Crunchy Numbers

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The Argument | The Counter-Argument | Notes

The Argument

The aim of Dalton Camp's column is to refute a Centre for the Study of Living Standards (CSLS) study of the Canada-U.S. productivity growth gap reported in the National Post on May 7. Camp's column asserts that:

  • a Harvard economist recently asserted that "improving business performance is more important than tax cuts in raising Canada's standard of living;"

  • the Post reported on the CSLS study as a rebuttal of the Harvard economist;

  • the CSLS study blames labour for Canada's poor performance - it attributes the productivity gap to Canada's inferior labour productivity;

  • the CSLS study asserts that the fall in personal income per capita in Canada to 78.3 per cent of the U.S. figure is due to rising taxes in Canada;

  • "tailing the Americans in labour productivity by a more seven-tenthsof 1 per cent" is insignificant;

  • Canadians are not as productive as they used to be in part because "the corporations, worldwide, have declared war upon organized labour and are winning;"

  • Canadians are less productive but this is irrelevant because the reason for the difference is that we have a different work ethic and put in shorter hours.

The Counter-Argument

While the Post's never-ending "tax rage" campaign is a legitimate object of criticism, Dalton Camp's column misses its target and makes unwarranted criticisms of the Centre for the Study of Living Standards. Most of the major assertions in his column are wrong.

1.
Truth is, Michael Porter is not exactly a Harvard economist - he teaches in the competition and strategy section of Harvard's business school - and portraying him as an opponent of the tax cuts campaign is not quite accurate either.

To understand where Porter fits into the policy spectrum, it's useful to know that his work with Roger Martin - the dean of the University of Toronto business school - was published by the C.D. Howe Institute, which is not exactly a foe of tax cuts. The two men also wrote an article to publicize their work. It ran in the National Post (and not as a Counterpoint column).

Porter and Martin's similar research (presented at a conference organized by the CSLS, with funding from Industry Canada) also didn't give heavy emphasis to tax cuts (though it was reported that way in a Post story at the time).

However, columns written by Martin in the run-up to the historic tax-cutting February 2000 federal budget came out heavily in favour of the cuts. The probable explanation for why Porter and Martin typically place less emphasis on tax cuts than the Post is that Porter and Martin are business consultants: if they didn't find some flaws with business, companies wouldn't need so much advice about how to correct those flaws.

2.
While the Post's Peter Foster did criticize Porter and Martin for not abiding by strict "free market" ideology, Foster is known for criticizing almost anybody, including conservative economist Thomas Courchene, for failing to meet the highest standards of free market purity. And just because not all Post columnists were in full agreement with the Porter-Martin findings is no reason to think that the Post covered the CSLS study in order to rebut Porter.

The Toronto Star covered the CSLS study before the National Post did.

It was covered by The Globe and Mail the same day as the Post covered it. (And the latter's story wasn't even written up by a Post reporter. It came from Eric Beauchesne of Southam News.)

None of these stories tries to argue that differences in tax rates explain the Canada-U.S. productivity growth rate gap. If the Post gave the story more prominence than the other papers, that is probably because the paper likes to emphasize that Canada has fallen behind the U.S.

3.
Mr. Camp says that, in explaining the Canada-U.S. productivity gap, the CSLS study "laid the blame on 'poorer labour productivity.'" He then goes on to quote the line: "It's the rich wot takes the credit, and the poor wot takes the blame." Apparently Mr. Camp is interpreting "labour productivity" as something due solely to the motivation and diligence of paid employees.

This is a common misinterpretation. But as explained by Statistics Canada:

"Labour productivity, or real GDP per hour worked, is the ratio of output to labour input (hours worked). Economic performance as measured by labour productivity must be interpreted carefully. This indicator reflects changes in the other factors of production such as capital, in addition to growth in productive efficiency."

So, to calculate labour productivity, you divide the amount of output per unit of time by the amount of labour input (hours in the Statistics Canada definition given above; number of workers in an alternative definition).

This is a neutral definition employed by statistical agencies around the world.

