Its Springtime in Canada and the Election Promises Come Easy

 

The federal election has taken on a somewhat bi-polar ambiance alternating from existential dread in the face of Trumpian tariff and annexation discourse to the usual vote buying behaviour with what is ultimately taxpayer’s money no matter who wins.  Indeed, the election promises have been coming fast and furious popping up like spring flowers. One might have expected that Canadians were going to get thoughtful proposals on how Canada and Europe might come together in a new economic and security alliance, perhaps with additional links that included Australia, New Zealand and the UK in a new global partnership spanning the Atlantic and Pacific via the Arctic.  This after all is probably one of Canada’s more consequential elections ranking up there with 1911 and 1988 given the focus on our economic relations with the economic behemoth to our south.

For the most part, Canada’s party leaders are not painting a compelling vision of how Canada will make its way in a dangerous and shifting geopolitical world devoid of American leadership over the next quarter of the 21^st century.  For the Conservatives, the campaign has not gone the way they were expecting given their substantial lead has evaporated with the arrival of the new Liberal leader.  The Conservatives seem unable to move beyond the baggage of the Trudeau administration which correctly speaking is indeed also the baggage of the new Liberal leader.  However, the conversation has shifted away from the baggage at the rear of the train to the oncoming Trump tariff freight train and the Conservatives have not pivoted with it. 

The NDP have quickly evaporated with progressive voters shedding them and flocking to what is perceived as the next best progressive hope.  As for the Liberals, they have been saying all the right things in the face of the existential challenge and their leader looks the part but they are short on actual details.  Indeed, there is the contradiction of Mark Carney first intoning that the old relationship with the United States is over and then after a phone meeting with President Trump saying that we will be negotiating a new economic and security relationship with the Americans.  One wonders what kind of new relationship can actually be negotiated with a President and Administration whose positions change like the wind. Indeed, one wonders if the conversation about what will be negotiated was more substantial than revealed?

When the tariff issue heats up as it did last week, it dominates the campaign’s attention.  Come April 2^nd, if the tariffs are again put on hold or are seen as not as severe, the campaigns will again revert to business as usual for Canadian elections as tariffs move into the background.  When not slagging each other’s personal finances or perceived abilities for the top job, the party leaders are hard at work laying the groundwork for a new era of deficit financed election promises.  Along with increased spending, all the parties have apparently seen the light when it comes to tax relief and indeed, they are finally addressing the needs of the lowest income earners. 

The Conservatives have pledged to slash the lowest income tax bracket rate by 2.25 percentage points to 12.75 percent.  And of course, they promise to completely eliminate the carbon tax for both consumers and industry.  The Liberals are not as generous promising only a 1 percentage point reduction down to 14 per cent and taking away the carbon tax only for consumers.  

Not to be outdone, the NDP have gotten into the act by raising the basic personal exemption – for lower income earners only - and removing the GST from an assortment of essentials including diapers.  The Liberals and Conservatives however have their own GST reduction ideas geared towards making housing more affordable by taking the GST off new homes with the point of difference being whether it should apply to homes up to$1 million or $1.3 million – assuming a million-dollar home is in your price range of course.  But, as one famous past cabinet minister in days long gone once purportedly remarked – What’s a million?

All this tax relief will have revenue implications - that at least for the Liberal and Conservative proposals, have been estimated in the six-to-fourteen-billion-dollar range.  While tax relief is welcome, all parties are also promising a lot of other things which require spending more.  And all the right buttons are being pushed depending on the day of the week and the location.   If it’s Windsor, then it is assistance and training for automobile production and workers.  If in Hamilton, support for steel in the fight against tariffs.  Rural Quebec or Saskatchewan means that our price support and regulatory systems for food products are sacrosanct. 

And if in Northern Ontario, make sure to promise an end to the red tape and a $1 billion road to the Ring of Fire to unleash the mineral development potential that has been anticipated there since at least 2007.  Though unlike a certain provincial premier who shall remain nameless, none of the federal party leaders has yet to promise that development will occur even if they have to go up there themselves and ride a bulldozer.  And of course, everyone is going to spend more on the military and the Arctic as well as make sure that robust COVID era style spending supports are available to assist both businesses and workers who might lose their jobs. And we all know how that turned out the last time.

The choice facing Canadians this election is indeed important.  If this was a normal time without the existential threats and geopolitical shifts, the Conservatives would be facing a government that was fairly long in the tooth. The Conservatives would be riding the clamour for change with their mantra that Canada is broken, and that the Trudeau Liberals have given us a lost decade culminating in an affordability crisis.  However, as noted, the ground has shifted, not that things were really that simple before.

The Canada is broken motif is somewhat of a stretch.  Millions of people do not normally immigrate to broken countries; indeed, the converse is usually true.  However, the actual handling of immigration over the last five years can be pinned on the incumbent Liberals.  While not broken, Canada could definitely have worked better on a number of fronts over the last decade particularly when it came to resource sector investments and productivity in general.  And the housing sector affordability and health care crisis has been aggravated by immigration amounts that were not accompanied by adequate investment in those critical areas.

