Canadians woke up to the news this week that we are richer than our American cousins. Rounds of back-slapping and boasting followed, naturally, but before you break out the bubbly, allow me to twist around a slogan from a certain well-known bank: You're not as rich as you think.
Scratch the surface of the data a little bit, and what looks like the True North's new-found economic dominance may be little more than an illusion.
Yet this illusion could stick. Reporting in Bloomberg on data showing Canadians' net worth is now higher than Americans', author Stephen Marche created an instant meme by describing Canada's economic system as "hardheaded socialism."
“Since the 1990s, Canada has pursued a hardheaded (even ruthless), fiscally conservative form of socialism,” Marche wrote, referring to the fiscal reforms put in place by the Liberal finance minister of the time, Paul Martin, whom he credits with triggering Canada's relative economic success.
Marche describes Canada as a place that has managed to balance the priorities of the welfare state with the priorities of business, creating a fiscally responsible social safety net and a business-friendly environment (the most business-friendly environment, actually, according to Forbes).
Marche was reporting on an Environics study, published by The Globe and Mail last month, showing that the average net worth of Canadian families (assets minus debt) is $363,202, compared to $319,970 for U.S. households.
That $40,000 difference has caused some commentators to gloat -- and others to fret that Canadian conservatism is dying a slow death in the face of Canada’s “socialist” success.
But there are a few problems with this victory-of-socialism argument. The first is that the economic policies of recent decades have seen a significant deterioration in Canada’s welfare state, as well as a reduction in union membership and a spike in income inequality. Canadian socialism, hard-headed or otherwise, is playing a smaller role in policy than it has in decades.
The second is that the very assertion that Canadians are richer than Americans is on shaky ground.
The Environics study measures average net worth of households, which is calculated by taking households’ assets and subtracting their debt from the total. Since the largest asset that most families own, by far, is their home, average household net worth is as much a measure of house values as it is of actual wealth.
The Globe said as much when it originally reported on the data in late June.
“Has Canada experienced a sudden surge of productivity or entrepreneurial genius? Not exactly,” Michael Adams wrote in the Globe. “Our resource sector is certainly firing on all cylinders, but the biggest reasons for Canadians’ deep pockets relative to Americans’ in recent years are the related phenomena of the 2008 economic crisis and the collapse of the U.S. housing market. Because house prices in the U.S. have plunged, the real estate held by Canadians is now much more valuable than that held by Americans (worth over $140,000 more on average).”
This is little more than wealth on paper. And it may not last long, even on paper. Vancouver home sales and prices are plummeting and the Toronto market is under heavy pressure. Meanwhile, evidence is mounting that the U.S. housing market, after five nightmarish years, is finally beginning to bounce back. Canadians could see themselves back at wealth parity (or worse) with Americans, and nothing about the nature of Canada’s economy or society would have changed (except for some unhappy homeowners.)
A better -- though by no means perfect -- indicator of whether Canadians are actually wealthier than Americans is GDP. On that front, there is some good news. As the Huffington Post Canada reported late last year, the IMF projected Canada would -- likely for the first time ever -- have a higher per capita gross domestic product than the U.S. for 2011 -- $51,147 per person in Canada, compared to $48,147 in the United States.
Though we can’t say for certain that a higher per capita GDP means Canadians are wealthier than Americans (how that money is distributed through the economy makes a difference), it’s a pretty good bet that Canadians are at least catching up with Americans.
The Wall Street Journal attributed that success to the energy industry, in an analysis that argued Canada is evidence an economy doesn’t need to be more productive -- so long as it has oil in the ground.
“With so much of the economy based on trade, Canada can transform its stock of assets -- in this case, natural resources that the emerging world wants -- into goods and services it wants to consume by exchanging them with other nations,” the WSJ's Paul Vieira reported, adding that Canada has benefited greatly from the run-up in commodities prices in recent years.
In other words, we aren’t producing that much more; we’re simply getting more money for what we’re producing.
None of which sounds like a stable basis for future wealth -- or for gloating about how much better we’re doing than our southern neighbours.
But in an age of global economic instability, when other countries are decimating their social safety systems and some economies are literally crumbling into nothingness, it’s probably not a good idea to look a gift horse in the mouth. Let’s count this up as a victory for Canada -- so long as we’re not under any illusions as to what that victory is worth.