FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, May 17, 2000

• 1537

[English]

The Chair (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'd like to call the meeting to order and welcome everyone here this afternoon.

As many of you may know, the finance committee is holding a series of round-tables on a number of issues, and today we are holding one on household debt.

I'd like to take this opportunity to welcome the following organizations and individuals: from the Vanier Institute of the Family, Bob Glossop, executive director of programs; from Informetrica, Michael McCracken, chairman and chief executive officer; from the University of Ottawa, Mario Seccareccia, professor, department of economics; from Statistics Canada, Stewart Wells, assistant chief statistician, national accounts and analytical studies, and Patrick O'Hagan, assistant director, balance of payments division; Warren Mosler, director, economic analysis, III Finance; and Armine Yalnizyan, economist.

Welcome. As you know, you have five to ten minutes to make your introductory remarks. Thereafter we'll engage in a question-and-answer session.

We'll begin with the Vanier Institute of the Family. Mr. Glossop, welcome.

Mr. Bob Glossop (Executive Director of Programs, Vanier Institute of the Family): Thank you, Mr. Chairman and colleagues of yours on the finance committee, for the opportunity to be here.

We have tabled with you as a background document a report prepared for us by Roger Sauvé, president of People Patterns Consulting in Alberta. That report is called The Current State of Canadian Family Finances: 1999 Report, which is an example of one of our attempts at the Vanier to monitor what's going on with Canadian families and to take a look at the issues that affect them most.

I will not in this brief opening comment take you through that report step by step. I believe you already have sufficient evidence of the increasing levels of per-capita debt as well as our own calculations of debt per household. You also have evidence, I believe, with regard to the trends in the rates of saving.

What seems clear to us, no matter what measure we use, is that at precisely the same time as most governments have been able to put their fiscal houses in order, or at least better order, individuals and families in the aggregate may well be overexposed and vulnerable to increased interest rates, market fluctuations, and temporary job losses by one or more wage-earners.

To review very briefly some of our findings, the strong economic recovery since the recession of the early 1990s has, I fear, not been particularly apparent to many Canadians as they sit at their kitchen tables trying to balance their chequebooks at the end of every month. The recovery, as monitored by most of the gross indicators of economic performance, has been for many an incomeless recovery.

On average, families have less disposable income today than they did a decade ago. As well, there are increased demands on the incomes they do take home, in the way of property taxes, increased user fees, and health care costs.

• 1540

Of course some families have fared better than others. Families with the highest incomes are dual-earner couples with children. They have seen modest, but only modest, improvements of $73 in their incomes between 1989 and 1997. On the other hand, one-earner couples with children have suffered a significant loss of their real incomes. Average family incomes of male lone parents have declined sharply, but it is still single mothers who struggle most to provide for themselves and their children.

Although some have argued that the erosion of disposable income is a result of an increasing tax burden, in real dollar amounts the average income taxes paid by families actually declined between 1989 and 1992, and since then have risen slightly and are back at the 1989 levels. Income taxes do, however, now represent an increasing proportion of the smaller total household incomes we bring home, primarily because the wages we earn in the marketplace have not, unlike in the U.S., kept up.

Faced with this decline in disposable income, it would be reasonable to expect families and households to have tightened their belts and reduced expenditures, just as governments have, but they haven't or they couldn't. Despite the roughly 9% decline in after-tax household incomes recorded between 1989 and 1998, spending per household was up by 1.5%, a small increase in comparison to historical gains. In other words, it would seem that, again in the aggregate, families and households are assuming higher levels of debt and saving less in order to maintain or increase their levels of spending.

So the obvious question for us is, why are families and households willing to take on this debt and willing to make themselves vulnerable? Somewhat curiously, now that Canadians have accepted the discipline of restraint when it comes to public finances, they seem either unwilling or unable to accept the same discipline when it comes to organizing their own private financial affairs. Unwilling or unable? Which is it? And who is unwilling and who is unable?

Statistics Canada has remarkably sophisticated and detailed data about the distribution of incomes, but it's my impression that we don't yet know all that much about the distribution of debt, or on the other side of the equation, the distribution of assets and wealth, although we expect this will be remedied with the eagerly anticipated release of the survey on wealth this fall.

We would first of all recommend an investment in data collection and analysis that would shed light on the character, distribution, duration, and depth of debt held by Canadian families and households.

Some initial work on this question, again done by Roger Sauvé, has used interest payments, as recorded in the Statistics Canada 1996 family expenditures survey, as an indicator of how debt is distributed across age groups. On average, the typical Canadian household in 1996 paid $2,264 in interest payments—that is, on their main homes, vacation homes, other property, equity loans, and personal loans. This interest paid was equal to 5.6% of total after-tax household income.

In comparison to this average of 5.6%, households headed by younger persons aged 25 to 34 and 35 to 44 paid 7.8% and 7.4% respectively of their annual after-tax incomes on these interest payments. The percentage of household income going to pay interest seems to decline, as we might expect, after the age of 44.

Upper-middle-income households, those in the fourth quintile, allocated the highest proportion of their total incomes to interest: approximately 7%. Upper-middle-income households headed by 25- to 34-year-olds had the heaviest burden of debt, with interest payments equal to almost 10% of after-tax incomes.

A number of reasons might account for why Canadians are taking on higher levels of debt. According to the pollsters, we are generally less apprehensive about losing our jobs, with lower unemployment rates than we've seen in a long time and strong job creation. I think Canadians generally feel they will be able to keep up with their mortgage payments, credit card bills, and car loans, at least in the short term.

Some families as well have certainly accumulated wealth, against which they are willing to borrow or which makes them at least more confident about the future, even if the notably increased values of their shares and pensions, which are now equal to two-thirds of all financial assets, are not necessarily secure and do not, as yet unrealized gains, make it any easier to keep up with the monthly bills.

• 1545

Even though the value of household assets per household advanced quickly up until 1997 and declined marginally in 1998, I would emphasize again the question of distribution. The poorest one-fifth of families have virtually no net worth, and the richest quintile holds about two-thirds.

Looking at the patterns of average family expenditure, it is reasonable to surmise that most families are indebted simply because they have traded off some of their long-term financial security in order to satisfy their immediate needs.

We have examined what families actually do with their hard-earned dollars, and we have a publication that will be released next week. I have given to the clerk some handouts that describe to you the average patterns of expenditure of two-parent families with children under 15 and lone-parent families with children under 15. I won't go through the details. I will promise to give a copy of Profiling Canada's Families II to the clerk of the committee next week. But I can share with you our conclusion that greed is not in fact all that apparent in the typical patterns of family expenditure.

At the end of the month, the most affluent families, namely those dual-wage-earner couples with children, spend more than half of their disposable income on the basic necessities of food, clothing, and shelter. Lone-parent families spend about three-quarters of their after-tax incomes on these basics.

The only families that really seem to have much elbow room when it comes to managing are those one-third of families with the highest incomes, namely those earning more than $67,300 per year in 1996. It is, by the way, these households that are most likely fueling the rapid increase in aggregate spending on recreation.

