One can only hope that on his trip to Canada this week, President Bush kept his mind open to lessons from comparing the United States with that nation.
There are few better ways to gain useful insights than by comparing the economic policies, institutions and performance of different nations. History and culture vary between countries, and they adopt different policies and institutions. At times the outcomes vary. In other cases, quite different policies lead to strikingly similar institutions.
Canada and the United States clearly share political and legal traditions. They have similar cultures.
Sharp differences exist, however. For decades, the Canadian government has played a somewhat larger role in the economy than the U.S. government has. Canadian health care is more government-run and drug prices are government-negotiated. Marginal tax rates are higher, and welfare programs are more comprehensive and generous north of the border.
The U.S. economy is, of course, larger and more complex than Canada’s. Depending on which exchange rate one chooses for the comparison, U.S. incomes are a bit higher. U.S. incomes also are less equally distributed, and poverty levels are somewhat higher.
If one travels from St. Paul to Winnipeg or from Duluth to Thunder Bay or even from New York to Toronto, one does not see notably different standards of living. Champions of Canada can point out specific ways Canadians are better off than their U.S. cousins. U.S. fans also can point out advantages to living in our country. But on the whole, living standards are comparable in 2004, just as they were in 1954 and 1904.
Some things change. A Canadian friend who visited 30 years ago wanted to cash a Canadian traveler’s check. The bank in Chandler had to call Minneapolis to determine whether it should give him $1.02 or $1.03 per Canadian dollar. The banker and our friend agreed that the Canadian dollar was going to pot. It had been worth $1.08 only a few years before.
Five years later, when I shared an office with a graduate student from Canada, the Canadian dollar had slid to 85 cents in our currency. In the mid-1980s it was down to 71 cents. Canadian economists moaned that their nation was in long-run decline compared with the United States, largely because of the fiscal imprudence of successive liberal governments in Ottawa.
The decline of the Canadian dollar did not bottom out until January 2002, when it briefly dropped below 62 cents. Since then it has become more costly. At its current level of about 84 cents, it costs 37 percent more in U.S. dollar terms than only three years ago. Canadian businesses, of course, complain bitterly that their strong currency is killing them.
The Canadian economy did perform less well than the U.S. economy in the 1970s and early 1980s. Over the past two decades, however, growth has been only marginally higher here, with U.S. gross domestic product growing at 3.15 percent compared with 2.98 percent north of the border.
From 1994 to the present, Canadian and U.S. output grew at essentially the same rate, 3.3 percent. In the five years since 1999, Canadian growth has outpaced ours a bit, 3.2 percent vs. 2.8 percent. That period includes the collapse of a high-tech stock bubble and the economic impact of the Sept. 11, 2001, terrorist attacks, both of which affected Canada much less than the United States.
The upshot is that while Canada grew more slowly than our country a generation ago, the two are now on roughly similar growth tracks. Where we differ is in the fiscal positions of our national governments. Canada, like the United States, ran budget deficits for 25 years. Its deficits were comparatively larger than ours in the 1970s and ours were comparatively greater in the 1980s. Both nations reduced their deficit spending in the 1990s.
Canada has run a federal budget surplus for seven years now, while the United States has returned to large deficits. Marginal income-tax rates in Canada are lower than under the Trudeau governments of the 1970s, but remain higher than here. And government activity as a proportion of GDP remains higher in the north.
By the precepts of the supply-side enthusiasts in the Bush administration, the Canadian economy should be groaning under the yoke of excessive taxation and stifling government bureaucracies. Instead, it seems to be doing as well as ours, thank you, and perhaps a bit better in the past few years.
Canadians ran large deficits in the 1970s and concluded that they were bad. We ran large deficits in the 1980s, and some — most notably Vice President Dick Cheney — concluded “deficits don’t matter.” The Bush administration apparently still believes it must champion a strong dollar even as it slips. Canadian Prime Minister Paul Martin must apologize for the strength of the Canadian dollar and reassure his citizens that it won’t hurt them too much.
The United States and Canada are an ongoing side-by-side experiment. Watching what happens to both over the next decade will be instructive.
© 2004 Edward Lotterman
Chanarambie Consulting, Inc.