To give a concrete example, road construction in high-income countries will be characterized by much higher labour productivity than road construction in the least-developed countries if workers in high-income countries use heavy equipment like bulldozers and workers in the least-developed countries use shovels and buckets. A given number of workers with advanced equipment will typically be able to produce much more in a given time period than an equal number of workers with less-advanced equipment. To say that one group is more productive than the other isn't to blame anyone for laziness. It is to describe the objective situation. The only other well-known measure of productivity is called total factor productivity or multifactor productivity but it is less commonly used and is more controversial because its calculation requires various theoretical assumptions.

4.
In suggesting that the CSLS study attributes the increased gap in personal income between Canada and the U.S. to the rising share of Canadian's income that went to taxes, Dalton Camp fails to recognize that the CSLS study examines statistics on three definitions of living standards - in terms of GDP per capita, personal income per capita, and disposable personal income (that is, personal income after taxes) - the second and third of which are relevant here.

Personal income per capita in Canada has fallen to 78.3 per cent of personal income in the U.S. This is pre-tax income. Disposable personal income per capita in Canada has fallen to 70.3 per cent of disposable personal income per capita in the U.S. This is post-tax income. The reason the gap between disposable personal income per capita is greater than the gap between personal income per capita is due to relatively higher taxes in Canada. This is a statistical fact, not an opinion.

The CSLS study, however - as opposed to the typical Fraser Institute study - fully recognizes that higher taxes "result in a greater supply of public services" and partly because of this the CSLS study states that: "The most relevant measure of income trends from a living standards perspective is probably personal income per capita measured in real terms (excluding inflation)."

And the CSLS study notes in a footnote (ignored by the Post story) that:

"It is interesting to note that the personal tax burden increased at a faster rate in the United States than in Canada over the 1996-2000 period. The share of taxes in personal income ... rose 1.2 percentage points from 23.0 per cent in 1996 to 24.2 per cent in 2000 in Canada while it advanced 2.3 points in the United States from 13.3 per cent to 15.6 per cent."

5.
In his column, Camp remarks: "I would have thought tailing the Americans in labour productivity by a mere seven-tenths of 1 per cent would not be too shabby ..." But the issue is not that the Canadian labour productivity level is seven-tenths of 1 per cent below the U.S. level. It is that the growth rate of Canadian labour productivity from 1988 to 2000 at 1.2 per cent per year was 0.7 percentage points below the 1.9 per cent growth rate of U.S. labour productivity.

Many would argue that such a difference could be significant. If you have two countries with equal levels of labour productivity at the beginning of a century, and labour productivity grows at 1.2 per cent a year in the first country but at 1.9 per cent a year in the second country, then by the end of the century productivity levels will be approximately twice as high in the second country as in the first one. (David Crane makes this general point from time-to-time in his Toronto Star columns.)

6.
Mr. Camp also asserts: "... the Centre for the Study of Living Standards is half right: We are likely not as productive as we used to be. Part of the reason is because the corporations, worldwide, have declared war upon organized labour and are winning."

The misunderstanding here is apparently related to the previous point. Again, a distinction must be made between level-of-labour productivity and the growth rate of labour productivity. A lower productivity growth rate does not necessarily mean a fall in the level of productivity. Neither the Centre for the Study of Living Standards nor any of the news stories (not even those in the Post) has asserted that labour productivity levels in Canada have fallen. They all recognize that we are more productive than we used to be.

And even if corporations attacking labour had caused a drop in Canadian labour productivity, the logic of Mr. Camp's argument is hard to follow. You would think that the attack on labour would have caused a larger drop in productivity in the U.S. than in Canada because various indicators (like the unionization rate or union density) point to the attack having been relatively stronger in the U.S.

7.
As well, Dalton Camp vaguely asserts that Canada-U.S. productivity comparisons don't matter because Canadians have a different work ethic than Americans. But to say the Canada-U.S. productivity gap is simply due to Canada-U.S. differences in the work ethic is to embrace the argument Mr. Camp earlier misattributed to the CSLS study: Americans are more diligent and motivated than Canadians or, as Camp likes to put it, American executives are "haggard, bedevilled, driven ..." whereas for many Canadians sports "fishing comes first."

