Accepting slow growth as the economy’s New Normal carries several serious risks
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After a decade of pedestrian increases in economic output, the federal government wants Canadians to believe our economy is no longer capable of sustaining higher growth. Pessimism about long-term growth prospects is embedded in the government’s plans. The 2021 budget foresees annual growth slumping below two per cent from 2023 on, after having decelerated to 2.2 per cent in the 2010s.
This echoes the pessimism of subscribers to the “New Normal” doctrine that advanced nations have entered an age of chronic slow growth. The New Normal hypothesis emerged in the aftermath of the 2008 global financial crisis. Former U.S. Treasury Secretary Larry Summers coined the term for the forecast from Northwestern University’s Robert Gordon that annual per capita real GDP growth will average less than one per cent for the next several decades. Gordon, Summers and others argue slow growth will persist both because societies are aging rapidly and because the transformative technological advances of the 20th century will not be repeated. A variant on this them is French economist Thomas Piketty’s gloomy prediction that income growing more slowly than capital would drive income and wealth inequality to extreme levels, further depressing economic growth.
Though arguments for a New Normal may seem plausible other interpretations of the recent slowdown are more convincing. The main alternative blames much of the recent record of sub-par growth on poor policies. For example, the Bank for International Settlements has attributed the protracted slump to the dulling impact of relentless monetary and fiscal stimulus on potential growth. If policy is to blame, that’s actually encouraging: it is more easily corrected than structural forces are.
Washington Post columnist George Will argues that accepting the inevitability of slow growth simply excuses such policy failures. As he puts it, “Making slow growth normal serves the progressive program of defining economic failure down.” If slow growth is somehow inevitable, environmental policies that have strangled growth with higher taxes, regulations, and refusals to approve projects have strangled what was doomed anyway.
Accepting slow growth as the economy’s New Normal carries several serious risks. By encouraging governments to fixate on redistribution — in the belief that the economy has become a zero-sum game in which one group can improve its lot only at the expense of another — it becomes self-fulfilling. Former Bank of England Governor Mervyn King described the resulting vicious cycle: “With stagnation comes a breakdown of trust. One person’s gain is another’s loss. The cooperative arrangements that typically characterize a period of economic expansion begin to fall by the wayside, threatening to lock in stagnation for the long run.”
More broadly, pessimism has a negative impact on the psychology of a society, as seen in Argentina and Japan during their long periods of economic stagnation. King argues this broader impact on sentiment results from the fact “our societies are not geared for a world of very low growth. Our attachment to the Enlightenment idea of ongoing progress — a reflection of persistent post-war economic success — has left us with little knowledge or understanding of worlds in which rising prosperity is no longer guaranteed.”
For optimists, the idea of secular stagnation is simply over-reaction to a transitory period of poor growth interrupting a long upward trend. Past periods of stagnation also generated despondency about the future. The term “secular stagnation” was originally coined in 1938 to describe how slow economic and population growth reinforced each other. But then the economy was surged during the post-war baby boom. A similar wave of pessimism followed the sudden slowdown in the mid-1970s. Alarmist forecasts that the post-war boom was over coincided with widespread angst over rising commodity prices and stagflation. But these gloomy predictions proved unfounded when the Reagan and Thatcher revolutions re-ignited growth in the 1980s and into the 1990s.
Over the centuries, optimism about long-term growth has always been vindicated. As growth theorist Paul Romer has observed, “The historical pattern has been one of accelerating growth — not just sustained growth but accelerating growth.” There are few reasons to think technological innovations have been exhausted. Patricia Meredith of the University of Toronto outlines numerous technological advances in today’s world, including “robotics, artificial intelligence, nanotechnology, quantum computing, biotechnology, the Internet of Things, advanced wireless technologies, 3D printing, and driverless vehicles.”
The optimistic view is that the recent slowdown reflects normal adaptation as society shifts to more powerful technologies. The seeds of faster growth have been sown but will take time to sprout and mature. As former Fed Chair Alan Greenspan observed, “The IT revolution provides a chance of extending to the service sector the sort of productivity gains that we are used to in the manufacturing sector.” Technology’s ability to boost many service industries has been on full display during the pandemic.
Romer explains how history has consistently surpassed gloomy expectations: “Every generation has underestimated the potential for finding new recipes and ideas. We consistently fail to grasp how many ideas remain to be discovered … Possibilities do not merely add up; they multiply.” When the main problem is that governments have adopted environmental and redistributive policies that hamper economic growth Canadians should not accept the inevitability of slow growth. Disruptive technological change is opening the door to higher potential growth.
Philip Cross is a senior fellow at the Macdonald-Laurier Institute.
Climate change is on track to cost the global economy $38 trillion a year in damages within the next 25 years, researchers warned on Wednesday, a baseline that underscores the mounting economic costs of climate change and continued inaction as nations bicker over who will pick up the tab.
Damages from climate change will set the global economy back an estimated $38 trillion a year by 2049, with a likely range of between $19 trillion and $59 trillion, warned a trio of researchers from Potsdam and Berlin in Germany in a peer reviewed study published in the journal Nature.
To obtain the figure, researchers analyzed data on how climate change impacted the economy in more than 1,600 regions around the world over the past 40 years, using this to build a model to project future damages compared to a baseline world economy where there are no damages from human-driven climate change.
