Comparison of Canadian and American economies

The comparison between the economies of Canada and the United States is generally far more of a concern to Canadians than to Americans.

Canadians feel that they are under constant pressure to remain competitive with the United States. Otherwise, they fear that they will suffer brain drain, where highly skilled Canadians emigrate, or corporations relocate to the United States. Americans rarely emigrate.

However, despite the contrasts listed below Canada and the United States are extremely similar economically. They are both developed countries and are thus vastly closer to each other than to the majority of the world's countries. Canada also is by almost all economic indices closer to the United States than it is to Europe.

Boom and bust cycles in Canada and the United States are closely linked as are many indices such as inflation and interest rates. Demographic patterns are also similar, with a higher birth rate in the United States (2.1 children per couple vs. 1.6 in Canada as of 2004) and a slightly higher immigration rate in Canada (0.6% net migration vs. 0.5% in the US). Overall, the United States has a (much larger) population that is growing faster than the population of Canada.

Geography

In its quest to appear to compete with the US, Canada starts at an immediate disadvantage. Canada's harsh climate and low population density leads to high fuel consumption for transportation and heating. Historically, Canadians were worried because much of the country lacks natural river systems that could be easily used for transportation, but this fear has largely abated. Canada's terrain is also somewhat more rugged than the United States. The Rocky Mountains are more of an obstacle, and the mass of the Canadian Shield provides a formidable barrier to any links between Ontario and Manitoba.

Canada does have some distinct geographic advantages. The large river systems in the north are sources of cheap hydro-electric power. The main advantage is Canada's vast supplies of natural resources and fossil fuels. While the United States has large supplies of resources and fossil fuels, these are not enough to meet domestic demands and they are forced to import many raw materials and fossil fuels, a great deal of which come from Canada. By contrast Canada is a net exporter of resources. This leads to an important difference as increases in the price of resources boosts the Canadian economy while hurting the American. For example a rise in oil prices generally causes a fall in the Dow Jones and NASDAQ but an increase in the TSX.

Government

Differences between government intervention in the economies of the two countries is most closely examined in Canada, because some feel that policies that more closely emulate the U.S. are preferable, while others disagree.

Taxation

The average tax rate in Canada is higher than in the United States. In Canada total tax revenue for every level of government equals about 36.8% of GDP, in the U.S. this is closer to 30%. There is some regional variation, however. A resident of oil rich Alberta pays less in taxes than a resident of high tax Maine.

The taxes are applied differently as well. Canada's income tax system is more heavily biased against the highest income earners, thus while Canada's tax rate is higher on average, the bottom fifty percent of the population is roughly as taxed as in the United States until sales taxes are considered. Canada has a national sales tax of 7% on all purchases, while the U.S. federal government has no sales tax at all. Canadian low-income earners are more burdened in this respect because a sales tax by nature is regressive and not progressive.

Canada has no inheritance tax while the United States still does, but the U.S. tax is currently scheduled to be abolished.

Social Programs

For its higher taxes Canada has a larger system of social programs than the United States. These differences include having a national broadcaster in the CBC, having a fully government-funded health care system, and having all major universities receive partial government funding. The United States, however, does have some major universities subsidized by state governments and its top universities – both public and private – tend to be more highly regarded internationally that their Canadian counterparts. For instance, the British Times Higher Education Supplement ranked 7 U.S. universities in the top 10 of the world, 11 in the top 20, and 16 in the top 30. Indeed, excepting only Oxford and Cambridge, each of the top 9 universities were in the United States (beginning with Harvard and ending with Princeton). Zero Canadian universities were in the top 20, and only one Canadian university (McGill) made the top 30. Five government-funded U.S. universities (and eleven private universities) were included in the top 30.

The greatest difference in social programs is in health care. The United States spends far more of its per capita GDP on health care than does Canada. Canadians, however, receive comparable care and most figures such as life expectancy and infant mortality are better in Canada. Another advantage is that the Canadian health care system is also very attractive to employers, as in Canada health care is mostly paid through employee income taxes, while in the United States most companies have to extend health benefits to full-time employees, something they do not have to do in Canada. The main disadvantage of the Canadian system are the long lines and waiting periods that have appeared over the last 15 years, especially for minor and non-life threatening procedure. For this reason, some relatively wealthy Canadians go to the United States to buy quick medical treatment.

See also: Canadian and American health care systems compared

Anti-trust

The United States has since the Sherman Anti-Trust Act been strongly opposed to monopolies. In Canada this has been far less of an issue, and Canada has never had rigorously enforced rules against monopolization, and in certain situations the government has even encouraged monopolies. However, Canadian government is more willing to interfere in the operations of large, integrated firms where they appear to be acting against the public interest, offsetting in part one reason that American law prevents large-scale monopolization.

Fiscal and Monetary Policy

Canada is generally forced to follow American monetary policy quite closely, any large difference in interest rates could quickly lead to large problems for the Canadian economy. The U.S. Federal Reserve and the Bank of Canada both staunchly believe in fighting inflation while neither aggressively pursue policies of full employment. One difference that has emerged recently is that while Canada is still hewing closely to the balanced budgets policies of the 1990s the United States has moved into a heavy deficit, a policy both countries followed in the 1970s and 1980s.

