I once suggested that the reason economists are such grumpy people is that they can’t read their morning paper without running into two or three economic fallacies. I was exaggerating, but only by a bit. Consider, for example, this doozie in today’s Globe and Mail – a column by Gary Mason, entitled “How does Canada compete paying wages this high?” He doesn’t exactly say what we are “competing” for, but suggests that somehow because Canadian wages are high, compared to those in China (!) and the United States, that our “long term economic growth” is at risk.
Anyone who has taken an introductory economics course will be able to see already that the column is going to be train wreck. Just from the headline, it’s obvious that Mason does not understand the concept of comparative advantage and the logic of international trade, confuses business competitiveness with national competitiveness, and plans to commit the pauper labour fallacy. Indeed, the whole column is about how Canada lacks absolute advantage over its “competitors.” Consider the following paragraph:
If a country is going to pay its workers more than the competition, it needs to find other ways to remain a viable business proposition. The usual remedy is to be more productive, but poor productivity has been Canada’s Achilles heel for years. And in productivity’s absence, a high-wage regime is bound to spell trouble in future, especially in a global environment where even more trade barriers are falling and even more lower-wage countries are looking to compete with Canadian businesses.
The fact that wages are “high” in Canada is just another way of describing the fact that Canada is a rich country. Furthermore, our wages are not high because we are rich – having high wages is what it means to be rich. Income, after all, is just another way of describing the national product, and the wage bill constitutes a fairly stable fraction of national income.
(To be ultracharitable for a moment, Mason could be making the slightly more subtle point, that the labour share of national income in Canada is too high. He hints at this when suggesting that “labour’s footprint on Canada’s corporate revenue and expenditures” is too large. But he presents no stats on this – all he does is complain about how high our wages are compared to other countries. In any case, if he did look at the data on national income shares, he’d see there isn’t much of a story there.)
So here’s the crazy-making thing about this column. If Mason were not confused about the basic economics of trade, he would realize that what he’s complaining about is the fact that Canada is a rich country. And what is the big problem with being rich? Apparently it’s that it threatens our long-term economic growth. So I guess we should try to become poor (i.e. lower our wages). Why? So that we can improve our long-term economic growth, i.e. so that we can become richer…. wait a minute, something seems to have gone wrong with this argument.
To the extent that Canada has a problem, it has nothing to do with the fact that wages are high, and that in other countries they are lower. And it has nothing to do with productivity, which is just an indirect way of referring to the wage rate. To the extent that there is any cogent thought in Mason’s column, it could be that our exports are too expensive, relatively speaking. But as introductory economics teaches us, that’s just a function of the exchange rate. And there are many who have been claiming that the Canadian dollar is too high, for precisely this reason. (Recall Tom Mulcair’s comments about “dutch disease”? That’s exactly what he was arguing. But that has to do with our resource exports, not the overall wage level. It was also before the dollar dropped by over 10%)
Mason circles around this point:
A weakening Canadian dollar is helping to offset our competitive disadvantage with the United States and others, to some degree, but it doesn’t look to be a long-term answer. And we know wage cuts aren’t likely to happen.
Notice the wistful tone in that last sentence. What he’d really like to see is everyone’s wages go down, but apparently that’s not realistic. I guess we can put that down to the unreasonableness of the working classes, unwilling to sacrifice their standard of living in the interests of securing… a higher standard of living. And why isn’t a weakening Canadian dollar a long-term answer? Depends what you think the problem is. If it’s correcting a balance of trade issue, then yes it is an answer. But if the “problem” is that our standard of living is too high, as Mason seems to think, then he’s right, a weakening Canadian dollar will not lead to a permanent reduction in national income. The fact that he, and the various business leaders he cites, regard this as a problem, suggests that they are either deeply confused, or else they harbour a fundamentally malevolent attitude toward the mass of the population.
To end on a slightly “meta” point, it is worth pausing to emphasize what an enormous disservice the Globe and Mail does to the country by publishing this sort of thing. If this column had appeared in a Sun newspaper, I wouldn’t be bothering to take time out of my day to criticize it. But the Globe aspires to being taken seriously, by serious people. In order to achieve this, it needs to achieve at least a minimal level of competence in its economic commentary — I’m not asking for sophistication, just basic competence.