The Importance of Growth

Of the current issues facing the Canadian economy, the biggest of them depend on how Canada’s trade negotiations with other countries settle. The Comprehensive Economic and Trade Agreement (CETA) with Europe, for instance, creates enormous potential for Canada’s export-oriented industry to expand. In Atlantic Canada, however, there could be severely negative consequences if the provinces fail to take steps that bolster economic growth and attract new talent to the region. The new method of determining health transfer payments, which focuses on population and GDP, is just one illustration of how important economic and demographic development is in Eastern Canada.

Canada’s economic success is rooted in exports, and the export-industry, which is composed primarily of natural resource extraction, has an opportunity to not only supply other countries with raw materials and manufactured goods, but also value-added products. Reducing and eliminating barriers to trade with the European Union (EU) will likely benefit key economic sectors, such as energy, manufacturing, and seafood, and freer trade between Canada and Europe will encourage domestic economic activity, as it expands the market available to Canadian industry. The EU is currently Canada’s second-largest trading partner–behind the United States–and, in 2012, exports to Europe totalled $41 billion. However, it is critical that Canadian industry remains competitive in foreign markets and focuses on value-added products, as well as supplying factors of production. In fact, CETA eliminates protective barriers that currently prevent Canadian industry from exporting value-added products into Europe, and vice-versa, which levels the competition, in addition to providing an opportunity for Canadian-EU businesses to produce the most desirable products.

CETA also creates enormous potential for the Atlantic Provinces to expand the agriculture and seafood sectors into the EU, but they face significant demographic challenges that could restrict new prospects. In the last several years, Atlantic Canada’s population has declined and the average age has increased dramatically. In 2011, roughly 16 per cent of Atlantic Canada’s population was aged 65 or above, compared to 14.4 per cent of Canada’s entire population, and by 2036, Statistics Canada expects it to be around 29.1 per cent (compared to 23.7 nationally). Furthermore, Canada’s labour force increased by 1.1 per cent between 2012 and 2013, however, Atlantic Canada’s increased by half that amount, which is due in large part to an outflow of young individuals and families and an influx of retirees. As a result, the region is not equipped to attract large-scale industry, especially compared to British Columbia, Alberta, and Saskatchewan, and has contributed much less than other regions to Canada’s GDP in recent years. This is an important caveat, considering the federal government will begin calculating the Canada Health Transfer using population and GDP in 2018. If the Atlantic Provinces fail to generate economic growth and attract newcomers, they will receive less than other provinces to fund their healthcare systems, which will become more cumbersome in the future due to an ageing population and declining tax base.

In coming years, these two developments–freer trade and the new healthcare funding mechanism–will play a large role in determining Canada’s economic prosperity and the viability of its healthcare system. Canada’s export sector and healthcare system are rooted historically in the country’s history and it is unclear what changes will materialize because of modifications to them. In any case, the Atlantic Provinces need to take measures that bolster economic growth and attract new talent, both of which will allow them to take full advantage of CETA and other free trade agreements and create a sustainable source of funding for their healthcare systems.

Rachel Lowe is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

Reconsidering Income Statistics

The measure most often used to track prosperity is some form of income statistic. Although this intuitively makes sense, the devil can be in the details. Income statistics, in general, can be misleading in many ways. Furthermore, some measures of income seem to be better than other measures. Nevertheless, measures of prosperity are likely to continue comprising of income measures and, therefore, it is important to understand their flaws and limitations.

The limitations of income statistics as a measure of prosperity fall into two categories. First, income is only one part of the picture. Second, it is not always clear that changes in income statistics accurately reflect changes that occur in actual per-capita income.

To begin with, income is not an all-encompassing measure. Other contributors to prosperity include job satisfaction, health, and leisureliness, which income statistics do not typically capture. In addition, certain aspects of the economy remain unaccounted for using income statistics, such as volunteer work, the black market, the household division of tasks, and other activities that do not appear on an individual’s tax return. As a result, using income on its own to measure prosperity is clearly misrepresents an individual’s level of affluence.

There is yet a deeper flaw in the measurement of income statistics, which lies in the imperfect science of trying to draw conclusions using statistical abstractions.

For instance, a common way to measure, and think about, income statistics is to consider the household unit. After all, most people are familiar with their household’s monthly budget and use this to help their understanding of the economy.

Household income, however, is, perhaps, the worst way to measure income. This is fundamentally a result of household variation, not only over time, but also between different demographics and income brackets. Thus, changes in household composition often cause variations in household income. Economist Thomas Sowell has studied this phenomenon extensively, offering three general observations:

1) Household size has decreased over time. Between 1967 and 2005, real per-capita income in the United States grew 122% (whereas household income grew 31%). In this case, shrinking household size has “weighed down” apparent income growth
2) Household composition, including the number of working household members, varies between groups. For instance, the highest earning 20% of American households consists of 64 million people, while the lowest earning 20% of households consists of 39 million people, including single-parent families, single-earner families, and so on. It is therefore easy to speculate that differences in household income can partially be attributed to differences in households
3) Most household income statistics do not follow flesh-and-blood individuals over time. This is important because a given income bracket does not perpetually consist of the same individuals, despite some narratives. While many people are surely living in conditions of poverty, individuals gradually climb the income ladder throughout their career. Sowell’s research suggests that individuals in the bottom 20% of households are more likely to end up in the top income bracket than to remain in the bottom bracket after ten years.

In any case, ‘household income’ is an abstract measure. Consider a fictional economy, for instance, consisting of a married couple living in a single dwelling. If said couple separates, however, “household” income decreases by 50%. Although per-capita income does not change, using household income as a measure would not lend that impression. This is precisely the rationale for distinguishing per-capita income from other statistical categories, such as household income.

Overall, it is important to recognize the limitations of income statistics when attempting to assess the wellbeing of specific groups, entire populations, or whole nations. While household income is particularly flawed, it is unlikely that any single income measure wholly measures prosperity or happiness.

Michael Craig is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute