Canada vs. US
Source Jim Devine
Date 04/04/19/15:18

April 18, 2004/New York TIMES
Two Countries, Two Tales of Jobs


FOR more than a year, economists have been perplexed by the startling
contrast between the nation's economic growth and its weak pace of job

But an equally puzzling contrast lies to the north: Canada, with many of
the same characteristics as this country, has added nearly one million
jobs since 2001, while the United States is down nearly two million.

Both countries are high-wage nations that face global competition. Both
are part of the North American Free Trade Agreement. And though Canada
did not suffer a recession in 2001, both economies have expanded by
about the same amount since 2000: about 9.6 percent for Canada, versus
9.3 percent for this country.

The easy explanation is that productivity in the United States has
climbed about twice as fast as that in Canada, in part because American
companies spent more on technology. But why did those companies focus so
keenly on productivity? Here is a theory: American economic policy leans
more heavily toward investment in equipment and capital than in labor,
and President Bush may have increased the tilt.

By any measure, the contrast between the jobs experience of Canada and
the United States is striking. If the United States had matched Canada's
growth rate in jobs, 5.6 percent from 2000 to 2003, it would have added
9.6 million jobs.

Those calculations come from a paper to be published this week by the
Center for American Progress, a research group in Washington that
acknowledges being "aggressively liberal."

The center blamed President Bush's tax cuts for part of the nation's
weak job performance. It noted that Canada's tax package in 2002 focused
more on the middle class than President Bush's tax cuts did in 2001,
2002 and 2003.

The Canadian tax cuts were based primarily on rate reductions for
lower-income and middle-income households. The American tax cuts were
weighted much more heavily toward the very wealthiest taxpayers and
investors. They included rate reductions for people in the top tax
brackets. They cut in half the taxes on stock dividends and capital
gains and offered new write-offs on equipment bought by businesses. They
also called for a gradual elimination of inheritance taxes, a move that
primarily benefits wealthy families.

"If the experience of these two countries over the past three years is
any indication, smaller tax cuts targeted toward middle-income taxpayers
is more stimulative than large tax cuts targeted at upper-income
taxpayers,'' wrote Scott Lilly, a senior fellow at the center.

To be sure, the story is more complicated. For one thing, unemployment
in Canada remains higher than that in the United States - 7.4 percent
versus 5.7 percent.

Carl B. Weinberg, chief economist at High Frequency Economics in
Valhalla, N.Y., noted that Canada also benefited from a weak currency in
2001 and 2002, which made its exports to the United States cheaper in
American dollars. But Canada's currency has been rising since mid-2002.

Canada lost 13,000 jobs in January and 21,000 in February, after gains
last summer and fall. Compared with its April 2003 level, Canadian
employment is still up 1.2 percent.

The more fundamental difference between jobs in Canada and the United
States stems from productivity. Canadian productivity climbed 1 percent
a year in the last two years, while American productivity rose about 4.5
percent, at an annual rate, during that same period. That allowed
companies to raise production and profit without adding workers.

"The U.S. economy is taking advantage of the higher productivity growth
that has been allowed by the very strong investment in technology in the
1990's,'' said Mr. Ferley at the Bank of Montreal.

By that analysis, the job market in the United States is still affected
by the excesses of the technology bubble that burst in 2000. That's a
long hangover, but it is plausible, given the other anxieties that
corporations faced - the terrorist attacks of Sept. 11, 2001, the war in
Iraq and corporate accounting scandals.

President Bush took office after the tech bubble popped, though his
policies consciously tilted toward investment. Alarmed about a drop in
business spending, the administration pushed through a generous "bonus
depreciation'' that let corporations immediately write off one-third of
their investment in many kinds of equipment.

In 2003, Congress expanded that tax break and extended its life through
the end of this year. It also passed a major break that tripled the
amount of equipment that small businesses could immediately write off as
an expense. And cutting taxes on dividends and capital gains provided a
lift to the stock market and new incentives for investment.

NEITHER the administration nor Congress, meanwhile, did much to relieve
a big disincentive to hiring: soaring costs for employee health
insurance. Health insurance premiums have climbed at double-digit rates
in the last few years, raising labor costs although wages have climbed
only modestly.

For better or worse, Canadians receive health coverage through the
government rather than their employers. Canadian health care costs
money, too, but it does not affect a company's decision to hire or fire.

"If you look at the tax code changes since 2001 - dividend tax
reductions, the bonus depreciation - all of the incentives are for
accumulating capital,'' said Carl Tannenbaum, chief United States
economist at ABN Amro.

"There is not much in there for reducing the cost of labor."

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