I would also draw attention to the fact that the next-largest increase of aggregate household expenditure is for medical care and health services, which may reflect a trend away from public expenditure toward private spending.

The purchasing power of families is regarded by economists as a major engine of economic growth and development. I think it is fair to say we do live in an economy that is in a sense addicted to growth in both consumption and production.

A number of questions I believe are in need of further analysis. How do increases or decreases in interest rates affect different groups of families and households differently? How does the aggregate debt of families and households change in its amount and distribution in the context of an aging society? How does the distribution of debt change over time? Do younger households today face relatively higher debt burdens than they did in the past? Will the changing composition of debt push younger households away from home ownership, given the high levels of student debt compared to the past? How vulnerable are the most indebted groups, namely the young and those with upper middle incomes, to fluctuations in markets, recession, and increased interest rates? Finally, to what extent have families and households assumed larger proportions of debt on the basis of increased assets comprised in larger measure today than in the past of stock market and other financial assets?

Our recommendations at this point are modest. Encourage and support data collection and analysis of family and household debt, its distribution, depth, and duration. Continue to be vigilant to keep interest rates low but the economy growing. Finally, if, as we would expect, we discover that the growing debt load of Canadians is disproportionately borne by the young, the middle class, and those with children, then income security programs as well as taxation policies and principles might be critically assessed with an eye to ensuring that family households—because they are the major engines of economic growth that they are, as well as the basis of future population growth or stability—can manage their financial affairs over the life course, in recognition that the typical patterns of family formation, wage-earning, expenditure, and savings require families to take on and sustain manageable levels of debt, in their own interests and in the interests of Canada.

Thank you.

The Chair: Thank you very much, Mr. Glossop.

We'll now hear from Informetrica, the chairman and chief executive officer, Mr. Michael McCracken. Welcome.

Mr. Michael McCracken (Chairman and Chief Executive Officer, Informetrica): Thank you, Mr. Chairman.

I have provided you a couple of copies of some foils, which we can make some reference to. I won't try to go through all of them, because I know we have limited time and we also want to get to the discussion period. I'm also sure some of the same information may be covered by others.

• 1550

I would like to spend a moment, though, on the first foil, entitled “Stability of Debt Ratio”, as a way of having a framework for our discussions.

In essence any debt-holder, or for that matter any asset-holder, is subject to two forces. One is the question of how interest rates behave relative to the growth of their income, and secondly, how much of that income are they saving; how much are they setting aside for debt retirement? If a person is not setting aside much for debt retirement, then the debts are going to go up, and even if they're trying to retire the debt, they may find it difficult if they face interest rates growing much more rapidly than their income growth. In Canada at the present time the consumer in particular is finding some difficulty with both dimensions of this.

The so-called stability factor is one in which real interest rates in Canada are high relative to their income growth and have been for some time. The second panel shows real interest rates in Canada essentially running in the 6% to 15% range for consumers since 1980—a much different world from the one that prevailed prior to that.

There is also a situation on the growth of disposable income per household. The bottom of the third page shows that in Canada income growth since 1989 has been negative. We've had declining income, as can be seen in the chart of disposable income per household, until very recently. Even today income levels are significantly below the levels of 1989 and are still below the levels of 1981.

So we have weak income growth and high real interest rates, and sure enough, the debt ratios are rising. You can see that on the top of the next page. We've boiled this all down into the so-called debt stability coefficient, which again shows it's operating in the unstable region and has been essentially for most of the years since 1980, and it continues to do so today. With the recent increases in interest rates, including those of this morning, the consumer is going to find it increasingly difficult.

How much are they saving out of their income? We find the signals there too are not terribly hopeful. We had a very high saving rate in the early 1980s, but that has been falling. It is now down approaching zero in 1999. If you look at the components of that, part of it is not in the hands of the consumer but is in the form of contractual savings arrangements, with pensions, registered pensions, or RRSP contributions in some sense locked up. Even that's been declining recently. The so-called discretionary savings rate has been negative, implying that consumers are taking on more debt than growth in their assets.

Nevertheless there have been some revaluations of assets and some improvements in the consumer, and the real net worth per household has been growing slowly. It's growing at about 2% a year and has been over the last several years, as indicated on page 7.

So we shouldn't forget the overall context of the balance sheet of the consumer, but as Mr. Glossop just pointed out, the balance sheet for all consumers is not necessarily the balance sheet of every consumer. Some consumers have assets and some have liabilities, but many have a lack of balance between those two sides. Indeed, with most of the concentration of the net worth in the top 20%, the message obviously is that the bottom 80% don't have much net worth.

If you look at the consumer liabilities and their increase, you can break it up and look at various subcomponents. On a per-household basis, we look at with and without mortgage debt. If you focus on one popular measure of consumer debt, which is the share of disposable income, including mortgages, you find the ratio is over 100%.

If you break that up into its components, you see that about 30% of this is non-mortgage debt, 70% roughly being mortgage debt. And of that non-mortgage debt, you can see at the bottom of page 10 that part of it is non-credit card loans, which would include loans to purchase consumer goods—auto loans, etc. That's running at about 20% to 23% now, and it's been rising. It's one area in which there's been a rising level of debt relative in this case to a concept of spendable income.

• 1555

Credit card debt often gets a lot of attention, but in fact if you look at it, you'll see it's running at about 5% of spendable income, and it's down in the last several years from peaks in the 1995-96 period. The outstanding balance per household is rising, however; it's up over $2,000 currently.

On the credit card side, the use of the credit card for cash advances is growing, with an average cash advance of $900. The delinquencies—people who haven't paid or are behind in their payments on credit cards by over 90 days—as a percentage of those who have some balance is running at about 0.8%. That's been fairly stable over the last five or six years, down from a peak in 1990. And on credit card accounts, in terms of just numbers, to give you a feel for it, we're talking about numbers of roughly 150,000 credit cards over 90 days in arrears.

Mortgage debt is still the dominant component, rising now up to about 70% to 75% of disposable income. Mortgage debt per household across all households, including renters and those without mortgages, is running at about $33,000 or $34,000.

The arrears on mortgages also have been high since 1991, and I think the main message here is to note that consumers haven't dug out from a position of arrears on the mortgage side. Still about 0.6% of the mortgages are in arrears out of the total portfolio, as compared to 0.2% back in the last half of the 1980s.

Is there a problem? Well, it depends on what you think about. As long as people are willing to tolerate rising debt ratios and accept them, one can say, “What's the problem?” But what we're facing now is a situation of a substantially rapid rise in interest rates, up another 50 points this morning and more to come, following on a rise of 150 to 200 basis points in the last six or seven months. We think this will lead to a slowing economy, both directly and because of the efforts of the U.S. Federal Reserve south of the border also trying to slow the U.S. economy.

So I think we will see a problem. I think the debt equation will begin to work with a vengeance, with higher interest rates, lower growth, and more difficulty of consumers saving out of an income that is not going to be growing as rapidly as we had hoped. This is going to create a major problem.

