In the wake of the US presidential election and Donald Trump’s ascension to the mantle of “leader of the free world”, one is left pondering the factors that differentiate Canada from the United States. When I was a young boy and visited relatives in Italy, much to my confusion we were invariably referred to as, “I Americani” and no amount of explanation seemed to be able to alter this perception. Needless to say, from the historical perspective of the land that contributed both Christopher Columbus and Amerigo Vespucci to the history of the New World, I suppose that Canada and the United States are one and the same. Yet, two societies and economies have evolved over time and the border between the two countries is a separation line that does mark differences.
Despite sharing a common language and culture, there are different cultural, institutional and economic features that have evolved over time and that we could discuss at length. To my mind the most significant economic differences between Canada and the United States can be demonstrated in a few simple graphs. Figure 1 plots Canadian and US real per capita GDP in US PPP$ as well as Canadian real per capita GDP as a percent share of US real per capita GDP from 1870 to 2013. The data for this graph comes from the recently completed and released Jorda-Schularick-Taylor Macro History Data Base.
The results show what I think most of us already know about economic performance in Canada relative to the United States. Both countries have seen substantial long-term growth in their real per capita GDP and have provided their citizens with economic opportunity. However, Canada has always had a lower per capita income than the United States though the gap has narrowed over the course of a century as evidenced by the linear trend line. Whereas Canadian real per capita GDP was at approximately two-thirds of the United States in 1870, it has grown to about 80 percent. It is interesting that noticeable periods of short term narrowing of the gap often occur during commodity booms such as the wheat boom era between 1896 and 1914 and oil price booms of the 1970s and 2000s. The point of all this is that the average American has always been richer than the average Canadian but the gap has narrowed over time.
Needless to say, money is not everything and we could probably digress at length on quality of life but I am not equipped to go there. However, being richer is also accompanied in the American case with greater extremes of both income and wealth relative to Canada. We are all familiar with the evolution of Canadian and American income inequality over the course of the twentieth century as presented in the work of Veall and Saez.
Yet inequality is also evident in the distribution of wealth. Indeed, wealth inequality is generally acknowledged as even more pronounced than income inequality. For example, even in Canada, Statistics Canada reported that in 2013, Canada’s top 1 percent of income earners earned 10.3 percent of income while the wealth share of the top 1 percent in 2005 was nearly 20 percent.
Figures 2 and 3 present a long-term picture of wealth inequality in Canada and the United States as captured by a large number of point estimates that I have compiled for Gini coefficients as well as the wealth share of the top ten percent of the distribution. The data underlying these figures is available in a paper here. Suffice it to say that there are a number of data issues and challenges when it comes to examining long-term wealth inequality using historical data including time periods with data gaps - which is discussed in the paper.
The figures plot the point estimates against year and also include a LOWESS smooth in an effort to visualize a trend. As Figures 2 and 3 show, wealth inequality rose in both countries during the industrialization era, moderated somewhat during the twentieth century and then began to rise after about the 1960s. What is also evident is that wealth inequality in the United States is generally higher than Canada’s though Canada is not necessarily an egalitarian paradise. If one uses the LOWESS smooths as the basis of comparison, Gini wealth coefficients of inequality for Canada since 1900 have on usually been above 0.7 while for the United States they are above 0.8. As for the wealth share of the top 10 percent, the top ten percent of the wealth distribution in the United States generally have held 70 percent of wealth since 1950 – with an increase in share above this recently. Meanwhile, in Canada, the wealth share of the top ten percent since 1950 averages between 55 and 60 percent based on the LOWESS smooth (though one can see that there is indeed quite some variation in the point estimates).
Canada has lower average incomes (and probably average wealth) compared to the United States but the extremes in both income and wealth are generally more muted than the United States. This is a key economic difference between the two countries and in my opinion a factor why politics in the United States can also be more extreme than politics in Canada. I suppose this is something we already suspected but having a picture painted by this long-term historical evidence suggests that these differences are not the outcome of differential government social policy in the post World War era or a modern development but a long-standing feature of the two countries. Indeed, the US appears to have had Canadian style inequality levels during its colonial phase but after independence and with industrialization it rapidly acquired a high degree of inequality.
A declining and angry American middle class is one of the factors being advanced for the victory of Donald Trump. In the case of the United States, the top ten percent on average hold nearly 75 percent of wealth while the remaining ninety percent of the distribution get 25 percent – that is what is left over for the middle class and everybody else to compete for. In Canada, the top ten percent of the wealth distribution on average hold at best 60 percent of wealth with the remainder of the population – including the middle class – getting the other 40 percent. Put another way, there is more left over for everyone else in Canada.
More extreme wealth and income distributions are a factor in stoking more extreme political results but Canadians should not be too smug. First, we share a border and are reliant for 70 percent of our trade with the United States, which seems to be an increasingly angry and divided country and with a President-elect who has the attributes willing to exploit those divisions. Dealing with an unhappy neighbour is going to be a big challenge. Second, while our wealth and income are not as unequally distributed as in the United States they are still unequal and the evidence suggests that even in Canada there has been an increase in inequality over the last 30 years. Moreover, while in Canada the bottom 90 percent has a larger wealth share than in the United States, it remains that the wealth share of the bottom 50 percent of the wealth distribution has generally remained flat at below 10 percent for over a century.
Just because a Trump has not arisen in Canada does not mean a potential constituency does not exist.