Last Friday, the House passed the $1.2 trillion Infrastructure Investment and Jobs Act (IIJA). The Senate passed the bill over the summer so now it goes to President Biden for his signature. With the infrastructure bill done, the focus shifts to the other piece of Biden’s agenda, the reconciliation bill, also known as the Build Back Better plan. Supporters of the reconciliation bill think it will help the country’s economic recovery, but there is a better chance it will exacerbate inflation and slow economic growth.
The current version of the reconciliation bill is full of spending unrelated to economic growth. This includes a hearing benefit for Medicare, expanding Affordable Care Act tax credits, tax credits to politically preferred energy sources, and more subsidies to Medicaid’s home-based care program. Most of this spending is simply a transfer from younger taxpayers to older retirees. People under the age of 65 are the folks who start or expand businesses and invest in companies, and entrepreneurship and investment are what drive growth. Helping retirees live more comfortable lives may be worthwhile, but it is definitely not pro-growth.
The bill also throws a lot of money at things that seem pro-growth, such as investments in education and workforce development, but it does nothing to address the underlying problems that make current government spending on education and workforce development so unproductive.
For example, the National Assessment of Educational Progress recently reported that today’s 13-year-olds perform worse than those of a decade ago, particularly in math. Peggy Carr, the commissioner of the National Center for Education Statistics, was so surprised by the magnitude of the decline that she had her staff double check the data.
Current workforce development programs are just as bad. The programs are scattered across various agencies, each with their own rules and eligibility requirements. Navigating this web of programs is bad enough, but evaluations of these programs also reveal that they rarely help people launch new careers. A 2016 report funded by the Department of Labor found that the availability of government workforce funding did not increase people’s earnings or employment 15 months later.
Absent real reforms, putting more money into our ineffective education and workforce training system can hardly be considered investment.
In addition to spending a lot of money on things unrelated to growth, the reconciliation bill raises taxes on the businesses and investment that drive growth. These taxes have consequences: A recent analysis from the Tax Foundation finds that the current iteration of the bill will reduce long-run GDP by 0.38% and wages by 0.27%. These declines may seem small, but 0.38% of current GDP is $80 billion, or about $240 per person.
The reconciliation bill will not increase growth, but the economy could use a boost. The November jobs report released last Friday was better than last month’s, showing a gain of 531,000 jobs in October, but it was not all good news. The labor force participation rate is still 1.7 percentage points lower than in February of 2020 and total nonfarm employment is still 4.2 million below the pre-pandemic level.
Prices are also rising fast. The annual inflation rate was 5.4% in September, a 13-year high. Consumers saved a lot of money during the pandemic, in part because of several rounds of government checks and generous unemployment benefits, and now they are spending it. High demand is running into low supply as firms struggle to rebuild supply chains and hire workers. The costs of shelter and energy—two prices people readily notice—are two of the biggest contributors to the high inflation rate.
The price of gas has been on a steady climb across the country since the fall of 2020, hitting over $4 per gallon on the West Coast, as shown in the figure below. President Biden recently said the price is unlikely to come down until 2022.
U.S. gas prices by region, Nov. 2020 to Nov. 2021.
EIA https://www.eia.gov/petroleum/gasdiesel/
The Biden administration is blaming OPEC for the high price of gas, but the administration has done its part. The administration cancelled a permit for the Keystone XL pipeline and paused drilling on federal lands and waters. Currently 13 states are suing the administration over the drilling pause, including Louisiana, whose State Solicitor General blames the administration for high oil prices.
U.S. monthly oil production is below its pre-pandemic level and many firms in the oil industry appear leery of investing in new supplies given the Biden administration’s regulatory actions and emphasis on alternative energy sources. If firms are unable or reluctant to increase the oil supply while demand remains strong, consumers will be paying high prices for a while.
Federal policy is not the only factor behind high prices. In an insightful thread on Twitter a couple weeks ago, Ryan Petersen, CEO of flexport, explained how local zoning policy is contributing to the Long Beach port problem. Dozens of container ships full of goods are waiting to be unloaded, but there is no space. Trucks could pick up containers to create space, but many have empty containers they need to drop off first, and this is where the problem lies.
Long Beach zoning code does not allow yards to stack empty containers more than two high. So, trucks are forced to store empty containers on their chassis, which means they cannot pick up full containers to create space at the port. With no space at the port, ships can’t unload, and the goods people are demanding cannot make it to the stores. This means shortages—which are already occurring at stores around the country—or higher prices.
It is well known that local land-use restrictions increase housing prices, but now it is clear they can harm the economy in other ways, too.
The combination of higher prices and low labor force participation is causing some economists to worry about a wage-price spiral. Gad Levanon, head of the Labor Market Institute at The Conference Board, recently wrote that the labor market remains tight: Average hourly earnings increased at an annual rate of 5.7% over the last seven months. Higher wages are often passed on to consumers in the form of higher prices, and as Levanon notes this may cause workers—who are also consumers—to demand even higher wages to compensate for the higher prices. If this process repeats—creating the wage-price spiral—it could cause prices to rise further in the short run.
The economy has a come a long way since the darkest days of the pandemic, but there is still room for growth, especially in the labor market. The reconciliation bill, however, is not the pro-growth plan we need. It does nothing to fix the economy’s underlying supply problems, and its taxes and subsidies reduce the incentive to work and invest. We need less top-down regulation and spending from Washington, not more.
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
