Friday, December 13, 2013

Why is Canada doing better than America?

Today I found a great article on the BBC talking about how Canada has a much lower unemployment rate than most European countries and now has a shortage of labor for the booming oil sands in Alberta.

This made me wonder why Canada is doing so much better than the US and Europe and what the underlying differences are between the three major economics (Europe is for obvious reasons more fragmented but their economy is in recession as a whole and that is where people are coming from).

Looking at the underlying features between the US and Canada they are very similar. They have extremely similar labor laws, extremely similar proportions on who works in what industries, and almost every other major figure is similar except for three important features:
  1. Canadians are paid more at the lower wage levels.
  2. Capital Gains are taxed at a progressive rate in Canada, but not in the United States.
  3. It takes only a day to start a business in Canada and they are ranked by the World Bank as the best country in the world, meaning competition in the private sector.
These three features are why Canada is doing so well right now and are finding such a developed economy.

The first point, higher wage levels, means that there is a higher demand for goods and services in Canada at the local level nationwide than in the US or Europe. The US is having a lagging economy right now, almost certainly due to lower consumer demand. Wal-Mart and other retailers are not finding people to purchase their services which is contributing to poor economic performance. Companies cannot stay open if no one will buy their product. Canada doesn't have this problem because everyone working full-time can survive. This helps small businesses and the entire economy.

Taxing capital gains as regular income solves the problem of the government not losing a lot of money during a recession, which keeps deficit low. However, I can't observe a difference in the stock markets so it doesn't dissuade people from removing their money from the market.

The United States has a similar sector makeup, and the oil boom is isolated to Northern Alberta, and the United States is also having an increase in drilling in different regions. But Canada's entire economy is doing better than the US and Europe, so blaming the oil boom is not enough, since it accounts for less than 19% of the economy.

So, the response of the stock markets is the same, the sector makeup is the same, all but one major feature of these economies I find are comparable, and that feature is distribution of wealth.

After the recession in 2008 the rest of the world came back (except Europe, but only after the implementation of austerity) and there was high demand for goods and services. The average Canadian is paid more than the average American, their distribution of wealth is a lot more equitable, close to what Americans want actually. Because of this difference, the change in economic spending wasn't so large in these other countries. a lot of America's economic growth of the past 40 years was also based in a lot of lending, through a system of government incentives for people borrowing for houses, and schools, which is more than other countries that have seen more steady growth. When the economy collapsed, millions of workers were laid off, and demand struggled. Without massive incentives to change this fact and increase the quality of life we will continue to see a major shift in economic growth. Nick Hanauer (an entrepeneur) made a TED talk talking about how the economy is an ecosystem (I'm paraphrasing) and that it requires transactions to be made, and when one large group of people are unable to make the transactions the entire ecosystem/economy falls apart. Other developed countries don't have this problem like us, and it is the only major characteristic that separates the US and Canada.

If we want to see growth and faster recoveries from recessions we need to increase our economy from the bottom so more people can participate, because no entrepreneur can start a business in a market where there is no demand. This is the reason the American economy is stagnating. It is also similar to the reason why the European economy is in depression, because millions of people have had their income taken from them and the aggregate demand curve has collapsed, leaving firms new and old with no demand, decreasing employment, and decreasing GDP, creating a cycle that has been feeding on itself. Western Europe (which has had large economic ties for the past 40 years) is now divided between north and south (though it hasn't always been to the same extent) between the employed and the unemployed, and this has reduced demand for goods and until they find that people in Southern Europe have opportunities restored, I have little doubt Europe will remain in recession. Other major economies are still growing at increased rates (as long as they didn't implement austerity).

I also predict that Canada saw a reduction in their GDP growth in 2012 because they are so heavily tied to the American economy which hasn't been growing as fast as we need to.

We need more avenues to the middle class so everyone with the skill and will can be as well off as possible. It will be a huge boom to our country's economy.

Sources: economic growth by country where available Summary of distribution of wealth TED Talk

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