US still Wealthier than Canada

The commentary and Op-Ed spheres are a flutter with talk of Canada having finally surpassed Americans in wealth. The assertion stems from a report by the Toronto based Environics Institute. In its report Environics highlights the average net worth of Canadians and Americans and how Canadians have surpassed Americans in that respect since 2006. The report was than picked up by a plethora of commentators ranging from Jonathan Kay at the National Post and Stephen March at Bloomberg all jumping on the bandwagon calling Canada’s socialism lite version a success relative to America’s capitalism.

 It is being said from all quarters that the Canadian economic tortoise has passed the American economic hare.

While it is heartening to see that Canadians are wealthier than Americans by this measure, the unbridled optimism of the Left needs little reality check. First the numbers they use need some context. The traditional measure of wealth, especially for Keynesians, has always been consumption, or consumption power. By this measure Americans remain much wealthier than Canadians. The Environics report itself states that disposable income (after tax pay) remains much higher in the US than in Canada by a staggering 67%.

Now many would argue, and rightfully so, that after tax income is a poor number for comparison as Canadians live in a country where they receive much more government provided services, not counted in the disposable income number. Turning to the Purchasing Power Parity adjusted GDP per capita number, we get a clearer idea of how many goods and services, public and private, that both countries’ citizens get to enjoy. In Canada that number is of 38,988.94 US dollars as of 2010 by the World Bank’s count. The equivalent number in the US is of 47,198.50 for the same year. That means that counting all goods and services consumed by citizens and adjusted for monetary discrepancies, Americans remain a full 21% richer than we are.

So why does the net wealth number paint a different story than the consumption numbers? The reasons are many but important. The first reason is that the US is in the bottom of a business cycle. After a good few years of growth the American economy is adjusting and correcting a few accumulated imbalances in its economy. Canada on the flip side is not. While we did suffer a mild recession, by no means can it be said that Canada is at the bottom of the business cycle.

While GDP did contract and unemployment did rise in Canada, house prices haven’t contracted at a faster rate than inflation since 1990-1991. The pace at which Canadian housing has grown in the past decade or so, would seem to indicate the Canadian tortoise has grown some long legs and bunny ears. The point is comparing two nations relative wealths at different points in their cycles obscures the long term trends in relative wealth. When Canada’s debt bubble rears its head and interest rates creep up do not expect housing prices to continue in their current upward trajectory. With a correction already in the bank expect American house prices to do some serious catch up (albeit probably slowly at first). With Housing values being literally the only variable where Canadians win in this equation, odds are the current crown on our heads is sure to be a temporary footnote in economic history.

While the likelihood of Americans reclaiming their North American wealth crown within the near future seems all to real, this should not distract us from looking to the future with confidence. Some of the long-term trends that have been developing for years now point to the real chance that Canada may yet come on top one day.

The Oil Sands will provide abundant resource to Canada for the next couple of generations, so the possibility of investing those gains efficiently and fiscally responsibly might yet lead to sustainable wealth which we’ll then be able to boast about.