Since the wealth of Canadians derives increasingly from enforced scarcities, especially in housing, they will resist efforts to break the logjam, John Rapley writes.Mark Blinch/The Globe and Mail
John Rapley is an author and academic who divides his time among London, Johannesburg and Ottawa. His books include Why Empires Fall (Yale University Press, 2023) and Twilight of the Money Gods (Simon and Schuster, 2017).
Canadians are richer than ever, their wealth having risen nearly two-thirds in just the past 12 years. That might seem the mark of a thriving economy. It’s actually a symptom of malaise.
According to Credit Suisse, in 2010 per-capita wealth in Canada stood at US$226,000. By 2022, that had shot up to $370,000. Had all that added wealth been the reinvested surplus generated by a booming economy, it would indeed point to robust economic health. But it wasn’t. In reality Canada’s growth remained weak, per-capita income rising a mere 15 per cent over the same period.
That wealth should rise four times faster than output results from an imbalance that grew acute after the 2008 global financial crisis. At the time of the crisis, Canada did like most Western governments and ran up its debt to keep the economy from tanking. Afterward, it followed them in tightening spending to reduce the deficit. In consequence, governments were able to keep taxes low, even cutting them in some cases, as was done by the government of Stephen Harper.
In theory, that would stimulate an economic rebound. In practice, it didn’t. Growth remained tepid. That’s because outlets for investment were few. Had Canadian companies benefited from low taxes at a time when their markets abroad were recovering from recession, they could perhaps have taken advantage of their lower costs to export their way to growth, creating a virtuous cycle. But the problem was that other Western governments were also practising various forms of austerity.
This produced a vicious rather than virtuous cycle. Research has shown that the effect of this co-ordinated fiscal consolidation among developed countries was to exacerbate its demand-constraining effects. Compared with rebounds from earlier recessions, the recovery across the Group of Seven was muted.
However, with growth anemic and inflation low, central banks had a bit of freedom. So they tried to do what governments wouldn’t, and stimulate the economy. They slashed interest rates until they approached zero in real terms, hoping cheap credit would encourage companies and people to spend and invest more.
Just like the fiscal austerity then being practised by governments, this proved to be an idea which made sense in theory but backfired in practice. With the economy too weak to justify investing in expanding production, money instead rushed into fixed assets – especially real estate – inflating their value. That’s how we got that surge in wealth. While world GDP has tripled since 2000, global wealth quadrupled.
What makes this comparative statistic more troubling is its imbalance: Most of the growth in GDP has taken place in the developing world, whereas developed countries mostly inflated their wealth. And the reason wealth rose so fast is that the loose policies of Western central banks caused the global supply of money to explode, rising more than fivefold. In effect, the currency was debased, and it took more of it to buy anything.
In Canada, this debasement has affected people most profoundly in the price of housing, because policies and politics have worked to limit the supply of new housing. Ultimately, the inflation of asset values fed through into consumer prices, and inflation returned. Central banks were then forced to raise interest rates to further soften already-feeble economies.
During the decade of easy money, in contrast, developing countries had generally followed a different course. Both governments and central banks remained prudent, keeping spending under wraps and avoiding easy money. Where central banks did loosen policy, as happened in China, they underwrote the fiscal largesse of the government. China took advantage of low rates to first stimulate a housing bubble, but when the government saw its mistake, it reoriented toward industrial policy and supported new technology, especially renewable energy.
So we now have a lopsided world economy in which, on paper, Western countries are wealthy but mostly moribund, and the economic dynamism has shifted to the global south. With comparatively cheap assets and more productive economies, developing countries will likely attract ever more investment. Back in the West, meanwhile, the high cost of assets has created barriers to new business formation and steered investment away from productive uses.
Changing this state of affairs won’t be easy. Had the wealth of Canadians been based on investments in a dynamic economy, investors would likely favour policies which further lifted growth rates. But since the wealth of Canadians derives increasingly from enforced scarcities, especially in housing, they will resist efforts to break the logjam. The Prime Minister gave expression to a widely-shared view when he said that whatever is done about the housing crisis, prices mustn’t fall.
But there’s no gentle way to put it. Without some wealth-destruction, Canada will continue to struggle. Economic stagnation has unfortunately become the price of keeping asset owners in the style to which they’ve grown accustomed.