Political Turbulence

Over the last few decades the Canadian economy may have been hurt by the threat of Quebec separatism, and Quebec's economy was almost certainly damaged. In an earlier era turbulence in the United States from the civil rights movement and Vietnam War may have hurt that country's economy. This also sometimes benefited Canadians as draft dodgers during the Vietnam War created a reverse brain drain that lasted for many years.

Market Size

One of the most important differences historically between Canada and the United States was the size of the two markets. When both nations had high tariffs the two countries did not have a unified market. Canada's smaller market led to higher prices and greater inefficiency.

A good example of this is the automobile industry, which can be clearly demarcated into two periods: before and after the free trade creating Auto Pact of 1969. Before Canada had its own production lines creating each of the models that would be sold in Canada. These branch plant factories would only make small production runs of each vehicle, requiring frequent, and expensive retoolings. The factories would also generally be smaller. Fewer varieties were available to Canadian consumers and prices were generally higher. However, these cars were almost all still made by American companies. After the Auto Pact, the industry was transformed as a unified North American market was created. The Canadian factories were rebuilt to be much larger, but to make only one model that would be sold in both countries creating large economies of scale. The prices of cars fell in Canada as wages and total employment in the automobile sector increased.

After the Second World War tariffs between the two countries gradually fell, with full free trade being established by the 1988 Canada-United States Free Trade Agreement. Some industries are still protected, however. These are mostly perceived as sensitive areas such as cultural industries including publishing, television, and newspapers, which all of have stringent foreign ownership rules. Other areas such as the transport industry are also protected with Canadian control of the airlines and trains being viewed as in the national interest.

This tends to create far more monopolies in Canada. For instance the air travel industry in Canada until recently was dominated by a single airline, Air Canada. Canada has long had to make a trade-off between monopolization and efficiency which the United States has not. The United States can support a number of airlines that are big enough to operate efficiently, and still have a competitive market. Canadians are forced to choose between small inefficient airlines that would be competitive, or monopolistic airlines that will generate its own inefficiency.

Another example of this trade off is the book industry which has recently switched models. Until the 1990s Canada had many small and fairly inefficient book stores. Then Chapters entered the market and quickly created a near monopoly, eliminating the inefficiencies of smaller stores but potentially leading to a monopolistically set price and limited choice of books. This monopolizaton was aided by government policy in Canada that requires bookstores in Canada be Canadian owned.

The larger market of the United States also contributes to the brain drain. Top Canadians will often find greater opportunities in the United States. An example of this is the entertainment industry. If Jim Carrey had remained in the Canadian entertainment industry, he would have made far less money and would not be world famous. The Canadian film industry will never be able to match the American one because Canada’s thirty million people cannot buy enough tickets to allow hundred million dollar budgets and stars that earn twenty million dollars per film.

Banking

Canada and the United States have long had very different banking systems. The United States' was copied from England while Canada's was taken from Scotland. The United States traditionally has had a plethora of banks, all with very few branches. This has lead to a competitive but unstable system, with many thousands of banks having collapsed during U.S. history (though this is the natural state of any competitive market, and American deposits are always protected by the U.S. government via FDIC insurance). Canada has always had far fewer banks per capita, but the banks have been larger and quickly became nationwide. Canadian banks have many branches and distributed assets and Canada has only had one major bank, the Homestead Bank, collapse in its history. This disbursement has continued to this day. In 2002 in Canada the six largest banks controlled 90 percent of Canadian domestic assets, while the five largest U.S. banks controlled only 9.7 percent of their domestic assets.

In real terms Canadian banks are much smaller. In 2003 the three largest banks in America had assets equal to the entire 67 banks (only 14 domestic) operating in Canada. The largest Canadian bank has 1300 branches while in the U.S. the four largest banks have over 2000 branches each.

Canada's banks have traditionally been much fiercer competitors internationally. In part this is rooted in Canada's smaller market. For Canadian banks international exchange was always a central concern. For American banks domestic banking was paramount. In the 1920s in the American economic centre of New York Canadian banks dominated the international banking sector due to greater expertise and focus. Thus Canadian banks came to have far wider spread networks. Much of the banking system in the West Indies is controlled by the Canadian banks. Canadian banks also have far more of a presence in the United States than American firms do in Canada. In part this is because American firms cannot buy Canadian banks, but Canadian banks have, at times, been able to buy American ones. Since the large Canadian banks already operated nationwide chains of a thousand or more branches, they find it relatively easy to integrate smaller chains of American banks into their systems. In recent years this advantage has disappeared as American banks have also grown substantially in size and today have many branches, and the large American banks are now operating over 2000 branches each. The ten largest banks in North America today are American.

Until recently, Canadian banks had historically been far less strictly regulated than their American counterparts. Canadian banks had, until the Gramm-Leach-Bliley Act in 1999, been freer to participate in the financial planning and insurance industries than their American counterparts. Canadian banks had not faced laws against usury, or interest guarantees on deposits. Profits for Canadian banks were generally higher, though with recent changes in American law, the most profitable bank today is, by far, Citigroup. The other large American banks are also very profitable.

