The pundits are still talking about this famous story that ran on the New York Times' new “Upshot” blog a few weeks ago, declaring Canada's middle class to be the “world's richest” — a title that was previously held by the middle class of America.
I’m always skeptical of Canadian economic triumphalism, and in a recent column for the Huffington Post, I quoted from two impartial US analysts who voiced some skepticism of the “Canada’s #1” conclusion: Reihan Salam in the National Review and Derek Thompson in the Atlantic.
The reason for the eclipse is that Canadian income growth has outpaced America’s over the last few years. Here are some reasons to be sceptical about what this means for Canada.
1. Canada’s housing bubble — Canadian housing prices are, by some measures, the most inflated in the entire world, which can be seen as a bad thing from a number of angles. Many economists have blamed Canada’s housing inflation for fostering a sort of “irrational exuberance” spending culture among middle class Canadians who cockily think they’re richer than they are because their house is worth so much, and don’t care about getting into enormous debt as a result. This stimulates consumerism in the short term, but at some point those debts need to be paid down and consumers will retreat.
The other problem is that housing-related industries in Canada, particularly construction, are providing a lot of high-paying jobs that may not be sustainable in the long term, once demand for new homes and condos eventually declines.
2. Oil — The second Alberta oil boom, based around the development of the northern Alberta oil sands, has created a lot of well-paying jobs and given Canada a lot of potential as an petroleum-exporting economic superpower, particularly in an era of sky-high oil prices. However, being a successful exporter requires a market to export to, and given all the politics surrounding the Keystone and Northern Gateway pipelines, it does not go without saying that Canada has a stable, long-term consumer base for its most valuable natural resource — particularly as other nations experience oil booms of their own.
3. Competitiveness and productivity— There was an interesting piece in the National Post the other day noting an uncomfortable and controversial fact — a lot of Canadian workers are overpaid. In a proper market economy, workers should be paid what their labor is worth, and the awkward fact is that a lot of Canadian labor is apparently not worth that much in the eyes of management. A lot of Canadian business are not as successful as they want to be, yet they’re paying their employees as if they were.
This is a fact we sometimes lose sight of when we talk about the US economy. America is still the richest country in the world because it produces a lot of stuff the world (and Americans) want and need. The problem with the American economy is that the profits produced by the companies producing all the good stuff are not necessarily being shared in the fairest way possible. In Canada, by contrast, profits may be shared a bit more equally, but the profits to share are smaller, and it may be hard to continue to share them as generously if productivity is not growing in sync with job and wage expectations. This is the old “bigger pie / equal slices” argument.
Below we see a Google chart of GDP growth.