The lost decade motif really depends on what you think has been lost.  If you are of progressive bent and favour government involvement in daily life and the economy and on social issues, then the last decade has not been lost at all. It has been a glorious aspirational triumph that has seen an expansion of the federal civil service, new permanent income supports for children, increased health transfers, school lunch programs and dental services.  On the other hand, if you were hoping for a productivity agenda that boosted business investment and generated rising per capita GDP, efficient management of public services including better health care, then it has been a lost decade.  You can see that there is a pretty strong difference of opinion here.

Of course, as has been wisely noted in this election, it is always easy to criticize and find fault especially if one is devoid of real-world experience like say an ivory tower academic might be.  On the other hand, what do we mean by real world experience?  Do a career politician or maybe even a finance guru - who all are removed from the nuts-and-bolts world of factory floor manufacturing production or a construction site – actually have real world experience?  Our politicians often portray themselves as being experienced with real world issues but in the end their primary skill is being politicians.  And they do not like informed critics, they like cheerleaders.

Even without real world experience, one can still fathom that a sudden mania for tax reductions combined with the ramping up of spending on a plethora of initiatives that have not been vetted for value for money is a harbinger of fiscal danger ahead.   Given the parallel nature of spending and tax initiatives across the major parties, combined with a lack of detail on the Trump tariff file, one is left with the realization that none of the parties probably really know what they are going to do after April 28^th.  How can they, given the mercurial volcano that is Trump? This makes the job of voting this time around even more difficult.  One sometimes envies the voters in Quebec who if faced with unpalatable choices across the three main federal parties, can always opt for the Bloc. 

Somewhere, there is an alternate reality where Canadian voters can vote for a party that combines the NDP spending and social agenda that provides a never-ending cornucopia of public goods, with Conservative managerial rectitude to ensure value for money and a reassuring Liberal technocratic global influencer as Prime Minister.  Alas, we are living in a quite different reality. A lot of spending and tax promises are being made in the heat of this springtime election.  While the easy and hopeful promises of a springtime election are palatable now, the reality is that spring and summer are short in Canada and winter always comes.

 

 

Canada's Trade with the USA Has been Shifting for Some time

 

NAFTA and its successor CUSMA have been instrumental in growing Canada’s trade and its economy by helping us find markets that have grown our export sector.  These agreements have helped cement an economic relationship with the United States such that by 2024 “ the combined value of Canada's imports and exports of goods traded with the United States surpassed the $1 trillion mark for a third consecutive year. In 2024, the United States was the destination for 75.9% of Canada's total exports and was the source of 62.2% of Canada's total imports.”  (Source: Statistics Canada, https://www150.statcan.gc.ca/n1/daily-quotidien/250205/dq250205a-eng.htm)

However, interestingly enough, the importance of the United States as a merchandise export market has actually declined somewhat and the composition of our exports to them has shifted also.  Since 1999, the total value of Canadian merchandise exports to the United States grew by over 90 percent but the value of our merchandise exports to all other countries aside from the United States grew by nearly 280 percent.  As a result, the US share of our exports declined from 87 percent in 1999 to 76 percent at present.  As well, there has been a compositional shift. 

In 1999, 30 percent of the value of our merchandise exports to the United States was motor vehicles and parts but this share declined to 11 percent by 2022.  The greatest growth in the value of our merchandise exports to the United States since 1999 was energy products, followed by metal ores and then farm, fish and food products.  Over the period 1999 to 2022, the energy share of our exports went from 9 to 34 percent, metal ores from 1 to 2 percent and farm, fish and food products went from 2 percent to 4 percent.  On the other hand, the share of forestry products declined from 13 to 8 percent, electronic and consumer goods declined from 8 percent to 3 percent, aircraft and transportation products from 3 percent to 2 percent.  In many respects, the long-term effects of NAFTA/CUSMA appear to be a decline in our export share of value-added manufacturing products and an increase in less value-added resource products.

This is of course all rather odd when viewed in the context of the Trump Administration’s desire to impose tariffs on Canadian exports.  If the goal is to move auto manufacturing out of Canada, it’s importance as a Canadian export driver has already been in decline.    If the goal is to make Canada hewers of wood and drawers of water to the American so to speak by having it specialize in resource inputs to the American economy – that is already happening.  While there have been some increases in Canada’s exports of consumer goods, metal products and industrial equipment, by far the largest increase has been in energy products.   

