U.S. Should Borrow Pages from Canada’s Recovery Playbook

Rachel Greszler / May 05, 2014

The New York Times has announced that the American middle class is no longer the wealthiest in the world. That distinction, the Times claims, now goes to our northern neighbors in Canada.

However, the data used to make this claim holds only if it is based on per-capita income among earners in the 40th to 50th percentiles of income. The data for household income and for the 50th to 60th percentiles show that incomes for the middle class are still higher in America than in Canada. And lower Canadian birth rates skew per-capita comparisons.

Regardless of which country boasts the highest middle-class income, Canada is outperforming the U.S. on a number of important fiscal and economic fronts. Over the past three years, the average Canadian deficit as a percentage of gross domestic product (GDP) has been only one-sixth that of the U.S., GDP growth in Canada has outpaced U.S. GDP growth in all but one year since 2007, and Canada’s debt actually declined by two percentage points of GDP in 2013, while U.S. debt increased by that same amount.

It wasn’t that long ago that Canada faced an economic downturn that was eerily familiar to the recent U.S. downturn. A recent Heritage Foundation report shows that, by many accounts, the U.S. economy since 2008 has closely tracked that of Canada following its 1991 recession.

The Heritage report credits Canada’s turnaround and continued economic gains to the radical but effective decisions invoked amid concerns that the country was on the verge of bankruptcy. Beginning in 1995, Canada invoked some tough reforms, including a cut in government spending of nearly 10 percent over two years, an even larger reduction in federal employment, labor market and unemployment insurance reforms, and reduced barriers to trade and labor movement.

These reforms were not easy. GDP growth temporarily slowed when government spending declined, and it took a decade just to bring the country’s debt-to-GDP ratio back to its pre-recession level. But in the long run, these reforms reaped huge payouts. As the Heritage report says, “The 1995 budget got deficits under control, turned the growing debt into a shrinking debt, and put Canada in a position to take advantage of the late ’90s boom.”

If the U.S. wants to remain the frontrunner in this competitive, global economy, it should heed the successful policies of countries such as Canada that threaten to take its lead.