For years now, scolds like me have been boring the pants off you with our interminable screeds about the problem of sluggish productivity growth. Oh God, we moaned, productivity in Canada is growing so slowly: slower than it was, and much slower than in other countries. This cannot go on; foundation of living standards; however will we pay for health care, etc., etc.
So it may relieve you to know that this has ceased to be a problem. Canada’s economic problem is no longer slow or slowing productivity growth. It is declining productivity, in absolute terms – and not occasionally, or tentatively, but steadily, and without much prospect for improvement.
The latest figures from Statistics Canada show that labour productivity – measured by real GDP per hour worked – fell again in the first quarter of 2023, for the 10th time in 11 quarters. Much of that decline, of course, is simply a return to trend, after the artificial spike in productivity observed during the lockdown.
But productivity has not just fallen back to prepandemic levels: that adjustment was already complete by 2021. Rather, it has continued to fall since then, to a level that is now lower than at any time since 2017. Had Canada’s productivity instead grown in line with that of the United States over the last five years, the economist Trevor Tombe calculates, it would today be 8 per cent higher than it is.
If you want to know why living standards in Canada have stalled – per capita GDP is also no higher than it was in 2017 – there’s your answer. Mr. Tombe calculates that Canada has fallen so far behind the U.S. in recent years that output per capita in Ontario, Canada’s fifth-richest province, is now comparable with that of Alabama, America’s fourth-poorest state.
Some, looking at the same figures, might conclude the problem was in the denominator rather than the numerator: in the rapid growth in population we have lately experienced, rather than the inability of output to keep pace. But productivity was an issue long before the population boom began, and in any case there is no reason per capita output must necessarily be a simple arithmetic function of population growth, any more than it is of population.
The problem is not that we have too much labour, but too little capital – machinery and equipment – for labour to work with. As a recent study for the C.D. Howe Institute has shown, the alarming deterioration in our already poor productivity performance closely tracks the extraordinary collapse in business investment in Canada in recent years – to levels that are not only lower than in other countries (the study estimates new capital per worker in Canada at less than $15,000 in 2022, compared to $20,000 in other OECD countries and almost $28,000 in the United States), but lower than the amount required to replace existing capital as it wears out or grows obsolete.
As a result, the study’s authors write, “the real stock of capital per worker has been on a downward trend since 2015 – a deterioration unlike anything since these measures began.”
Surely the most remarkable part of this performance, however, is that it has occurred under a party that came to power promising to boost Canada’s economic growth after what it decried as a lost decade under the hands-off, austerity-driven policies of the previous government. In the short term, it ran deficits to “kickstart” the economy (who could forget the multiplier estimates in that first budget, of three and four dollars in GDP for every dollar in government spending?).
But it was in the longer term that it would set itself apart, as an advocate of the sort of modern, forward-looking industrial policy that sensible people agreed was needed to move Canada onto a permanently higher growth track – using the levers of government to “make big bets” on industries of the future, invest in productivity-enhancing infrastucture, and generally drive innovation and “grow the economy.”
No one can say they failed to deliver on the policies. A short list would include the Canada Infrastructure Bank; the “superclusters” program, designed to create world-beating hives of activity in selected sectors in cities across Canada; Innovative Solutions Canada, a program to boost startups through government procurement; the Strategic Innovation Fund; the various government-sponsored venture-capital funds administered by the Business Development Bank; all the way to the Canada Growth Fund, the Canada Innovation Corporation (the renamed Canadian Innovation and Investment Agency), and the massive subsidies for battery manufacturers of more recent budgets.
All those agencies, all those acronyms, all those billions, and what is the result? Falling capital stock, falling productivity and falling relative living standards – year after year after year. I can’t imagine a more perfect test of Liberal economic theories, or a more complete failure.
Editor’s note: A previous version of this column incorrectly described Ontario as Canada’s fourth richest province. It is the fifth richest. This version has been updated.