Are We Really Better Off?

Great article by William Hanley at the Financial Post...

Are we really better off?
http://www.financialpost.com/most-popular/story.html?id=2193316

The numbers don't lie -- especially those issued by Statistics Canada, which has an outstanding record of adhering religiously to strict methodology. So when I read a recent front-page commentary in the National Post by William Watson, I was surprised at the StatsCan numbers he quoted to defend capitalism's record in Canada.

Not that capitalism really needs defending, despite Wall Street's central role in triggering the financial crisis that sank the markets. To borrow Winston Churchill's words about democracy, capitalism is the worst system, except for all the rest.

Mr. Watson's point -- underscored by StatsCan's numbers in a report racily titled Income in Canada -- was that Canadians' real incomes rose strongly for the 10 years from 1998 to 2007 among all groups and individuals. The median income of families with two or more persons rose to $71,900 in 2007, from $59,300 in 1998 in inflation-adjusted 2007 dollars. Elderly families' income rose to $54,200, from $43,800. Elderly single men saw incomes rise to $31,000 from $27,000. Even elderly single women, often the poorest and most vulnerable financially, had a rise in real income, to $25,800 from $22,100.

Yes, the StatsCan numbers do paint a bright picture of Canada's particular form of capitalism at work. So, why am I not convinced that the underlying reality is no longer aligned with the numbers?

First, much has happened since StatsCan meticulously crunched the 2007 real-income numbers. When the Income in Canada report for 2008 is published in June 2010, the numbers are not likely to look as good, because recessionary forces had already begun chipping away at incomes.

And when the annual report for 2009 is issued in June 2011, the picture will look far bleaker, reflecting this year's high unemployment rate and a host of other realities associated with the recession, including falling portfolio values and tumbling fixed-income rates of return. And in relief, the decade from 1998 to 2007 was a very good one for the personal finances of most people, despite the brief 9/11 recession and the tech wreck of 2000.

Second, anecdotal evidence I've collected tends to belie the numbers. Few of the many people I know have been getting pay raises and few retirees I know have made any real income gains in the past few years. If they've kept pace with inflation, they've been fortunate.

Third, despite the tame inflation rates of recent years, many people will attest that things are more expensive. For instance, food prices and restaurant prices have been rising much faster than the rate of inflation in the past year.

Anyway, the basket of goods that StatsCan uses to track the consumer price index is not necessarily an accurate measure of many people's spending habits. I know for certain that local restaurants and pubs I frequent have raised prices steadily, so customers are having to spend more of their higher real incomes.

In all, the impression I and others get is that many people these days are "feeling" poorer or at least less well-off. That could be a result of the financial tensions of the past year or so. But I expect the mood to remain somewhat more downbeat for a while at least.

One event that is likely to reinforce some of today's uncertainties is the coming rise in interest rates, which have been kept artificially low to help stimulate the economy. Sometime next year, the Bank of Canada will begin raising rates, pushing up accommodation costs for legions of mortgage holders, who will start to feel a little poorer, with less discretionary income to spend.

Meantime, Canadian government deficits -- totalling about $100-billion this year alone -- will hang over the country and its citizenry. Those deficits will continue to be racked up for the next few years at least and they will have to be at least partly addressed by higher taxes if the country is to get a handle on its fiscal outlook.

The hard fact is the country is in nowhere near as good shape overall as it was just two years ago, when the latest real income numbers indicated Canadians were making solid gains.

That, despite capitalism's record of working well for our prosperity, is a reality Canadians must continue to deal with in the coming years.