Canada's Failing Economy

Jul 16, 2013

economics canada work life

I was reading a brilliant article titled "Post-Scarcity Economics" by Tom Streithorst and it resonated with me about our failing economy in Canada that I needed to write an article on it. Although the article is set against the US economy, much of what happens there also happens in Canada, albeit to a less extent ¹. Please read the entire article (warning: it is lengthy) first, and I will be pulling sentences out and applying my experiences in Canada to them.

When I graduated high school, in 1975, I assumed that whatever I did, I would end up somewhere in the great American middle class, and that I would live better than my father, who lived better than his. Today, my son doesn’t have nearly the same confidence.

In Vancouver, this has been erased. Completely. If you look at the previous generation (the baby boomers) they have sucked up the majority of the wealth and cheap real estate. There is no such thing was a starter home in Vancouver any more, as these are now condominiums and townhouses that are overpriced and with no room to grow as a family. The previous generations have been afforded cheap housing prices, which provides them with the ability to pay off their houses quickly. However, in this emergency interest rate environment, housing prices skyrocketed and there is little to no way that people will be able to pay off a $1,500,000 home without some incredible salary increases in the near future.

Today kids need a spectacular resume just to get an unpaid internship at IBM. Our children fear any moment not on a career path could ruin their prospects for a successful future.

Unpaid internship is the newest phrase to enter our vernacular in Canada and the US. Basically, it is a slave's position whereby you are gambling your time for the chance to gain business experience and hopefully a job in the near future. However, what is the point of an employer to hire an intern when they can simply hire another unpaid intern and not impact their balance sheet? And yet, more kids are stupidly jumping on the internship bandwagon with dreams of riches in their eyes.

The fear of not working is something I spoke about in my article on burnout. There is a large stigma applied to someone to explain any period of unemployment, as somehow one must be employed to learn anything. I'm currently on sabbatical, and I still feeling the lingering effects of pushing myself ever harder to learn and be seen a good worker in the eyes of some mythical employer (even though I am self-employed).

Most of us are working harder, for less money and with no job security. My father and I both worked at the same large corporation but there was a difference, a difference determined by our respective eras: he was staff, I was freelance.

In Vancouver, using freelancers is becoming a commonplace activity. After all, this is exactly how some of my company's largest clients came to be. There is a huge cost savings when a company hires a freelancer (or independent consultant/contractor). Although at first these people look to others to be expensive, one forgets that all sick leave and vacation time is included in the contract price, as well as all risk of profit and loss is borne by the consultant. Companies will even use consultants as a proving ground for hiring full-time employees, as it allows them to vet someone for an extended period of time without having to get the HR department involved (usually just the purchasing department). Once the consultant is converted (or flipped in industry parlance) in a full-time employee, this person can see a 40-50% drop in money that they see (this is based on experience). You have to work incredibly hard in the Vancouver region to justify making more than $100,000 per year. This number is important as I will soon talk about Vancouver real estate compared to income levels.

He yelled at the CEO habitually without any fear of losing his job. I mouthed off once to a middle manager and was never hired again.

I mouthed off (indirectly) to a middle manager and I will not be hired again at EA (whether I was right or wrong to do it is besides the point, the fact is it happene). That being said, the underlying managers all liked me and would definitely hire me again, but the middle manager is the one who is the gatekeeper. The crux of it is that I'm not bitter about it; I understand that some people act like this. While at EA I noticed a line of thought that one could fire easily because there are always more people that are lining up to be hired. While that may be the case, my experience is that the level of skill for the majority of people is subpar and the people that a company really wants is quite rare indeed. However, when time is of the essence, EA would hire someone, anyone, just to fill the spot. This type of thinking only perpetuates the personality defect afflicting middle managers.

His generation gave their youth to a corporation, and the corporation took care of them in their old age. Today loyalty, if it exists at all, goes just one way.

But all that money coursing through the world financial system has to go somewhere and despite the lack of goods and wages inflation, it sparked inflation in real assets. Houses on my block in the United Kingdom that cost £3000 in 1970 are now going for over £1.5 million.

This is the true meat of the article, and one that highlights just how screwed we are in Canada. In this CBC article titled "Housing prices rise in June", an interactive map of Canada is provided that shows the average house price across the country (and as a whole). I'm assuming they mean single detached home here, but it is not listed anywhere on the page.

In Canada, the average price of a home as of June 2013 is $386,585, which is a heck of a lot of money considering that Canada is a very large place (where most of it is in the "boonies"). "That's not too bad", you think to yourself. When the average Canadian salary is included, you start to see the problem. In June 2013 the average hourly wage across the country was $24.01, which is hair under $50,000 a year (assuming 2,080 workable hours per year). That pegs the price to income ratio on a national level at 7.72, which is about 4.72 points higher than the historical average of 3.0, and rates as severely overpriced.

If we zoom into Vancouver, we see a wholly different problem, and much worse to boot. The average price for a house in Vancouver, as of June 2013, is an absurd $750,778. The average hourly wage according to StatsCan is $23.81, resulting in an average annual salary of $49,524. The price to income ratio here is now 15.2. Yes, you right that correctly. FIFTEEN TO ONE. Whereas Canada is about 2.5x the historical average affordibility, Vancouver is 5x the average price to income ratio of 3.0. And oddly enough, $750,000 doesn't buy you a whole lot in the nice parts of Vancouver (usually just the surrounding suburbs). If you want to purchase a house in Vancouver proper, you need $1,500,000 to $2,500,000. Just think about how much debt people are incurring. Just think about how much speculation is rampant in people's minds when they incur all that debt.

When you are strapped for cash and owe more than you can afford, reducing your expenditures is a sensible response. Unfortunately, when everyone is cutting back, the economy slows. When consumers stop spending, firms have no reason to invest in increased capacity, no reason to hire more workers. And when workers fear for their jobs, they cut consumption even more. In 2007, the debt-based feedback loop that had kept the economy ticking went into reverse.

This is exactly what has yet to happen in Canada, as the majority of people are still spending because, in their mind, the economy and real estate is rising. Consumer debt in Canada ² rose to 161.8%, according to Ipsos Canada. In simple terms, for every $1 that an average Canadian earns before tax, they hold $1.61 in debt. Of course, this is just long-term debt, and they only need to make interest payments. However, interest rates in Canada are still in their emergency mode and are kept artificially low, but when the rates rise, these people will be in serious trouble. How serious? Just think what would happen to your spending if interest payments on debt take the majority of what you earned.

Austerity has been a dreadful failure. A return to sensible Keynesian policies is the first step to restoring prosperity.

This is the only part of the article I majorly disagree with. I believe that austerity trains the minds of the people that they cannot spend needlessly and beyong their means without consequence. Once the citizenry start to educate themselves on the fundamentals of finance and economics (nothing too advanced, just basic stuff), they will require their leaders to be more fruitful in their spending.

Footnotes