Front Burner - Is Canada's economy working hard, or hardly working?

Episode Date: May 30, 2024

You might be hearing some positive-sounding headlines about Canada's economy recently. Inflation is coming down, and we've (so far) managed to avoid the recession many were predicting following the pandemic. So why do so many Canadians still feel like they're struggling to get by?In a word: productivity. The Bank of Canada has called the country's economic productivity situation an "emergency," and economists say there's a direct link between productivity and standard of living.BMO chief economist Doug Porter explains.Help us make Front Burner even better by filling out this audience survey.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. Hi, I'm Jamie Poisson. You may have been hearing some decently good news about the economy lately. Inflation is down and technically we haven't actually gotten the recession that everybody seemed to be predicting. At least, not yet.

So then, why for so many people doesn't it feel like our economy is on the right track? If you ask some economists, they would probably tell you that our economy isn't growing fast enough. And a lot of them have been frantically pointing out this thing called productivity. I'm not really talking about how many things you cross off your to-do list in the afternoon. I'm talking about how we use that word in economics to describe how many things of value Canada actually makes for all the hours that we're working. It's low. In fact, it's declining. And why does that matter to you? Well, those same economists would say it's the number one thing that decides what our standard of living is in this country. Because it's a big factor in how much we get paid and can even influence how much things cost.

Today, Doug Porter is here. He's the chief economist at BMO, the Bank of Montreal. And we're going to talk about what the Bank of Canada is calling a productivity emergency. What we can do about it, and also whether this is really as big a deal as economists are saying. Doug, hi, thank you so much for coming on to FrontBurner. It's a pleasure to have you. Well, thank you for having me, Jamie, and it's a pleasure to join you. So I'm hoping that we can start by kind of de-jargoning the word productivity, or at least the way that we use it when we're talking about the economy.

What does it actually measure? What is it? Well, actually, your introduction was fairly good. It really laid out essentially what productivity is. It's the value of goods and services that we produce divided by the number of hours we work. So in simple terms, it's how productive we are as a society, as an economy. very rough and weighted to think of productivity is it's it's basically the total amount of output sometimes known as gdp uh divided by the the total number of hours we worked and and a really rough way to think of that is is income per person you know and and that's that's why it ultimately matters to an individual or for all of us is because productivity growth will ultimately determine how quickly our incomes can grow after inflation. And so if we're seeing next to no productivity growth, which is effectively what we've seen over the last five to six years on balance, is it's going to be really tough for people to see gains in income after inflation. And that's essentially what we're experiencing.

And it's why economists regard it as very important. And I would just drive home the point that it may sound like sort of this esoteric concept to worry about, but it matters to all of us because it does ultimately determine our standard of living, how quickly productivity is growing. And when we're talking about what productivity actually is, I'm sure that there are people listening right now and they might be thinking to themselves like, I work very hard. How could I work harder? But this isn't necessarily about people working harder, right? About people being lazy. Yeah. And to be clear, it's not say the number of hours you work. That's,

for instance, if we all work 35 hours a week and then decided to work 70 hours a week, our productivity would probably actually go down because it's how much are we producing per hour that we work. And I would say it's not necessarily got anything to do or it doesn't have anything to do with how hard we work. That's a small part of it. But really, it's how smart we work, how efficiently we work, how well organized we are as a team, as a group, as an economy. Are we doing things in the most efficient manner?

And I'll give you one example. If you think of a farmer, if they plow a field by hand, or if they plow it with a super sophisticated tractor, they're going to be a whole lot more productive using that tractor. They're going to get a whole lot more productive using that tractor. They're going to get a whole lot more done in the space of an hour. So some of it is, do we have the machinery and the equipment to do our job? That's a big part of determining how productive we are. It's not how hard we're working. It's whether we have the tools to do our job properly. Right. And I want to get into a bit more in a couple of minutes about, you know, why we might not have

all of those tools specifically here. But just, you know, of course, you know well, I'm sure, all about the speech that the deputy governor of the Bank of Canada gave in March, where she called this an emergency in Canada.

