The limits of macroeconomic statistics, Ontario edition

By Felix Salmon
November 15, 2011
report on "Prospects for Ontario’s prosperity" -- you're jealous, I know.

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I spent this morning at the release of the tenth annual report on “Prospects for Ontario’s prosperity” — you’re jealous, I know. Ontario, if you read the report, is in pretty bad shape, when compared to its peers.

ppp.tiff

The general theme of the report is that the way to fix this situation is to improve Ontario’s performance when it comes to productivity and innovation; there was a general consensus in the room that Ontario wasn’t nearly productive or innovative enough, and that this was a big problem.

So, being a bit contrarian, I decided to push back. The first thing I did was point out that the chart above is rather misleading: there’s a very good reason why the two Canadian provinces are at the bottom of the league table. All numbers have been converted using “2010 PPP”, under which one US dollar is worth 1.2 Canadian dollars. In reality, of course, one US dollar is worth 1.02 Canadian dollars. So if you simply use exchange rates rather than PPP, suddenly Ontario looks much better off, with GDP per capita of $54,700 — above, rather than below, the median level of its North American peers.

And if you look at other metrics, those of us who live in New York should probably take relatively little pride in our status atop the GDP-per-capita stakes. Here’s one chart Nick Rizzo put together:

ontario new york median household income.JPG

And of course in lots of other metrics, too, like health outcomes, or the poverty rate, or just general quality of life, Ontario manages to handily beat New York state. GDP masks more than it reveals, much of the time; New York state’s high GDP Is largely a function of the financial industry, and that in turn only serves to make life much more expensive for the overwhelming majority of New York City’s population which does not work in that industry.

Besides, especially during an economic slump, improving productivity is not necessarily a good thing: it often just means that businesses are laying a lot of people off. Dividing GDP by the total number of workers can make for an interesting exercise, but if the number of workers is falling faster than GDP, no one’s going to be happy, even as productivity numbers are likely to look great.

And innovation is not always a good thing either, if the downside of failure is high. Innovation usually ends in failure: the most innovative areas are ones where the cost of failure is low. Before you can become an innovative economy, you need to have a culture of rewarding people who fail. That exists in places like Silicon Valley, but it’s hard to implement in bigger states like Ontario or even, for that matter, New York.

And of course the one area where New York really did innovate was financial services: AIG’s a prime example. It came up with fantastic innovations when it came to guaranteeing super-senior tranches of CDOs, or lending out its securities and investing the proceeds in synthetic bonds. In doing so, it came thisclose to bringing the entire global financial system to its knees.

I ended my talk by asking the crowd to engage in a classic philosophical thought experiment. I’ll give you a choice, the day before you’re born. You can either be born to a randomly-chosen mother in Ontario, or else you can be born to a randomly-chosen mother in New York state. Which do you choose? For me, and for most of the audience, the choice was clear: Ontario. Its PPP-adjust GDP per capita notwithstanding.

9 comments

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As a resident of NY State, with a kid attending university in Ontario and several relatives that are Canadian citizens, I think you conclusions are spot-on.

One only needs to drive through the rot of inner cities in upstate NY or the hollowed-out rural communities and then go across the border to see the difference.

Speaking of the border, the militarized borders are really something for those unfortunate enough to drive or take Amtrak to/from Ontario. But we’re “safer”, right???

Posted by upstater | Report as abusive

If only we could get more Americans to understand the Rawlsian thought experiment, or even the basic facts about how income and wealth are distributed here and elsewhere ( http://paul.kedrosky.com/archives/2010/0 9/americans_have.html ), maybe there could be some kind of reasonable discussion about such things.

Posted by Auros | Report as abusive

PPP is the correct way to compare stats cross border. I have no idea why you disagree or think using nominal FX rates reveals something PPP does not. Unless your argument is that PPP is different from 1.2, in which case make that argument.

Posted by topofeatureAM | Report as abusive

“Ontario isn’t nearly productive or innovative enough.”

Let me guess. The main solutions proposed to make Ontario more productive and innovative involve … tax cuts for corporations and high income earners?

Did I guess right? Did I guess right? Can I have a cookie? Can I have a cookie?

Posted by Frwip | Report as abusive

Hope you enjoyed your trip to Toronto.

I’m a Canadian who has turned down job offers in Silicon Valley. Part of my reasoning is that Canada wins big by lowering the cost of failure if I or a loved one gets sick. I can rely on our safety net. I’m rooting for the US to continue its move more equitable health care. (Go single payer go…)

Posted by dneto | Report as abusive

Ask yourself this: why is total GDP reported and not reported as per capita GDP?
Why is the total GDP reported instead of using the GDP deflator?
It is an obvious incentive for both political parties that “GDP is growing” while if you just see what the increase in population does to the mean, it is evident that “we are getting poorer!”
http://www.tradingeconomics.com/united-s tates/gdp-per-capita

Posted by fresnodan | Report as abusive

Reforms introduced by the Mulroney government of the early 1990s were supposed to make Canada (the majority of Canadian manufacturing is in Ontario) more competitive. These reforms include the Free Trade Agreement, the federal value added tax and relatively low corporate income tax rates.

Does this report address why these liberal reforms have not had the desired effect; or have the reforms actually worked as intended, but the use of stats has hidden this improved performance?

Posted by canuckA | Report as abusive

It all comes down to GDP being a very poor proxy for wealth and productivity of a society. It’s susceptible to inflation via credit bubbles and the tool of PPP is not granular enough to really capture the cost of living in an area.

Besides GDP is more or less a “delta” of services and production rendered in an area, but captures neither existing infrastructure (the real estate of Rome or Paris) only shows up in building activity, not in substance.

Neither are governance and services captured well. Business threatening levels of litigation actually show up as a plus in GDP, same goes for an inflated but ineffective health care system. Quality of life is not expressed by this measure.

Posted by Finster | Report as abusive

Can you please tell me what the source is for the Ontario data in the second chart? Also, has anything been done to adjust the data in the chart? Thanks for an interesting post.

Posted by mlcan | Report as abusive