President Trump seems hell-bent on tariffs and applying them to everything - including energy.  Why the Americans would subject such an important input into their economy to tariffs seems rather incomprehensible.  Given our share of their energy needs, one suspects their demand is quite inelastic meaning  that energy tariffs will have few output and employment effects in Canada and the tariff will be borne primarily by the American consumer.  There may be an incentive for Americans to try and negotiate energy prices downward to compensate for the tariff impact on their consumers  but that essentially means that Americans want to have cheaper Canadian energy and use tariffs on our energy as a revenue source and ultimately have us pay for both these goals.   Why Canada would want to subsidize American energy consumers in this manner is an interesting question.  It will be crucial for Canada to quickly find alternate energy markets to forestall such a scenario.

 

 

 

Why Does Canada Exist?

 

Last evening in Paris, as Canada’s Prime Minister was exiting his vehicle and going into a building, a journalist shouted the question “Is Canada viable as a country” which really asks should Canada exist?  This question has emerged in the wake of the ongoing verbal onslaught from the President of the United States with respect to tariffs, annexation and talk of Canada becoming a “cherished” 51^st State.  One wonders if this journalist was Canadian or American.  If American, not already knowing the answer to that question can be forgiven.  If the journalist was Canadian, well that is also disappointing indeed because that question was answered a long time ago by Canada’s great economic historian Harold Adams Innis. 

Whether or not Canada should exist as a separate entity distinct from the United States has long haunted Canadians – or at least English Canadians.  Before 1763, Canada was Quebec and Quebec has never had any doubts that they constituted a distinct people and nation within their North American environment.  English Canada was settled by refugees from the American Revolution – the United Empire Loyalists – and while they also constituted a distinct cultural group within North America, the similarity of language and culture with the United States has always led to questions of distinctiveness and identity.

These questions have been aggravated by the seemingly north-south geographic grain of the continent with only the Canadian Shield being apart from that grain.  The Atlantic region appears to be but an extension of the New England states, southern Ontario essentially juts into the US northeast, the prairies are an extension of the Great Plains while British Columbia and its mountains are an extension of the Pacific Northwest. The bulk of Canada’s population is clustered along an east-west corridor within a day’s drive of the U.S. border and therefore Canada as an east west construct has seemingly been constructed in defiance of North American geography.

And yet, in his Fur Trade in Canada, Innis argued that Canada was indeed a natural rather than unnatural construct because its east-west orientation was rooted in geography and economic relationships.  Canada became a country because of and not despite its geography and the fur Trade was instrumental in bringing that about. The fur trade waterways of the Great-Lakes-St. Lawrence system and the rivers of northern Ontario, the Prairies and British Columbia and even up to the Arctic provided the east-west canoe travel network of the fur trade first under the French, then under the traders of the Northwest Company of Montreal and finally those of the Hudson Bay Company. 

As the accompanying maps illustrate, the routes of the fur trade penetrating the Canadian Shield were the first network traversing Canada A Mari Usque Ad Mare. And given their links southward via the Mississippi system or into the Washington-Oregon area, one could make as much a case that these regions are but an extension of Canada’s east-west waterways.  Many of Canada’s towns and cities were originally fur trade posts on this east-west network and when the railway came decades later, it followed this east-west line.  This east-west alignment of the country was natural according to Innis and facilitated the east-west extension of Canadian sovereignty into the west during the 19^th century.  

 

 

 

As the famous passage from Innis’s The Fur Trade in Canada goes:

“The Northwest Company and its successor the Hudson’s Bay Company established a centralized organization which covered the northern half of North America from the Atlantic to the Pacific.  The importance of this organization was recognized in boundary disputes, and it played a large role in the numerous negotiations responsible for the location of the present boundaries.  It is no mere accident that the present Dominion coincide roughly with the fur-trading areas of northern North America.  The bases of supplies for the trade in Quebec, in western Ontario and British Columbia represent the agricultural areas of the present Dominion. The Northwest Company was the forerunner of the present confederation.” (Innis, The Fur Trade in Canada, 1930/1971, p.392)

In other words, Canada was the path dependent outcome of a natural east-west economic network.  Canada exists A Mari Usque Ad Mare for reasons that are rooted in its economic history and development and not as an artificial construct.  The border with the United States is there for a reason.

 

 

Federal Finances in Review

 

The last week has been a chaotic one in Ottawa given the resignation of the finance minister on the eve of the Federal Economic and Fiscal Statement (FES), the turmoil over the Prime Minister’s leadership and the ongoing verbal assaults of President-elect Trump on Canadian sovereignty.  Nonetheless, lost in all of this is that after a considerable delay, there has finally been an update to Canada’s Fiscal Reference Tables (FRT) and Figures 1-4 here provide an overview of both the past (1966-67 to 2023-24) as laid out in the FRT and the future (2024-25 to 2028-29) such as it is laid out in the FES. 

