Economy

There has been a great deal of recent media commentary on inter generational unfairness, much of which misleadingly argues that affluent older Canadians are benefiting from current economic and social arrangements at the expense of youth.

There are many factors other than federal government policy that strongly influence the quantity and quality of Canadian jobs including resource prices, business decisions, the state of the American and the global economy, and the actions of provincial governments to name a few. 

That hasn’t stopped Stephen Harper and his Conservative government from trumpeting their record as good economic managers and pursuing a successful jobs and growth agenda. Harper’s supposedly “steady hand” on the economy is central to Conservative election messaging and his perceived economic acumen a frequent talking point of the mainstream press.

So on the eve of the tabling of the federal budget for 2015-16 and during this election, it is relevant to ask: has the job market improved under Harper’s watch from 2006 to 2014? 

Which gives us a better picture of where the economy is headed -- near record low interest rates on government bonds or a stock market that is not far below record highs? 

In Canada as well as the United States, bond yields are just above record lows. The interest rate on 10-year Government of Canada bonds is about 1.4%, meaning that investors are prepared to lock in their money for 10 years for a return well below the official 2% inflation rate target. 

Economists love to talk about the theory of comparative advantage, which holds (somewhat counter intuitively) that two countries trading with each other will be better off if each specializes in what it does best, even if one country has an absolute competitive advantage in the production of all goods and services traded.

David Ricardo famously argued that it made sense for England to specialize in the production of cloth and Portugal that of wine, even though Portugal could produce both goods more cheaply.

Unfortunately, the theory has limited application to the real world, and can have pernicious policy consequences.

In the run-up to the delayed federal budget, there is a strange disconnect between fiscal policy and our changing economic circumstances. Balancing the budget seems to remain the key political priority, as if nothing had changed.

But the collapse of oil and other resource prices has changed a lot. Most notably, the Bank of Canada has, unexpectedly, cut interest rates to take out “insurance” against a serious slump in our resource-dependent economy. TD Economics forecast slow growth of just 2.0% this year, and have projected that unemployment will rise by 0.2 percentage points in the next few months.

Meanwhile, Prime Minister Stephen Harper has said that he will not run a deficit unless and until Canada falls into an outright recession, something we would know only in hindsight.

The words “industrial policy” have been virtually banned from polite company, and should certainly never be uttered in the presence of small and impressionable children.

Many mainstream economists and conservative think-tanks believe that governments should seek only to create a favourable business climate through low taxes and light regulation, and should not intervene in the investment decisions of private corporations.

And yet, industrial policy (which should be called strategic economic policy) persists, and arguably has a greater impact on investment and jobs than broad framework policies like deep corporate tax cuts.

The Harper government claims to be good economic managers pursuing a successful jobs and growth agenda.

To be sure, there are many factors other than federal government policy that strongly influence Canadian jobs and incomes, such as resource prices, business decisions, the state of the United States and the global economy, and the actions of provincial governments. No federal government can take all or even most of the credit or blame for how our economy is doing.

Economists take a benign view of the impact of technological change on jobs, dismissing the "Luddite" view that technical progress can be a significant cause of unemployment. The core argument is that higher productivity (output per hour worked) drives increases in incomes so that demand rises, creating new jobs as old ones are destroyed.

That said, it has become the conventional wisdom that there are winners and losers from the new information based, digital technologies, and that these have been an important factor behind rising income inequality since the 1980s. “Skill biased technological change” is held to benefit the highly educated since technology generally complements cognitive skills, while it eliminates many less skilled jobs.

Wages in Canada and the other advanced economies are about as flat as left-over champagne in the glass on New Year's Day. This poses a major threat to a sustained economic recovery.

During the four years from 2009 through 2013, average hourly wages adjusted for inflation rose by a grand total of just 2.3%, or by about one half of 1% per year. Real wages rose by a total of only 0.9% in Ontario and 1.1% in Quebec over those four years, though by a healthier but still unimpressive 4.8% in Alberta.