Before you basically say, “Oh, well, it's just consumers. Who cares? Let them each go bankrupt on their own”, we should recognize there's always a flip side for that. One of the problems is that whenever there is a debt problem, there is also an asset problem. The asset problem is of course those who are lending the money. In fact it's they who have the problem if the consumers in large numbers begin to find themselves unable to repay that debt. We've been there before, with difficulties in financial markets when debts go sour.

So it is very opportune that this group is taking a look at this issue. It will be interesting to see how you figure out how to solve it.

The Chair: Thank you, Mr. McCracken.

We'll now hear from Professor Mario Seccareccia. Welcome.

Professor Mario Seccareccia (Department of Economics, University of Ottawa): Thank you.

I am quite happy to be able to follow up on what Mike has been saying, because I have some similar comments, but there are some differences I would like to highlight as well.

• 1600

Before I get started with some of my charts that I'd like to show, I would like to begin by mentioning that this issue of declining savings rate and increasing household debt is of course something they faced in the United States sometime earlier. We're simply following up, perhaps a decade or so later, but basically we've had the same phenomenon. So it's important to note that in the U.S. they had a similar phenomenon, and we must also address the question.

They've been doing research on that, and I'd like to quote one study done that reflected on what happened in the 1980s in the U.S. in this case. This is from the National Bureau of Economic Research, and it's by two fellows by the name of Auerbach and Kotlikoff. They referred to what had happened then and said while demographics was a potentially very important factor in explaining savings, it did not appear to explain the drop in the U.S. savings rate in the 1980s, for instance. What happened to the U.S. savings rate remains an intriguing puzzle basically.

In fact it's interesting that all kinds of work have been done, but except in some circles, as we're going to see—and I'll be referring to that in a minute—most of them have been concentrating on demographic factors and all kinds of stuff like that, which I don't think is that important in the context of what we've seen.

Some may wish to perhaps make the same comment about what has happened to the Canadian savings rate during the 1990s and the growing indebtedness of households, but in Canada I do not believe it is much of a mystery. Indeed it does need to be explained, and what I tried to do in this short paper here, which I would like to summarize for you, is give you some indicators of what may be important factors contributing to this dramatic fall in the savings rate and the concomitant growth in household indebtedness.

Also I should mention this is a very important macroeconomic problem. As Mike mentioned earlier, if you have growing indebtedness, per se it is not problem. What is the problem is if things go bad. If there is indeed some minor downturn, what's going to happen is that as households attempt to address the problem of a higher and growing debt load, that will further shrink spending in the economy and therefore lead to problems of sustainability in the long run in terms of consumer demand.

So it is a very serious problem we may be facing, and indeed it's in that regard that we have to be concerned about it.

I have here a few charts just to highlight the problems. Some of them I think Mike has already shown on his charts, but I'll just highlight these.

I've looked at the trend patterns as well as the variations around the trends. The key thing is to look at the trend patterns. This is for Canada, 1961 to 1999. I looked at the savings rate out of disposable income. As well, I simply looked at consumer credit as a share of GDP, which is a useful indicator. What you see is, in the period where we had fairly good growth, let's call it—sustained growth, fairly stable income distribution, and so on—in the 1960s and early 1970s, both the savings rate and the credit ratio were moving upwards in tandem with that.

As one would expect, as real income is growing for households and as more and more households are moving up the bracket in terms of higher real income, they will have a lower propensity to consume. But on the other side of the coin, they will also be buying more out of their income, because of their expectations of continued higher income. This is what I refer to as a positive-sum economy, where it's growing and things are moving pretty well.

If you look at what happened starting in the 1980s, you'll see things started to move in the opposite direction. Indeed during the 1990s this happened with a vengeance. What you see in the 1990s especially is growing household indebtedness while at the same time dramatic decline in the savings rate. This is an economy that one would argue is not of the same nature at all. You have a declining or what I refer to as a zero-sum economy, where growth is small, if at all, or even declining, as we'll see, depending on how we look at these measures.

• 1605

But most important, because of the difficulty of households in being able to maintain some standard level of consumption norms, we see therefore a bifurcation of those series, moving in the opposite direction and leading toward all-time highs in that gap between the credit ratio and the savings rate.

What explains this phenomenon? I've looked at some variables that traditionally Keynesian-type economists have referred to, and I would like to point out their relevance in this discussion.

First I would like to point to one I think we would all agree is very important in explaining the savings rate, which is the growth in real per-capita disposable income. Mike has referred to the same series. I just did it on a per-capita basis because it's probably even more dramatic.

What you see here is that in the period of the 1960s and early 1970s, there's a trend growth that is pretty stable. Then starting again in the 1980s you start seeing it shooting down, and then in the 1990s basically it's negative growth for most of that period I have there.

Needless to say, if you have decline in real income, that's going to impact on saving behaviour, because as households attempt to maintain certain standard consumption norms, they will more and more find themselves running down the portion of the disposable income they would save, or indeed going into debt, which is what we're seeing as the counterpart of that.

Another variable I found of use to mention here, because there's been a lot of discussion in the U.S. as well, has to do with the capital gains in the stock market. I just took a simple indicator, which is the rate of change—the rate of appreciation, if you want—in the TSE 300 index of stocks, and as you're going to see, I did some more statistical work on that. I used that to see if in fact it played some role statistically in explaining the behaviour of the savings rate.

What you find is, and the argument is, that households, even with their unrealized capital gains in a sense—meaning as they see an upward valuation of their capital assets—would in fact spend more regardless of their current income flows, thereby once again reducing their savings rate.

During the 1990s especially—and we did see fairly significant growth throughout most of the 1990s in that index—it played a rather significant role, as I'll show in the actual statistics on that, in explaining the savings rate.

One other important variable I was interested in picking up in showing what happened to the savings rate is interest. Mike referred to real interest rates, which are very important, because they do highlight what are the threshold levels where it could have it either exploding or inflating. That is important, but I didn't look at that. I looked at the share of interest out of national income. The reason for that is there's an income distribution variable here.

If you look at the actual statistical series, on the top end I have the savings rate and on the bottom end I have the share of interest out of national income. What you find there is that as interest rates rose—and they did peak in the early 1980s and then had another local peak in 1990 approximately—the share of interest income more or less moved in tandem with those interest rates. With that of course, we find those are the individuals, generally speaking, who would have a higher propensity to save a lot of their income.

• 1610

So purely because of this redistributive effect of interest vis-à-vis non-interest or non-rentier income, as I refer to it in the paper, you would find it would impact also on the savings rate. And indeed this is what happened. So during the 1990s, when the Bank of Canada finally started to put on the brakes to bring down interest rates to some extent, because of less fear of inflation and all of that, the effect was to bring down the share of interest out of national income and also to some extent contribute to the decline in the savings rate.