Figure 1 provides a nice snapshot of the federal fiscal footprint – the federal spending to GDP ratio. Over the period of this chart, the federal footprint reached a  maximum of 25.6 percent in 2020-21 during the pandemic. This was of a course an outlier year and if one takes this out, one nevertheless notices that from a low of 13.9 percent in 2013-14, the federal fiscal footprint has gradually drifted upwards notwithstanding the pandemic and in 2022-24 stood at 17 percent.  While not at the level of the 1980s when it exceeded 20 percent, it remains that the federal fiscal footprint both in 2023-24 and going forward to 2028-29 is the largest it has been since the late 1990s and marks a calculated expansion of federal public sector size relative to GDP.

 

 Part of this rising expenditure has been financed via borrowing and in 2023-24 the deficit stood at nearly $62 billion.  From 2023-24 to 2028-29, Canada is forecast to accumulate another $242 billion dollars in deficits bringing the national net debt to $1.549 trillion by 2028-29. Figure 2 plots the deficit to GDP ratio, and it stands at nearly 2 percent for 2023-24 and is forecast to drop to 0.7 percent by 2028-29 – assuming of course that given the deficits projected, nominal GDP growth proceeds at 4 percent annually.  Given the slowdown in the economy that appears to be underway and the likely imposition of US tariffs in 2025, this would appear to be an exceptionally rosy GDP growth forecast.

 

 Figure 3 plots the net debt to GDP ratio, and it began to take a definite upward path starting in 2019-20 when it went to 37 percent from 33 percent the year previous.  It peaked at just over 44 percent in 2022-23 and is only going to come down slowly to about 42 percent by 2028-29.  Now, while up by recent standards, it is nowhere near where it was during the federal fiscal crisis of the 1990s.  Yet, the debt is mounting, and interest rates are higher than they were during the debt and spending spiral of the pandemic and so debt service costs have gone up.

 

 In 2019-20, debt service costs were $24.4 billion representing about 7 percent of federal revenues that year.  For 2024-25 they are anticipated to be more than double at $53.7 billion or 10.8 percent of federal revenues.   By 2028-29, it is projected that annual debt service costs will reach $66.3 billion or 11.3 percent of federal revenues.  As Figure 4 illustrates, we are again nowhere near the numbers of the federal fiscal crisis when well over 30 percent of federal revenues went to service the debt. At the same time, we appear to have settled at a plateau over 10 percent for the foreseeable future and that is money better spent on programs.

 

 In her resignation letter, the outgoing finance minister appeared to have a fiscal epiphany as she noted the need to keep our fiscal powder dry to face the economic challenges coming down the pipeline.  The trends of the last few years suggest that there has been a certain dampness to federal fiscal powder for the last few years that is expected to persist into the future.  While there is still fiscal room to manoeuvre, a large recessionary shock will quickly erode that room given the gradual enrichment of long-term  federal spending via assorted initiatives over the last decade as illustrated by the federal expenditure to GDP ratio. This suggests that dealing with a major recession will be more challenging that it would have been a decade ago.

 

 

Inflation, Productivity and Real Wage Stagnation: Canada 1960 to 2023

 

Today’s CPI inflation numbers have many breathing a sigh of relief with the expectation that with inflation below 2 percent, more interest rate relief is on the way and Canadians can resume their high personal borrowing lifestyle.   Lost in the short-term euphoria and celebration of expected lower borrowing costs is the long term cost that inflation has had on our standard of living given the low productivity gains of the last five decades.  Nowhere is this more evident than when one takes a look at how real wages have performed over time.

 

Figure 1 plots the average annual monthly hourly Canadian manufacturing wage – nominal and real – for the period from 1960 to 2023.  The nominal hourly manufacturing wage data and the All-City CPI data are both from the US Federal Reserve of St. Louis data sets [CPALCY01CAA661N; LCEAMN01CAM189S] with the real hourly wage data in $2015.   Why manufacturing wages?  Well, the manufacturing sector has generally been held up as the beacon for good quality and high paying jobs with a lot of hand wringing as manufacturing jobs have declined as a share of employment.  It sounds old fashioned but many still regard manufacturing jobs as the “high ground” of an economy in terms of value added to which I would also add the resource sector (including agriculture).

 

 

 

When nominal hourly wages are examined, their performance looks impressive.  The monthly nominal manufacturing wage in Canada in 1960 averaged $1.78/hr. By 2023, it was $30.66/hr and the average annual growth rate of real nominal hourly wages in manufacturing was 4.7 percent.  However, when adjusted for inflation using the All-City CPI for Canada with 2015 as the base year, real nominal wages barely double over the period going from $13.64/hr to $24.91/hr.  The average annual growth rate of real hourly manufacturing wages over this entire period was only 1 percent annually.  Given that at 1 percent annual growth it would take approximately 72 years for a quantity to double, we can expect real hourly wages in manufacturing to be double those in 1960 by 2032.

