Canada's Surprising Prosperity: What's Our Secret?


It’s a fact that George W. Bush loves his tax cuts. When he campaigned to become president, the United States was in an enviable fiscal position. Record surpluses raised the possibility of paying off the national debt by 2010. Bush felt that surpluses were the right time for tax cuts, since they were a sign that the government was taking too much out of the pockets of Americans. With the economy performing so well, the government could afford to share that wealth with the people who provided it.

For various reasons, the fiscal picture of the United States reversed soon after Bush’s tax rebate. The United States entered into a recession, and for Bush the solution was clear: more tax cuts. Cutting the revenue the government received from taxpayers would put more money in taxpayers’ pockets, allowing them to spend their way out of recession. Even now, as the United States struggles through a lackidaisical recovery, Bush points to his tax cuts as the reason why the recession wasn’t as severe as it could have been.

I’ve already made my attempt to debunk the correlation between tax cuts and increased economic activity. Bush is holding onto his belief that tax cuts always generate jobs in a 1:1 ratio out of a dogmatic stubbornness akin to his belief that there’s nothing wrong with his foreign policy. Counter-evidence to Bush’s claim that tax cuts spared America from a worse recession can be found north of the border.

Canada has higher tax rates than the United States (although the burden on Canadian taxpayers is about the same as on American taxpayers when American health insurance is added to the equation), and although Paul Martin cut taxes, he did not cut so deeply as to put his government into deficit. There have been challenges, but Canada remains the only G-7 nation maintaining a healthy fiscal surplus ($9.1 Billion this year, at last count), and from January 2001 to this day, Canada managed to avoid the recession that hobbled the United States — the first time that Canada has been able to do so since Eisenhower (finally spelt his name right!) was president.

So what, some may say. The United States had unique pressures placed on it since 2001. There was the consumer confidence crisis following the September 11 attacks. There was the tech-sector bust. There was the… ah… consumer confidence crisis following the September 11 attacks (I know I already said that, but it was so profound, I thought I’d use it twice!). That explains why Bush presided over the greatest period of American job losses since Herbert Hoover.

These excuses ignore how connected the American economy is to the world in general, and Canada in particular. Canada is the largest single supplier of American energy. Canada is America’s largest trading partner. Almost 85% of our exports head south of the border. Canada’s trade surplus with the United States is measured in the hundreds of millions, per day. Throughout the seventies and the eighties and into the early nineties, the truism was that whenever the American economy sneezed, the Canadian economy caught cold. By rights, when America went into its post 9/11 slump and stopped spending, Canada’s economy should have tanked. It didn’t. The gap between American and Canadian jobless rates narrowed to its smallest point in fifty years. Even this past September, a country ten times the size of Canada in population can only manage twice as many new jobs.

I am not going to claim that higher taxes are the sole reason for this economic miracle. But clearly Canada and the United States are taking different approaches, and Bush’s approach of lowering taxes isn’t working.

So, How Did We Do It?

Economists are stumped, frankly. Few have even commented on this reality, possibly afraid that questioning it will make it go away. Some have cited Canada’s undervalued dollar as a de-facto tarrif that protected Canadian factories, but this strikes me as a simplistic explanation. Canada’s dollar is now as high as it was between 1988 and 1992, and Canada’s economy isn’t tanking as it did back then. Our trade surplus remains as high as ever.

I’m no economist, but I know enough that answers involving economics are rarely simple. So over the next few posts, I will explore a few theories as to why Canada is doing so well compared to the United States. These theories may be right or they may be wrong, but they all may be worth exploring to discover the secret of Canada’s success.

Next Article: Are Balanced Budgets More Important than Tax Cuts?

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