One last variable I would like to mention, and then I'll conclude, is on the fiscal side of things—that is to say, government deficits or surpluses. I took the ratio of deficits or surpluses of all levels of government to gross domestic product. At the same time I have here the graph of the savings rate. If you look at that, you'll see there's a lot of noise there, but the key thing is that they tend to move in opposite directions to one another. The point of this is that as the deficits rise, as was the case for instance during the period of the 1970s and the 1980s, it leads to greater transfers, because program spending is going on, relatively speaking, and it therefore generates incomes for individuals.

In the late 1980s and during the 1990s, as we can see here, it hit bottom and then moved in the opposite direction, and we're running surpluses nowadays. The effect of that—of higher taxes, of lower spending on programs once again—is to create more difficulties for certain households to be able to maintain their consumption levels, the effect of that being to reduce once again the savings rate.

So I would like to argue that another rather important parameter or variable to consider has to do with the behaviour of budgetary policy, if you want to call it that. While the crusade against the deficit did bear fruit in terms of balancing and indeed generating surpluses, a lot of that seems to have been done on the backs of households. To some extent this seems to highlight that.

I also did a simple econometrics exercise by looking at these variables and trying to show their explanatory power. I found they do in fact play a significant role in terms of standard statistical techniques of testing. I summarize that in the paper, and you're welcome to pose questions about that.

All things are good or bad, depending on what kind of perspective you put on them. For instance, the decline in the interest rates has been important in bringing down the savings rate. I don't think that's bad in itself. The fact that we had a redistribution away from interest income during part of the 1990s was not such a bad thing for society perhaps. Therefore, per se, if that contributed to the decline in the savings rate, well, that's not a problem.

However, if, as we've been arguing here, real disposable per-capita income has declined dramatically, especially during the 1990s, maybe this should be a serious concern for policymakers. Moreover, if we feel that the way in which we've been trying to balance the books and generate surpluses is in fact really shifting the burden onto households by generating deficits on that end, then frankly that should be another concern for policymakers.

• 1615

That is basically what I wanted to highlight today. I'll be happy to take any questions you have. Thank you.

The Chair: Thank you very much, Professor Seccareccia.

We'll now hear representatives from Statistics Canada: Stewart Wells and Patrick O'Hagan. Welcome.

Mr. Stewart Wells (Assistant Chief Statistician, National Accounts and Analytical Studies, Statistics Canada): Thank you for asking us down here. I have with me, as you said, Patrick O'Hagan, who is probably more intimate with the balance sheet data and the flow of funds in this country than anyone else in Canada. It would be presumptuous of me to talk instead of him to start off.

I would just say we have with us the full package of balance sheet data, for anyone who wants it. I'm not sure where it is, but it's here. I'd also say—and Pat may refer to this too—as Bob Glossop indicated, we really don't have much data yet on the distribution of debt. We are hopeful that the surveys with which Pat is involved will improve things in the future, but that is a gap in our information at the moment.

On that note, I'll let Patrick begin on our account.

Mr. Patrick O'Hagan (Assistant Director, Balance of Payments Division, Statistics Canada): Thank you very much.

I thought I'd spend a few moments talking a little bit about how we construct the data, the sources of data, and the components of household debt, and then also spend a few moments talking about trends in the evolution of this debt over time.

Estimates of personal debt are available annually beginning in 1961. These measures are part of Canada's system of national accounts, a sub-component called the national balance sheet accounts, and they cover the economy as a whole.

Data on assets, liabilities, and net worth of the persons and unincorporated business sector, as it is formally referred to, cover all households in aggregate. In other words, these are macroeconomic data with no breakdowns by province, income, or wealth class. In addition, as the name suggests, total liabilities of this sector would include those of unincorporated business, such as farmers, consultants, lawyers, and small retailers. Having said this, individuals account for the lion's share of total liabilities in this sector.

There are five main components to liabilities in the personal sector.

The first one is consumer credit. This is defined, according to national accounts conventions, to cover borrowing for the express purpose of financing purchases of consumer goods and services. This covers all types of credit cards; instalment loans from banks and other lending institutions, such as automobile loans; and lines of credit.

Bank loans cover personal loans extended by Canadian chartered banks to purchase or carry securities, including RRSP loans, home renovation loans, other types of personal loans, as well as loans to unincorporated business and non-profit institutions.

Other loans are very similar in nature to bank loans. However, they apply to other types of financial institutions, such as credit unions and caisses populaires, trust and mortgage loan companies, and sales finance and consumer loan companies. An important shift in the 1990s was a trend to leasing automobiles. Automobile leases are treated as liabilities in the Canadian system of national accounts and are included in the component of other loans.

Mortgages cover mortgages on residential real estate, including property held as investments, and can also include some mortgage debt for non-residential property owned by unincorporated business, including farms and other properties.

Trade payables, which I won't discuss very much today, cover short-term business credit extended to unincorporated business.

How are the estimates constructed? They're put together largely using counterpart information from lending institutions. As was mentioned earlier, we do not have a regular household survey with which to collect these data. However, lenders are asked, in the survey forms sent out by Statistics Canada, to indicate non-mortgage loans by type, such as personal loans by use, and they are asked to split mortgages between residential and non-residential mortgages. Thus personal-sector liabilities, as we measure them—except for what I would refer to as the trade payable component—are considered to be of good quality.

• 1620

Over time we've seen that total liabilities of the personal sector rose from $17 billion in 1961 to $667.5 billion at year end 1999. Most of the discussion that follows will focus on the growth of relative indebtedness, particularly as a proportion of personal disposable income.

If you look at chart 1, which was distributed with the package, you will note that total personal-sector liabilities, the blue line, do increase quite substantially from 1961 to 1999. It does have a cyclical effect, particularly in the 1981-82 recession.

Household debt, which is the red line on the same chart, grew from $14 billion to $579 billion over the same period. Relative to personal disposable income, it reached yet another historical high by year end 1999. Factors influencing growth in household indebtedness have included demographic and social changes, regulatory and institutional changes, fluctuations in both the real and nominal rates of borrowing, the impact of business cycles, and more recently wealth accumulation in the personal sector.

I chose to say a few words by breaking it down into specific periods, so I'd like to start with the period from 1965 to 1979, a period of strong economic growth. It can be argued that growth in this period was fueled by the first wave of baby boomers emerging as an economic force. Significant numbers of them were purchasing their first automobiles, first homes, and household furnishings in this period.

That same period was very clearly a period when the accumulation of non-financial assets, particularly housing and consumer durable goods, outpaced the accumulation of financial assets. This in turn created a strong demand for mortgage and consumer credit.

The 1970s, as mentioned before, were also characterized by strong inflation, which had the effect of increasing the value of the non-financial assets but also increased the amounts that had to be borrowed to finance their acquisition.

Interestingly, for most of the 1970s, interest rates did not keep pace with inflation, producing a low relative cost of borrowing. As a result, it did make economic sense to borrow at these low rates in order to acquire non-financial assets that were at the same time appreciating in value. This may have in turn accelerated demand for credit over that period.

