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Paul Romer coined the phrase “a crisis is a terrible thing to waste” back in 2004.

“I tried to suggest that there is a risk of complacency in ordinary times and that a crisis is the time when you might be able to mobilize some coordinated efforts to do better,” the Nobel Prize-winning economist said in an interview with the National Post this week.

Romer is heading to Ottawa later this month to talk about stimulating economic growth at a summit organized by the Coalition for a Better Future, a group of more than 100 organizations – from universities and think tanks to business groups and charities – who recognize the imperative of improving Canada’s economic performance. The event will be co-chaired by former Liberal deputy prime minister, Anne McLellan, and the ex-deputy leader of the Conservative Party, Lisa Raitt.

A significant number of members are concerned that for all his talk about “building back better,” Justin Trudeau is wasting the opportunity provided by the pandemic to spark the growth needed to ensure continued rising prosperity.

Trudeau has paid lip service to investing for the future but the frustration for many of the coalition’s members is that the Liberal government is more focused on redistributing the existing economic pie than generating the wealth needed to ensure future prosperity.

Senior Liberals concede that thinking about the economy has not been the first instinct of any ministers in the government since the departure of former finance minister, Bill Morneau. The belief seems to be that ongoing affluence is ordained and guaranteed.

The Trudeau government’s performance on growth has been grim even in the pre-pandemic years, with output growing by an average of just two per cent. The government’s budget projections suggest it is resigned to lethargic growth of around 1.7 per cent for the rest of the decade. This acceptance of the “new normal” and the inevitability of slow growth permits the kind of zero-sum thinking that has characterized this government, where the focus is on levelling up and redistribution.

Trudeau and his finance minister, Chrystia Freeland, would prefer to talk about social justice issues than productivity, business investment or competitiveness. We have just spent a month-long election campaign where economic performance was barely mentioned, save when it touched on the nexus with gender politics in the form of childcare.

In his victory speech, Trudeau said millions of Canadians chose “a progressive plan” that focused on the end of the pandemic, climate action, $10-a-day childcare, affordable housing and reconciliation. He basked in “the warmth of a new dawn.” But he did not touch on how his government plans to ensure the next generation enjoys the kind of standard of living previous generations have taken for granted. The plan seems to be to paper over the cracks by increasing immigration targets to 400,000 new permanent residents a year.

Ottawa positioned its 2021 budget, and its $100 billion in new spending, as “a recovery plan for jobs, growth and resilience.” Yet informed observers like former Bank of Canada governor David Dodge said “being generous, very generous, only 20-25 per cent was for growth, the rest was to boost personal and government consumption.”

The Liberal calculation appears to be that voters don’t care about economic growth.

But what we are really talking about is prosperity – and the prospect that it is imperilled.

A report by a group of 12 senators under the umbrella the Senate Prosperity Action Group that was released earlier this month illustrates this country’s failing grades.

Canada is the world’s 10th largest economy but in global competitiveness, it is 14th out of 141 countries; in GDP per capita it is 15th; in productivity, it is 18th; in terms of ease of doing business it is ranked 23rd; and in gross domestic research and development spending it is 18th.

Canada’s relative prosperity has worsened over time – in 1970, GDP per capita was 15 per cent lower than in the U.S.; in 2019, it was 25 per cent lower.

Our output per worker is particularly distressing – Canada’s GDP per hour worked was $18.10 lower than the U.S. in 2019 and $9.50 lower than the G7 average, the Senate report said, citing OECD statistics. U.S. economist Paul Krugman once said that productivity is not everything when it comes to maintaining standard of living, “but it is almost everything.”

Equally troublesome is business investment – or lack of it.

Businesses across the OECD invested 40 per cent more per worker than Canadian companies, and U.S. firms 75 per cent more – in part because of the perception that it is difficult to get projects off the ground in this country.

Even Canadian firms have been investing abroad to benefit from  more attractive investment environments (as a share of GDP, Canada’s taxes on corporate profits and payroll taxes are higher than the OECD average, while the average top marginal personal income tax rate in Canada is 53.5 per cent, compared to 47 per cent in the U.K. and 46 per cent in the U.S.)

The rate of economic growth has been falling decade over decade for the past 50 years and our current account trading deficit is growing, the inevitable product of exporting disproportionately to slow growth markets like the United States.

If the Canadian economy was the Starship Enterprise, a yellow alert light would be flashing, and shields and phasers would be on standby.

The Liberals have also presided over a fiscal landscape that has the potential to undermine progress.

