April 18, 2004

Why Canada Can Create Jobs and the US Can?t

Consider these figures.

Since 2001, Canada 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 members of the North American Free Trade Agreement. And though Canada did not suffer a recession in 2001, both economies have developed by about the same amount since 2000: about 9.6 percent for Canada, versus 9.3 percent for the US.

Then why this striking contrast in job creation? One explanation is that productivity in the United States has doubled faster than 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 encouraged such investment.

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. These are the conclusions from a paper to be published soon by the Center for American Progress, a research group in Washington that dubs itself "aggressively liberal." The paper cited President Bush's tax cuts as partially responsible for 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 focused predominantly on rate reductions for lower-income and middle-income households. The American tax cuts were inclined much more 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.

Scott Lilly, a senior fellow at the Center, wrote ?"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.'' But the issue gets more complex. Canada?s unemployment rate remains higher than that of 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.

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 ostensibly affected by the excesses of the technology bubble that burst in 2000. When President Bush took office, 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 the soaring costs for employee health insurance. The doubling of health insurance premiums has raised labor costs though wages have fared modestly.

Canadians receive health coverage through the government rather than their employers, and thus, the issue of health insurance 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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