Real estate prices, rise in oil values and currency parity explain our new-found advantage over American counterparts
Fresh from reporting the latest on Sheriff Joe Arpaio's investigations into Barack Obama's birth certificate, the Drudge Report Wednesday shocked its readers with an even more shocking shock story: Canadians Now Richer Than Americans. The headline ran beneath an Obama election poster from 2008, emblazoned with the slogan (oh irony!): Progress.
The basis for this was a story in U.S. News about a column for Bloomberg View citing a report in the Globe and Mail on a study by Environics Analytics. The study shows that, indeed, as of 2011 the aver-age net worth of households in Canada had pulled ahead of the United States by about $43,000, or 14 per cent, from a deficit of roughly $60,000 five years earlier.
If, for Drudge, this was an opportunity to blame Obama, in Canada, it was the reverse: proof at last that, as the columnist for Bloomberg View, the Canadian novelist Stephen Marche put it, "the Canadian system" - something he called "hard-headed socialism" - "is working; the American system is not." The National Post's Jon Kay went further, divining within that single statistic nothing less than the destruction of Canadian conservatism, which he identified as "at heart, wealth-envy of the United States."
Of course, the same systems were in place in both countries in 2006, when Canadian wealth-envy would have been well advised. What changed in the interim, to produce such a remarkable turnabout? Did Canadians suddenly turn into wealth-creating dynamos? No: productivity growth in Canada is among the slowest in the OECD; average labour productivity in Canada remains about 70 per cent of U.S. levels. Did we become conspicuously thrifty? No. Not a day goes by without some report agonizing about allegedly extravagant Canadian household debt levels.
What happened, then? Three things. First, the U.S. housing market collapsed, while ours continued to rise. Practically all of the roughly $75,000 decline in U.S. household assets in the Environics study was a result of the nearly one-third drop in the value of their real estate holdings. Practically all of the roughly $64,000 increase in Canadian household assets was derived from the 25 per cent rise in their real estate portfolio.
Second, commodity prices, on which Canada's economy is notably dependent, rose sharply. Oil prices, for example, climbed from roughly $65 a barrel in 2006 to more than $100 in 2011. That improvement in our terms of trade made an obvious and direct contribution to increasing Canadian household wealth.
And, third, flowing in part from that, the Canadian dollar also soared: from about 88 cents US in 2006 to about $1.02 in 2011. Indeed, its value is considerably overstated, by the measure economists use: that is, relative to its "purchasing power parity" level (the level at which a basket of goods and services would cost the same in each country, after converting). The University of British Columbia's Sauder School of Business, for example, calculates the dollar is about 20 per cent overvalued, relative to its U.S. counterpart.
Add up a one-third drop in U.S. real estate, a 50 per cent rise in oil prices and a 15 per cent increase in the value of the Canadian dollar and it's hardly surprising to find the financial position of Canadian house-holds has improved, measured against the Americans. It would be astonishing if it hadn't. But how exactly does this make the case for the comprehensive superiority of "the Canadian system," let alone "hard-headed socialism?"
I get the "hard-headed" part: the brutal cuts in social spending Paul Martin pushed through in the mid-1990s (having come to power denying any such cuts were needed), which is more or less what the Tea Party is calling for these days. But social-ism? Compared to what? Are we to suppose the U.S. does not have any comparable programs: no unemployment insurance, no social security? Ah yes, there's always health care - on which the Americans spend more public dollars than we do (counting the tax deduction on health care premiums), not only per capita, but as a percentage of GDP.
Well, there is one thing we got very right and they got very wrong: financial industry regulation. Wasn't it that same Paul Martin, as Marche and Kay both note, who bravely for-bade the banks to merge? Yes, it was, and it was good policy: Canada needs more banking competition, not less. But it had absolutely nothing to do with sparing Canada from the housing bubble, collapse, and associated financial follies the Americans (and Europeans) endured. Or if it did, neither argument nor evidence of it are presented.
So far as the two countries' approach to financial regulation diverge, they more usually reflect a lighter hand on the Canadian tiller than the opposite.
We have no counterpart to Fannie Mae and Freddie Mac, the government-sponsored enterprises that own more than half the mortgages in the U.S., nor any of the detailed intervention in lending practices to which the U.S. is given. We let our banks spread across the nation, historically, rather than confining them within state boundaries as the Americans did.
If we did not see the same growth in "shadow banking" as the Americans, it is in part because we let our banks buy up most of the investment houses in the deregulation exercise of the 1980s.
So far as our banks showed greater caution than most in the last decade, it may have been because they were still nursing a hangover from the early 1990s, when they nearly blew them-selves up in the Third World debt crisis. Etc. Etc.
That system may be many things, but "socialism" isn't quite it. And while it's a fine, though hardly novel ambition to combine a productive economy with a decent safety net, we have a lot of work to do on both.