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Home Publications Blogs Beat the Press The NYT Wants the U.S. to Have Slower Growth

The NYT Wants the U.S. to Have Slower Growth

Sunday, 31 July 2011 07:12

That would seem to be the implication of the advice in an article that we should follow Canada's model for dealing with our deficit. According to the NYT, Canada did things right when it decided to get its deficit down in 1994, doing a comprehensive review of its spending.

Since that was almost 20 years ago, we have some basis for assessing how things turned out. According to the OECD's data on productivity growth (the main determinant of living standards), it doesn't seem that Canada has done very well. Its productivity growth has averaged just 1.0 percent annually from 1994 to 2010. This compares to 1.8 percent in the United States. Canada's rate of productivity growth is behind the 1.5 percent rate for Greece and Portugal and even behind the 1.1 percent rate for Japan, although it is better than the 0.7 percent rate for Spain.

If the United States had experienced the same productivity growth as Canada over the last 17 years, we would be on average 12.6 percent poorer today. Insofar as the weaker growth can be attributed to Canada's fiscal consolidation we can say that the path advocated by the NYT is equivalent to imposing a 12.6 percentage point income tax increase on the United States.

The article also refers to the surpluses at the end of the Clinton years and the expectation that the United States would pay off its debt. Economists who know national income accounting (an essential part of economics that unfortunately seems little known by economists) did not believe that the United States would pay off its debt.

The large budget surpluses projected by the Congressional Budget Office in the context of continuing trade deficits implied large dissaving by the private sector. (This is an accounting identity -- it must be true.) It was very unlikely that either households would have large negative savings rates, especially as the baby boom cohorts were approaching retirement. And, it was also very unlikely that there would be an enormous investment boom even as the country was sending much of its manufacturing sector overseas.

Therefore, it was easy to predict that we would not see the surpluses that were projected at the end of the Clinton years. Unfortunately, economists never suffer any career consequences for being completely wrong. Therefore most still have not learned the basic national income accounting that is taught in every introductory class.

Comments (5)Add Comment
Seriously what's the deal?
written by JR, July 31, 2011 10:03
What's the deal with that not being widely understood? While I majored in economics it wasn't as if I was at an Ivy and I read this stuff and think "Oh yeah, that was in my Blanchard book." You'd think that if you were paid to write about economics every day, or even teach or actually formulate policy proposals you might retain just a little of your undergrad intermediate macro no?
written by AlaninAZ, July 31, 2011 10:29
Although Canada may have grown less than the US, the distribution of the benefits from that growth was probably more more evenly divided between classes in Canada. I suspect that the middle class in Canada does not feel as badly about back sliding as in the US. Just a guess on my part.
written by AlaninAZ, July 31, 2011 7:30

The above link is to a paper that takes a different position from Dean Baker on the implications of Canada productivity.
Canada cut social programs in the 1990s...
written by Anthony, July 31, 2011 9:35
It should be noted that, aside from low productivity growth, the effect of Canada's austerity budgets in the mid-1990s is still being felt. Health care transfer payments to the provinces, which deliver health programs on behalf of the federal government, were drastically cut, as were welfare subsidies and unemployment insurance payouts. The late-1990s boom masked the extent of the damage, but Canada's recent recession revealed just how brutal the cuts had been.

Sadly, the myth of Canada's economic miracle still resonates, as the architect of Canada's austerity budgets, Paul Martin, recently found himself invited by the IMF--as an "expert"--to help them craft austerity plans for Greece, Ireland and Portugal.
The definition of "GROWTH" is broader than productivity growth
written by A Greek bearing facts, August 01, 2011 9:22
Productivity growth in Canada has been disappointing relative to that in the U.S. since 1994. On the other hand, other dimensions of Canadian growth have been considerably better than in the U.S. A typical bottom-line measure of overall growth is the percentage increase in national output per person in the population. Fortunately for Canada and unfortunately for the U.S., this broad measure favors Canada, not the United States.

Since 1994 real GDP per capita measured in constant prices rose 1.6% a year in Canada and 1.5% a year in the U.S. Measured in PPP currency units (which converts Canadian and U.S. production to the same currency units but does not adjust for inflation), GDP per capita rose 3.7% a year in Canada and 3.6% a year in the U.S. Thus, both measures show that Canadian growth has outpaced U.S. growth since 1994. By the way, these calculations are based on the latest estimates shown in IMF's "World Economic Outlook" database. They do not reflect the latest revisions just published by the Commerce Dept. last Friday, which showed that U.S. economic performance in 2008-2010 was in fact worse than reflected in the latest IMF statistics. Thus, the latest revisions imply that Canadian outperformance relative to the United States was likely to be larger than the estimates reported immediately above.

The U.S. has outperformed Canada on productivity growth, as Dean Baker shows. But Canada has outperformed the U.S. in other crucial determinants of overall economic growth. Most critically, Canada has been more successful in keeping a large percentage of its adult population employed. I think this measure of economic performance should also be important to readers of the daily newspapers.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.