How Canada measures up

Despite big setbacks, our middle class is still pulling ahead

Middleclass, Canadians

Susan Walsh/AP

When not teaching law at Harvard University or overseeing the U.S. Treasury Department’s massive bank bailout program on behalf of Congress, Elizabeth Warren has found another calling of late: middle-class folk hero. Warren, a tough-talking, no-nonsense Oklahoman whose parents lived through the Dirty Thirties, has repeatedly blasted fat-cat bankers, credit card companies and politicians for grinding down workers. “Dang gummit, somebody has got to stand up on behalf of middle-class families,” she twanged to the New York Times last month. And with America’s unemployment rate stuck at 10 per cent and debt levels still near record highs, she’s found an eager audience. After she took comedian Jon Stewart through her down-home analysis of the financial crisis on The Daily Show recently, Stewart admitted, “When you say it like that, and when you look at me like that, I know your husband’s backstage, I still wanna make out with you.”

But while Warren is winning fans among the millions of Americans who have lost their jobs and their homes during the financial crisis, her underlying message—that ordinary workers are falling behind—appears to resonate far beyond America’s borders. Thirteen years after then British prime minister Tony Blair vowed to create a “classless society,” his Labour Party successor Gordon Brown is desperately trying to reinforce his “ordinary middle-class” roots ahead of the country’s general election. Before the global recession hit, many developed nations were already fretting about their dwindling centre grounds. Reports of Germany’s shrinking middle class have become common, as has talk of rising inequality in countries like Australia. Even in South Korea, which until relatively recently was still considered a developing nation, headlines warn of the collapse of the middle class.

For Canadians who’ve seen the middle-class debate take on an urgent edge during the recession, one thing should become abundantly clear—we’re far from alone. Across the developed world, countries are grappling with a similar problem. After experiencing tremendous growth in incomes during the ’50s, ’60s and ’70s, there’s a growing sense that prosperity has stalled. Yet, looking at the international scene, an obvious question emerges. How exactly does Canada’s middle class stack up to the rest of the world? Turns out, much better than you might think. “The situation in Canada is actually much improved from where it was,” says Mike Veall, a professor of economics at McMaster University. Yes, the recession has set everyone back, but middle-class workers have made great strides since the mid-’90s.

Any sort of cross-border comparison is fraught with trouble, economists warn. How do you define each country’s middle class? And even if you do that, how do you account for the differences in currencies and prices between one country and the next? Needless to say, it’s impossible to reach a definitive conclusion. But in looking at recent data and surveys from various countries, Canada’s middle-income earners appear to be pulling ahead.

One obvious place to start is with how much we take home in pay. As recently as the mid-2000s, median income earners in the U.S. were still ahead of Canada, according to the Organisation for Economic Co-operation and Development. After adjusting for purchasing power parity and converting to U.S. dollars, middle-class Canadians earned roughly US$25,340, compared to US$26,990 in the U.S. While Luxembourg, the Netherlands, Switzerland and Norway were ahead of us, the median income for Canadians was still higher than it was for individuals in Great Britain, Australia and Germany. Since then, though, there are signs Canada is pushing past the U.S. According to CIBC World Markets, between 2005 and 2009 personal disposable income in Canada has been growing twice as fast as in America.

Another standard measure when comparing the wealth of nations, and by extension their inhabitants, is GDP per capita. By that yardstick, which values each individual’s share of the economy, America remains the dominant nation by far. Last year, GDP per capita in the U.S. was US$45,597, compared to US$39,088 here. Yet GDP per capita has also faced mounting criticism for failing to truly capture individual prosperity. One alternative is the Legatum Prosperity Index, produced by the Legatum Institute, a British non-partisan group based in London.

The index captures a wide range of criteria, from a country’s economic fundamentals and innovation to health, safety and governance. By that broader gauge, Canadians are doing remarkably well. The country placed seventh, slightly behind Australia. The U.S., meanwhile, came in ninth. But on the economy, Canada placed sixth, while America was a dismal 14th.

In the short term, Canadians are likely to pull further ahead, if overall economic growth is any indication. Last week, the OECD predicted Canada would rebound faster than all other G7 nations. In the first quarter, it estimated Canada’s economy grew 6.2 per cent, compared to 1.9 per cent for the G7 overall.

