Magazine | December 31, 2009, Issue

Jobs Up North, Jobs Down Under

Why do Canada and Australia beat the U.S. on employment?

General Motors is hiring. In Canada. In what must have been a vexatious development for Barack Obama, who moonlights as de facto chairman of GM and a dozen other ailing U.S. companies, Canada announced that its economy added five times as many jobs as expected in the month of November — nearly 80,000 new jobs. Those holiday tidings of comfort and joy came on the very day that the Obama administration was desperately trying to spin the evaporation of 11,000 U.S. jobs during the same month as good news. 

GM wasn’t a huge driver of Canada’s employment recovery, but the firm is investing a load of loonies ($90 million Canadian) to expand capacity at its plant in Ingersoll, Ontario, where it will build good old-fashioned, ungreen, gas-guzzling SUVs: the Chevy Equinox (22 mpg in the city) and the GMC Terrain (17 in the city with all-wheel drive and the V-6). No solar panels on those suburban baby-haulers. 

As of December, the official U.S. unemployment rate was hovering around 10 percent. The real rate of unemployment, which includes those who have given up the job hunt but would happily accept gainful employment if it were to fall into their laps, was thought to be around 17 percent. Canada’s rate fell from 8.6 to 8.5. And the Australians were enjoying a jobless rate of 5.7, with the trend line pointing in the right direction: south. 

It’s a world gone mad: The Euro-welfarized ’Nucks are hard at work, their wages up 2.3 percent year over year, while the Aussies, who have a 45 percent top rate for personal income taxes plus a 5 percent payroll tax, are booming. But the rugged individualists toiling in the fields of freewheeling American capitalism are suffering Gallic levels of unemployment. How can that be? 

Job losses were pretty rough over the course of the recession, but we are not shedding jobs very quickly anymore. The number of job losses in recent months is, in fact, down around our historical levels. But there aren’t new jobs. During normal economic times, there’s a fair amount of churn in U.S. employment, with older firms shedding workers and new businesses picking them up. But the startups have gone missing, and that’s bad news for American workers — worse, even, than they might think. The Kauffman Foundation recently ran the numbers and concluded that almost all of the net job growth for the United States in recent years has come from startups: “Until 2005, we knew that from 1980–2005, nearly all net job creation in the United States occurred in firms less than five years old,” the authors write in Where Will the Jobs Come From? “This data set also shows that without startups, net job creation for the American economy would be negative in all but a handful of years. If one excludes startups, an analysis of the 2007 Census data shows that young firms (defined as one to five years old) still account for roughly two-thirds of job creation, averaging nearly four new jobs per firm per year. Of the overall 12 million new jobs added in 2007, young firms were responsible for the creation of nearly 8 million of those jobs.” No new firms, no new jobs. 

There will be no new firms without new investment, and that’s the fundamental problem. Investors are terrified. The big guns are worried about the tax hikes that will be necessary should Obamacare pass, about new regulatory burdens like cap-and-trade, and, most of all, about the apparently boundless jurisdiction of Washington meddlers who have arrogated unto themselves the authority to micromanage every nut and bolt of the economy, from the design of cars to the size of Wall Street traders’ paychecks. Individual investors are feeling the continued pinch of the recession and, rather than pouring money into their 401(k)s, are paying down consumer debts and thinking about rainy days. 

Why aren’t the Canadians and the Australians suffering the same fate? It’s not like Canada and Australia didn’t have housing bubbles, too. True, Canada was a little more reserved, and Canadian borrowers tend to have a bit more equity in their homes than do American homeowners, but the numbers aren’t radically different. Highly urbanized Australia’s housing bubble — called by one economist the worst in the English-speaking world — made much of the country look like Seattle during the dot-com boom, with the average price of a house in Sydney hitting nearly ten years’ median income. Australian banks haven’t been exactly prudish in their loan-to-value requirements, either. Canada and Australia had their stimulus packages — but they were smaller ones than the United States enacted. Keynesian pump-priming does not seem to be the relevant variable.

