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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Stephen Marche on Household Wealth in Canada and the United States



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Stephen Marche has a short piece at Bloomberg View observing that the net worth of the average Canadian household in 2011 ($363,202) exceeded the net worth of the average U.S. household ($319,970), and he draws a number of broad conclusions from this fact, e.g., that Canada has been served well by what he calls “hardheaded socialism.” 

There is much to admire in Marche’s article, including this passage that belies the article’s larger frame:

Since the 1990s, Canada has pursued a hardheaded (even ruthless), fiscally conservative form of socialism. Its originator was Paul Martin, who was finance minister for most of the ’90s, and served a stint as prime minister from 2003 to 2006. Alone among finance ministers in the Group of Eight nations, he “resisted the siren call of deregulation,” in his words, and insisted that the banks tighten their loan-loss and reserve requirements. He also made a courageous decision not to allow Canadian banks to merge, even though their chief executives claimed they would never be globally competitive unless they did. The stability of Canadian banks and the concomitant stability in the housing market provide the clearest explanation for why Canadians are richer than Americans today.

It is worth noting, however, that Canada never had a Glass-Steagall-style wall of separation between commercial and investment banking, and its highly-concentrated financial services industry has thus long been dominated by so-called “universal banks.” Canada was able to “resist the siren call of deregulation” in part because Bay Street was in some respects less tightly regulated than Wall Street. The Canadian mortgage market does work very differently from the U.S. mortgage market, in part because mortgage interest is not tax deductible in Canada and because Canada has tighter minimum down payment requirements, among other things. Post-crisis, the minimum down payment for government-backed mortgages was increased dramatically. These measures strike me as very wise, but it’s not obvious that was a less “socialistic” approach than that of the U.S., where the state, through direct and indirect subsidies, has made a concerted effort to spread property ownership. 

Martin also slashed funding to social programs. He foresaw that crippling deficits imperiled Canada’s education and health- care systems, which even his Conservative predecessor, Brian Mulroney, described as a “sacred trust.” He cut corporate taxes, too. Growth is required to pay for social programs, and social programs that increase opportunity and social integration are the best way to ensure growth over the long term. Social programs and robust capitalism are not, as so many would have you believe, inherently opposed propositions. Both are required for meaningful national prosperity.

That is, Canada has a mixed economy, as does the United States. It happens that the main vehicle for U.S. “socialism” is our confusing and often highly regressive welter of tax expenditures.

So where does Marche go wrong? One example is his discussion of Canadian immigration policy:

[O]f all the world’s societies, Canada’s is one of the most open to immigrants, as anyone who has been to Toronto or Vancouver will have seen. Yet Canada also imposes a mandatory one-year prison sentence on illegal immigrants, and the majority of Canadians favor deportation. Canadians insist that their compassion be orderly, too.

This immigration policy is neither “liberal” nor “conservative” in the American political sense. It just works. You could say exactly the same thing about Canada’s economic policies.

I would suggest that Canada’s immigration policy, which gives a strong preference to skilled migrants and that, as Marche clearly states,”imposes a mandatory one-year prison sentence on illegal immigrants,” is not exactly a lofty Third Way compromise that reconciles the ideals of American “liberals” and “conservatives.” Rather, it seems to capture the basic impulses of center-right politicians and voters, only it is vastly more draconian. Consider that the number of unauthorized immigrants in the United States is approximately 11.5 million. That number would presumably decline if the federal government rigorously enforced a one-year prison sentence for, say, taking a job while overstaying a visa.

Marche’s essay begins by citing average net worth in the United States and Canada. One happy byproduct of Canada’s more stringent mortgage regulation — a practice embraced in conservative Texas and by many conservative policy analysts, including my colleagues at Economics 21 — is that Canada hasn’t had a housing bust (yet), though there is some anxiety about the property market in southern British Columbia and Toronto.  

It is worth noting that Marche might have instead used median net worth instead of mean net worth, which I suspect would have made for an even more favorable contrast in Canada’s favor. Binyamin Appelbaum of the New York Times recently summarized findings from the Federal Reserve’s Survey of Consumer Finances, noting that family net worth has dropped to the levels of the early 1990s. Specifically, median net worth has plummeted in the post-crisis era: 

A hypothetical family richer than half the nation’s families and poorer than the other half had a net worth of $77,300 in 2010, compared with $126,400 in 2007, the Fed said. The crash of housing prices directly accounted for three-quarters of the loss.

This implies that at least half of U.S. households have seen a marked decline in their net worth, which would presumably impact the average. Appelbaum writes:

Families with incomes in the middle 60 percent of the population lost a larger share of their wealth over the three-year period than the wealthiest and poorest families.

One basic reason for this disproportion is that the wealth of the middle class is mostly in housing, and the median amount of home equity dropped to $75,000 in 2010 from $110,000 in 2007. And while other forms of wealth have recovered much of the value lost in the crisis, housing prices have hardly budged.

So it seems that Canada’s stringent mortgage regulations are really, really important, as I think many non-socialists would agree.

There is another factor that might have larger implications for household wealth in the United States and Canada, namely family structure. It is widely recognized that two-parent families have a somewhat easier time accumulating assets than single-mother families, for reasons closely related to the landscape Jason DeParle recently evoked in his article on marriage and the income gap. Is family structure very different in Canada than it is in the United States? A 2007 dissertation by Stephanie K. Grutzmacher suggests that the answer is yes:

The United Kingdom has the highest proportion of children living in single mother families (21.7%), followed by the United States (19.5%). Canada has a relatively small proportion of children living in single mother families (13.1%). The United States has the highest proportion of children living in households not headed by an adoptive or biological parent, such as grandparent-headed families (10.0%). The United States has the largest proportion of children living in households earning less than 50 percent of the median income (21.9%), while Canada and the United Kingdom have smaller proportions of children represented in the poverty population (14.9% and 15.6%, respectively).

The Census offers a different statistic — not the share of children living in single mother families, but rather the share of single-parent households as a share of all households with children. Here the difference is less dramatic. As of 2008, the U.S. number was 29.5%. As of 2006, the Canadian number was 24.6. For reference, the number was strikingly smaller in the other countries cited by the Census: Japan (10%), Denmark (21.7%), France (19.8%), Germany (21.7%), Ireland (22.6%), Netherlands (16%), Sweden (18.7%), United Kingdom (25%).

The divergence between these numbers is interesting, e.g., that only 21.7% of children live in single mother families in the U.S. while 29.5% of families with children are headed by a single parent. This suggests that non-single-mother families in the U.S. have somewhat larger numbers of children than single mother families, which makes intuitive sense. 

The really interesting question is this: given the massive housing bust in the U.S. and the continuing appreciation of home values in Canada, Canada’s importation of large numbers of college-educated immigrants and its draconian policies towards unauthorized immigrants, and its markedly different family structure, why isn’t the gap in average net worth between Canada and the United States much larger? 



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