BC Business Council: Canadians face 40 years of stagnant incomes – government’s economic strategy is failing, vs Coyne’s supply side immigration approach

Good hard hitting look at the government’s economic and related immigration policies. Money quote: “… like believing Christmas dinner will be made easier if you invite more people because they can help with the washing up.”

Sharp contrast to the Andrew Coyne piece below “hallelujah for all those extra people, and let’s have lots more,” which reminds me of voodoo supply side economics and the Laffer curve:

The House of Commons resumes sitting Sept. 18. One of its first orders of business should be to debate the government’s economic growth strategy, which is failing and needs a rethink.

In the five years to 2019, Canada’s real GDP per capita growth was an anemic 0.5 per cent per annum. Since 2019, it has been the fifth-weakest of 38 OECD countries – and per capita GDP growth has even turned negative over the past year.

For the second quarter of 2023, year-over-year GDP growth was 1.1 per cent. But population growth was 3.1 per cent, the highest since 1957-58, after the Hungarian Revolution and the Suez Crisis. Thus, in per capita terms the Canadian economy is shrinking by 2 per cent year-over-year.

Canada is one of the few advanced countries where real incomes are lower than before the pandemic. Real GDP per person is $55,170, compared with $56,379 in 2019, meaning the economy is generating $1,200 less income per person, or $2,830 less income per household, than it was four years ago.

We estimate Canada will not recover its 2019 income per capita until at least 2027, based on the federal budget’s projections for GDP growth and likely population growth. The OECD forecasts that Canada will be the worst-performing advanced economy over both 2020-30 and 2030-60, with the lowest growth in real GDP per capita. The principal reason is that Canada is expected to rank dead last among OECD countries in productivity growth over most of 2020-60.

Young and aspirational Canadians face 40 years of stagnant average real incomes. The only way to feel confident about future living standards is to avoid looking at the data.

Several of the government’s core policy beliefs are misguided. The first is that freewheeling government spending, untethered by the defined limits of a credible fiscal anchor, is not “consumption” but rather “investment” that raises real incomes. The data say otherwise.

A related belief is that government programs are what entice companies to become more innovative and productive, rather than signals from well-functioning, competitive product markets and discerning customers. The government has relied on households and business taxpayers to fund subsidies for preferred recipients and has massively expanded the bureaucracy without much to show for it other than shrinking the relative size of the private sector. That is a recipe for a low-productivity, low-wage economy.

A third belief is that “ever-increasing” immigration is an economic panacea. The academic literature overwhelmingly finds that the level of immigration has a negligible or neutral overall impact on indicators that determine a country’s living standards: labour productivity, real wages, the employment rate, the population’s age structure and, crucially, GDP per capita.

Ramping up immigration to fill low-wage jobs instantly increases demand for things that take years to build, such as housing (especially rentals), roads, schools and hospitals. We have no idea how provinces and municipalities can be expected to quickly address the needs of 800,000 extra temporary residents arriving in the past two years – people they did not know were coming – along with 920,000 additional permanent residents. Our concern is compounded by the revelation that Statistics Canada has undercounted – by one million – the number of temporary residents already here. The federal government’s immigration strategy is like believing Christmas dinner will be made easier if you invite more people because they can help with the washing up.

“It ain’t what you don’t know that gets you into trouble, it’s what you know for sure that just ain’t so,” wrote Mark Twain. Demonstrably, federal policies are yielding “prosperity-free” economic growth.

We believe Canada needs an economic policy agenda focused on raising average living standards. The country would benefit from modest (and co-ordinated) fiscal and monetary policy restraint to dampen inflation, alongside a productivity-focused agenda to expand the economy’s supply-side capacity, expedite business investment and innovation, scale domestic firms and ensure Canada can supply the world with responsibly produced natural resources and manufactured goods.

This will require overdue reforms to our inefficient tax and regulatory systems. Such a policy agenda would aim to cool demand and enhance supply, bringing them into balance. Critically, this would lift rather than reduce or stagnate average real incomes, as is happening under the federal government’s current approach.

