Why Americans are richer than us: Don Newman on Canada's productivity gap.

June 17, 2010 /CBC NEWS:

Forget this idea that Canadians are so smart and that we have breezed through the Great Recession better than our American neighbours.

And that, going forward, the wind is at our back and great things are just waiting to happen.

As we get ready to welcome the leaders of the G8 and the G20 next week, Canadians seem to be basking in a glow of economic superiority.

Part of this, no doubt, has to do with the Harper government's continued boasts about how much better we weathered the recent downturn than the U.S. and most of Europe.

But neither Stephen Harper, nor any Canadian political leader for that matter, is discussing the little acknowledged reality that Canada has been steadily falling behind the U.S. - not only our closest neighbour, but our biggest trading partner - for the past 30 years.

No one wants to talk about the data that everyone should be studying, except perhaps for the Institute for Competitiveness and Prosperity, whose recent study - "Beyond the should be required reading.

Worker prepares the security fence for the G20 meeting in Toronto in June 2010. Are we investing enough in education and high-paying jobs, the Institute for Competition and Prosperity asks. (Canadian PressA )

The right priorities

What this study shows is that while the U.S. went into recession sooner than Canada, once in, our economy dipped just as deeply.

What's more, following the first-in, first-out principle, the U.S. recovery began slightly earlier than it did here.

So not only is much of our Canadian self-congratulation misplaced when it comes to the recession, our continued back-patting obscures the main point of the institute's report, which is that Americans are still, on average, much richer than Canadians.

And except for the occasional exception, they have been getting richer by the year, which is

something we have been very good at ignoring.

The Institute for Competitiveness and Prosperity, which is attached to the Rotman School of Business at the University of Toronto, reports that, at the end of 2009, the prosperity gap between the average Canadian and the average American was $9,300 in America's favour.

What is more, the situation has been getting steadily worse. Just under 30 years ago, the gap was only $2,600.

How has this happened? Well, according to Roger Martin, the dean of the Rotman School of Business, while Canadian governments have been pouring money into health care, Americans have been spending heavily on education and the results are showing up in family income.

In the U.S., there is a greater differential in earning power than there is in Canada between people with more education and their less educated countrymen, which is one reason for the prosperity gap between our two countries.

Beyond that, alone among wealthy developed nations, it seems, Americans have continued to maintain their hard work ethic even as they have prospered.

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A real problem

As you read this report, you realize that we Canadians have come to resemble those wealthy European countries and Japan that we currently seem to be looking down on. The more prosperous we have become, the more we have eased up.

Key recommendations

Remain determined to close the prosperity gap.
Continue investing in people.
Increase business investment in communication technology.
Encourage HST harmonization.
Lower marginal tax rates for lower-income Canadians.
Expand international trade.

Source: Institute for Competitiveness and Prosperity report [http://www.competeprosper.ca/index.php/work/reports_canada]

But clearly we can't go on like this forever. As the Rotman school researchers point out, unless we can raise our productivity, we aren't going to be able to afford the social programs and society to which we have grown accustomed.

So what is the answer.

First, it seems to me, Canadians have to be convinced that there is a real problem here, which has not been an easy message to get across.

Twice since the late 1980s, the federal government has tried programs to increase Canadian productivity.

When it first started, the productivity gap between Canadians and American was about $6,000. Since then, the gap has increased by more than 50 per cent.

One last push

This time, blue ribbon participants at a conference organized by the institute suggested that a non-partisan, expert advocacy group be set up to try to convince Canadians - and the federal and provincial governments - of the policy changes necessary to put more effort into improving our productivity.

But it won't be easy. Just one example: Everyone who spoke at the conference praised the Ontario and B.C. governments for moving ahead with a Harmonized Sales Tax, folding their provincial sales tax into the federal GST.

But the move is unpopular in both provinces, wildly so in B.C. And most governments, whose political survival hangs from election to election, are rarely that brave.

Making Canada more competitive has been a priority over the years, at least for anyone who was really thought about it.

With the rise of China, India and other Asian "tigers," it is now more important than ever.

But will most Canadians recognize that importance and the sacrifices and adjustments they may have to make? Or will they continue to accept a slowly declining standard of living vis-a-vis the U.S. and many other emerging counties?

At this point, we are rather like that frog in a slowly boiling pot of water. At first the warming water is pleasant. By the time it comes to a boil, it is too late for the frog to do anything about it.

The moncitizenship is the new Canadian governmental task. The diplomatic lines of Republics of Yemen and Poland are non grata with their masks.

M.T. Al-Mansouri