A more generous interpretation, for which there is little evidence, might be that Mr. Camp is trying to express the plausible point that U.S. productivity growth rates have been higher in Canada than in the U.S. because average weekly hours worked in the U.S. may have been increasing relative to average weekly hours worked in Canada. But the CSLS study notes that trends in GDP per worker (Canada relative to the U.S.) and GDP per hour (Canada relative to the U.S.) are fairly similar.

8.
Combined with the suggestion that the CSLS is feeding into the National Post's tax cuts campaign, references to the "11 listed executive officers and directors" of the CSLS and to "the bean counters at the CSLS" must create the impression for some readers that the CSLS is a large, conservative organization, akin to the Fraser or C.D. Howe Institutes.

In fact, though it may seem much bigger based on its high level of output, the CSLS is largely a one-man operation. What we have called the CSLS study - as some of the news stories (including the one in the Post) have made clear - is in fact a paper written by Andrew Sharpe, the head of the CSLS, and published as one of several articles in the Spring 2001 issue of the CSLS journal International Productivity Monitor.

The CSLS is not right wing, but middle of the road. And its advisory boards have higher than usual centre-left representation. Andrew Sharpe has also featured a range of centre-left speakers and discussants at CSLS conferences. He's a friend from student days of left-wing Toronto Star columnist Tom Walkom and of popular author Linda McQuaig (and is thanked for detailed and valuable feedback in quite a few of her books). Shape is alos a member of the Progessive Economics Forum.

You might say that Andrew Sharpe has played a leading role in the emergence of a "progressive economics" in Canada. He is a centre-left economist with a strong commitment to scholarly research, and Dalton Camp is seriously mistaken in attacking him for being a right-wing ideologue.

Perhaps one lesson here is that political commentators without an economics background should not assume they always possess the expertise required to evaluate the analysis of PhD-level economists. Another lesson may be that you should never assume that a study covered in the National Post has the policy slant you might imagine from reading the Post's coverage. It's always a good idea to check the original source.

This article is originally produced by Brian MacLean as Canada's Economy in the Newspapers, which is available as an e-mail newsweekly (ISSN 1492-2274). Visit his Web page for archives, updates, and corrections.

You can send requests to be added to Brian MacLean's mailing list. Subscriptions are free.

Notes

  • The first news story on Andrew Sharpe's article was probably David Crane's "Canadian living standards rising." Then came Bruce Little's " Are Canadians up to increasing productivity?" and Eric Beauchesne's "Productivity gap widens: study."

  • The piece by Roger Martin and Michael E. Porter, "Weak newsprint makers a metaphor for Canada" was criticized by Peter Foster in "A cluster of bad ideas."

  • For a critical discussion of the Martin-Porter research presented at the January 2000 CSLS conference, see my commentary on David Crane's Toronto Star article from January 27 2000. My piece is in Canada's Economy in the Newspapers.

    On the National Post reporting in January 2000 on the Martin-Porter research, I commented that:

    "Reporter Alan Toulin filed a story in the National Post about a presentation to this conference the day before the paper was presented. The story emphasized that the paper expressed the views of management guru Michael Porter although the paper was a co-authored one to which Porter [may have] added nothing but his name and the right to rehash his old material. The story emphasized that 'Porter's' paper supported the case for tax cuts while the paper provided little empirical evidence for anything, and argued primarily that what Canada needs for improved productivity performance is better business management (which can presumably be acquired through payment of appropriate consulting fees to Michael Porter and his associates). Several conference participants commented on the surreal nature of attending a conference and finding the concurrent media coverage to be a newspaper story filed by a reporter who was not present about a speaker who was not present and focusing on a message that happened to be a favourite of the reporter's newspaper but which was not emphasized by the absentee speaker's associate."

    For critical commentary on one of Roger Martin's "tax cuts" columns ("Taxation: the new wave," Globe and Mail, February 10 2000), see the February 13 2000 edition of Canada's Economy in the Newspapers.

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