Last week, my colleague Bernard Beaudreau and I were guests on the local Radio-Canada afternoon show to discuss recent events (lots of fun, BTW: if there's anything more riveting than an economist on the radio, it's two economists), and at one point I found it necessary to argue against the notion that the recession that we're now dealing with was somehow due to the failings of Canadians, the idea that somehow, we had all collectively sinned against the Gods of Economics, and now it was time to pay the price.
Paul Krugman has a series of posts trashing this theme in the context of the US recession, and it makes even less sense for us. Especially the 'living beyond our means' meme:
- We are not borrowing from foreigners; we've been running a current account surplus for the last 10 years.
- We are not borrowing from our children: governments have been running surpluses for more than 10 years.
Now, it is true that personal savings rates have declined recently, but in the context of the above points, it's not at all clear why that's a big problem. Here's a wonderful graph from the early days of WCI:
If Canadians slowed their rates of personal savings over the past few years, then at least part of the reason why they did so was that they saw less of a need to compensate for the other two sources of national savings.
More generally, the problems we're seeing cannot be ascribed to any obvious failing on the part of Canadian households or of Canadian governments. We've done our homework, eaten our vegetables and saved for a rainy day. The storm is upon us, yes. But we shouldn't be thinking of it as a form of retribution for our sins.
Worthwhile Canadian Initiative 
Even in the US people were to some degree reacting rationally to the prevailing incentives. Why save when interest rates are low, unemployment very low, and credit plentiful?
I love your chart of personal savings and general gov’t liabilities, great post and like the correlation between personal savings and gov’t debt. But perhaps there’s a different causal link. The gov’t deficit was tamed, in part, because spending and services were slashed. Perhaps personal savings have decreased because people are receiving less gov’t services and must spend more of their own income to compensate?
Surely, the question of whether we are/were living beyond our means is best measured by how our debt levels have behaved. Public debt is one piece of this, what about private debt?
I read this article, U.S. and U.K. on brink of debt disaster, which talked about how high debt as a percentage of GDp was in the U.K. and the U.S. and was left wondering what the comparable figures were for Canada. But it seemed surprisingly difficult to google the figures – a million articles on government debt and nothing on private debt.
The best I could find was a google books excerpt from ‘The Global Debt Bomb which has some outdated figures showing Total debt/GDP in Canada as second highest in the G7 at 204% as of 1993. But 1993 was a long time ago.
I couldn’t track down the current figure, but surely you or Nick know what it is…?
If our total debt level hasn’t risen above historical norms then I agree with your post – if not…
Responding to Declan: Stephen is a much better empirical macroeconomist than me, and might know better than I do where to find data on private debt in Canada. The Bank of Canada’s website has data on various monetary, debt, and credit aggregates, but I think they only look at the chartered banks asset and liabilities, so may miss some.
Here’s how I look at it:
Net household debt + net firms’ debt + net government debt = net Canadian foreign debt.
Since net foreign debt is approximately zero (we used to be net borrowers, but not (much) now), and firms and government are net debtors, this means that Canadian households have NEGATIVE net debt. Collectively, we have lent all the money that Canadian firms and governments have borrowed, and don’t owe anything to foreigners.
But, even though the average Canadian household is in good shape, (owing nothing, and being owed money), this hides what is going on at a disaggregated level. Some Canadian households owe money to other Canadian households. I’ve been trying to drive this point home on various posts on debt and wealth.
No, we should not beat ourselves up for not being able to save more. So many are lined up trying to get our dollars from our wallet; everything is going up exponentially except for the income. What we can do is reduce our debt and not buy anything we absolutely do not need.
Evelyn Guzman
Debt Challenger
re: graph and government liabilities
What about pension liabilties for government employees (Fed-Prov-Municipal) and perhaps other workers such as Hydro One, postal workers, OPP, RCMP and other police, teachers, nurses, firefighters, etc. ?
How much do we have in hidden liabilities ? Have these been increasing dramatically as program spending did from the 1960’s to mid 80’s ?
Or perhaps, since government deficit = non government surplus, the surpluses over the last few years have drained financial assets from the private sector and not replaced them with anything?
“National Savings” is, at best, a highly misleading concept in a floating exchange rate regime. True, you guys have accumulated financial claims on the rest of the world (which allowed your Govt. to run surpluses without utterly tanking the private sector), but there’s no reason to beleive that those claims will be worth anything when you cash them in. You’d have been better off either importing consumer items or capital equipment that adds to the real stock of wealth. Trade surpluses are a subsidy by Canadians to the rest of the world. But, as a USian, I say: Keep it up!
“We are not borrowing from our children: governments have been running surpluses for more than 10 years.”
Yes but only two years of Harper deficits will kill a decade of surplus pay downs. Harper changed federal policy two years ago so interest rate savings on debt repayments go towards automatic tax cuts. Doesn’t this mean a massive deficit should trigger clawbacks on those interest savings tax cuts? The Americans might beat us to universal daycare. Demand for commodities will keep us bouyant but we can do much better than tax cuts for rich people (corporate and upper income). Tax cuts for small businesses (<$1M), lower income, and R+D, are welcome. Where is the $150M grain research institute Harper promised Wpg? What about a high speed rail corridor now while contruction is depressed?