No one could have predicted two decades ago how quickly the relative fortunes of the United States and Canada would change. In the early 1990s, the US was beginning a new decade of prosperity, while Canada was stagnant, stuck with perpetually low growth rates, a high long-term rate of unemployment, large fiscal deficits and a future pension crisis. Stock markets in the US set records and healthy exports pushed the value of the dollar ever higher.
Today, of course, Canada is the economic star. Few developed countries withstood the shocks of the Great Recession as well as Canada. It has improved against the US in nearly every important economic category, and continues to rise in various indices of human development, while the US has seen little progress in any area over the last decade or so.
There are of course many reasons for these trends, but here’s one:
This index is from a conservative think tank, the Heritage Foundation. It measures “economic freedom” by a number of different indicators, including trade freedom, labor freedom, business freedom and fiscal freedom (ie. freedom from taxes). It’s a good measure of the general attitude of a country toward “laissez-faire” economics. It’s clear that Canada has gone away from its old quasi-socialist image, while the US has seen a marked decline in economic freedom since the beginning of the recession.
What changed? In the mid-1990s, Canada’s new government under Liberal Prime Minister Jean Chrétien and Finance Minister Paul Martin began slashing spending, eliminating the federal deficit within a few years. Later, they sharply reduced tax rates, including the corporate tax rate. In 1997, they revamped the Canada Pension Plan, partially privatizing it and cutting benefits. This tight attitude toward fiscal policy has remained the standard at the federal level to this day.
In the US, things began to change in the early to mid-2000s. The Bush tax rate cuts were too deep and too quick, and federal spending began to ramp up with the war in Iraq and many new federal spending projects. The United States’ approach to the 2008 downturn was unfortunate: fiscal spending ballooned and was spent in some of the least effective places. Canada’s approach was much more sensible.
If this narrative could be boiled down to one thing, it’d be the leaders each country elected. Martin, Chrétien (both Liberals), Stephen Harper (the current Conservative Prime Minister) and Bill Clinton (Democratic) are fiscally pragmatic, economically literate leaders. Harper even has a Master’s degree in economics. Presidents Bush and Obama, on the other hand, are not. Electing a Harper-style president wouldn’t be an economic panacea for America (especially with a gridlocked Congress), but it could mean the difference between poverty and prosperity for millions of people.
Today’s post was shorter; this week has been a busy one. If you haven’t had the chance, please read through some of my older entries!