Economists say Canada’s middle class should also benefit from the country’s relatively sound balance sheet. Canada faces a $50-billion shortfall this year, but that’s still considered small compared to other developed nations. As governments tackle their deficits, many are being forced to hike taxes, putting a tighter squeeze on the middle class. There has been some evidence of that here, too, of course. Both the Quebec and Nova Scotia governments are jacking up their sales taxes—Quebec by one per cent, Nova Scotia by two—in a bid to slay deficits. “At the federal level, the idea that we could be plausibly back to budget within five years puts us way ahead of everybody else,” says Veall. “The provinces are a different story. So you’ll probably see a higher tax level on the middle class for a while, but that’s probably better than the alternative of hoping and praying it will go away.”

The simple fact is, the scale of the problem in countries like the U.K. and the U.S. is far greater than here. Last month, the Bank for International Settlements in Switzerland warned Britain must take “drastic” steps to rein in its finances. The BIS predicted interest payments on the country’s debt will explode over the next three decades and amount to more than a quarter of the economy. In the U.S., interest payments could reach more than 22 per cent of GDP. As U.S. Federal Reserve chairman Ben Bernanke warned last week, “To avoid large and ultimately unsustainable budget deficits, the nation will ultimately have to choose among higher taxes, modifications to entitlement programs such as Social Security and Medicare, less spending on everything else from education to defence, or some combination of the above.” Either way, America’s middle class faces a tough slog.

Not that Canada’s middle class should grow complacent. On two very important fronts, Canadians are falling behind. Up until the 1990s Canada was a nation of savers, with individuals putting away 16 per cent of their take-home pay. Today that figure stands at just 4.6 per cent, far behind the 16.5 per cent in the European Union. Even the spendthrift British save more. True, Canadians are putting away more than Americans, whose savings rate has fallen to three per cent, but it’s a dismal showing that threatens many peoples’ retirement plans. “Let’s not kid ourselves,” said David Dodge, the former Bank of Canada governor, during the federal Liberal party’s conference in Montreal last month. “Middle- and upper-income Canadians now in their prime earning years are going to have to save more and expect to retire later in life than they hoped to do.”

Along with not saving enough, Canadians are borrowing far too much. The typical Canadian household now carries a staggering amount of debt. For every dollar of disposable income they earn, Canadians now owe more than $1.41 in debt, accord to the OECD. And that means we’re even more indebted than Americans, who owe roughly $1.32 for every dollar of disposable income. If it’s any consolation, both the British and Australians are deeper in hock.

The biggest culprit for our mushrooming debt loads is our love affair with real estate. In its most recent annual economic outlook, the OECD found Canadian house prices to be among the highest in the developed world, at least when compared to rental rates. Canada’s price-to-rent ratio hit 174.5 in 2008, with the base level of 100 being the long-term normal. After a small dip in prices last year, home values have soared well past where they were at that time. By comparison, the price to rent ratio in the U.S. was 118.9 per cent, while in Germany it was just 71.4 per cent. As long as house prices remain so high, homebuyers will have no choice but to pile on more debt.

Still, despite those problems, economists insist Canada’s middle class is in far better shape than it was a decade ago. But if that’s the case, why does it feel like so many are falling behind? Part of it could be that Canadians have been fixated on the erosion of the middle class for so long. It’s become entrenched in the national psyche, says David Detomasi, a professor of economics at Queen’s University. At the same time there are inherent flaws in looking back at rapid income growth in the ’60s and concluding that we’re worse off today. “When you’re competing with a memory, you’ll always lose,” he says. “What memories don’t show you is that an income now buys a lot more than it used to, thanks to falling prices.”

Ironically, no matter how much better off the middle class in Canada has it compared to other developed countries, the fact is the greatest risk to our prosperity comes from abroad. “The biggest problems Canada faces are external threats, and the biggest one is the state of the U.S. economy, because it’s not clear how they’re going to solve their fiscal problem,” says Veall. “What happens in the U.S. is going to hit us even if governments here take the right steps.” And that could leave Canada’s middle class in rough shape all over again.

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