Gross domestic product (GDP) is what economists call the totality of goods and services Canada produces. It’s often referred to as the economic pie. We all want a share of the pie.
Most of us think it’s only fair that all Canadians should be able to enjoy at least a basic level of income. Therefore, much of the attention around GDP goes to how it’s divided. Who gets too much, and who doesn’t get enough? How can we use taxes and transfer payments to smooth out the distribution?
There are two ways most Canadians can get themselves a bigger piece of the pie. One is to try to take some pie from people who have more. That’s a zero-sum game; any increase in pie for some is exactly matched by a reduction for others who won’t be enthusiastic about the change.
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A better way to provide more for all is to increase the size of the pie. We increase our GDP by investment – by providing capital. Investment is the spending businesses use to produce more of the goods and services we enjoy and trade with other countries. That’s making the pie bigger.
Investment dollars, once put to use, become capital. Capital can take many forms. It can be buildings and infrastructure, machinery and equipment, software or other forms of technology, or even human capital – the skills and abilities people acquire from training or experience.
Strong investment and a growing capital stock increase our GDP and get us out of the zero-sum game. Now everyone can have a bigger piece of the pie, and no one has to cut back.
Alas, that’s not happening in Canada.
In 2015, investment in the private sector was growing at a four per cent rate. But it has been declining since.
As a stream fills a lake, investment flows maintain our stock of capital. Capital depreciates over time. Unless new investment more than compensates for this deterioration, our stock of capital is reduced, leaving us less able to produce goods and services, and seeing our economic pie shrink instead of grow.
Statistics Canada has released data that show an absolute reduction in Canada’s stock of capital in 2020, the first time such a drop has occurred since records were kept. This drop can’t all be blamed on the pandemic since it reflects a trend that started several years earlier.
The traditional energy sector – oil and gas – has been hard hit. Other things being equal, this should be good for the environment. However, there hasn’t been a compensating increase in investment and capital stock in alternative energy sources such as solar, wind or small-scale nuclear power. Nor have we seen investment in natural gas or other less polluting carbon energy sources.
Reducing investment in old energy without increasing it in cleaner energy sources will reduce total energy output, reduce exports and raise prices for Canadians.
The energy sector is not the only one losing capital. The stock of capital in the manufacturing sector is at its lowest level in 35 years. Optimists have been saying that Canadian manufacturers could expand by taking advantage of goods shortages generated by COVID-19-related supply chain problems. With capital stocks at the level of 1986, manufacturers are unlikely to be able to do so.
We can’t rely on foreign investors to deal with our depleting capital stock. This year, Canadian pension funds bought more investments from foreign countries than foreigners bought from Canada.
There are things we can do to encourage more private sector investment in Canada. First, however, there’s one thing we mustn’t do. No restrictions should be placed on the outflow of capital. Such restrictions reduce foreign capital coming into Canada since investors fear they won’t be able to take their money out. And Canadian and other businesses may choose not to operate in Canada for fear of limitations on capital movements.
Governments should make it as easy as possible to do business in Canada by minimizing restrictions, regulations, red tape and time delays.
Individuals can choose saving over spending. Whether they invest the saved funds themselves, use the money to pay down debt or put it in the bank, the dollars not consumed will end up as capital.
Finally, people can invest in themselves through education and training. Human capital is at least as important as the financial kind.
Roslyn Kunin is a consulting economist and speaker. For interview requests, click here.
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Troy Media is an editorial content provider to media outlets and its own hosted community news outlets across Canada.