And I just wonder if you could put that into context for me, like just how bad is our productivity situation, especially versus similar countries. And this is, to be clear, this is not really a new issue for Canada. It is something that we've been struggling with, I would argue, for the last 40 years or so, that this has been an issue that's come and gone. There was about a 10-year spell there where we had strong productivity in the late 90s and early 2000s, mostly when the internet was more widely adopted. We did see good productivity growth. But aside from that, it's been challenging in Canada, but I will say it's

been especially a challenge in recent years. And I think this is why the Bank of Canada has gone so far as to actually call it an emergency. Essentially, normally our productivity grows by about 1% a year. It doesn't sound like a lot, but that definitely adds up over time. But in the last five, six years, it's almost stalled out. We've seen next to no growth. And meanwhile, in the US, they've managed to churn out productivity growth of almost 2% a year in the last five years, which is closer to their long run average. I will say what's notable is the US has actually been a little bit of an outlier in the last year. In much of the rest of the industrialized world, they've seen challenges too on the productivity front more recently. And I do think the pandemic

played a bit of a role here in the aftermath. We can point to all kinds of different factors as to why productivity would have been especially low in the wake of the pandemic. But we're not alone in seeing a relatively weak productivity performance. That doesn't make it any better. That's certainly the case. Why do you think that is the case? What is the U.S. doing that Canada and other industrialized countries haven't been doing? So one theme in the stock market in recent years has been the Magnificent Seven, the so-called Magnificent Seven in the US, essentially all tech companies. And the very strong performance of those particular stocks, I think, does play into one of the big advantages the US has over much of the rest of the world. And that's a very large portion of their economy is driven by the

tech sector. And that's the sector of the economy that sees especially large productivity gains, whether you're talking about Nvidia or Microsoft or Apple, those are the areas of the economy that typically see really strong productivity growth and they are overrepresented in the tech sector to their benefit. And I do think that's one of the reasons why we are facing these productivity challenges. And I wonder if it makes sense to start with a reason that I know you have written about, and you have argued that some of it has to do with the very nature of Canada, like its geography, like something that's kind of out of our control. And why is that? Yeah, historically speaking, look, in some ways, we have a lot of advantages in this country, of course, with our natural resources. We have a very well-educated, well-trained population, but we also have some inherent

disadvantages. You know, we're relatively small population over a huge area and we have some pretty intense winter. And, you know, those things do throw a lot of sand in the gears and in terms of, you know, we have to transport things over great distances, travel over long distances. It can deal with some pretty harsh weather, which can tend to slow things down, cause a lot of disruptions. Those are some of the reasons why Canada would be starting off with a lower level of productivity than the U.S. But it doesn't really explain why the growth rate would be consistently lower. And there, I think we get more into some of the policy differences or the industrial structure differences. And one of them is what I talked about earlier, the fact we have a smaller tech sector. But then you also have to look at things like business investment in this country

or capital spending is lower. And it's been very weak in recent years. And that to me is really the nub of the issue as to why productivity growth has slowed so much in recent years and why we've been so much weaker than say an economy like the US is because business investment has been quite a bit lower. And why is that? Why do you think that is? Well, that is, not to use the cliche, but that is the $64,000 question. You know, what could we do to really spur business investment? You know, and if there was a light switch that we could flip, we would have flipped it. You know, I think this is a very broad-based challenge.