The upswing over the 1965 to 1979 period was accommodated by an expansion in credit available. This included legislative changes, in particular a few changes to the Bank Act, which were important. New types of credit were introduced in that period. Chargex, now known as Visa, and Master Charge, now known as MasterCard, were also introduced in 1968 and 1972 respectively.

Over the whole of the period, mortgage debt grew faster than consumer credit debt, and the ratio of mortgage debt to residential real estate—in other words, the claim that lenders had on these assets—grew from 25.9% to 34.2% over the period 1961 to 1979. Overall household indebtedness reached a high of 76.4% by the end of 1979.

However, the 1980s ushered in a new economic environment. A deep recession coincided with historically high nominal and real rates in 1981 and 1982. In the face of these economic and financial conditions, the personal saving rate peaked in 1981. That's evident on chart 4 in the handout.

The changes in the saving rate in that period were largely reflected in a substantial slowing of household demand for funds. Not surprisingly, if you look at chart 2, household indebtedness as a percentage of income plunged in that period. However, as the economic recovery progressed and interest rates eased, household demand for funds picked up. It can be argued that the second wave of baby boomers were stepping into the housing and durable goods market. By 1988 the household debt-to-income ratio had reached its previous high, recorded in 1979, and closed the decade at a new high again.

• 1625

Another factor that spurred demand in this decade may have been the upswing in the trend to two-income households, which began in the 1970s. This may have partly accounted for the fact that household borrowing activity seemed undeterred by higher unemployment rates that prevailed in the 1980s.

On the supply side, for their part lenders continued to accommodate the demand for funds. Mortgage terms became more flexible, household lines of credit emerged, and there was an easing of the conditions by which credit cards could be obtained. Mortgage indebtedness again accounted for a higher percentage of the value of residential real estate in that period.

However, when we reached the 1990s, we opened the decade with a small recession. This decade was characterized generally by slower economic growth than in previous decades, despite a downward shift in interest rates. Notably, however, the real cost of borrowing, the inflation-adjusted interest rates, remained quite high throughout the 1990s.

In addition, the downward trend in the personal saving rate referred to earlier was indicative of consumer expenditure generally outpacing personal income over that period. This activity pushed the household debt-to-income ratio to historic highs year after year through this decade, closing the decade at just over 100%.

To some extent, however, a higher debt level for households may not have necessarily increased the overall debt burden in terms of the monthly payments, given the lower interest rates that prevailed through the 1980s. Also, from about the mid-1990s, a falling unemployment rate combined with negligible inflationary pressures may have buoyed consumer confidence, thus further stimulating the demand for consumer goods and credit. So may have the trend to lone-parent households increased the need for additional credit.

Another factor that has been given some attention and has been referred to here is the impact of the so-called wealth effect. The 1990s were a time of substantial financial investment in RRSPs, mutual funds, and employer-sponsored pension plans, as well as gains in the values of these and household portfolios. Households that felt wealthier may have been induced into additional borrowing and spending.

The trend to new and easier forms of credit continued in the decade, and I would note there was a significant upswing in the personal leasing of automobiles. This essentially lowered the cost to individuals of carrying debt related to the acquisition of services of a new car.

Over most of the decade, consumer credit grew more quickly than mortgage debt. The housing market was a bit slower to recover, partly due to the fact that perhaps the baby-boom generation was to a significant extent through their house-buying cycle. In fact the ratio of mortgage debt to residential property, which had risen to 36.7% by year end 1997, had eased to close the decade at 36.5%.

I'll make a few comments about international comparisons.

A look at U.S. data, chart 5, suggests households there have been overall relatively less indebted than in Canada. U.S. consumer credit and mortgage debt, as a proportion of personal disposable income, followed similar patterns to Canada, especially since the mid-1970s. However, the household debt-to-income ratios for U.S. households were lower, except for a few select years, than in Canada.

Looking more broadly at chart 6, now we turn to total liabilities of the household sector. Based on an OECD study, Canadians seem to be relatively more indebted than their counterparts in the G-7 countries. According to this study, Canada's personal-sector liabilities as a proportion of GDP recently—and that's in 1996—surpassed both the United Kingdom and Japan to take the lead.

In summary, by all measures, Canadians are both absolutely and relatively more indebted now than in the past. Two important issues that have been discussed come to mind: first, whether increasing debt loads are sustainable; and second, a related question, what is the distribution by income and wealth class as well as by province of this debt?

Some light will be shed on the latter issue, the distributional issue, when the results of the survey of financial security—essentially a survey on household assets and debt—are released later this year. This survey was run in May and June of 1999. It had a sample size of 23,000 dwellings, including good coverage of the high-income sample. The response rate was approximately 75%. The release of these data is expected to be in the fall of 2000. However, there will be stages of release: the aggregate data in the fall of 2000, with additional data to be released at stages right through to the spring of 2001.

• 1630

I would also note that a paper reconciling the aggregate measures of debt with the micro data measures coming out in the fall will be produced at the same time.

Thank you very much.

The Chair: Thank you very much, Mr. O'Hagan and Mr. Wells.

Now we'll hear from Mr. Mosler. Welcome to the committee and also welcome to Canada.

Mr. Warren Mosler (Individual Presentation): Thank you.

This is a publication from the University of Missouri in Kansas City for the U.S. case. It's available for everybody, and I'm going to try to translate it a little bit into the Canadian situation.

The thing I want to emphasize is Mario's last point, and that is the difference between a micro and a macro problem. I'm going to give you a couple of examples.

If you send a hundred dogs out after 95 bones, five of those dogs will come back without any bones. You have a macro problem there. Somebody could look at it and say, “Well, with better training and more work and whatnot, maybe we can help those poor five dogs get up to speed”, but you know you're going to come back five short. We're dealing with the same thing here. It's a macro problem, as Mario touched on.

Another example, a little more technical, is this. Back in the mid-1970s I was working on the takeover of Bell Federal, which had $3 billion or so in loans and $4 billion in deposits. They were very much upside down. I was valuing the bank, and I came up with the idea that the government would have to pay us $500 million. I valued it because I saw the cashflow and I looked at the macro picture and said, “This place is going to lose $50 million a year for about ten years”—that's what the duration was—“and we'd like to get that paid up front.”

The First National Bank of Chicago came by. Two people came in with boxes of documents. They had analysed every single asset in that bank for its cashflow. It had taken them weeks. They came up with $490 million.

Voices: Oh, oh!

Mr. Warren Mosler: That's the idea. If you have the macro level, for the micro, it gives you what we call a sanity check to see if you're in the right ballpark.

It's a matter of accounting when we talk about savings rate. Somebody publishes it, and it's an accounting number. We have to look at where it comes from. There's basically what's called an accounting identity, which means you figure something out on the left side, and then how you account for it on the right side is called the accounting identity. But it's really the same number; just one's on the left side and then the explanation is on the right side.

