Action Plan for an Aging Population

By Patrick O’Brien (AIMS on Campus Student Fellow) 

The Government of Nova Scotia is leading a new proposition to change how we think of the aging population, the benefits provided, the obstacles surrounding “aging” and the impact it has on our economy. By 2030 the Government of Nova Scotia estimates that one in four people will be over the age of 65, which shows a major change in demographic we will have going forward.

The “SHIFT” plan will make investments in transportation and affordable housing for those who want to retire in their own communities. It will seek to promote health and wellness, and promote participation in the labor market as the primary objectives. This is all capable with $13.6 million committed to the plan by the Premier Stephen McNeil with as many as 50 objectives to be completed by the end of 2020.

There are many positive aspects of the plan that could help the economy and community. Increasing the participation of older adults in the labor market lowers the unemployment rate for the province, which is 8.7% compared to 6.3% for the rest of Canada. It also brings experience and wisdom to these roles, not to mention that because there is such a large presence of older adults in many rural communities of Nova Scotia, it could increase competitiveness for the small businesses that adopt the hiring of older adults.

Another benefit of the plan is promoting healthy living, including exercising lessons. This also limits social isolation, which in a finding by the SHIFT program was found to increase the likelihood of smoking, drinking, and enabling the individual four to five times more prone to hospitalization. Implementing these strategies and educating the public on the matter will reduce the chances of an elder adult going to the hospital and therefore reducing healthcare costs.

Notwithstanding, there are many obstacles facing this initiative.

The main challenge for the SHIFT program will be the encouragement of older adult employment. First the employer may believe that the older adult is less productive than a younger hire, or may not want to pay the premium for workers compensation to the employee if he/she was to get hurt on the job. From the outlined reasons above, for example when the Government of Nova Scotia stated it “will work with employers” it could be assumed that some sort of training cost to mentor employers during the process will be a part of the program, or potentially a subsidy for said employment, however this is yet to be confirmed.

Should there be a subsidy for the employment of the elderly, this would increase the number of older adult hires, and would limit the hiring of younger employees and immigrant workers as well. Although this does improve the cost efficiency of hiring for the employer, one could argue it may not be as effective as hiring a younger, and more energetic and motivated individual. This would create an uncompetitive hiring process, limiting the number of new participants added to the labor force 15 years of age and older looking for work but are unable to acquire employment. This could factor into an increase in the unemployment rate.

The SHIFT program will be a positive step forward for the economy in Nova Scotia by better involving and demonstrating the importance older adults have in our economic development, in addition to the wisdom and experience they can share to improve our quality of living through labor participation, volunteering, and mentoring. However, and arguably most importantly, it will be of great interest to see how the government will maneuver around the many challenges this program will yield, in addition to implementing the necessary change.

Is Higher Education Really a Bubble?

Canada’s alleged housing bubble has returned to the media spotlight with full force in recent months. Falling oil prices have slowed housing sales, which has led to speculation that a bust is drawing closer. Bank of Canada Governor Stephen Poloz did not help matters in December when he was widely quoted as claiming housing could be overvalued by as much as 30 per cent. Less quoted was his repeated assurance that Canadian real estate does not qualify as a bubble about to pop. The perennial fear of collapsing real estate values, at this point, has become a form of mass hysteria.

I have wondered lately whether higher education fits that mold. Theories of a “higher education bubble” exist, but mainstream economists almost universally scoff at them, which is understandable because calling student debt a “bubble” is highly misleading as anything more than a metaphor. Yet, it is also worth acknowledging that those who deny the possibility the loudest tend to belong to a knowledge-based class predisposed to uphold the value of university education. The question is not whether higher education has value, though. Rather, the question is whether underlying incentives have caused a misallocation of credit to leverage the wrong kinds of education in the wrong quantities.

The first symptom of a bubble to consider is rapidly rising prices. It is well known that tuition costs have grown significantly above the average inflation rate in both Canada and the United States. In the five academic years from 2010/11 to 2014/15, for example, the average tuition rate in Canada climbed from $5,146 to $5,959, which is roughly 3 per cent annually. During the same period, inflation averaged 1.5 per cent, indicating that tuition increased 1.5 per cent in real terms. Whether this trend is “good” or “bad,” it is not accelerating out of control. In comparison, however, real estate values appreciated by 80 per cent or more between 2001 and 2006 in seven American metropolitan areas. Now that is a bubble!

Student debt, too, is less of an issue and recent graduates are faring much better than is widely believed. The widely-reported number is that students graduate with around $25,000 in debt, but this figure is misleading. In 2012, for example, Simon Fraser University conducted a survey that revealed student debt levels to be roughly $24,600, yet, what is often missed is that this average excludes those who graduate debt free. The average drops to $14,500 when debt-free students are included as part of the analysis.