David Williams, DPhil, is vice-president of policy at the Business Council of British Columbia. Jock Finlayson is the council’s senior policy adviser.

Source: Canadians face 40 years of stagnant incomes – government’s economic strategy is failing

Coyne:

By now the consensus has more or less become set in stone. Why are housing prices in Canada so high – fifth highest, relative to income, in the OECD? Well, it’s obvious, isn’t it? It’s because we’re taking in too many people. Supply and demand and all that. Common sense, really.

The same goes for our stagnating standard of living. Canada’s GDP per capita is no higher than it was in 2017; labour productivity, having fallen for five consecutive quarters, is back to where it was in 2014. That, too, we are told, is on account of there being too many people about. Again, simple math, right? More labour relative to capital equals less investment per worker equals lower productivity. QED.

Or health care. Wait times are now three times what they were 30 years ago. Must be because of all of those immigrants.

It’s true that Canada’s population has been growing over the past year or two at rates that exceed recent experience: a million more people last year, probably at least as many this year.

Of course, that’s coming off a relatively slow year in 2021, when the population grew by only 200,000 and change, but still: We’re looking at an average population growth rate, over the past three years, of nearly 2 per cent annually. And yes, most of that has been the result of immigration.

Of course, 2-per-cent population growth isn’t especially high by historical standards. From 1946 through 1982, that was the average growth rate; throughout the 1950s, indeed, it was well in excess of that mark. I do not believe the 1950s are commonly associated with either sluggish growth rates or housing shortages.

For that matter, soaring house prices and lagging productivity growth – and health care wait times – have been issues in Canada for many years, long before population growth began to take off. As they are in other advanced countries, with stable or even falling population numbers.

So perhaps the case that Canada, of all places, suffers from Too Many People may not be quite so self-evident as it may have first appeared. If GDP per capita is straggling, is it because of the denominator (population) or the numerator (GDP)? If housing prices are soaring, is that because of the demand, or the supply? Is the problem too many people, or too little of the investment and housing needed to support them?

It would be one thing if the supply of either were running flat out – if investment or output or housing starts were at record or even unusually high levels, but still could not keep up with the torrid growth in population. But such is not the case.

I suppose it’s possible to connect the relative stagnation of per capita GDP over the past several years to the surge in population over the last two. But it’s surely at least as significant that GDP growth itself has slowed markedly throughout. At roughly 1.5 per cent a year, after inflation, GDP growth since 2014 has averaged less than a third of what it was in the 1950s.

The same with housing. Maybe you can put the current level of house prices down to the number of people living here. Or maybe we should look at the number of houses. At 424 housing units per 1,000 residents, economists at Scotiabank have observed, Canada has the lowest supply of housingof any G7 country.

Why? Because the supply of housing in recent decades has slowed to a trickle. Housing starts, at roughly 260,000 annually, are lower now, in absolute terms, than they were in the early 1970s, when our population was barely half what it is today. Adjusting for population, the rate of housing starts is a third less than it was in the 1960s and 1970s (600 per 100,000 population versus 900).

If we were still building as many houses, proportionately, as we did then, we’d be adding more than400,000 units a year, and no one would be talking about a housing shortage. We’re not overpopulated, we’re underhoused.

It’s just too simple, in other words, to look at the number of people, or the growth rate, as our neo-Malthusians would have it. It’s certainly true that an increase in population, given a fixed quantity of investment or housing, will lead to increased pressure on these resources. But these quantities aren’t fixed, or certainly needn’t be. If they are, it’s worth asking why – notably, what contribution ill-considered policy might be making to this.

As, in fact, we now are. What can be said about population growth is that it makes the costs of bad policy more apparent. If it means we are now beginning, at long last, to have a serious conversation about the barriers to investment and housing construction that have bedevilled this country for decades, then hallelujah for all those extra people, and let’s have lots more.

Source: It’s not that we have too many people. It’s that we have too few houses