On the latest Canada-U.S. wealth comparison debate

Interesting debate over at the National Post between Andrew Coyne and Jonathan Kay over what to make of data that’s been interpreted as showing that Canadians are now on average richer than Americans.

Kay says this statistical trading of places challenges cherished assumptions of Canadian conservatives, who have long looked admiringly at the more freewheeling style of U.S. capitalism. Coyne counters that the apparent increase in Canadian household wealth relative to American averages is based, not on some advantage in Canada’s economic model, but on the recent rises in oil prices and the Canadian dollar, set against a plunge in U.S. real estate values.

As usual, Coyne makes strong points. Still, I agree with Kay to the extent that Canadian conservatives can hardly say, “Well, Canada-vs.-U.S. comparisons were instructive back when Canada was coming up short, but are deceptive now that Canada is coming out ahead.”  If short-term changes in a few factors—commodity and currency fluctuations, U.S. house prices—can seem to make such a signal difference, then maybe these stats never provided a very well-rounded picture in the first place.

If we’re going to try for a better understanding of the Canada-U.S. contrast, there are a few points I think are worth keeping in mind.

For starters, the foundation of many a conservative critique of the Canadian economic policy mix has been that our governments are too big, as evidenced by higher taxes. Looking at the OECD numbers, total tax revenues in Canada and the U.S. were about the same back in 1965, roughly 25 per cent of gross domestic product. After that, they diverge. Between the mid-1970s and the present day, Canadian taxes as a share of GDP have run six to eight points higher than U.S. levels; in 2010, Canadian taxes totaled 31 per cent of GDP, while U.S. taxes were 25 per cent.

In other words, Canadian taxes overall were higher during periods when our economy looked weaker and higher during stretches, like right now, when our economy looks stronger. So if we’ve had a problem, that doesn’t seem to have been it. And if we’ve fixed something, it must have been something else.

There’s how much we tax and then there’s how we spend. Both Kay and Coyne put a fair amount of emphasis on social spending cuts under the Liberals in the mid-1990s. I’ve argued before that cuts during that deficit-slaying period have been over-emphasized and tax revenue gains under-appreciated. Still, it’s true Paul Martin’s budgets imposed serious short-term reductions in transfer payments to the provinces, funds largely meant for health and education. But after the federal books were balanced, those transfers bounced quickly back to previous levels—and then well above.

Here’s one way to sketch the social transfers story: payments to the provinces ate up 16.6 per cent of federal spending when Jean Chrétien assumed power in 1993-94, dipped to 13 per cent in 1997-98 during the deficit-slaying period, and had risen to 19.5 per cent by the time Stephen Harper took over in 2005-06—about where the Conservatives have kept transfers ever since (this data from Finance Canada tables).

So Canadian social spending wasn’t permanently scaled down by the experience of 1990s. Another Chrétien-era legacy that’s much discussed in the context of the Canada-U.S. comparison is financial-sector regulation. My sense is that the crucial differences in regulation between the two countries are not widely understood.

John Palmer, the former top federal banking watchdog, told me for this story a couple of years ago that the key to Canada’s 1996 reforms was that the Office of the Superintendent of Financial Institutions was given the authority to issue highly discretionary instructions to banks as dubious lending patterns or other vulnerabilities on their balance sheets took shape. So the subprime mortgage portfolios taken on by U.S. banks before the 2008 market meltdown would have set off OSFI’s alarms, at least in theory, before they grew so recklessly huge.

The willingness and ability of Ottawa to impose this more assertive banking regulation tells us something. So do the persistence of higher Canadian taxes and the resilience of federal transfers for provincial social programs. Only a few years ago, regulation, taxation and social spending were routinely cited as serious Canadian economic liabilities. Lately, you don’t hear that so much.

It might be simplistic to assert that these three broad factors have actually made Canadians richer, but it’s fair by now to observe that they certainly haven’t consigned us to being poorer.