Chronicle of a debt foretold
The remarkable thing is that everybody knew. No one could have been unaware of the scale of the demographic and fiscal challenges facing Canada as it entered this century: it was a simple matter of arithmetic. Any demographer could have told you that, as the Baby Boomer cohort (the last of which are still with us) passed through life, the ratio of the working-age population to retirees would shift, from its postwar peak of five to one to the present two to one...
It was predictable, and predicted -- as were the fiscal consequences. While the pension crisis was popularly thought to have been resolved by the “reforms” of the late 1990s -- namely, a massive increase in taxes, called “contributions,” to pay for the Canada Pension Plan -- in fact the plan retained an unfunded liability in excess of $500-billion, or about the same as the national debt was then. Moreover, the cost of providing health care for all those future pensioners, while not lending itself to such precise calculations, could easily have been foreseen to be of a similar order of magnitude. Could have been, and was.
So everyone knew the country faced an enormous fiscal challenge in the decades to come. And everyone knew what the answer was: to raise national productivity, year after year, that the next generation might more easily shoulder the burden of looking after the last. Again, it was a matter of arithmetic. A 1% annual increase in output per capita over 30 years produces a 35% increase in average incomes. But raise productivity growth a notch, to 1.5%, and incomes instead grow by 56%.
Yet nothing was done. The great commodity price boom of the early 21st century was in full swing, and everyone thought the good times would last forever. The nation’s political and business leaders busied themselves arguing about equalization, the fees for using automatic teller machines, or that great fad of 2007, the “hollowing out” of corporate Canada. By the time, well into the last decade, the country finally woke up, it was too late to avert the cycle of rising deficits, higher taxes, and youth flight with which we have become familiar in recent years.
What might have been done? Again, no hindsight is required. The country’s anemic productivity performance had been a concern for some time. It wasn’t only relative to the United States, the usual benchmark, that this could be measured: from 2000 to 2005 productivity growth in Canada ranked 20th out of 29 OECD nations. The sources of this malady, soon widely referred to as “the Canadian disease,” were well known, as were the remedies. Among them:
A shortage of capital. In the century’s first decade, unemployment had fallen to what were then thirty-year lows. One consequence of this increased use of labour, however, was a decline in the ratio of capital to labour. Instead of giving workers more capital to work with, the country was relying on a plentiful supply of cheap labour. The solution: increase the supply of domestic savings, notably by reducing taxes on incomes, and lower the barriers to capital inflows from abroad. Instead, the era was marked by cuts in sales taxes and hysteria over foreign takeovers.
A shortage of labour. As time wore on, what had seemed a blessing, the end of mass unemployment, came to be seen as something of a curse, as shortages of labour developed in certain industries and regions. What had previously seemed tolerable imperfections in the labour market, such as the restrictions provinces imposed on the hiring of out-of-province construction workers, now became the source of serious bottlenecks. Yet aside from the odd sectoral or bilateral agreement, little progress was made in improving labour mobility within the country -- to say nothing of the hundreds of other internal trade barriers -- while the other obvious source of labour, increased immigration, was ruled out by a surge in nativist sentiment.
Costly, uncompetitive infrastructure. We are hesitant to suggest any industry is more “critical” than another. Yet there can be little doubt the costs of inefficiencies in those industries that fall into the category of “infrastructure” -- electricity, transportation, telecommunications, and finance -- have the most acute implications for national productivity. It would seem only logical, then, that of all industries these would be the ones in which policy makers would be most anxious to ensure the free play of competitive forces.
Yet what was the status quo in Canada, circa 2007? Massive, and massively subsidized, provincial hydro-electricity monopolies. A state monopoly post office. A state monopoly railway. Roads still clogged with traffic, the “congestion pricing” revolution having yet to arrive in Canada. A ban on foreign competition on domestic air routes, leaving the market to be carved up between two or three domestic airlines. Restrictions on foreign ownership in telecommunications and finance, notwithstanding similarly uncompetitive industrial structures.
We repeat: the problems facing Canadians in 2007 were well known, as were the solutions. Yet that generation failed to act -- the same generation that now demands we, their children, should bear the consequences.
7/18/2007
