For decades, Canadians have accepted lower incomes than their American neighbours, with little complaint. Canada, its citizens tolerantly reasoned, has compensating economic virtues: governments here give better welfare to the poor, provide cheaper post-secondary education for the majority and, above all, bless everyone with medicare. Besides, the economic advantage in being American usually seemed relatively modest.

But Canadians may be wrong on all of these counts. Statistics from the Organization for Economic Co-operation and Development (OECD) and others suggest a different picture:

• American governments now dedicate more money per capita to both public health and education than their Canadian counterparts according to the OECD (story on page 34 of our printed edition).
  
  
• Although the poorest segment of Americans does receive a smaller percentage of the national economic pie, that pie is now much bigger per capita. A Canadian federal study has concluded that poor Canadians and Americans enjoy about the same buying power.
  
  
• Perhaps most telling of all, Americans as a whole have grown far better off than their Canadian counterparts through the past decade. A statistically average family of four south of the border, according to the Toronto-Dominion Bank, has about $35,000 more money (Canadian currency) to spend each year after paying for necessities and taxes.

Canada is certainly not without its admirers, among them Jack Boyd. Trained as an economist, he has spent 24 years analyzing new plant sites in North America and Europe for clients like Pratt & Whitney, Pepsico, Pitney Bowes and Time Inc. "We're not prejudiced for or against any nation. We sell objectivity," says the president of the Boyd Company Inc., a six-person location-consulting firm based in Princeton, New Jersey. Canada now offers a world-class opportunity for manufacturers and processors who need blue collar workers and semi-professionals, Mr. Boyd enthuses.

"Operating costs are very attractive there. Given the low Canadian dollar, Canadian workers earn less than Americans would. Also, because taxpayers pay for medicare, the fringe costs per employee are about half what they'd be in the U.S. [where employers typically pay a portion of medical insurance]," the location expert comments. "Canada has a good education system, telecommunications and other infrastructure. Altogether, it's a strong package. That's why Honda and Toyota are expanding in Ontario, Motorola's moving into Montreal, and so on. I think you'll see quite a bit more foreign investment in the near future. The free trade agreement is an important factor for everyone. European firms, in particular, have always liked Canada but they usually chose the U.S. before access to the full North American market was assured."

The Fraser Institute agrees with Mr. Boyd in part. Michael Walker, its executive director, reports, "Auto manufacturers and other multinationals often find their Canadian plants more productive than their American operations. But there is a much more important point here. Canadian productivity in total lags well behind the United States even though our professionals and workers are just as skilled. One factor that limits our productivity is the size of Canadian companies; they tend to be too small and under-funded."

Why are Canadian entrepreneurs commonly, even usually, poorly financed? High taxes, responds Mr. Walker, and Canadians' much lower disposable incomes. People here have less money to invest. Also, Canucks often send what funds they do have into foreign markets. Outward-bound foreign investment—sometimes called "capital flight" by Latin Americans—has doubled in the last 10 years. Ironically, Canadians frequently invest in foreign companies with plants in Canada.

The growing impoverishment of Canadian citizens infuriates Dale Tremblay. Although he is neither an accountant nor university-educated, the blunt-spoken Calgarian has bootstrapped his way upward into the chief financial officer's post at Precision Drilling. Asked if his firm could fend off a determined foreign takeover bid, Mr. Tremblay snorts derisively. "First of all, people should realize that what looks like a large company in Canada is never more than a middleweight at best in the international market. Koch Oil, for instance, has gross revenues of US$16 billion a year. They're more than 20 times larger than us, yet Koch is just an American independent, not one of the big multinational players."

But taxation, not size, is what truly cripples Canadian firms, Mr. Tremblay asserts. "Compare Precision to Nabors, the world's largest on-land drilling contractor. At our last year-end, we paid tax of $128.5 million on gross revenues of $1.012 billion. Nabors grossed US$1.03 billion but their income tax was just US$67.6 billion, barely more than half of our tax burden." So Nabors, already larger than Precision, offers investors (including Canadians) a distinctly superior profitability. "I have no reason to believe that any company is thinking of taking us over at the moment but the time may come when our sector consolidates," the Precision CFO continues. "If and when a takeover struggle occurs, who do you think has better access to more cash from investors?" During the 1980s, he recalls, Alberta fostered two technology—generating petroleum service champions, Nowsco and Canadian Fracmaster. Both now belong to Houston-based BJ Services. "Canada's tax policy dictates that, whenever Alberta does produce winning technology, the Americans can buy it easily. What a way to build a country," fumes Mr. Tremblay.