The model primarily considers the climate damages stemming from changes in temperature and rainfall, the researchers said, with first author Maximilian Kotz, a researcher at the Potsdam Institute for Climate Impact Research, noting these can impact numerous areas relevant to economic growth like “agricultural yields, labor productivity or infrastructure.”
Importantly, as the model only factored in data from previous emissions, these costs can be considered something of a floor and the researchers noted the world economy is already “committed to an income reduction of 19% within the next 26 years,” regardless of what society now does to address the climate crisis.
Global costs are likely to rise even further once other costly extremes like weather disasters, storms and wildfires that are exacerbated by climate change are considered, Kotz said.
The researchers said their findings underscore the need for swift and drastic action to mitigate climate change and avoid even higher costs in the future, stressing that a failure to adapt could lead to average global economic losses as high as 60% by 2100.
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Cost is a major sticking point when it comes to concrete action on climate change and money has become a key lever in making climate a “culture war” issue. The costs and logistics involved in transitioning towards a greener, more sustainable economy and moving to net zero are immense and there are significant vested interests such as the fossil fuel industry, which is keen to retain as much of the profitable status quo for as long as possible. The researchers acknowledged the sizable costs of adapting to climate change but said inaction comes with a cost as well. The damages estimated already dwarf the costs associated with the money needed to keep climate change in line with the limits set out in the 2015 Paris Climate Agreement, the researchers said, referencing the globally agreed upon goalpost set to minimize damage and slash emissions. The $38 trillion estimate for damages is already six times the $6 trillion thought needed to meet that threshold, the researchers said.
“We find damages almost everywhere, but countries in the tropics will suffer the most because they are already warmer,” said study author Anders Levermann. The researcher, also of the Potsdam Institute, explained there is a “considerable inequity of climate impacts” around the world and that “further temperature increases will therefore be most harmful” in tropical countries. “The countries least responsible for climate change” are expected to suffer greater losses, Levermann added, and they are “also the ones with the least resources to adapt to its impacts.”
The fundamental inequality over who is impacted most by climate change and who has benefited most from the polluting practices responsible for the climate crisis—who also have more resources to mitigate future damages—has become one of the most difficult political sticking points when it comes to negotiating global action to reduce emissions. Less affluent countries bearing the brunt of climate change argue wealthy nations like the U.S. and Western Europe have already reaped the benefits from fossil fuels and should pay more to cover the losses and damages poorer countries face, as well as to help them with the costs of adapting to greener sources of energy. Other countries, notably big polluters India and China, stymie negotiations by arguing they should have longer to wean themselves off of fossil fuels as their emissions actually pale in comparison to those of more developed countries when considered in historical context and on a per capita basis. Climate financing is expected to be key to upcoming negotiations at the United Nations’s next climate summit in November. The COP29 summit will be held in Baku, the capital city of oil-rich Azerbaijan.
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Growth in gross domestic product (GDP), the total value of all goods and services produced in the economy annually, is one of the most frequently cited indicators of economic performance. To assess Canadian living standards and the current health of the economy, journalists, politicians and analysts often compare Canada’s GDP growth to growth in other countries or in Canada’s past. But GDP is misleading as a measure of living standards when population growth rates vary greatly across countries or over time.
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Federal Finance Minister Chrystia Freeland recently boasted that Canada had experienced the “strongest economic growth in the G7” in 2022. In this she echoes then-prime minister Stephen Harper, who said in 2015 that Canada’s GDP growth was “head and shoulders above all our G7 partners over the long term.”
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Unfortunately, such statements do more to obscure public understanding of Canada’s economic performance than enlighten it. Lately, our aggregate GDP growth has been driven primarily by population and labour force growth, not productivity improvements. It is not mainly the result of Canadians becoming better at producing goods and services and thus generating more real income for their families. Instead, it is a result of there simply being more people working. That increases the total amount of goods and services produced but doesn’t translate into increased living standards.
Let’s look at the numbers. From 2000 to 2023 Canada’s annual average growth in real (i.e., inflation-adjusted) GDP growth was the second highest in the G7 at 1.8 per cent, just behind the United States at 1.9 per cent. That sounds good — until you adjust for population. Then a completely different story emerges.
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Over the same period, the growth rate of Canada’s real per person GDP (0.7 per cent) was meaningfully worse than the G7 average (1.0 per cent). The gap with the U.S. (1.2 per cent) was even larger. Only Italy performed worse than Canada.
Why the inversion of results from good to bad? Because Canada has had by far the fastest population growth rate in the G7, an average of 1.1 per cent per year — more than twice the 0.5 per cent experienced in the G7 as a whole. In aggregate, Canada’s population increased by 29.8 per cent during this period, compared to just 11.5 per cent in the entire G7.
Starting in 2016, sharply higher rates of immigration have led to a pronounced increase in Canada’s population growth. This increase has obscured historically weak economic growth per person over the same period. From 2015 to 2023, under the Trudeau government, real per person economic growth averaged just 0.3 per cent. That compares with 0.8 per cent annually under Brian Mulroney, 2.4 per cent under Jean Chrétien and 2.0 per cent under Paul Martin.
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Canada is neither leading the G7 nor doing well in historical terms when it comes to economic growth measures that make simple adjustments for our rapidly growing population. In reality, we’ve become a growth laggard and our living standards have largely stagnated for the better part of a decade.
Ben Eisen, Milagros Palacios and Lawrence Schembri are analysts at the Fraser Institute.
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