You know, to me, it's that in some ways, you know, are we as welcoming to capital as we could be? I do wonder about that. Is our tax system favorable to capital? Even if you look at marginal personal rates, they're relatively high and they kick at a relatively low level. In general, I would say that that's probably our single biggest issue. The other thing I've pointed out is there is essentially a fixation on housing in this economy. In some years, we actually spend more on residential investment than we do on business investment. And as far as I know, there is no other country in the world that sees that. Right.

the world that sees that. Right. Like you're essentially saying that instead of taking money and investing it in a factory that produces widgets that then people buy, we're just trading houses around a lot. Is that a fair way for me to describe it? Exactly. And by the way, the one thing I do want to say is in manufacturing, we actually have pretty decent productivity. That's actually not where the issue is. It's actually more of a whole economy. I think oftentimes when people think about business investment or productivity, they immediately think of manufacturing. Manufacturing productivity is not bad. It's actually the rest of the economy where we do tend to lag behind a bit on the US. In the Dragon's Den, a simple pitch can lead to a life-changing connection.

Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization. Empowering Canada's entrepreneurs through angel investment and industry connections. Hi, it's Ramit Sethi here. You may have seen my money show on Netflix. I've been talking about money for 20 years. I've talked to millions of people and I have some startling numbers to share with you. Did you know that of the people I speak to,

50% of them do not know their own household income? That's not a typo. 50%. That's because money is confusing. In my new book and podcast, Money for Couples, I help you and your partner create a financial vision together. To listen to this podcast, just search for money for couples. This argument that, you know, the taxes are too high here, that they're not encouraging people, I guess, to come here or to start

businesses and then to invest money in their businesses. I suppose the pushback to that is that, you know, the taxes are there to bring in revenue, to provide services that are crucial to help Canadians, including Canadians who are struggling, right? Dental care, child care. And like, are you saying that you think that the country would be better off if we taxed people and corporations less and what cut this kind of help? Oh, I'm definitely not trying to say that that is a silver bullet that is going to solve all our productivity woes. You know, for instance, we did have some pretty meaningful tax cuts in the late 1990s and early 2000s. As I said, we did get a bit of a productivity bump for a number of years, but then, you know, we were right back at it

and productivity deteriorated later on. So it's clearly not the be-all and end-all solution. I think it's actually much broader than that, but I do think having a relatively favorable tax backdrop is important to encourage and entice investment. To me, it's not an either or. I think basically it just behooves governments to spend money as efficiently as possible. Definitely the public sector is part of this story as well. They have to deliver services in the most efficient manner that they can too.

I do think that's part of the broader story as well. Another issue that I saw the Bank of Canada deputy governor bring up is that we're taking in skilled immigrants but not recognizing their degrees and training. And too often, these people wind up stuck in low-wage, low-productivity jobs. Doing better at matching jobs and workers is crucial to the future of Canada's economy. It was notable to me because this was like one of the first examples that she brought up when she was talking about why we're having these productivity problems and you know how does that hurt our productivity? Yeah in general I would say that if you've got a very

well-educated population, which we do, you want them basically working up to or as close to their potential as possible. And I do think we're falling short on that in many ways. I do think we've got probably a lot of very well-educated people working in jobs that are well below, you know, what their education would demand. And, you know, that is simply inefficient. That's true for people who were born here or people who have recently immigrated to Canaan. I think that is a broader issue, you know, that it's part of the bigger piece, essentially. Another issue I hear people talking about a lot is like a lack of competition in the country in certain industries, right? Phone companies, groceries. And is that playing a factor here in our productivity problems? I think you can generally say that if you've got an economy that's content, you know, that isn't really competing hard in general, that probably

means that your productivity growth will tend to be a bit lackluster. And I think there is a case to be made that we could certainly stand with a bit more competition in a variety of sectors. Another thing I would point out, and this is a concern that many economists have pointed out over the years, is we don't have free interprovincial trade in this country either. And I think that that's, as they say, shooting ourselves in the foot or a known goal that we could certainly do something to fix relatively easily, I would say. And why would that be important to have interprovincial free trade? So there's different measures of how much that could add to the economy overall. It runs anywhere from 1% of GDP to 7% of GDP.

