December 20, 2012

“Japanese are smart. Chinese are smart. Americans are smart. Even Finns are smart. But Canadians? We tend to be plodders.”

Filed under: Cancon, Economics, USA — Tags: , , — Nicholas @ 12:38

William Watson on a terrible psychological burden Canada has been labouring under for generations — the productivity gap — which does not actually appear to exist.

The good news just keeps pouring in. Last week we learned courtesy of a special report from TD Economics that median income in Canada had caught up with median income in the U.S. Never mind that the measure of income used was a little screwy: market income plus cash received from the government — basically all the goodies — with no accounting for taxes paid to the government. Most Canadians seemed tickled by the result anyway, as we always are when outperforming the Americans.

Now this week, just in time for Christmas, comes news that Canada’s productivity, far from having flatlined over the last 30 years, has actually been growing at a perfectly respectable pace that’s even comparable to American rates. It turns out we’re not nearly as incompetent as our official productivity numbers have been suggesting we are. We’ve just been calculating them wrong. In fact, it’s tempting to say our incompetence is mainly in the productivity section of Statistics Canada. Tempting maybe, but not fair. It’s Christmas, after all, and, besides, calculating productivity is like doing Sudoku for a living and there’s plenty of room for disagreement over what the data are saying.

[. . .]

StatCan’s estimates of our MFP have consistently suggested that as a people we aren’t at all clever. We may be lumberjacks. We may be OK. But doing more with less — or even more with the same — just hasn’t been our game. Japanese are smart. Chinese are smart. Americans are smart. Even Finns are smart. But Canadians? We tend to be plodders. Thus over the last half-century our business-sector MFP growth has averaged just 0.28% per year. By contrast, the Americans are used to rates a full percentage point higher. In 2010, they hit 3.4%! But now Diewert and Yu estimate that in fact over the last 50 years our MFP growth has averaged a perfectly respectable 1.03% per year. If you can add 1% a year to overall output without adding more and smarter people and machines to the mix — which of course you’re also allowed to do and we have been doing — your living standards will rise very nicely over time.

How can StatCan’s estimates have been so wrong? Diewert and Yu use quite different techniques at different stages of the calculation, but the main problem surrounds capital services. StatCan’s estimates of how much capital we use in production typically are much higher than Diewert and Yu’s. Partly the difference revolves around abstruse discussions about what internal rates of return to assume when trying to measure capital.

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