Canada’s economy is growing at a slow pace coming out of the economic crisis and recession, about 30 per cent weaker than recoveries of the 80s and 90s. An increasing number of economists claim this is the new normal – “secular stagnation” – but are we really condemned to a future of diminished economic expectations?
Some say we have to get used to slower potential growth because of our aging population, slower labour force growth and because we can’t count on productivity growth like we used to. Others say we can grow a bit faster, either through even more market-friendly policies, or by boosting government investment and reducing inequalities. Still others welcome slow or even no growth as the only way to prevent ecological catastrophe.
Why is this issue important? At a fundamental level, the revenues governments raise to pay for public services are closely linked to economic growth, and increasingly governments are linking the transfers they provide to rates of economic growth. The way governments perceive and respond to the challenge of sluggish growth with labour market, economic and social policies will affect everyone. Slower economic growth also implies low interest rates are likely to persist for some time.
At the heart of the matter is a simple equation: economic growth = employment growth + productivity growth.
As baby-boomers retire over the next two decades, our working age population is expected to slow to growth of just 0.5 per cent annually, about a third of the average annual rate during the last 40 years.
Most of this growth will come from immigration, with natural population growth contributing only a quarter. Higher labour force participation of seniors will contribute some, but it’s being offset by lower labour force participation of younger workers.
However, labour force growth doesn’t count for much if workers are unemployed. Instead of pushing more seniors into the workforce, governments should focus on creating more jobs and helping underemployed groups obtain decent work.
A national public child care program, which can pay for itself through higher government revenues, would also help to increase labour force participation, employment and economic growth.
Demographics and better employment of workers is only part of the story. Most of our economic growth over the past 70 years has come from productivity growth rather than labour force growth. And that’s more complicated. Productivity doesn’t mean working harder, as management often puts it to workers. Productivity really means producing more with the same or fewer resources through technological advances, investments, greater efficiency and less waste.
Underemployment and productivity are linked: workers’ skills rust and degrade if they aren’t being utilized, a phenomenon called hysteresis. Under and unemployed workers who stay home are often scarred for life with lower earnings.
Despite record profits, corporations have reduced their rate of investment in the economy and instead put much of their excess cash into share buybacks and speculative investment, which helped cause the financial and economic crisis. They have little reason to invest in productive capacity when there’s little demand, in part because of slow wage growth.
If corporations aren’t investing it makes sense to tax back some of this excess cash with higher corporate tax rates and have the public sector increase investments in economically and socially productive purposes. Since those with lower incomes spend a higher share of their income, reducing inequality will also boost demand and thereby productivity.
Boosting economic growth is important, but ultimately our economy should serve the people. We need an economy that’s more socially equitable and environmentally sustainable, where our goals and measures of growth reflect these broader measures of wellbeing. But in the transition to a more sustainable and equitable economy, many things can be done that would both improve our short-term economic growth and our long-term wellbeing. Secular stagnation is more of a threat for the state of our minds than for the state of our economy.