I would tend to be towards the lower end of that range. But basically, if you allow free trade across provinces, it means that people can really, and provinces can really concentrate on what they do best. Again, it would make us more efficient, basically allow the economy to operate closer to its capacity. This last potential, when we're talking about factors that cause this, this last one I wanted to talk to you about, I'll say, like, I don't mean to insult anybody here. And also, like, I could totally be one of these people. But I'm also wondering if the type of jobs Canadians are working are part of the problem. Like, I have heard critiques of too many people

working as managers or in what they'd call like email jobs where they're more like providing a service, right? The anthropologist David Graeber has called these bullshit jobs. And I just wonder what you think about that. And is that part of this or not? So one thing I would say is that if someone is being paid to do a job, presumably, you know, there's a reason why they're being paid and that, you know, there is some economic benefit, even if it's very indirect to what they're doing. And, you know, certainly, I will tell you that the U.S. does not suffer for a lack of managerial jobs. They have a lot of service sector jobs as well. So I don't know that we can just point to that. We talked a little bit earlier about the public sector role in this.

It would be helpful to have the most efficient bureaucracy that we could have. bureaucracy that we could have. It would also help in a broader sense if government was as streamlined as it could be in terms of the delivery of services. And that certainly goes for the private sector as well. But like I said, the US has got a lot of head offices. They certainly have a lot of managers in the US, a lot of well-paid managers, and that hasn't really harmed their productivity. They are, by many measures, one of the most productive nations in the world. So I wouldn't attribute it just to that. So we've talked today, you know, a lot about the importance of focusing on productivity, right? And how it's so closely tied to our standards of living. But I'm also wondering whether there are limits to prioritizing productivity.

I think of Unifor's economist recently pointing out, aren't there jobs that do great things for our quality of life, like in healthcare, but don't necessarily do anything to directly boost our productivity numbers? Actually, healthcare would probably contribute a little bit to, uh, just the way they measure, uh, productivity. It's, um, it, it, it, you know, certainly would not be disregarded. And, and by the way, we can always improve productivity in the healthcare sector as, uh, as well. But yes, I, I, I do certainly take the point, you know, there is, uh, there, there, there are lots of things to, to quality of, of life.

There's, there's no question, uh, no question that just your economic standard of living definitely does not answer the complete picture. I guess all I'm saying is, and one of the reasons why I think we should pay attention to productivity is we should not be complacent in this economy. We do not want to see our standard of living stagnate over a long period of time. And I am concerned that if we look over the last 20 or 30 years, relative to other major economies, Kin has taken a bit of a step back. And by the way, one thing we didn't get into is how well measured is productivity. And it is devilishly hard to measure precisely over time.

But I think it is fair to say that we have slipped down the leagues over the years. And I think it definitely is worth paying attention to. And in some ways, I'm glad that the Bank of Canada did raise the alarm on this front because we have seen a notable deterioration in recent years that I think is well worth studying in greater depth. And just as a final question here, if we are complacent, right, and our productivity continues to decline, what does that look like in 5, 10, 15 years? Like, how could that materialize for people in their everyday lives? Well, I think in their everyday lives, what they would find is it's, it's really

tough to, to get ahead. It's tough for, you know, our, our, our children to, to, to, to get ahead in, in, in a world where we're really not seeing, you know, incomes per person rising. And, and, you know, obviously in, in, even in that environment, some people would be, would be getting ahead. But you know, if as an economy as a whole as a whole, we're not improving, then that means others would be taking a step back. And that can lead to real discontent and frustration.

I think if the pie isn't growing overall, it can lead to a lot of discontent. And even if other areas are doing relatively well, if economically we're not moving forward, I think it can lead to broader disappointment. All right. Doug Porter, thank you so much for this. It's really interesting, and I learned a lot. Thank you so much for coming by. Oh, my pleasure. Thanks for having me. Well, my pleasure. Thanks for having me. All right, that is all for today.

I'm Jamie Poisson. Thanks so much for listening. Talk to you tomorrow. For more CBC Podcasts, go to cbc.ca slash podcasts.