 

 

 

Figure 2 plots the annual average growth rate of real hourly manufacturing wages and adds a 5^th order polynomial smoothing plot.  When one examines both Figure 1 and 2, it becomes apparent that the stagnation in real wage growth really sets in during the 1970s.  There was a brief uptick in real wage growth in the wake of the FTA and NAFTA (in 1988 and 1994 respectively) but decline sets in again after the 2008-09 financial crisis.  When one combines the productivity decline that starts in the 1970s following the first oil price shock with the effects of inflation, the erosion of the standard of living – as captured by real wages – is dramatically illustrated.  It makes the case for why bringing inflation under control is so important and also why we need a productivity agenda to drive Canadian policy going into the next election.

Harris or Trump? For Canada, Post November 4th Is Going to Be a Challenge

 

As we move into the final sprint of the US election, it bears as always to pay attention to the economic implications for Canada.  Whatever one’s political priors or favorites may be in this election, in the end it needs to be realized that when it comes to US trade and economic interests, it does not matter whether Trump or Harris wins– American interests trump (no pun intended) Canadian ones.  And in the case of the economy and our trade relationship with the United States, be prepared for some tough bargaining.  While 2024 marked the 30^th Anniversary of NAFTA, it has since 2020 been replaced by the USMCA or CUSMA agreement with renewal talks beginning in 2026. 

 

Along with perennial sticking points like milk and dairy or softwood lumber, in the United States, despite what economists and evidence might say about economic growth and the benefits of trade in the wake of NAFTA and CUSMA, the debate will be shaped by the widespread belief that NAFTA in particular resulted in job losses and wage stagnation.   In the case of manufacturing, the accompanying graphic summarizes quite nicely why the Americans are going to be playing hardball.  In many respects, US manufacturing job losses did coincide with NAFTA. 

 

Figure 1 presents annual Canadian and American manufacturing employment from 1976 to 2023 using a dual scale since US employment and population in general is about ten times ours.  In 1994, there were nearly 19 million Americans employed in manufacturing and 1.8 million in Canada. In the decade afterwards, by 2005, US manufacturing employment fell to 16.2 million while Canadian manufacturing grew to 2.2 million.  In the wake of NAFTA, American manufacturing employment fell by 14 percent while Canadian manufacturing employment rose by 20 percent. 

 

 

 

 Since 2005, American manufacturing employment has declined slightly to 15.6 million while Canada’s declined to about 1.8 million where it has stabilized somewhat.  In other words, over thirty years, Canada has stayed flat in terms of total manufacturing employment (notwithstanding the rise and fall from 1994 to about 2010) while the US has seen a decline.  The good news is that since about 2019, as evidenced by the 5^th order polynomial smoothing line, both countries have seen a slight increase in manufacturing employment as a result of fallout from the pandemic, trade issues with China and the rise of onshoring production activities.

 

Yet those same polynomial smooths show a pretty consistent decline for the US since 1976 with Canada doing somewhat better.  True, Canada is not to blame for the decline in US manufacturing.  Both countries have seen a decline in manufacturing employment over time both in absolute numbers as well as a share of total employment.  It is not 1960 anymore.  There have been productivity issues in both countries as well as intense competition starting in the 1990s from China and other Asian economies as well as Mexico which is/was a part of CUSMA/NAFTA.  However, that does not matter.  For the United States, creating jobs in manufacturing will mean looking at all the players – including Canada.  It will not matter whether Harris or trump becomes President in this regard.  Notice has been served.

Rising Crime in Canada: Evidence from Thunder Bay

 

Rising crime and perceptions of rising crime in Canadian urban areas have become more concerning as media reports increase and a recent study by the MacDonald-Laurier Institute provides some evidence to back up the feeling that crime is up.  The report looks at the last decade’s worth of police reported crime data for nine major Canadian urban centers: Calgary, Edmonton, Montreal, Ottawa, Peel, Toronto, Vancouver, Winnipeg, and York Region.  Essentially, crime and especially violent crime is up in all of these cities with sexual assaults in particular showing large increases.  Of course, this study omits a lot of cities and so of course the question that arises for inquiring local minds is how Thunder Bay has been doing over the last little while?  Is crime rising in Thunder Bay? Well, it depends on the time span you want to look at as well as the specific type of crime.  But overall, the feeling that crime is rising here is not misplaced.

 

Using police reported crime data from Statistics Canada, here is a quick snapshot of how some crime rates in Thunder Bay (crimes per 100,000 population) have been performing. Figure 1 plots the crime rate for total violent crimes and total property crimes for the period 1998 to 2023.  Over the long haul, the trends do not seem particularly concerning.  The property crime rate in 1998 was 6,285 crimes per 100,000 population and after 2009 it began declining quite steadily followed by a spike in 2019 and then further decline.  Between 1998 and 2023, the property crime rate fell from 6,285 crimes per 100,000 to 3,117 per 100,000 – a 50 percent drop.  

 

 

 

Violent crime between 1998 and 2023 has also dropped but not by as much.  It went from 2,401 violent crimes per 100,000 to 2,195 per 100,000 -a nearly 9 percent decline.  However, the violent crime rate seems to be broken into two phases.  It went from 2,401 in 1998 to a low of 1,414 in 2015 – a decline of 41 percent.  Since 2015, it has grown and by 2023 was, as noted, at 2,195 – an increase of 55 percent.  While violent crime is lower than 1998 that is small consolation given what appears to be a fairly rapid increase in recent years.

 

 

 

Figure 2 presents the percentage change in crime rates over a ten-year period – 2013 to 2023 – for a select number of crime categories.  The results paint a more complicated picture.  The total crime rates (all criminal code violations including traffic) are down 2.5 percent over the last ten years.  This seems to be driven in part by a decline in property crimes as the total property crime rate over the same period is down 13.4 percent.  However, over a ten-year period, the total violent crime rate is up nearly 39 percent.  Homicides are up 120 percent from 2013 (though these are two points in time.  Using a three-year moving average for 2012 and 2022, homicides are only up 87 percent if that makes you feel better).  Total sexual assaults are up 68 percent while total assaults in general are up 31 percent.   Impaired driving is up about 5 percent while robberies are up 39 percent. 

 

So, are perceptions of rising crime justified?  I would think so given that while overall crime rates might be down or flat, the rates for more serious crimes such as homicides, assaults and robbery are up.  There you have it.

Memories of Canadian Federalism

 

A blog post titled  “Memories of Canadian Federalism” evokes thoughts of a potential discourse about a President’s Choice product, perhaps a salad dressing or syrup, that promises a fusion of flavors that is both united and diverse.  Alas, that is not the case here.  I am in the process of putting the final touches on my fall Fiscal Federalism graduate course which interestingly enough seems to have a rather large number of students enrolled – for a graduate course.  The explanation for the bump in enrollment likely rests with a dearth of electives this fall for graduate and senior undergrad students in Economics at Lakehead rather than any innate magnetism on my part.

 

I have been teaching this course for a number of years now and it has evolved into a course that covers both the classic economic foundations of federalism with papers by James Buchanan, Charles Tiebout, Richard Musgrave, and Wallace Oates to more recent work that marks the new fiscal federalism with its focus on micro theory and incentives.  There are a lot of empirical papers – especially on measuring the Tiebout migration mechanism – and of course lectures on grants, transfers and equalization and those aspects that characterize what can only be termed as the “immeasurable majesty of the Canadian federal system in all its splendor.” Weekly module topics include, Federalism: Rationale and Functions, Federalism, Mobility and Resources: Tiebout Model-Theory, Federalism, Mobility and Resources: Tiebout Model-Empirical Evidence, Federalism, Spending and Public Sector Size, Centralization and Decentralization, Grants and Equalization, Public Goods and Taxation in a Federal System and the relatively new section Federalism, Health, Pandemics and the Environment.

 

Now, to the point.  In the process of going through my many folders and files, the following gem tumbled out:

 

 

 

I had not seen this for a long time, but it is a set of 20 little pamphlets in a convenient pocket sized paper carrying case called “Notes on Canadian Federalism.”  This obvious collector’s item dates back to the early 1980s or so in the wake of the national unity crises brought about by the election of the PQ in Quebec and the first sovereignty referendum as well as the natural resource clashes between Ottawa and Alberta over energy policy,  not to mention the conversion of federal grants for health and post-secondary education from a 50/50 cost sharing approach to the block Established Program Financing grant and the debate over repatriating the Constitution..  It was the best of times; it was the worst of times and in the tumult the Canadian Unity Information Office issued this 20-pamphlet set of information that in essence was a short lay person’s course on federalism but from the lens of the government of the day and its own agendas.  Why pamphlets?  Well, this is the 1980s.  There was no Twitter or Facebook.

 

 

 

As the images show, a wide variety of topics are covered by these 20 pamphlets which taken together provide a short course in Canadian federalism.  There are all kinds of interesting quotes in these pamphlets.  For example, in No. 1 What is Federalism it defines federalism as: “a type of association between groups, communities, peoples or nations who have agreed to unite in order to better safeguard their future and their prosperity…federalism ensures unity in diversity…Federalism…ensures a spirit of healthy rivalry among the member states. On the other hand, it calls for a sense of solidarity and for dialogue among participating governments.”  In No. 5, Advantages and Disadvantages of Federalism, among other things…”it should be noted that the economic policies implemented by one of the governments in the federation sometimes have negative effects on the total economic situation of the country. For example, heavy borrowing on the part of the provinces may greatly increase the deficit in the balance of payments and negatively influence national monetary policies.”  This is quite an intriguing statement given that it was eventually the borrowing of the federal government that led to the federal fiscal crisis and transfer payment cuts of the 1990s.

