It is still too early to focus on what might come for Canada’s economy after the COVID-19 pandemic. Yet, we will get to the point where this question will become central. When we do, Canadians must not miss the opportunity to reconsider what we think of as national progress. Our approach since the 1950s has rested on short-term thinking centred around gross domestic product (GDP). This fixation on GDP simply no longer serves. We need to move beyond it and focus instead on building Canada’s wealth. Not wealth as traditionally understood, however.
Rather, our focus should be on a broad measure of wealth that reflects the value of Canadian skills and expertise (human capital), of our mutual trust and cooperation (social capital) and of our natural environment (natural capital). These lesser known forms of wealth are as important as buildings, machinery and stock portfolios (produced and financial capital) in assuring national progress and arguably, more so.
What we know about well-being in the long term
This broad measure of wealth is referred to as comprehensive wealth. Comprehensive wealth is what underpins well-being in the long term, so it is a natural choice for moving beyond short-termism.
The problem with GDP (or national income) as our central measure of progress is that it leaves out at least half of the truth. While growing income may align with peoples’ well-being in the short-term, it says nothing about well-being in the longer term. That this is so is obvious to anyone with a job. As every worker knows — and the pandemic has only made this clearer — a regular pay cheque is only part of financial security.
The other part is having a nest egg to fall back on when times get tough. This is called saving for a rainy day and it has been common sense for as long as paid work has existed. Common sense also calls for keeping an eye on the size of one’s nest egg. Every smart individual knows her bank balance and (if she is fortunate) the value of her stock portfolio and home equity too.
Countries are, in principle, no different. When times get tough, they too can fall back on assets and should, therefore, keep track of their value.
Countries differ from individuals in two important ways, however. First, most have central banks that can help stabilize the economy when times get unusually tough, like now. This kind of intervention is happening in Canada and elsewhere as countries grapple with the pandemic.
Central banks refer to it as “quantitative easing.” It is referred to more infamously as printing money. There is reason for concern about quantitative easing, but the point here is not to debate its merits (except in one aspect, which will become clear in a moment). Rather, the concern here relates to the point about keeping an eye on nest eggs. Though countries should do this too, the fact is, they do not. Few countries track the value of their assets — or national wealth — at all. Even countries, like Canada, that do measure only selected assets. This is the second way in which individuals and countries differ.
Why do smart countries measure wealth incompletely or not at all when smart individuals keep a close eye on it? The answer is GDP fixation.
Among other distortions, our love affair with GDP biases the data available to guide decision-making. Even though statistical agencies follow a system that mandates compilation of both GDP and wealth figures, their effort is devoted largely to GDP. As a result, wealth estimates (if they exist) are often of low quality and always incomplete.
Few users complain about this because nearly everyone implicitly agrees GDP is what matters anyway. Most decision-makers, from finance ministers and central bank governors, to private bank presidents and foreign CEOs, feel they have all they need in GDP to judge how well a nation is performing.
This is where the concern about quantitative easing emerges. The Bank of Canada is making a bet that the economy will be strong enough in the future to pay back the vast sums of money it is about to print to buy government bonds. There is a lot at stake. We all have to hope this decision turns out to be sound.
Here is the thing though: the bank is making this bet based on an economic dashboard where several dials are not fit for purpose. The centrally-placed speedometer (GDP) is working well and accurate. But the surrounding dials that measure how long the economy can keep up its speed (wealth) are faulty.
The most important dials are missing entirely (human capital and social capital). Another is working only partially (natural capital). The two that are working well (produced and financial capital) are, arguably, the least important given where we find ourselves today. Whichever side of the quantitative easing debate one comes down on, it should be uncontroversial that the best data possible should be available to inform its use. We do not have the data we need in Canada–or anywhere–today.
The problem with only partially measuring wealth
How concerned should Canadians be that national wealth is only partially measured and that GDP is, therefore, over-weighted in decision-making? After all, has the country not done pretty well with GDP at the centre of the dashboard?
It matters a great deal. It is not clear that Canada’s economy is as strong as the GDP dial suggests. This was troubling before the pandemic. It is all the more so now that the country has entered the uncharted territory of quantitative easing.
In a recent report for which I was the lead author, the International Institute for Sustainable Development used Statistics Canada data to compile the most comprehensive estimates of Canadian wealth possible. The results paint a picture of the economy’s capacity to support long-term well-being that is quite different from that painted by GDP.