On the left side we have something called the public sector deficit or surplus. How do we account for that? What does that mean on the right side of the equation? That means a non-government goes the other way; it has to equal zero. In other words, if you have a public sector surplus of $10 billion Canadian, and if that's accurate—you have to include spending by the central bank as well, but if that's pretty much what it is—then you know the non-government deficit is going to be $10 billion, end of story. That's how we account for it.

So now you can divide up that non-government sector into household, business, foreign, and whatnot, but you know the total is going to be about $10 billion. You know the current account is pretty much in balance or maybe a little bit negative, so that might take care of part of it. And you know business pretty much stays in balance; otherwise they get shut down and have to raise equity. So you're pretty much left with the household sector to absorb the difference. That's what Mario's chart showed.

Here's an interesting quote. Professor Randy Wray wrote this. He says:

It is particularly ironic that while many economists would argue that government deficits cannot rise without limit,

—this is the government, being the issuer of a currency; we all have floating exchange rates now—

they do not recognize the dangers in rising private sector deficits.

That is ironic.

Is this sustainable? Clearly not. What we're saying is it's clearly not sustainable that private sector deficits can grow beyond income indefinitely. You just run out. I don't know if it's this year, next year, or whatever.

What are we really saying? What we're really saying through this accounting identity is that a public sector surplus is not sustainable. In fact it hardly makes any sense. When you're in that situation, you have to be very nimble. It may be appropriate right now, but you have to be very quick to realize that might have to be turned around very quickly.

• 1635

What do we know in history about public sector surpluses not being sustainable? Well, the last major country that let their budget go into surplus was Japan in 1988 and 1989, and I say “let it go into surplus” because as modern economies grow, with the income tax structure they have, tax liabilities grow faster than income. It's not anybody's arguing in Parliament or whatever; it just happens.

If you let that happen, as Japan let it happen in the late 1980s.... They got their big frenzy stock market up. Remember in the late 1980s the Japanese banks were the strongest banks in the world. Capital ratios were 12%, some unheard-of numbers. It wasn't much past 1990 when they were at the very bottom of the barrel. The public sector surplus was not sustainable.

The United States is now buying back securities because it can't retire the debt fast enough. It's not maturing fast enough to pay. When was the last time this happened? Well, the last two periods of time were 1928 and 1930. I don't think anybody needs to know any more than that.

You can go back and correlate budget surpluses with depressions in the U.S. They correlate very well. It does not prove causation. I'm not trying to say that. But when we look further into this, we can see what's happening.

Currently a lot of financial engineering is going on. When someone goes to buy a car or a house, he's talking to a very powerful computer at international banks that decides how much he can afford. They've come up with new ways to get the consumer to be able to afford more. Last year the Wall Street Journal had an article about issuing credit cards to mentally retarded people because they had a source of income that had been untapped.

These financial engineers at Citibank and Chase are very, very bright people. They're the finest minds in the country. Rather than curing cancer, we're out figuring out how to get people to go into debt, but that's another problem.

Voices: Oh, oh!

Mr. Warren Mosler: It's not necessarily a good use of resources, but the market right now is channelling resources in that direction.

You're not going to see the delinquencies go up until after there's a problem. The reason they keep delinquencies at 0.6% on mortgages instead of 0.2% is it's more profitable. If delinquencies are too low, you're giving up too many good loans. They have that figured out to the 0.001%. They know exactly what they're doing. So you can't look for too much of a clue there.

Financial engineering has allowed the consumer to go further into debt. Right now, if you weren't running a public sector surplus and you were giving the consumer more money through lowering taxes or whatnot, you might have a heating up or inflation problem. I'm not saying you don't. Right now it's a balance.

Oh, am I done?

The Chair: No, no, no. That's a voting bell.

Voices: Oh, oh!

The Chair: Did you notice the other guys didn't get a bell? You were the only one.

Voices: Oh, oh!

Mr. Warren Mosler: I'm a guest here.

Voices: Oh, oh!

Mr. Warren Mosler: So what you have is an unsustainable situation where you can't have debt growing beyond income. Yes, you only owe $100,000 on that $200,000 house, but if you're only making $20,000 a year, you can't keep refinancing it. At some point the assets start to get sold.

There's an old phrase, “fiscal drag”, which nobody uses much any more. The idea is when you tax more than you spend, you're creating something called fiscal drag. Don't forget, a tax eliminates money, net nominal wealth in one form or another, and spending adds it. You want to look at these two things and what they do to the non-government sector.

We know collecting taxes doesn't increase the wealth of the government. If you go out and pay with $100 bills to the government, to the central bank, you know what they do with the money? They burn it. If they really needed it.... It clearly doesn't add any wealth. What it does is it subtracts wealth from the private sector, which is what it's supposed to do.

This was all outlined in something called functional finance in 1940-something.

A voice: It was 1940.

Mr. Warren Mosler: Okay. This is not very new. You can go back to 1913, and somebody named Innis outlined this all. You can go back to the Middle Ages. This is not a new thought.

• 1640

That's disconcerting, isn't it, the flashing bell.

The Chair: It will be turned off very soon, as soon as we get quorum in the House.

Mr. Warren Mosler: Okay.

Let me add one more thing here. One thing that's been sustaining the United States is the fact that somehow the rest of the world got short dollars. By that I mean they're all in debt. The only way they can service their dollar debt is to sell things to the United States and send the dollars to the U.S. to service their dollar debt. It creates a big resource drain on the rest of the world, where all these real goods and services flow into the United States at the rate of probably close to 3% of our GDP, $225 billion or $230 billion a year, which increases the U.S. standard of living.

Looking at the numbers—and again, I can't look at them hard enough to get into all the derivatives—it looks as though about 20% of corporate public Canadian debt is U.S.-dollar-denominated, which could be a major drain on the standard of living of the average Canadian. Again, I haven't looked at that in a lot of detail, but it's an area to look at carefully. Foreign currency debt is very different qualitatively from local currency debt.

On household debt, to tie that right back down here, I just want to say there's clearly a macro situation going on here, where, if you're going to run a public sector surplus, the whole point of running a public sector surplus is to remove net nominal wealth from the private sector, from the non-government sector, and thereby reduce the savings. That's what's going on. The rest of it will sort itself out. With these kinds of statistics, you can see the breakdowns but you know what the total's going to be simply by looking at the budget surplus.

Thank you.

The Chair: Thank you very much.

Ms. Yalnizyan, go ahead.

Mrs. Karen Redman (Kitchener Centre, Lib.): That was the giant sucking sound that Ross Perot was really talking about, right, government sucking the...?

Mr. Warren Mosler: He had it backwards.

Mrs. Karen Redman: Oh, it wasn't...?

Mr. Warren Mosler: [Inaudible—Editor]...are in Boston.

Ms. Armine Yalnizyan (Individual Presentation): Well, now for something completely different.

I've also given you guys copies of my brief, called “Household Debt—What's Government Got to Do with It?” I hope you have a copy of it.

