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Canada's economy can teach the U.S. a thing or two

The United States will probably take years to recover from the global recession and credit crunch, economists say, but its northern neighbor is back in fine shape.

July 11, 2010|By Don Lee, Los Angeles Times

Reporting from Washington — — Whatever else they've thought about their much smaller neighbor to the north, Americans have almost never looked to Canada as a role model.

Indeed, during the long, bitter push to revamp the U.S. healthcare system, opponents repeatedly warned that, if we weren't careful, we could end up with a medical system like Canada's.

But on healthcare, as well as on such critical issues as the deficit, unemployment, immigration and prospering in the global economy, Canada seems to be outperforming the United States. And in doing so, it is offering examples of successful strategies that Americans might consider.

While the United States, Japan and much of Europe are struggling with massive fiscal deficits, Canada's financial house is tidy and secure. Most economists say it will take years for the United States to make up the 8 million-plus jobs lost during the recession, but Canada — despite its historic role as a major supplier for the still-troubled U.S. auto industry — already has recovered essentially all of the jobs it lost.

Meanwhile, as Americans continue their grueling battle over immigration, Canadians have united behind a policy that emphasizes opening the door to tens of thousands of skilled professionals, entrepreneurs and other productive workers who have played an important role in strengthening the Canadian economy.

Granted, Canada's problem with illegal immigration is smaller, and its economy does not match the scale and dynamic productivity of the world's largest. But on the most troubling issues of the day, the U.S. is locked in near-paralyzing political and ideological debates, while those same issues are hardly raising eyebrows in Canada.

"We did a lot of things right going into the financial crisis," said Glen Hodgson, senior vice president at the Conference Board of Canada, a business-membership and research group in Ottawa.

One of the most important, he said: Back in the 1990s, it cleaned up the fiscal mess that most every developed nation is now facing.

Earlier that decade, Canada too was straining from years of excessive government spending that bloated the nation's total debts, to 70% of annual economic output — a figure the U.S. is projected to approach in two years.

As with Greece, Portugal and Spain this year, Canada's credit rating was downgraded in the early 1990s, sharply raising its borrowing costs. With its economy suffering and pressure mounting from international investors — Wall Street bankers in particular — Canadian officials slashed spending for social programs and shifted more of the cost burden to provincial governments, which almost everyone in Canada felt.

"I had to share a phone line with another professor. Can you believe it?" recalled Wenran Jiang, who joined the University of Alberta's political science faculty in 1993. Professors there and elsewhere also took salary cuts.

It would take several years of such tough medicine, but as Canada headed into the new millennium, the government's total debts were shaved nearly in half, and then whittled down to a little more than 20% of gross domestic product just before the global recession began in 2008 — by far the lowest ratio among major developed countries.

With the economic downturn, Canada pumped up public spending to stimulate growth, as other nations did. Even so, its fiscal shortfall this year is projected at $33 billion, comfortably below the 3%-of-GDP threshold that economists consider a manageable level of debt.

Washington's deficit this fiscal year is estimated by the Congressional Budget Office at $1.35 trillion — or 9.2% of projected GDP.

The United States' larger size — its population and economy are roughly 10 times those of Canada — makes direct comparisons difficult. And many Canadians readily acknowledge that American entrepreneurship and productivity are enviably stronger.

But having learned to tighten their belts in the 1990s, Canadians such as Michael Gregory have little sympathy for U.S. consumers who pile debt onto their credit cards and homes.

"We've been taught: You don't buy what you can't afford," said Gregory, a senior economist at the Bank of Montreal.

Similarly, Canadian banks have been more conservative than American ones. So they made few subprime loans, and home equity lines are relatively recent offerings in Canada.

Yet their solid if unexciting product lines and financial results mean Canadian firms can now expand lending. This as U.S. banks continue to refrain from extending credit, thus restraining spending, investment and job growth.

Canada's stricter banking regulations and bankruptcy rules certainly have played a role too, but Gregory attributes part of the difference to cultural factors. When he worked for now-defunct Lehman Bros. Holdings Inc. in New York in the late 1990s, Gregory drove a Ford minivan or a Toyota Camry, while many of his colleagues tooled around in BMWs and other luxury brands.

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