Canada needs to grow back better

WE HAVE BEEN DOGGEDLY ATTACHED TO A SHUTDOWN POLICY BASED ON INFECTION RATES, ALTHOUGH OUR FATALITY RATE HAS BEEN COMPARABLY GOOD. — BLACK

Even as the number of COVID-19 cases remains elevated across the globe, the notion of “build back better” is already coming to define the post-pandemic recovery in Canada, the United States, the United Kingdom and elsewhere. The alliterative slogan reflects a view among politicians, social activists and an increasing share of the general public that the unprecedented experience of the past several months requires a permanent expansion of the welfare state. New York Times columnist David Brooks recently summed up this prevailing political mood: “the era of big government is here.”

Although the current emphasis on social welfare spending has been hastened by the pandemic, it isn't actually new. It follows a broader trend over the past decade or so from a politics oriented around questions of economic growth and wealth creation to a politics now primarily concerned with distributional matters. It's as if we've collectively decided that modest yet stable economic growth is an inevitable fact of modern life and therefore no longer requires our attention or care. In lieu of debates about how to bolster growth, our political parties now compete for median voters with tax credits, cash transfers or other government programs.

Canadian policy thinker Alex Usher touched on this trend in an online essay earlier this week. As he sees it, our collective retreat from economic growth is causing us to neglect fundamental questions about innovation, productivity and ultimately higher living standards. The recent federal speech from the throne is a case in point: it was a long laundry list of new entitlement spending that, by and large, disregarded how we'll actually pay for it all.

We need to rediscover the case for economic growth. It matters now more than ever in light of the economic damage caused by the pandemic. Canada's economy contracted by 11.5 per cent in the second quarter and it may take years to recover the lost output.

We have our work cut out for us. Canada's economic growth has been slowing for the past several decades. Average GDP growth was 4.08 per cent between 1960 and 1980, 2.73 per cent between 1980 and 2000, and just 1.99 per cent from 2001 to 2018. The differences are enormous. An economy growing at three per cent instead of two per cent isn't just an extra point. It's an economy that's growing a full 50 per cent faster.

It's counterintuitive when one thinks about it. Our collective attention has shifted away from economic growth at the precise moment that it's been slowing. It's almost as if we've decided that we can't do much about it one way or the other so there's no point in worrying. Stagnation has bred complacency.

The retreat from growth manifests itself in different ways. One is the current political debate about the sustainability of deficits and debt. The left and the right are having a spirited argument about whether we can afford new and more spending. But it mostly misses the point.

The real issue here isn't sustainability, per se. It's the opportunity costs of dedicating more government spending to current consumption such as health care, at the expense of future-oriented investments such as science and technology. The former relies on a dynamic, growing economy and the latter helps to create one. Our budget debates will need to be able to distinguish between the two if we're going to restore economic growth back to historic rates.

A politics detached from growth also has broader societal implications. In the absence of a future-oriented vision rooted in economic growth and dynamism, people can become consumed by loss aversion in the present.

The individual stakes are necessarily higher in a world of scarcity. So much of the zero-sum thinking reflected in contemporary politics is the result of people's reduced expectations. We've come to collectively accept that a different and better future isn't possible and in turn we've

OUR RETREAT FROM GROWTH IS CAUSING NEGLECT IN AREAS SUCH AS INNOVATION.

become increasingly polarized and pessimistic as polls consistently show.

What does this all mean? The prevailing vision of “build back better” cannot neglect economic growth. Only higher rates of economic growth and productivity can produce the employment, wages and government revenues necessary to underwrite the welfare state — particularly in an era of aging demographics.

How we can achieve more growth is a complicated question. There are different perspectives about the role of government versus markets, economy-wide policies versus sector-specific ones, and traditional policy levers such as taxes and regulation versus newer ones such as public transit and housing. There are also legitimate concerns about how we ensure that the benefits of economic growth are broadly distributed among different people and places. We'd be much better served if our politics was reoriented around such questions in the aftermath of the pandemic.

This will require our political class to rethink what its main purpose is. Distributing wealth is the easy part, especially when it's paid for by borrowing. Creating wealth is much harder and yet it will be even more important as we come out of this crisis. Build back better? No, our real priority must be to grow back bigger.