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.

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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.

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