Don Wright on why our kids will struggle to have a higher living standard than us: Hub Dialogue

Originally published in The Hub. August 31st, 2021

In this Hub Dialogue, The Hub’s editor-at-large Sean Speer speaks to Don Wright who, among other roles, served as deputy minister to the premier of British Columbia.

This conversation has been revised and edited for length and clarity.

Sean Speer

Today’s Hub Dialogue is highly relevant in the context of the ongoing federal election campaign.

I’m speaking to Don Wright, a Public Policy Forum fellow, who has had quite a diverse career including serving as Deputy Minister to the Premier of British Columbia, Deputy Minister for education in Saskatchewan, president of the British Columbia Institute of Technology, and President and CEO of Central I Credit Union.

In June 2021, Don published a major policy paper entitled, Rhetoric vs. Results: Shaping Policy to Benefit Canada’s Middle Class, which essentially argues that Canada’s overall policy framework for the past 30 years or so has produced poor results for the country’s middle class. In its place, he proposes a new policy framework that seeks to boost worker productivity on one hand and provide for greater worker protection and a stronger social safety net on the other hand. It’s a fascinating Left-Right synthesis that would place the goal of higher levels of GDP per capita at the centre of Canada’s public policy agenda.

I’m honoured to be able to speak to him about his thought-provoking research and policy recommendations. Thank you for joining us, Don.

Don Wright

Thanks for having me. It’s my pleasure.

Sean Speer

Don, one of your paper’s core insights is that we have a 0.16 percent problem in our country. What is this referring to? And why is it a problem?

Don Wright

That refers to the rate of growth of real wages over the past 40 years or so. It’s a marked contrast to what was happening in the immediate post-war period. In the 30 years after World War Two, average real wages went up about 2.8 percent annually, give or take, which meant that they doubled every 28 years. Whereas the 0.16 percent means a doubling of more than 400 years.

So, now to expect that your children could have a markedly higher standard of living than you, you’d have to live to Biblical standards to be able to see that happen. I think that’s a real problem because I think that you need an expectation of increasing standards of living to develop and generate the optimism that you need in society.

I can’t help but refer to a Nanos poll that came out in June where they asked, “Do you expect to the next generation to have a higher standard of living to the previous one?” Only 13 percent of Canadians think that’s the case, whereas 52 percent think it will actually be lower. So, four times the number of Canadians believe their children’s future will be worse rather than better. What does that mean for our belief in ourselves as a society and our optimism individually and collectively? I just don’t think it’s healthy.

Sean Speer

You referred to the marked difference in the performance of average real weekly earnings in recent decades compared to the post-war era. That’s certainly a key insight in your paper.

Do you have a view of how much the extraordinary gains in the post-war era were a reflection of policy choices versus a broader set of conditions that we may not be able to replicate? How should we think about the role of policy versus some of these more contingent factors in the post-war era?

Don Wright

I think the policy framework is a large part of the explanation, but it’s not the only explanation.

In my paper, I make reference to a white paper that C.D. Howe introduced in the federal House of Commons in spring 1945, which laid out the blueprint for economic and social reconstruction after the war. It was very much focused on maintaining and growing the standard of living in Canada, and that reflected the consensus across most of the Western democracies of the day. The Beveridge report in Britain and U.S. post-war policy did the same. That suite of policies – including a focus on manufacturing, worker protections, and a strong social safety – was a good part of the explanation of why things went so well.

Now, I also think that we benefited from all of the amazing technological advances that the war had precipitated, but I think the policy framework was the most important consideration.

Sean Speer

You note that, due to aging demographics, we are poised to face a period of sustained labor tightness that will represent, in your words, “a seller’s market for workers.” To what extent will these demographic changes alone reshape some of these underlying, structural issues that have contributed to this period of relative middle-class stagnation?

Don Wright

Well, I think if policymakers are comfortable with letting that happen, it will have a fundamental effect. One of the things I argue in my paper is you need to have tightness in the labour market. That will lead to increases in real wages, but also require firms to say, “you know, if I’m going to be able to afford to pay higher wages for my workers, I better figure out how to develop a better business model or invest in new plant and equipment or new products that are going to increase our productivity.” So, I think it will have a very positive effect on middle-class wages as well as our overall productivity.

What concerns me is I see so much discussion in the media, from parts of the business community, as well as parts of the political community, that essentially says, “Well, we can’t let this tight labour market happen, so we’re going to have to increase immigration levels significantly to overcome that.” I think that’s the wrong mindset.

I’m a big believer in relatively high levels of immigration, and I think Canada’s become a wonderful multi-ethnic society. But I don’t think we should base our immigration policy on employers desperate to find workers. It just seems to be a wrong prescription.

Sean Speer

In your last answer, you referred to Canada’s poor productivity and innovation performance. What’s interesting is that, although we’ve underperformed other jurisdictions in recent decades on most productivity-related metrics, the truth is productivity in most advanced economies haven’t been great.

One factor is that, in relation to post-war era, most innovation seems to be highly concentrated in small number of sectors as opposed to economy-wide. Silicon Valley investor Peter Thiel says we’ve had innovation in the world of bits but not the world of atoms.

What do you think explains the concentration of innovation and productivity in a narrow sliver of the economy without seeing it expressed in other parts of the economy?

