Short sighted policies hamper our economic performance
I recently had the pleasure of attending a very interesting presentation.
Professor Christopher Ragan of McGill University – a renowned economist with a world class resume – gave a talk entitled A Complex Collection of Economic Challenges.
In it, he clearly and entertainingly set out some of the most important long term challenges facing our economy, and indeed those of all developed nations: an aging population and retiring baby boomers; the productivity of our workforce; climate change, and; globalization and international trade.
Together, these four major themes should be driving the policy agendas of all governments in the 21st century, he said. But, obsessed as they are with short term political maneuverings, today’s governments seem unable to address issues that think even a moment beyond the political cycle, much less decades into the future.
Fewer working people
The theme of an aging population is a well known one, and a macroeconomic indicator that can be predicted with extreme precision. The baby boom generation – children born between 1946 and 1960 – is now starting to retire from the workforce. Those first post-war babies are turning 65 this year, and in the coming decades the ratio of workers remaining in the labour force to those no longer in it will shrink dramatically.
Right now, there are about four people working and paying taxes for each retiree in Canada. In 20 years that ratio will be cut in half as the entire baby boom cohort leaves the workforce. There is very little that increased immigration or higher birth rates can do to stop this downward trend. It is coming, and governments will have to figure out a way of dealing with it.
A retirement system designed in an era when post-work life lasted maybe ten years cannot be sustained when the golden years last nearly as long as one’s career. But that is precisely the demographic future that lies immediately before us, and today’s young people will be left holding the bill.
We must boost productivity
How will they pay it? Luckily, we still live in one of the world’s wealthiest countries. This will go a long way to helping us ease the burden of coming challenges. But the second major theme will have to do much of the heavy lifting as well: productivity.
Though it runs the risk of putting readers to sleep (and therefore garners little attention from politicians), it is probably the single most important aspect of our national well-being. Simply put, it’s the average output produced per worker per hour and in Canada, it’s been growing at an alarmingly slow rate in recent years. The reason we are richer than our parents and they were richer than theirs comes down to one word: productivity.
We are, at best, in the middle of the pack of developed nations with regards to our productivity growth. It’s stuck in the low-one per cent range. In the U.S., for example, it’s about twice that amount, at two per cent. Small difference, you may say. But compounded over decades the differences start to look massive indeed. At two per cent per year, productivity growth would yield a 30 per cent higher average annual income in Canada by 2030 than its current one per cent clip. The problem is: no one really knows what drives it, or what causes our weak performance. Is it our conservative approach to business? Our risk aversion? Our nationally-ingrained complacency? Over-reliance on natural resources? No one really knows why the Americans manage to double our rate of annual productivity growth, but they do. But if they can manage a two per cent clip, so can we.
Environment needs attention
Third, climate change threatens the very world in which we live, and ill-designed policies to combat it threaten our prosperity. The most elegant tool we have is the taxation of carbon-emitting activities to slow the rate at which we dump greenhouse gases (GHG) into the atmosphere. Sadly, to date, that has been a political non-starter in most countries.
Also, it is important to draw a distinction between present-day emissions and the GHGs already in the atmosphere. Even if we could somehow stop all emissions tomorrow, there would still be billions of tones of GHGs in the air, and climate change would continue to occur. Therefore, we must adapt to the changes we know are coming with regards to climate shifts, and limit temperature increases over the next century as much as possible. There is a very good chance we can achieve this, but along the way it is important to get the policy right.
Finally, international trade and globalization were touched upon. Canada has been a trading nation for centuries, and if we are to pay the bills we know are coming in the decades to come, we must remain so. The U.S. has always been and will probably always be our most important business partner, but as in any portfolio, diversification is of paramount importance. This is why bilateral trade deals – such as the one being negotiated with the EU – must be pursued with vigour in the context of a moribund Doha round of global trade talks. Canada has what the world needs to keep its economy growing. New markets for our goods and services will help insulate us from downturns and recessions in the future, which we know will come sooner or later.
So what are the answers to all these complex, long term policy issues facing the country? I do not know. But we should all rest a little easier knowing that someone is thinking of them, despite the short-termism often displayed by political leaders.
