The Sour Smell of Success
The Bank of Canada’s Mark Carney released an update on the Canadian economy yesterday that told us third-quarter growth has been disappointingly less than expected and that the next four quarters will also fall behind expectations. He then informed Canadians that we’ll eventually get out of this economic quagmire.
Carney was only doing his job of warning Canadians and trying to keep them believing at the same time. It’s a high stakes, high-wire performance, meant to instill confidence and propel cautious actions.
Hidden in Carney’s report are two key issues of concern that speak to difficult days ahead. The first is our national productivity. A sound economy is one innovative enough to create a rising standard of living and has enough tax revenue to support the public services citizens require. But in both these areas Canada has fallen behind.
The largest deficit in our history was primarily created by a federal stimulus program that invested in 18-month short-to-medium term projects that kept people hired a little bit longer in order to build roads, stadiums, or renovate buildings. Stimulus was meant to provide an immediate shot in the arm. But without innovation it remained a dubious exercise that only created significant medium-term debt. It is likely that over the next decade we will be unable to build long-term growth. The best way out of the present economic mess would have been to generate good jobs by investing in new activities that were destined to create the jobs of tomorrow. The federal government bypassed that option, choosing instead to invest in a band-aid outlay of funds that would hopefully tide us over until the recession was over. Well, it largely has run its course, but our lack of prudent investment and innovative planning has meant the economy isn’t what it used to be. Given the government’s ideology, it’s likely that deep cuts to the public sector will be their way of dealing with the bleeding – just another way of avoiding the deeper investments in the newer economy that is required. You can’t have a solid recovery without people abiding in meaningful employment.
Carney’s second worry was household debt, and for many of us, this is where we fit into the larger story. This lower rate of productivity that has descended on Canada means that every Canadian will be worse off by some $30,000 and our overall economy will be $1 trillion smaller than just a few years earlier. That means we won’t be able to lift our incomes easily. Carney reported that lowering borrowing costs resulted in Canadians purchasing more in ways that only added to their debt.
You can see the effects everywhere. It seems to take forever for university and college graduates to acquire employment. Those losing their jobs find little opportunity for transitioning to new opportunities. A recent poll found that 6 out of 10 Canadians said they would be in financial trouble if their pay was one week late. This is how thin we have stretched ourselves. Our paycheque-to-paycheque lifestyle has now made us, and our children, economically vulnerable. The easy access to credit has placed our modest gains in danger.
So there’s the picture. Our private debt is now the highest in the world, and our public deficits are the highest in our history as a nation. If our answer to that is to just go out to eat a little less, or for the government to spend massive amounts of cash on short-term projects, then we won’t have learned our lesson. We are going to struggle in this country until we get this right.
Carney observed that responsibility for recovery “starts with the individual; it starts with the household, it extends to the lender, and then ultimately goes to policy makers.” In so many ways, it’s exactly the opposite. Unless we as policy makers make prudent decisions, creating the framework that eases the long-term burden on Canadian families, little else will matter. Our recent successes were built on heavy borrowing and we’re now paying an onerous price. It’s time to cast aside the temporary stimulus mindset and get on with building the prosperous and green economy of tomorrow. Canadians have to start living smaller; their federal government has to start living smarter.