In the first half of 2019, the average U.S. worker got about $20,500 in new capital — some $7,500 more than the average Canadian
A key element in every quarter’s release of numbers for the national economy is business investment. When capital spending on non-residential structures, machinery and equipment (M&E) and intellectual property products is strong, GDP and jobs get a boost in the short run — and, more important, workers get the tools they need to produce more, compete abroad, and earn higher incomes. When capital spending is weak, the reverse is true: the economy takes a near-term hit, and workers get less of the tools they need to compete and prosper.
Last Friday’s Statistics Canada’s report on the Canadian economy in the second quarter brings bad news on this front. A promising bump in spending on M&E in the previous quarter reversed, leaving real (i.e., inflation-adjusted) business investment outside the housing sector at its lowest level in more than two years and more than one-fifth below its peak in late 2014. Taking account of the growth in employment since then, real capital spending per worker in Canada is off by more than one-quarter.
Weak investment per worker is bad in its own right. What makes it alarming is that the story is so different in the United States. South of the border, investment in all three categories of capital — non-residential structures, M&E, and intellectual property products — is going from strength to strength. U.S. businesses are equipping their workers with new tools at a rate that far exceeds what Canadian workers are getting, and the widening gap bodes ill for Canada’s ability to compete and prosper both in North America and in the wider world.
Investment per worker in Canada has long been below that in the United States but the critical deterioration started earlier this decade. Because Statistics Canada produces price indexes that let us adjust for the different price of capital on either side of the border we can compare per-worker spending in Canadian dollars in both countries on a bang-per-buck basis since the early 1990s (see the solid lines in the figure, which are measured off the left axis). U.S. workers have typically benefited from more new capital every year than Canadian workers but growth in investment in Canada matched and even outpaced growth in investment in the United States through the 2000s. Through most of the current decade, however, the gap has widened again. In the first half of 2019, U.S. investment stood at $20,500 per worker; in Canada, it was $13,000.
A stark measure of the difference between the two countries is to ask, for every dollar of new capital invested in the average U.S. worker, how many cents of new capital is the average Canadian worker getting? That’s shown by the dashed line in the figure, measured off the right axis. In 2011, the answer was 80 cents — its highest value since the beginning of the 1990s. In the first half of 2019, the answer was 63 cents — its lowest value since then.
Why is capital spending in Canada so feeble? Weak prices for natural resources explain some of the problems since mid-decade — the fossil-fuel sector in particular is highly capital-intensive — but much of the trouble there is self-inflicted: a less adversarial and uncertain approval process for major projects would help. Taxes are another suspect: Canada established a competitive tax advantage during the 2000s, but lower corporate tax rates and faster write-offs in the United States and elsewhere have eaten into it. Protectionism in the United States, our largest market, is a threat — so we need to work harder to keep our international and interprovincial borders open, to create as dynamic a trade environment as we can. And in particular industries where bad regulation is reducing competition and increasing costs — think electricity in Ontario, telecoms and financial services, and our agricultural cartels — governments need to react less to today’s lobbying and think more about tomorrow’s prosperity.
In the first half of 2019, the average U.S. worker got about $20,500 in new capital — some $7,500 more than the average Canadian worker. That is a lot of infrastructure, mighty yellow machines at job sites, information technology and software, and it heralds a competitiveness problem for Canada. We know we can do better. We have in the past. We need to do it again.
William Robson is president and chief executive officer of the C.D. Howe Institute.