Annual federal program expenditures as a percentage of GDP grew to 27.9 per cent during the pandemic but will remain close to 20 per cent in the current year – much higher than the 13.6 per cent the Liberals inherited six years ago.

The Senate Prosperity Group’s report did not advocate an austerity push but said there is a need to avoid financing new programs with new debt.

There is a growing exasperation among many economists. “You can’t spend on everything, you can’t push up taxes forever and you can’t push debt up indefinitely,” said Chris Ragan, the founding director of McGill University’s Max Bell School of Public Policy, in a discussion on the findings of the Senate Prosperity Action Group’s report.

The Liberal commitment to fiscal sustainability is implied, rather than explicit. The party’s election platform suggests that Canada’s debt to GDP ratio will decline slightly year on year to reach 46.5 per cent in the middle of the decade, by which time deficits will have dropped to a more normal range of $32 billion.

Ragan is skeptical. “Prudence is not really being talked about. I worry they are not going to be as successful as they think they are going to be,” he said in an interview. The Parliamentary Budget Office noted that a one point increase in interest rates could add $10 billion to public debt charges by mid-decade.

Ragan proposes a program spending review that would reduce expenditure on low priority items to make room for new Liberal priorities.

In their election platform, the Liberals did promise a strategic policy review of government programs – although not one that would be driven “by cost-savings or deficit reduction objectives” – as if such goals were now impolitic.

But such audits tend to flatter to deceive. A 2016 review of the hundreds of billions of dollars of tax credits that choke up the revenue system yielded just $3 billion a year in savings. Even the most unrestrained profligate would abolish tax incentives that were introduced to solve particular problems back in the mists of Canadian history but which are now superfluous – for example, the 10 per cent credit on investment in Atlantic Canada, introduced in 1977, or the tax relief for construction contractors, in effect since the early 1970s.

There should be a meaningful debate about the necessity of the child care expense deduction, which costs $1.3 billion a year, given the new daycare plan and the expanded Canada Child Benefit. Or about the Age Credit, which Canadians get just for turning 65, on top of Old Age Security and the Canada Pension Plan (it costs the Treasury $4 billion a year). Or how about the non-taxation of health and dental plan benefits, at a cost of $3.7 billion a year. The real third rail is the non-taxation on capital gains from the sale of principal residences, which costs $7.7 billion a year. It is unlikely that any of this spending will be rolled back, given the vested interest involved.

Kevin Milligan, professor of economics at the University of British Columbia, said he will be looking at the mandate letters of the new Cabinet to see if there is an intention to follow through with a real review of spending. He said he is generally at ease with Ottawa’s fiscal position but concedes “there is not a lot of wiggle room there.”

“I am curious to see what they are going to do on economic growth,” he said.

Attendees at the Coalition for a Better Future summit will be interested to hear from Romer, who made his name as a growth theorist and has long pioneered the optimistic view that the historical pattern has been one of accelerating growth.

That view, though, has been tested in recent years.

He joked that he is a “recovering” University of Chicago economist. “Twenty or thirty years ago, the message I gave people was that we need an innovative market economy that generates new ideas. The message I give people now is that we need governments to do their job, together with an innovative market economy.”

The pandemic has revealed significant weaknesses in the capacity of government to perform its most basic function – protecting its citizens.

There is a general acceptance, even among free market conservatives, that new rules will govern the economy of the near future, a landscape where governments are more involved in planning growth and resilience.

Romer said his concern is that governments are too weak to do the job that citizens want and need them to do, in part because “special interests” are able to stop government action. He is particularly concerned about the power of the tech sector to induce paralysis in government.

Romer introduced the idea of endogenous technological change into the world of economics – the concept that more researchers produce more ideas and ultimately make everyone better off because ideas are not depleted by use, unlike objects that, if used by someone, cannot be used by someone else.

He said he sees an opportunity for Canada to devise bold new initiatives in machine learning explicitly designed to avoid recreating Silicon Valley. “That’s what you don’t want,” he said.

He noted that Canada’s growth is constrained by higher wages being paid in the U.S. but that this country could make a virtue of being a place that specializes in building a different kind of innovative tech sector based on public service, not stock options.

Romer said such an initiative would require the involvement of the federal government. Yet Coalition for a Better Future has emerged to build a consensus for an ambitious plan for Canada’s economic future precisely because there is a policy vacuum.

The worry is that the federal government is too complacent and self-satisfied at its re-election to mobilize the efforts that are needed to get its finances in order and gear the economy to compete in a digitized world.


Story by: National Post