I also have copies of the documents I guess on which basis I was invited to speak to this illustrious committee—The Growing Gap, which was about a year ago, and Canada's Great Divide, which is about what's happened in incomes distribution in Canada and the provinces over the course of the 1990s. I'm very, very pleased to be able to have the opportunity to speak to whoever's left in the finance committee meeting today.

You folks in finance, both politically and bureaucratically, have basically held the reins of economic and social policy in this country over the last decade. You have the economic fundamentals right, as we've repeatedly been told. You have low interest rates, low inflation, growth in GDP, and low unemployment rates.

I guess what I would like to speak to you about with respect to this issue on household debt is that the economic fundamentals for people in the immediate, with respect to food and shelter and their economic fundamentals with respect to investment in the form of education, are far from there. Maybe that speaks to the more basic deficit that our last speaker was referring to. Of course, health is the contingency fundamental here. With respect to day-to-day, however, food and shelter are the absolute economic fundamentals for Canadian households, and education is the way, beyond mere survival.

Now, we've heard from a number of different speakers that any way you measure it, national household debt is peaking at new highs in the late 1990s. Of course, one of the most confounded parts of it is national wealth, and household net worth is also rising. This is something that none of the speakers have touched on yet, that we're talking about rising household debt and rising national net wealth at the household level in the context of growth. We're not talking about rising household debt in the context of a recessionary scenario.

My first major point is one that's been made by a couple of other speakers, that we do not know anything of relevance about the distribution of assets and debt in this country at the moment. The most recent data we have on the distribution—and distribution is the key word on this—was from the last survey of net wealth by Statistics Canada, done in 1984. We had in 1987 an occasional paper that talked about the distribution of net wealth.

• 1645

In 1984, the poorest 10% of the population were net debtors. The bottom half of the population held less than 6% of the country's wealth, and the wealthiest 10% of our citizens held over 50% of the wealth in this country. As well, only 13% of Canadians held stocks. Less than a third of them had a registered savings plan.

By 1996, only 37% of Canadians owned shares either directly or indirectly through mutual funds or private pension plans. That means almost two-thirds of Canadians haven't been part of this market bonanza of the 1990s, even in an indirect way. So the importance of income remains the base of what we're talking about in terms of why households are in the position they're in.

As has been mentioned, the results of the 1999 survey of financial security, which is the net wealth survey, should be forthcoming this fall. I would just like to mention that in the U.S., the net wealth survey is conducted every three years. Until 1984 Canada used to conduct its own wealth survey on a very regular basis. It's an absolute shocking lack of information that we haven't been keeping up with that in this country.

My third point is that average incomes, as has been mentioned, have fallen not just on average for Canadians but in every income category when you slice it up by income deciles over the course of the 1990s, at least until 1997, which is the most recent date available.

What's more shocking than average incomes falling in every income category is that the whole distribution of income is sliding towards the bottom. If you take a look at where families that were raising kids were located in 1989, 30% of them registered after-tax incomes of less than $35,000. By 1997, 37% of all Canadian families raising kids have slid under that threshold. That's a very rapid decline.

The poorest 10% of families fared the worst. Between 1989 and 1997, this group lost $2,000 of their after-tax income. These are families raising kids. They're not individuals. We're talking about a loss of income from about $15,500 a year to $13,500 a year after tax. You figure out where you would spend $13,500 a year to raise a kid.

The proportion of families in the middle and at the top actually fell in this period. So we're not even talking about a growing gap between rich and poor and there's more people getting ahead. There are fewer people in the middle. There are fewer people at the top over this period, over the decade.

Until at least 1997, which is the only data we have available, there was a slide to the bottom with fewer opportunities to get to the middle, let alone get ahead. This should tell you something about what's happening to net indebtedness.

Let's go, however, beyond 1997 and talk about job creation, because certainly between 1997 and 1999 we were repeatedly being told that we have come to the land of milk and honey. More jobs have been created than for the previous generation. May I remind you all that we are still not at the employment rates we were at in the 1980s in this country? With more people working, we still have not gotten back to the employment rates of the 1980s.

Tomorrow morning you have people coming to talk to you about the new economy. Let's talk about the new economy. There are record numbers of non-permanent jobs in this new economy. The dominant labour market trend of the 1980s was the replacement of full-time jobs with part-time jobs. The dominant labour market trend of the 1990s, at least until 1998, was the replacement of employment by self-employment.

The hallmark of the new economy has been downsizing, whether we're talking about the public sector or the private sector. Downsizing means you spin people off. People are the residual, and they have found that employment by self-employment. We know the income flowing from self-employment is much further down the income spectrum.

Maybe the most troubling form of this is that non-permanent forms of work are increasingly the norm for the younger generation of workers, people under the age of 35. These are the people who are forming the backbone of your next generation of voters and citizens. These are leaders and the followers we're talking about. We're talking about creating a norm of labour market experience that is non-permanent, casual, without benefits, without support, without a social contract.

The distribution of disposable or after-tax incomes grew better during the recessionary period and grew worse during a period of economic decline in the 1990s. How do you figure that happened, huh? Well, it's because of government.

Between 1989 and 1994 the market distribution of incomes blew wide open because of the recession. People got hammered at the bottom end. They lost their jobs. They lost hours of work. People at the top lost some hours of work, some income, but the gap between rich and poor in this society blew wide open—except government intervened. In 1989, 1990, and 1991, three provinces made the difference. They raised minimum wages, they raised the rates of social assistance, and they raised eligibility in this country. In three different provinces, that tilted the Canada average, because at the federal level what we were doing was stripping unemployment insurance. We weren't adding anything to income supports.

• 1650

So those three provinces raising the floor of the social wage made all the difference to the distribution of incomes in this country in a recessionary period. That put us on the map internationally.

While other nations were looking at the globalization phenomenon, how it's inevitable that the gap between the rich and poor get worse, Canada was actually decreasing its gap between rich and poor in this country during the recessionary period.

So you would think, when you get to a recovery period in the period 1994-97, when you're creating jobs and more people are getting work, you'd be able to close the gap even further, right? Well, indeed, the market did close the gap. More people did get work. People are coming on stream, getting jobs at the bottom, and that gap between rich and poor closed, in market terms.

And what did governments do? They continued to strip away the social wage, the bottom of the floor. By so doing, the gap between rich and poor, in after-tax terms, grew more rapidly between 1994 and 1997 than it has in all the years we've collected data on income distribution in this country. We are consistently overestimating the role of the market and underestimating the role of governments in this country and what we are able to do in forming a cohesive society.

I'm going to take you down a path that none of us have discussed here, because I do want to focus on the real economic fundamentals of households. The largest consumption item in household budgets in this country out of disposable incomes is for shelter. Shelter costs as a proportion of income have been rising.

