, too.Â We still have a small deficit on this count (presumably because foreign-owned projects here are more profitable than Canadian-owned projects abroad???).Â But it’s way smaller than in past years.Â And the reversal on this score is a major reason why Canada’s NI is growing much faster than its GDP.Â But again we must ask, who benefits from this?Â Corporations with foreign subsidiaries, and the investors who own those companies.Â Again, it’s not the whole “nation” we are talking aboutÂ here.
The depreciation adjustment doesn’t make nearly as much differenceÂ to the NI-GDP comparison.Â 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).Â On the productivity front, we have been absolute laggards.Â 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.Â (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.Â 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.Â (The first of these is by far the most important.)Â 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?Â This is the third recent piece which I found to be less than neutral, and highly rose-coloured,Â in its overall tone.Â 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 anyoneÂ — the same line as is trumpeted by the anti-union auto analysts.Â 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.Â Now this one.Â I doubt it’s a question of intended bias from those folks at StatsCan.Â 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 Itâ€™s Cracked Up To BeÂ
by Jim StanfordÂ
Â Â Â Â Â Â Â Â Â Â Â Let the good times roll.Â That was the gist of a startling Statistics Canada report that hit the front pages last week.Â For the first time in decades, â€œreal national incomeâ€ is growing faster in
Â Â Â Â Â Â Â Â Â Â Â Statistics Canadaâ€™s conclusion was as cheerful as it was blunt: â€œIn three years, real income levels have returned to the levels of the mid-1980s.Â Much of this has been due to the much maligned resource economy.â€
Â Â Â Â Â Â Â Â Â Â Â But can three years of runaway commodity prices really reverse an entire countryâ€™s economic destiny?Â If this sounds too good to be true, maybe it is.Â Much as I hate to interrupt a good outbreak of national chest-thumping, this rosy conclusion needs some serious second thought.
Â Â Â Â Â Â Â Â Â Â Â Letâ€™s start with some definitions.Â Most economists focus on gross domestic product (GDP).Â Thatâ€™s the value of what we actually produce each year.Â On this score, Canada has nothing to boast about.Â
Â Â Â Â Â Â Â Â Â Â Â So how did Statistics Canada construct such a different, happier ranking?Â They focused on an alternative, unconventional measure of prosperity, called â€œreal national income.â€Â This requires two key adjustments to the GDP numbers.Â First, it incorporates the rise in Canadaâ€™s international terms of trade: the value of our exports, compared to what we pay for imports.Â Since prices for our oil and minerals have soared in recent years (thanks to
Â Â Â Â Â Â Â Â Â Â Â But while this looks good for the â€œnation,â€ whether it benefits individuals or not depends entirely on whether lower import prices are passed through to consumers.Â As the 4 million Canadians who went shopping in America last month can readily attest, this has not occurred.
Â Â Â Â Â Â Â Â Â Â Â Secondly, Statistics Canada folded in profits which Canadian-based companies and financiers have pocketed on investments in other countries.Â Thereâ€™s been a $30 billion turnaround in this net investment income flow since 2001, mostly thanks to booming foreign investments by Canadian-based companies.Â This outflow of investment actually undermines our economy here at home.Â But it generates a positive entry on the national income scorecard.
Â Â Â Â Â Â Â Â Â Â Â So if you own an oil company, or have big investments in a foreign subsidiary, youâ€™re doing much better than the GDP numbers make it seem.Â But if you work for a living, you still must earn your prosperity the old-fashioned way â€“ by producing it.Â In other words, Canadaâ€™s true prosperity depends on what we make, how efficiently we make it, and what we get paid for it.
Â Â Â Â Â Â Â Â Â Â Â Sadly, Canadaâ€™s productivity performance during the resource boom has been abysmal.Â High-productivity industries like automotive manufacturing are shrinking rapidly, battered by the loonie.Â Meanwhile, the efficiency of resource extraction itself is deteriorating, as companies are enticed by inflated prices to exploit lower-quality deposits.Â Statistics
Â Â Â Â Â Â Â Â Â Â Â Meanwhile, real incomes for working Canadians are barely inching along.Â 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 â€“ one-third as much as real national income per capita.Â It seems, then, that your share of this amazing resource boom depends totally on which side of the national tracks you inhabit.