There are lots of explanations buried in the economic particulars, but the most potent factor seems to be: uncertainty. “There’s a bunch of money sitting on the sidelines,” says one investment manager, “because nobody knows what the hell they’re going to do in Washington. So the banks are sitting on what they’ve got, repairing their balance sheets, and the more adventurous investors are looking for opportunities everywhere else, especially in vehicles where they think they may get some protection from their exposure to the dollar.” 

Politics is at play: The Economic Freedom Index, which is published by the Heritage Foundation and the Wall Street Journal, finds that Australia has one of the most free economies in the world: relatively low spending, transparent and responsible government, market-friendly institutions, free trade, etc. In fact, Australia now ranks ahead of the United States in its overall measure of economic freedom, in third place — behind only Hong Kong and Singapore. The United States is in sixth place, where it is nearly tied with No. 7 Canada, and its score is in decline. It’s not so much the present economic-freedom rankings that are a cause of concern, but the direction of movement. Australia and Canada, like Hong Kong, New Zealand, and Denmark, are getting more free and moving up in the ranks. The United States is getting less free: The government is eating up a bigger share of the national economy, deficits are pumped up like a steroidal Jose Canseco, and the hypostomes of politics are extended ever more deeply into the tissues and organs of private enterprise.

“Australia and Canada have very stable policies,” says Terry Miller of the Heritage Foundation, who helps calculate the Economic Freedom Index. “They did some fiscal-stimulus spending, but did it from a situation in which there was a balanced budget, or an almost-balanced budget. Australia had a surplus, but we have enormous deficits.” The U.S. outlook is anything but stable: If Obamacare passes, or a second stimulus bill, those deficits are going to get even bigger.

Canada has a relatively big government compared with the United States, but it seems to work better — some countries, like Sweden, just do statism better than others. In spite of its larger welfare state, Canada beats its southern neighbor in such categories as “Business Freedom,” which measures how difficult and expensive it is to start a new business or get a license, the self-explanatory “Trade Freedom,” and “Fiscal Freedom,” which measures taxation relative to the size of the economy. 

One surprising finding: It’s not the size and expense of government alone that has sent the United States downward in the economic-freedom rankings — it’s corruption. “We’re not talking here about outright bribery or petty corruption,” Miller says. “It’s the perception that the United States has a political system that is about rent-seeking and dispensing favors. Canada and Australia have different electoral processes, and very disciplined party structures, so they have less of that. It may not be illegal, but this kind of political bribery, with people buying access and Washington picking winners and losers, creates a perception about the U.S. that shows up in these corruption scores.” 

It shows up in investors’ calculations, too. You might call it the Ethanol Effect or the Citigroup Codicil. Archer Daniels Midland, for instance, employs a lot of Democratic congressman Phil Hare’s constituents in Illinois, and it gave generously to his campaign. He secured $25 million for the firm through the stimulus bill, for biofuels development, meaning ethanol. Nothing new there: ADM has been using its political clout to turn corn into gold for decades. But the recent troubles, and Washington’s response to them, have investors reassessing the credibility of U.S. institutions. Say you’re an investment banker or a private-equity fund. In the present financial environment, do you want to put $25 million into a plucky little garage-based biofuels startup that has to compete with a firm that can simply wring $25 million out of Congress? Do you want to compete with an insurance company that’s backed by billions of Treasury dollars or a manufacturer partly owned by the government? The events of the past two years may have changed the way some investors answer those questions. 

As the U.S. government grows, so do the suspicions it inspires. There are good reasons to believe that the United States cannot operate a Canadian-style welfare state as well as Canada does, though the Obama administration seems intent on finding out. Apparently, that’s change that investors don’t quite believe in. And beyond its spendaholic domestic agenda, the administration has signaled its hostility to America’s free-enterprise traditions in other ways, for instance by allowing previously negotiated trade deals with South Korea, Panama, and Colombia to founder, partly as a payback to the union bosses who helped put Obama into office. Those would have been win-win propositions, opening new markets to American businesses and bringing lower prices to American consumers. The trade deals would have created some jobs — maybe not huge numbers, but every little bit helps when your job market is looking like Peru’s. Okay, not quite Peru — but if we’re lucky and get our unemployment rate down another 1.2 percent, we’ll be there.

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