Prices

In Canada prices have long tended to be higher. This is partly because of structural issues in Canada such as low population density and harsher weather, and partly due to Canada's tax system, which depends more heavily on sales taxes relative to income taxes than the U.S. This has contributed to problems such as cross-border shopping and a reduced standard of living. Since the early 1990s this has not been the case, as the Canadian dollar had fallen low enough that it more than made up for price differences. Today prices are somewhat lower in Canada, the Big Mac Index shows that in 2003 a Big Mac cost $2.65 in the States and only $2.41 in Canada (both figures in USD).

Fuel prices have always been higher in Canada, even though Canada is a net exporter of energy. This is partly for the same reasons as above and partly because of taxes levied specifically on fuel. Unlike many oil producers, particularly those in the developing world, Canada does not heavily subsidize fuel, so prices are based on the world market price.

Productivity

By most measures Canadians workers are less productive. Canadian levels of mechanization are also not always as high, and Canada is more heavily unionized. All in all, Canadian workers are estimated to be 82% as productive per hour as their American counterparts. [1] Because American workers also tend to work longer hours, the productivity gap per worker becomes even greater. The industries with the largest producivity advantages for the U.S. are the manufacturing (particularly electronics and computer), finance, and service sectors. Industries where Canada is actually more productive than the U.S. are the construction and natural resources sectors.

The productivity gap had been even larger in the 1950s but the difference has been narrowing, aided by the elimination of the smaller market problem through free trade. The gap is still closing somewhat but at a much slower pace than in the 1960s. From 1961 to 1973 labour productivity rose annually by 3.3 percent in Canada and 1.7 percent in the United States. From 1973 to 1995 productivity growth was 1.1% in Canada and 0.8% in the States.[2]

Unemployment

Canada has a higher unemployment rate than the United States with the Canadian number being around 7 to 8% while the U.S. tends to be around 5%. During the 1980s when this gap first emerged it was a controversial issue. Canada's higher income taxes and more generous benefit programs were blamed. It has recently been noted that about half of the difference is caused by the two countries measuring the unemployment rate differently. Carig Riddell, a UBC economist, found that the unemployment gap had averaged about 2% over the last several years. His numbers show that 0.9% of the difference was caused by differing measurement systems. Other factors explaining the remaining difference are the large number of seasonal workers in trades such as fishing and logging who are unemployed for a portion of the year. Canada's more restrictive labour laws, increased role of unions, and greater unemployment benefits have also all been blamed for creating some of the difference. However, when unemployment insurance and welfare were sharply cut in many parts of Canada during the 1990s there was little gain relative to the Americans.

Balance of trade

While the United States has in recent years had a large trade deficit Canada has recently maintained a trade surplus. The Canadian surplus is almost entirely due to trade with the United States. Canada has trade deficits with the countries of Europe and Asia, just as the Americans do. In 2002 Canada exported about 100 billion dollars worth of goods more than they imported to the U.S. With the rest of the world it had a trade deficit of $83 billion creating an overall surplus of some $17 billion.

Income

Canadian GDP per capita (US $31,000) is lower than that in the United States (US $40,000). Though wealth is more highly concentrated in the U.S., the median (50th percentile) worker also has a higher income in the United States than in Canada, but it is much closer. In purchasing parity adjusted Canadian dollars, the median income in the United States is $16,800 and in Canada $16,500.[3]

The GDP gap has been shrinking. From 1961 to 1973, real GDP grew at an average annual rate of 5.5 percent in Canada and 4.0 percent in the United States. From 1973 to 1995 it was 2.6% in Canada and 2.3% in the States.[4]

Standard of Living

Standard of living is perhaps the hardest measurement to make since a wide array of factors have to be taken into account. The United Nations Human Development Index has traditionally listed Canada higher than the United States, with some exceptions. Other independent groups, such as the Economist, rank some Canadian cities as better places to live than some American ones.

Canada ranks higher than the U.S. in statistics such as life expectancy and infant mortality. Both countries rank highly with 97% literacy rates. The United States has more major consumer goods per capita than Canada. For instance, while Canada had only 297 computers per 1000 people in 1996, the United States had 403.

Both median and average income are higher in the United States. There is sometimes a racial element to poverty in both countries. African-Americans and Hispanics, on average, have a lower standard of living than the rest of the population. Aboriginal peoples and Hispanics have a far lower standard of living than the majority in Canada. Canada's French-Canadians also used to be a much poorer group, but since the Quiet Revolution in the 1960s this has been partially remedied.

The United States has a higher poverty rate than Canada. The two countries use different standards for measuring poverty because Canada is unique in relying on Low-Income Cutoffs, measuring poverty by looking at what percent of their income of family spends on necessities. In the United States the poverty line is set at triple the "minimum adequate food budget." When a common measure is used, such as that of the Luxembourg Income Study, the United States has considerably higher rates. The LIS reports that Canada has a poverty rate of 15.4% and the United States 18.7%.[5] In both countries those most affected by poverty include female-led sole parent families and single elderly people.

See also:

• Canadian and American politics compared
• Economy of Canada
• Economy of the United States