Bubbles are not just fast growing prices or debt loads, however, but prices that are not connected to market fundamentals. In Canada, rising tuition fees clearly reflect three fundamental forces: 1) demand rising faster than supply (the ratio of students to faculty has increased from 17 :1 to 25:1); 2) higher administrative costs; and 3) a shift in the balance of cost-sharing. Government funding, for example, once comprised more than 80 per cent of Canadian university operating revenues in 1990, but is today closer to 57 per cent percent on average.

Perhaps, then, Canada’s postsecondary education is less like the US housing bubble and more like our own “overvalued”–but not out of control–real estate. The analogy matches quite well. Rather than being driven by easy credit and speculation, our real estate boom is mostly confined to regional markets where the supply of housing is constrained and immigration is high. Low interest rates might have caused some overleveraging and modest mismatching, but it has not been enough for a big bust. In the same way, Canada’s model of postsecondary education leads to modest malinvestments in human capital: too many people with arts degrees, too few in vocational programs. These malinvestments almost surely decrease productivity and lead to labour market mismatches, but they do not portend a catastrophic implosion.

One final possibility is that our public model of university funding transfers the risk to taxpayers, which would mean that our student debt, while not at bubble proportions, is also not the full story. A substantial share of public debt must be considered as well. If that is the case, the question is not one of student solvency but provincial solvency. That, however, is a debate for another time.

Samuel Hammond is an AIMS on Campus Student Fellow who is pursuing a graduate degree in economics at Carleton University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies

A House on Every Lot? Reconsidering the Economic Ramifications of Pursuing National Homeownership Policies

Similar to other western countries, Canada has deliberately encouraged homeownership as a policy objective. One of the means Ottawa uses is the Canada Mortgage and Housing Corporation (CMHC), a crown corporation created in 1946 to resolve housing shortages that emerged when swaths of soldiers returned home from Europe and Asia following the Second World War. Today, it encourages banks to provide mortgages in many ways, such as insuring risky loans, which reduces the cost of homeownership for low-income individuals. In response, bank officials assert that interest rates on mortgages would rise with CMHC’s support.

However, since many Canadians rely on mortgages to purchase their homes–and since higher interest rates would deter loans and mortgages–removing insurance, it appears, would reduce Canadian homeownership.

Currently, Canadian homeownership is nearly 70 per cent. In other countries, though, homeownership rates are dramatically lower. Switzerland’s rate, for instance, is 34 per cent, Germany is 41 per cent, and Denmark is 52 per cent. In fact, all three countries rank higher than Canada in terms of human development as reported by the United Nations in 2013. Although the average rate of home ownership of OECD members is closer to Canada’s, the fact that some countries have succeed without such high rates raises the issue of whether encouraging homeownership is worthwhile.

Upon examination, it seems that Canada’s homeownership policy facilitates a number of serious economic harms.

First, encouraging homeownership destabilizes the economy. The CMHC lowers mortgage rates artificially by providing insurance on all mortgages. This creates significant moral hazard–a situation in which an actor privately benefits from taking excessive risks, since the costs are borne unto other actors (i.e. taxpayers).

If a mortgage falls, for example, CMHC compensates the lender. Knowing this, the lender is more likely to give risky mortgages.

In the United States, the federal government created similar environments, albeit much worse, by instructing Fannie Mae and Freddie Mac–government-sponsored enterprises–to encourage homeownership aggressively among low-income individuals that would not otherwise qualify for a mortgage. Insuring these firms and providing them with implicit government support fueled the subprime mortgage crisis that wrecked the American economy and deflated its real estate market.

Many factors differentiate the American arrangement from Canada’s system–CMHC insures all mortgages rather than aggressively encouraging lower-income ones. And, for the most part, in the United States, it is easier to walk away from mortgages. But in both situations, the public must take on private risk in the mortgage market.

The second destabilizing characteristic of government-sponsored homeownership is that homes become difficult to convert into cash and usually constitute a very large chunk of their owner’s net worth. By subsidizing mortgages, Ottawa encourages people to invest their income in a single volatile asset that, unlike stocks and bonds, are difficult to sell. Furthermore, when payments or rates increase, the possibility of a national housing crisis emerges and the inability to convert assets to cash exacerbates the process.

Encouraging homeownership also reduces labour market flexibility by making it more difficult for people to mobilize when new job opportunities arise or old employment arrangements dissolve. Renters, however, by virtue of renting and not owning, tend to be keener of exploiting interregional wage and employment differences. In fact, studies reveal a positive relationship between homeownership and unemployment. This is probably because homeowners are less likely to move to areas with more job opportunities. (Economist Milton Friedman argued that the natural rate of unemployment in an economy depended on its labour market mobility, which is dependent on how people house themselves.)

The politics of homeownership are appealing and owning property is an attractive prospect. However, the economic harms associated with government-sponsored homeownership suggest that it is imprudent. Considering the rising demand for mobilize labour, not only in the global setting, but also in Canada, it is, perhaps, time for the Canadian government to reconsider the role of the CMHC and homeownership in general.

Michael Sullivan 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