 

And in Note 12 The Provinces and their responsibilities there is this: “Certain responsibilities must belong to the provinces because each province has its own special characteristics that give it, its “personality”: language, culture, and different economic institutions.  Albertans may want to stress the physical sciences in university teaching and research programs, while the people of Ontario may want to concentrate more on business administration.”  Of course, in this day and age, if Alberta and Ontario were individual people, this would probably be seen as some type of gender-based career stereotyping.  But I digress.

 

These are intriguing documents and now a part of Canada’s fiscal economic history.  In essence, they provide a short course on federalism from the perspective of the federal government and issues of the day.  All things considered, they discuss concepts at a fairly high level for today’s general public and these types of discussions would not be out of place and perhaps even of benefit today.  After all, Canada is still a federation and if it seems acrimonious today it must be remembered that it has always been so.  The danger to a federation and its unity comes not from rancorous debate over issues, but from silence when the constituent units have decided to stop talking.

Canada's Life Expectancy at Birth in Decline

 

Standards of living are marked by a number of indicators most upfront of which are economic measures such as per capita GDP or per capita wealth.  However, other indicators of the standard and quality of life include basic health indicator and life expectancy at birth has long been a marker of the average “quantity of life” a country provides.   Yet after the increases of the twentieth century and 21^st centuries which saw average life expectancy in the world rise from 32 years in 1900 to 71 in 2021, much of the world has seen a decline in recent years in the wake of the COVID-19 pandemic.   Statistics Canada has already noted that for three years in a row, life expectancy at birth for Canadians has declined from 2019 to 2022 with this decline being driven by an increase in unexpected deaths (such as substance related deaths, suicides and homicides) as well as the impact of COVID.

 

However, what is more interesting in the Canadian case is just as real per capita GDP growth slowed after 2010, so did the growth in life expectancy at birth which highlights the connection between economic growth and performance and ultimately health indicators such as life expectancy.  The accompanying figure plots life expectancy at birth for Canada and Ontario at assorted overlapping three-year intervals since 2005 and they show that life expectancy at birth grew from 2005/07 to 2011/13 from 80.51 years to 81.73 years for Canada and 80.86 years to 82.19 years for Ontario.  Growth then slowed and life expectancy at birth peaked at 81.94 years from 2015 to 2018 for Canada and 82.41 years for Ontario.  Since then, both have declined hitting 81.55 years for Canada and 81.97 for Ontario by 2020-22.

 

 

 

While much of the decline definitely coincides with the pandemic, life expectancy was essentially flat from approximately 2011/13 to 2017/19 when the decline begins but then accelerates during the 2019/2021 window as the pandemic strikes.  So, the takeaways I get from this is that the pandemic indeed is associated with a decline in life expectancy at birth, but growth had already plateaued and begun to slip well before this in the wake of the 2008/09 recession and the slower economic growth and performance since.  The pandemic appears to have strained or augmented whatever forces were already in play prior to 2020. 

 

Of course, one might ask if this has also occurred in other countries.  For example, a quick glance shows life expectancy at birth in Japan rising from 2012 until 2020 before a decline set in going from 83.1 years to peak at 84.56 in 2020 before declining to 84 by 2022.  From 2012 to the pandemic start in 2020, life expectancy at birth grew 1.8 percent in Japan but only 0.2 percent in Canada.  Germany, on the other hand from 2012 to 2020 grew by 0.6 percent (from 80.54 to 81.04) years.  The United States on the other hand saw life expectancy essentially flat since 2012 (growing just under 0.1 percent) to the pandemic with a decline during the pandemic.  These trends are food for thought indeed. 

Canada and Ireland: The Great Divergence

 

Having returned from a great visit to Ireland, I have been reflecting on the Irish economy and economic miracle that have seen Ireland become a country with one of the highest per capita incomes in the world as measured by per capita GDP.  With its membership in the EU and access to the European market, it has pursued an economic strategy which is largely rooted in attracting large foreign multinational firms which has not only boosted activity in finance, research, and digital services but also in manufacturing.  Information technology and pharmaceuticals have been particularly important sectors. While much is made of the Irish corporate tax advantage, there is also a highly educated population which provides Ireland with human capital strength.

 

Ireland is a much smaller country than Canada with a population of only 5 million, but it has some interesting similarities.  It is a bilingual country – Irish and English – and it has seen substantial immigration in recent years to the point where nearly 20 percent of its population is foreign-born.  This of course represents a remarkable reversal from Ireland’s past as a source of migrants. And with rapid economic growth and substantial immigration, like Canada, it has not been building enough homes and housing prices and rents have grown substantially creating some tension.

 

However, despite these similar aspects including housing issues between Canada and Ireland, there is one key difference.  Ireland’s per capita GDP has soared well past Canada’s.  Indeed, as the accompanying figure illustrates, the cross-over year marking the start of this divergence was 1998 and even with the setback of the 2008-09 financial crisis, Ireland recovered and has powered its way to a real per capita GDP that is nearly twice that of Canada’s now.  Since 1998, real per capita GDP in Ireland has grown 173 percent whereas in Canada it only increased by 30 percent.  And unemployment rates remain quite low even with robust immigration and population growth.

 

 

 

It is true that Ireland’s performance has been truly exceptional and probably represents an outlier rather than the norm. And it is not only doing better than Canada but a lot of other places. Still, given that Canada has many similarities with Ireland in terms of immigration levels and population diversity, high human capital, and access to a large foreign market (the US), why we seem to have similar problems (such as infrastructure and housing deficits) but not the rapid economic growth that went with it is indeed an important and perplexing question.  With our own highly educated population, why have we not been able to leverage growth and attract investment? What is holding Canada back given the many obvious advantages we seem to possess?

Finding Canada's Most "Entrepreneurial" Province

 While employment in Canada is up since the pandemic what is disturbing is the shift towards public sector employment combined with a trend away from self-employment over the longer term.  As has been noted, since January 2014, public sector employment in Canada has expanded from 3.5 to 4.4 million workers—a 27 percent increase—private sector employment grew from 11.6 to 13.4 million—a 15 percent increase—and self-employment shrank by approximately half a percent.  From January 2020 to the present, public-sector employment has expanded nearly 17 percent going from 3.8 to 4.4 million. Private sector employment grew from 12.6 to 13.4 million, an increase of 6 percent. Self-employment fell from 2.8 to 2.6 million—a drop of 7 percent.  Self-employment has been in decline for some time but the pace picked up with the pandemic.

Of course, a regionally diverse economy like Canada has provincial differences across all kinds of economic and fiscal indicators and self-employment is no exception.  While all provinces have seen a long-term decline in their self-employment share of employment, there are some interesting provincial differences.  Figure 1 uses Statistics Canada data on employment by class of worker to plot monthly self-employment shares of employment from 1976 to the present. Up until the late 1990s, the self-employment share was actually rising in all the provinces with the exception of Saskatchewan and Prince Edward Island.  The declines there are likely a reflection of farm consolidation in the agricultural sector as family farms are businesses and both these provinces have large agricultural sectors.

 

However, starting in the late 1990s, self-employment declines also commenced in the other provinces and the decline has picked up steam since the pandemic.  Self-employment peaked in Canada at just over 17 percent in the late 1990s and then declined to just under 15 percent by 2019 and has now reached approximately 13 percent.  Self-employment as an employment share actually spiked upwards during the early months of the pandemic as layoffs hit other sectors but then begins to decline rapidly.  One suspects the length of the pandemic with its restrictions was a contributing factor to many small businesses winding up their activity.

The decline of self-employment is disturbing because small business are in many respects a backbone for entrepreneurship and innovation.  New ideas are often translated into reality via the creation of a small businesses and while businesses are always being created or destroyed, if on net more small businesses are being wound up than created, then the long-term result is a smaller field for the development of entrepreneurial skills.   Small businesses provide opportunities for financial independence outside of traditional large employers and many small businesses being locally owned and based are also active in communities providing support for an assortment of charities and community activities.  And while self-employment as the owner of a small business may only account for 13 percent of total employment, these businesses in turn further employ a lot of private sector workers.

If one accepts the self-employment share of employment as a metric for entrepreneurship in Canada, then a provincial ranking does provide one measure of where entrepreneurship is most important.  Figures 2 to 4 provide a provincial ranking at three points in time and when combined they illustrate two types of trends.  First, there is an overall decline in self-employment particularly after 2000 and second, there is a shift across provinces. 

 

 

 

 If one starts in 1976, the self-employment shares are highest in Saskatchewan and Prince Edward Island at 29 and 21 percent respectively.  At the bottom are Ontario, Quebec, and New Brunswick.  By 2000, Saskatchewan is still on top, but its self-employment share has diminished to 25 percent. Meanwhile, British Columbia moved into second place from fifth in 1976.  Ontario and Quebec moved up to sixth and seventh spot respectively while at the bottom are Newfoundland and New Brunswick.  However, in the 2000 ranking, with the exception of Saskatchewan and PEI, the other provinces all saw some fairly hefty increases in their self-employment shares from 1976 to 2000.  Moving to 2024, all the provinces have seen a decline in self-employment shares over the 2000 to 2024.  However, the ranking now places British Columbia, Ontario and Alberta at the top and Nova Scotia, New Brunswick, and Newfoundland at the bottom.

So, self-employment as a share of total employment in Canada has been in decline for nearly a quarter century.  However, there are variations across provinces.  The takeaway from this is not that BC, Ontario and Alberta are the most entrepreneurial provinces.  The takeaway is that since 2000, all the provinces have become less entrepreneurial as measured by self-employment shares of total employment but in this diminished state of entrepreneurship some remain somewhat more entrepreneurial than others.