American corporations and Canadian workers settle down together easily, Mr. Walker contends, because the two nations have grown increasingly similar over the last half-century. "If you examine our cultures, the trends are self-evident. We go to the same restaurants, watch the same movies, live in the same types of houses and so on." Despite this quasi-twinning, however, personal incomes have drifted steadily apart during the past decade. Different statistics abound but they unfailingly move in the same direction. The TD Bank says real personal incomes per capita rose 13% during the 1990s, while Canadians' total income stagnated and their disposable income actually declined 5%. The Bank of Montreal reports, "Real personal disposable income per capita in Canada fell to 42% below the U.S. level in 1996...after fluctuating at around 20% below through the mid-1980s." The Vanier Institute of the Family confirms that the after-tax income of Canadian families has declined 5% since 1989.

So why are Canadians falling behind their American cousins? A flurry of headlines erupted in recent months over Canada's productivity, conceivably a factor in dropping incomes. "Productivity refers to an economy's capacity to produce wealth," explains John Baldwin, director of microeconomic research for Statistics Canada. "Canada's productivity rate has historically trailed the Americans [see graph, top] but the gap has not grown worse over the past 10 to 15 years. An average Canadian worker creates just as much value per hour compared to an American as he did before. If anything, the productivity gap has narrowed very slightly," Mr. Baldwin says.

What has grown dramatically worse during the 1990s, the Statscan researcher notes, is Canada's employment picture versus its American counterpart (see graph, bottom). Through the 1980s, about 60% of employable adults in both the U.S. and Canada had jobs. In the past decade, American employment climbed steadily to more than 64%. Unfortunately, however, Canada's employment figure sank as low as 58%, recovering only recently to the 60% threshold. "Canadian workers are not losing their ability to produce but because fewer of them can find work, the country as a whole is less wealthy than the U.S.," says Jim Stanford, an economist with the Canadian Auto Workers. Equally troubling, the union researcher adds, a significantly greater proportion of the employment which has been generated north of the border is 'McJobs'—part-time, low-paid service positions. Americans, comparatively, get more skilled, full-time positions. "We must do better for our young people," Mr. Stanford concludes.

Productivity figures are gathered solely from the private sector, where it is relatively straightforward to calculate whether a company earned a profit through its workers' efforts. Paradoxically, federal statisticians cannot assess the productivity of governments, partly because governments do not keep as careful track of how their money is spent. Nor have they worked out standardized measures of efficiency for their own operations.

Yet it is precisely the public sector that the Fraser Institute blames for Canada's relative inadequacies in income and employment performance. "The one significant way in which the U.S. and Canada have diverged since World War Two is in the size of government," says Mr. Walker. "In 1950, the public sector of both countries occupied the same percentage of GDP within a fraction of 1%. By 1992, however, public spending amounted to 33% of American GDP, and 49% of Canadian. Today the figures are 31% and 44%, respectively. The optimum for Canada, like most industrialized countries, would be about 33%. Above that level, increases in government spending do not mean you get better roads, higher literacy rates and other useful benefits. Instead, citizens are burdened with more taxes and transfer payments, generally from productive endeavours to less efficient recipients. And that is where Canadians' money and opportunities are being squandered today."

"Over the last five years the government's income tax take has risen almost twice as fast as the economy as a whole and close to 2.5 times as fast as wages and salaries," David O'Brien, president of Canadian Pacific Limited said last month. "This country's investment in machinery and technology as a share of its Gross Domestic Product [already smaller than the American GDP, per capita] is 30% lower than in the U.S." Research and development spending by high-taxed Canadian companies is among the lowest within the G-7 nations, Mr. O'Brien added. He also slammed Ottawa's transfer payments, which shift billions from richer to poorer provinces. "We have simply spent too much money on regional development trying to move jobs to people rather than letting the market work and creating the jobs where it makes sense."

In principle, Canada easily could close the gap with American productivity and living standards, says the chief economist of the TD Bank. "Just act like them," says Ruth Getter. A TD senior vice-president who holds American and Canadian citizenships, she lived in Boston for 20 years. "To get as rich as the U.S., all we have to do is work a lot harder, value making money above everything else, allow employers to fire workers on two weeks' notice even if they've been there 30 years, that sort of thing."

But Canadians should remember that money is not the measure of everything, Ms. Getter advises. "Personally, I could make more in the States. I work in Toronto because life is better here. It's more humane, less of a grind, less of a constant dog-eat-dog environment. But superior civility doesn't show up on economic charts." On the other hand, the chief economist insists, Canadians cannot afford to let the income disparities between the two countries grow any wider or they will find themselves in truly serious trouble. "A gap we can live with but not an ever-widening gap. The federal government must reduce taxes." BCR

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