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Thought Leadership

2009


"What comes after The Great Recession?"

This article was published in The National Post on June 30, 2009.
Written by Don Drummond.

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There is growing consensus that a global economic recovery is in the making, albeit the pace will be tepid and restrained. Momentum should, however, build through 2010 and 2011.

The question we should start asking is, 'What comes next?' In part this will depend upon the skill and will of central bankers. They will need to withdraw their unprecedented monetary stimulus with surgical precision-- not so quickly as to jeopardize recovery but not so slowly as to stoke the inflation fire.

But the world economy will still be a dangerous place. In the name of mitigating the downturn, the U. S. federal government will go from around a 40% debt-to-GDP ratio to 100% within a few years and many states are racking up large fiscal shortfalls as well. The United States will not likely deal with this exploding debt very well. They will find it difficult to cut spending or raise taxes sufficiently. Even if financial sector regulations are improved around the world, this type of imbalance could provoke the next economic cycle. And even if another crisis is avoided, the United States will be exporting to the world lower growth, a depreciating dollar and premiums on bond yields as the inexhaustible supply of debt floods the global markets.

Canada cannot count on an automatic economic lift from the United States. Lower growth there will depress our prospects. We will need to address our own economic demons. Public spending growth will have to be reined in to ensure a timely return to fiscal balance. And a concerted effort will be needed to address the greatest Canadian economic shame -- our anemic productivity growth. That's because productivity growth is the key determinant of the standard of living and ours has been performing badly for a long time.

Consider some facts: Canada's productivity level has gone from third in the OECD in 1960 to 15th among the original 20 member nations and 17th among today's 30 members. Since the late 1980s, all but two OECD countries have outperformed Canada's productivity growth. So far this decade, output per hour worked has averaged only 1% growth in Canada compared with 2.5% in the United States, leaving our level of productivity in the business sector only 73.6% that prevailing south of the border.

In many respects the script for better productivity growth is well known. We just need the will to act. Surely we can mount the inspiration to deal with issues such as multiple securities regulators, restrictions on the free flow of goods, services and labour within our own borders, the patchwork of regional environmental approaches sprouting up and employment insurance as well as welfare programs that incent people not to work?

In some cases it means moving faster in areas where action has begun. Employment and income will become more correlated with education attainment. Almost all new jobs will require some form of post-secondary education.

The payoff to the individual is apparent in an unemployment rate for those with a university degree that is about half that of a person with a high school degree and less than one-third that of someone without high school.

Further, the unemployment rate for those with university degrees has risen just 1.1 percentage points during this recession compared with 3.9 percentage points for those without high school.

We have a well-educated population but university participation sits only in the middle of the OECD and we're light on graduate and business programs. We don't do enough to ensure access to post-secondary education for children from poorer families or certain communities such as the rapidly growing Aboriginal population. What's more we are within a few years of immigration supplying all of Canada's net labour force growth yet we are failing immigrants and all Canadians in their integration into the Canadian economy. Even those immigrants with post-secondary degrees are, after five years in Canada, just barely earning half what the Canadian-born make.

Some aspects of the productivity challenge remain a puzzle and we need to work hard to put those pieces together. It clearly isn't all about government policy. Why, despite relatively generous tax credits, are our private-sector research and development efforts so weak? Canada stands only 16th within the OECD in business research and development intensity. Why despite recent reductions in the taxation of capital does Canada remain so under-invested in machinery and equipment? On average, a Canadian worker only has only slightly more than half the stock of machinery to work with as the U. S. counterpart. No wonder our labour productivity is weaker. One of the most disturbing features of the current recession is how business investment has been hit. This will have lingering effects of restraining productivity growth.

For all our economic challenges, Canada still appears to have better potential than almost any other nation. Can we take advantage of this position and bring us back to where we belong -at the pinnacle of the world's standard of living? Strong leadership from policy makers will be required. But just as in the case of Canada's successful effort to slay the fiscal deficit in the 1990s, a heavy dose of public pressure will also be in order.

 

Executive Headshot :  Don Drummond
Don Drummond
Former Senior Vice President and Chief Economist
TD Bank Financial Group

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