This article was published by Policy Options on April 24, 2024.
The Trudeau government’s latest budget contained a number of splashy items, ranging from housing policy to national defence. In the midst of a national housing crisis and with mounting geopolitical threats, it’s no surprise that these policy areas are getting attention.
Another issue that the government sought to address in the budget is Canada’s lagging productivity. It’s perhaps less well understood, but one that will determine Canada’s ability to fund solutions to our most pressing national challenges. Dusting off the industrial policy playbook may be part of the solution.
Canada’s productivity challenges aren’t new, and aren’t news. Economic commentators have been raising flags about them for years. A recent speech by Carolyn Rogers, senior deputy governor of the Bank of Canada, injected some urgency into the discussion.
“You’ve seen those signs that say, ‘In emergency, break glass.’ Well, it’s time to break the glass,” she said.
In other words, productivity is no longer just a problem. It’s an emergency.
Why should Canadians care?
But why should ordinary Canadians fixate on productivity? Next to the increased cost of living – particularly the cost of shelter – productivity can seem like an abstract concept. Why spend money trying to make firms more efficient when many households are having trouble paying the bills? It’s an important question that elected officials need to answer.
But productivity isn’t a mere statistical artifact. Nor is it something that just pads the corporate bottom line. It determines how much Canadians can produce, and therefore how much we’re able to enjoy.
Investments in productivity – ranging from big ticket items like cutting-edge machinery to improve manufacturing output, to marginal tweaks like better software to improve agricultural output – mean we’re able to produce more goods and services per hour worked. Put simply, it means we get more output for the same amount of effort. Increased productivity means an increased standard of living, and a greater ability to finance important social programs.
Let’s use housing as an example. Several analysts have estimated that Canada is short over three million housing units. That is a daunting number. To meet that goal, we need more output. Unless we’re going to make a massive push to get young people into the building trades or completely reorient our immigration policy to focus on construction workers, we need to build more housing units per worker. In other words, we need more productivity.
Increasing productivity isn’t easy. If it was, we’d have already done it. It’s easy enough to tell firms that they ought to invest more in equipment or software. But they need to have the right incentives and the right tools at their disposal.
One potential tool to hit the accelerator is industrial policy. It’s a broad concept that means different things to different people. The idea that there is a role for the state to nudge private companies in a particular direction is often thought of as antithetical to a market-oriented economy. In reality, we’ve always done some form of industrial policy. This ranges from past large-scale interventions to build out Alberta’s oilsands to tax credits for research and development.
There’s plenty in the budget that broadly falls under the industrial policy umbrella aimed at bolstering clean technology, artificial intelligence, Indigenous reconciliation and other key priorities.
A cynic could argue that the federal government is merely throwing money at stakeholder groups. Indeed, some skepticism is warranted. After all, if there’s money to be made on something, why doesn’t the private sector just step up?
Private firms can’t always address broad public interest
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