Don Wright

That’s a fascinating question. I’d never really thought of innovation from the bits versus atoms perspective. But you’re right that the productivity performance across the western world really did fall over the post-war period.

I think, to a considerable extent, we are still suffering from the 1970s. Governments let inflation get out of control, and then spent the better part of 15 years trying to bring it back under control. I think that experience has hardwired itself into the brains of contemporary policymakers. It’s a little bit like the generals fighting their last war.

As for your particular question about why productivity and innovation has been mostly concentrated in information and communications technology and less in other parts of the economy, I wonder to what extent it is because of the rise of China as a low-cost manufacturing jurisdiction has impacted Western productivity and innovation. This is obviously a generalization but with the opening up of trade and investment flows to China, a lot of industrial-based companies came to outsource their manufacturing to China in order to lower their production costs

Rather than investing in achieving productivity improvements in the domestic manufacturing sector, businesses basically said, “well, it’s actually way easier and way more profitable to outsource it to China because they can produce it way cheaper than us due to their low labour costs.” I think that’s certainly part of the answer to that.

Sean Speer

Another factor that economist Ed Glaeser at Harvard and others have observed is that it’s much easier to innovate in the world of atoms than it is in bits because of regulation. The regulation of the internet is a much lighter touch than, say, medicine or energy, and so it may not be a surprise the most de-regulated part of the economy has also been the most innovative and productive over the past 20 or 30 years. The good news though is that, as your paper observes, we may be on the cusp of seeing the spillover of progress from bits into the atoms part of the economy, including advanced manufacturing, agriculture, and so on.

Another common view that your paper challenges is the assumption that higher and higher levels of immigration are necessarily good for the economy. You make the point that this perspective confuses the importance of higher levels of GDP with higher rates of GDP per capita which you believe is the more important measure of the country’s overall economic health. Why is this distinction between GDP and GDP per capita so important? And why in your view, should we be setting higher GDP per capita as our overriding policy goal?

Don Wright

There are two reasons why I think we should be setting GDP per capita as the more important criteria. The first goes back to my earlier comments about living standards.

The standard of living is a direct function of GDP per capita, not merely GDP. The economist Paul Krugman once famously said: “Productivity isn’t everything, but in the long run, it’s almost everything.” If you’re only talking about GDP, as opposed to GDP per capita, just unconsciously, you’re going forget that important lesson. We need to be much more focused as a society on the productivity of our workers and the shared benefits of those productivity gains. That’s how you ultimately improve living standards and in turn give people a reason to feel optimistic about their futures.

The second reason why I think it’s more important is in its terms of government capacity. That may not be surprising since I spent a good part of my career in the public sector. Most government expenditures are directly related to population size. Health care costs, education costs, infrastructure costs, and so on – these are all a function to one degree or another to changes in population. The more people that we have, the more we’re going to have to spend in these areas. So the goal shouldn’t just be more people as an end in itself. It should be wealthier, more productive people so that we can cover the costs of government programs and services.

Sean Speer

At some level, you’re putting forward a unique vision for the economy and society that doesn’t quite fit a typical Left-Right framework. You want, on one hand, a freer, more dynamic economy that sounds highly capitalistic. But on the other hand, you want an economy that is supported by a stronger social safety net and that has a more pro-worker bias.

Is it possible this policy agenda may represent a basis for new political economy consensus that crosses ideological and partisan lines?

Don Wright

I don’t want to have the hubris to suggest that I can show the way or anything. But I do think that we need to reorient things along the lines that I’ve suggested in the paper.

When you look at jurisdictions around the world that seem to be doing a better job than us in terms of living standards, you immediately think of the Scandinavian countries which have traditionally been fairly social democratic, but it’s a social democracy that’s rooted in a highly-competitive economy and a highly active labour market. In Denmark or Sweden, for instance, if you’re unemployed, you don’t just get a cheque from the government, you receive active assistance to trying to get you back into the labour market.

I think there’s a kind of synthesis to be had here that draws on the ideas and traditions across the ideological and political spectrum.

Sean Speer

One final question, Don. You’ve been at the coalface, so to speak, in the policy world for a long time in different roles, and you’ve encountered different perspectives. What are the primary obstacles to some political party, politicians or political voices taking up this agenda? Is it a lack of imagination or a path to dependency?

Don Wright

That’s a great question. I don’t have a perfect answer but I think there’s really two things that are going on. The first is I don’t think we should underestimate the importance of the dominant narrative at any point in time. Folks talk about a group of people that include government policymakers, politicians, business leaders, and academics, and they tend to coalesce around a common viewpoint and say, “Here’s how we think the world works, and here’s where the economy is going.” And, as I mentioned earlier, I think we are still, to a considerable extent, captive to that policy narrative that emerged out of the horrible decade of the 1970s. I think that is a key part of it.

The second obstacle is that politicians are invariably influenced and shaped by the game of politics. Increasingly politics seems to be focused on short-term questions like “Who’s going win this news cycle? What’s going on in the Twitter wars?” That gets in the way of being able think and plan policies for the long-term. I think that’s a major challenge. We need to do what we can to tilt our politics and policy towards a long-term orientation.

Sean Speer

Well, in that regard, your paper can make a useful contribution to Canada’s political economy. Don, it’s been a pleasure. Thanks for your time.

Don Wright

Thanks, take care.

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