Canadian Commentary: Economics

Productivity and the Pundits

April 1999

Canada's economic commentators are becoming more and more parrot-like in their pronouncements, repeating the same free-market mantra whenever they are presented with a new problem. Regardless of the actual circumstances of the issue in question, they tell us to reduce government, reduce spending, and rely on the private sector. The next thing you know, they will be telling us that the solution to bad weather is to privatize Environment Canada.

A depressing example of this trend is the recent controversy over Canada's low productivity growth during the last decade. The pundits immediately blamed Canada's social programs. Canada is unproductive, they said, because it is too generous, too regulated, too unionized. The solution they provided was the usual free-market diet: reduce spending, reduce taxes, reduce regulation, reduce barriers to trade, reduce unionization, reduce Employment Insurance, reduce regional support programs.

The use of this convenient and often-repeated formula means that the pundits do not have to go through the trouble of analyzing the problems they are discussing. If they did, they might find that their proposed solution did not really address the problem of productivity at all. In fact, many nations with higher taxes, more generous social programs, and higher rates of unionization have better productivity rates than Canada (e.g. France, Belgium, Sweden). Meanwhile, a nation such as Great Britain, which has been pursuing free-market policies for two decades, remains considerably less productive.

The Canadian example is, if anything, even more telling in demonstrating the emptiness of the knee-jerk free-market solution. In the 1960s and 1970s - decades in which Canada pursued protectionist policies, expanded its social programs, increased regional assistance, increased unemployment insurance payments, and had a high rate of unionization - Canadian productivity increased rapidly, in line with increases in the U.S. It was only after 1985 that Canadian productivity growth slowed dramatically. And what were Canadian governments doing after 1985? They were implementing precisely the free-market agenda being proposed by the pundits: establishing free trade, reducing social spending, cutting back UI payments, reducing regional assistance. So, if anything, these policies have coincided with a reduction in productivity, not an increase. Whether they actually caused this decrease is a matter of debate; but they are obviously not a solution to the productivity problem.

Any attempt to really address the issue of Canada's low productivity growth would start by trying to determine those economic factors which actually affect the issue. Productivity is the result of the skill, training and motivation of workers combined with the quality and sophistication of the equipment they use. The quality of equipment is dependent upon business investment, which is in turn dependent upon interest rates. One of the actual causes of Canada's declining productivity growth over the last decade might therefore be the high interest rate policy pursued by the Bank of Canada in the early 1990s, and the obvious solution is to keep interest rates low. As for worker's training, one might point out that Canadian businesses invest very little in employee training compared to other industrialized nations; and one might look at the general disorganization of Canada's provincially-run education system (in particular in relation to vocational training), the severe cutbacks to which education has been subjected over the last ten years, and the rapid increases in tuition fees, as causes of low productivity growth. Any solution to these problems would necessarily entail a significant re-investment in education - an issue that is directly related to productivity issues, yet is mysteriously absent from the automated responses of our economic pundits. Perhaps it is time that our pundits tried to research and analyze each issue on an individual basis, rather than relying on the same tired formulas whenever they are faced with economic problems. They might find it makes them more productive in the end.

April 1999

A version of this article first appeared in The Hamilton Examiner

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