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First, comprehensive wealth has grown much more slowly than GDP. From 1980 to 2015, comprehensive wealth increased only about 0.2 per cent annually (adjusted for population growth and inflation), while GDP grew about 1.3 per cent per year. There is no obvious explanation for this gulf other than that Canada has been supporting GDP growth by eroding its capital base.
Most worryingly, since the 2008 financial crisis, comprehensive wealth has stalled, and even declined, while GDP has continued to grow. Declining wealth is a textbook indicator of unsustainability. These trends are of course, not widely understood because wealth has always taken a backseat to GDP.
This assessment was troubling enough when it was published in December 2018. As the report noted: “climate change, concerns about the competitiveness of the workforce, protectionism, mounting levels of debt, rapid evolution of energy markets, population aging and worries over social cohesion are just some of the reasons for concern about long-term well-being.”
A global pandemic could certainly have been added to this list. The fact that the world is today facing 1) a global pandemic; 2) growing costs from climate change; and 3) an unforeseen and precipitous drop in oil prices only heightens the concern.
To give one example of the risks Canadians face, when oil prices were around $100USD/barrel in 2007, Canada’s fossil fuel assets were worth over $1.1 trillion. At today’s oil prices, this wealth has essentially evaporated. Along with it, billions more in human capital has disappeared in the form of unemployed oil-sector workers. This wealth may not return completely and may not return at all, for a variety of reasons beyond Canada’s control.
Why we should have maximized comprehensive wealth
As Canada tries to stare down the pandemic, how much stronger might our position be if we had followed a more balanced path since the 1950s, maximizing comprehensive wealth rather than just income? Would we be better placed to make it through the pandemic relatively unscathed? The answer is likely yes.
For one, natural resource revenues may have been treated more wisely. More provinces might have embraced the eminently sensible idea of setting aside a portion of resource revenues for a rainy day. Former Alberta premier Peter Lougheed tried this in 1976 with the creation of the Alberta Heritage Savings Trust Fund. Regrettably Albertans soon abandoned his vision. Had more provinces managed their resources as Lougheed imagined, they (especially Alberta) might well find themselves today with trillion-dollar-plus-nest eggs to see them through these tough times. Norway, which takes a wealth-maximization perspective on its oil reserves, is in exactly that enviable position.
Second, monetary policy may have been used more judiciously. Central banks in many countries, including Canada, resorted to low interest-rate regimes to stimulate GDP following the stock market meltdowns in the 2000s. Though this worked (GDP grew strongly in the last two decades), it came at a cost. For one, low interest rates drove house prices skywards, putting home ownership out of reach for some and forcing many others to stretch themselves to their financial limits. Too many families find themselves in dire straits as a result, with little or no nest egg to fall back on as they face job losses from the pandemic.
It has also left central banks with limited room to provide stimulus now that it is truly needed. The Bank of Canada’s overnight interest rate sat at 1.75 per cent on March 3, 2020, already low by historical standards. Less than four weeks later, it had fallen to 0.25 per cent. One need not be an expert in monetary policy to realize it cannot fall much further before we enter truly uncharted territory.
Third, Canada and the rest of the world might not have dithered so long on climate action. When the climate is understood as a critical asset and greenhouse gas emissions are understood to deplete that asset, a policy of wealth maximization would demand action to limit emissions. No similar incentive exists under short-term income maximization; quite the contrary, in fact, as emissions growth and income growth go hand-in-hand in the short term.
Finally, investment and consumption would have been better balanced. Short-term growth favours the latter. Wealth maximization does the opposite. The threats the pandemic poses for the economy are found on both the demand and supply side. Investment-oriented policies would have left us better prepared to address both.
The time has come to move beyond GDP. This can no longer be contested. Fixation on GDP growth has left Canada in a weaker position than people realize as we face the greatest economic and social crisis in two generations and wield fiscal and monetary tools of a type and scale never before seen here. Canada and, indeed, all countries must broaden the measures upon which national progress is assessed.
Once we are through the pandemic, governments cannot return to business-as-usual. Short-termism must be replaced with policies that prioritize well-being in the long-term. This is unlikely to happen unless governments begin measuring and using comprehensive wealth to guide policy-making. While this is not the only step needed, it is essential.
Canada already has the best wealth measures in the world, even if they are incomplete. We can lead the way by making them truly comprehensive and then setting about using them to guide the country down a more sustainable path. Doing so would be truly in the spirit of peace, order and good government.
This article is part of the The Coronavirus Pandemic: Canada’s Response special feature.