In 1996, census results show us that about six out of ten households own their own homes, which means four out of ten households rented. The ratio is tilted when you look at urban centres, where you get closer to a 50:50 mix. In Quebec, you get a higher proportion of renters in the urban centres than you do homeowners. In Regina and Edmonton and in the maritime provinces, you get a higher proportion of owners. However, between 1991 and 1996, the average amount of income spent on rent increased but the average amount spent on mortgages didn't. Overall rents decreased until 1996, but incomes of renter households tanked. The rents decreased by 2.5% and renter household incomes decreased by 12.5%—immediate squeeze play.

I heartily recommend that you take a look at this Federation of Canadian Municipalities document, if you haven't. It's called Toward a National Housing Strategy, and it came out on April 26, 2000. I'm sure you folks heard previously from the Federation of Canadian Municipalities.

They document that average rents for two-bedroom apartments in the major cities of this country increased between 1997 and 1999 by 11% in Toronto, 8% in Ottawa, 16% in Calgary, 7% in Regina, 10% in Edmonton, and 10% in Vancouver. Incomes are still falling for those renter households in this period.

Approximately one in four households, by 1996, had affordability problems with their shelter needs. What do I mean by “affordability problems”? They're defined by Statistics Canada as shelter costs eating up more than 30% of your disposable income. I know that would be a problem for me, and I think you would agree that it would be a problem for you. If you're spending more than 30% of your disposable income on shelter, you know you're in a vulnerable position if your rental costs keep going up. Over 43% of renter households had affordability problems in 1996, which was before the rental increases I was indicating.

I note that the parliamentary secretary to the finance minister is present.

Mr. Cullen, I just think you might find it interesting that we are celebrating, practically to the day, the tenth anniversary of Paul Martin's task force on homelessness. On May 14, 1990, Paul Martin said:

The starkest manifestation of the failure of Conservative housing policy is the growing number of homeless persons in Canada. In a cruel twist, the homeless are said to be the “product of prosperity”.

Been there, done that: We're doing exactly the same thing 10 years later.

I think we need to be reminded that in terms of economic fundamentals, 22 people died in Toronto this winter. That's about as fundamental as you can get. They did not have housing.

I think one of the things you could be looking at is the issue of housing, what governments can do about household debt. The gap in incomes between renter households and homeowners is almost 100%. Rental households have an average income of $30,000 and the average homeowner household has an average income of $59,000. That differential a generation ago was 20%. So you had a much more homogeneous housing market.

We have a really erroneous view in government policy that there is one housing market. There is not one housing market. The housing market does not function on the laws of supply and demand in this country. There are two demand markets for housing—one for rental, one for ownership—and there is only one stock of housing in this country. With an income gap of 100%, the developers and the buyers in the home ownership market always outbid the rental builders and buyers. I would really urge you to look at the role your government has to play in intervening in one of the most key issues of household debt.

• 1655

That squeeze play at the bottom of income distribution, between falling incomes and rising costs for basics such as housing, makes day-to-day life increasingly tenuous for a growing number of households. Investment in the future is rapidly becoming less feasible for a growing number of young families, and the biggest investment individuals will make in their own human capital is going to be in education.

Here's another disaster story in terms of what government has to do with household debt. The recent developments in post-secondary education threaten to put this option out of reach for those with little disposable income. Since 1990, average tuition fees for undergraduate arts have increased by 126% even though there have been tuition freezes in three provinces.

In Alberta, tuition fees have nearly tripled. In Ontario, if you want to study to be a doctor, your first-year medical school tuition has increased, in two years, from $4,800 to $11,000. The average level of student debt for graduates of four-year programs have tripled since 1990, from $8,000 to $25,000.

You want to talk about household debt?

In 1996, tuition fees for a full-time arts student were 5% of average total income—and that's average total income. How many people at the bottom end of the distribution do you think are sending their kids to university these days?

Roughly 750,000 students need financial assistance in the post-secondary system in this country every year. Under the proposed Canada Millennium Scholarship Endowment Fund, which was announced in 1998, less than 8% of those students will be eligible. Not one first-year student is eligible. That means a whole bunch of people who might have gone to post-secondary are not going to get a crack at doing that.

In 1998, when the federal government announced that $250 million annual investment over 10 years to set up the millennium scholarship foundation, one of the things you may want to consider is that between 1994 to date, roughly $7 billion has been stripped, either through EPF, the established finances programming, and then the CHST for post-secondary education.

Where does household debt come from? It comes from making people pay for the basics more and more as their incomes are declining.

This committee has been very articulate in arguing for tax cuts, increases in RRSP contributions, and increases in the foreign content for RRSPs. Tax cuts have primarily featured in the productivity covenant you put forward to the Canadian public. I would just like to remind you that when you put that forward two years ago, in 1996, 32% of our Canadian tax filers had no taxable income. Tax cuts would have meant nothing to them. In 1996, 23% of tax filers reported incomes of less than $10,000. The tax cuts proposed would not speak to those people.

The issue of debt is most critically an issue about the distribution of debt. It matters whether the younger generation is facing a growing debt load to cover the basics in life at a time when their capacity to earn a living is either stagnant or declining. It matters if households are stripping their assets simply to ensure their basic shelter and food.

Senior levels of government have claimed that they've reasserted control over public finances and eliminated budgetary deficits. I would assert that the mechanisms you put into place to achieve this goal have driven deficit and debt to subsidiary levels of government, to public institutions, and to households themselves. Nothing can substitute for political leadership and good governance.

The government spending programs of today are currently at the levels they were in the 1950s. This was the goal of your 1995 budget. In fact, the last time I addressed the finance committee was in the wake of the 1995 budget.

You're there. You're at the level you were at in the 1950s, but in the 1950s the federal government made massive investments in both housing and education and training in this country. In fact, the last time we had the economic fundamentals right like this, we were investing in public assets; we brought in medicare; we built hospitals, universities, and community centres; we opened up skating rinks and pools. The prosperity of today has been not only about more net wealth for some people but also about stripping public assets.

• 1700

I'm going to make two recommendations to you that are wildly out of line with the discussion of household debt but I think definitely will pragmatically address the issue of household debt.

The first is a fundamental reinvestment in a national housing policy that would, by itself, represent the most significant intervention the federal government could make today in addressing the issue of household debt for a growing number of young families and individuals whose economic fortunes are in decline.

The second is a significant overhaul of federal policy around post-secondary education, because this is what's required to keep our population amongst the best and most widely educated in the world. This is one of the parameters that keeps putting Canada consistently at the top of the UN Human Development Index, and this is what brings business to Canada.

On those notes, I hope we can talk about what we can do.

The Chair: Thank you.

We'll move to questions and answers, beginning with Mr. Forseth.

Mr. Paul Forseth (New Westminster—Coquitlam—Burnaby, Canadian Alliance): Thank you very much.

Certainly we've heard a lot today about defining the problem, about weakened income, real interest rates. Real interest rates are high, saving rates are low, debt is rising, and family debt is especially high, perhaps to the point of danger. We've heard today about a whole basketful of negative signals.

I, and often my party, have talked about at the macro level, certainly, the national debt bomb ticking away. We've made suggestions. Perhaps in parallel today, we've heard about the personal family debt bomb that appears to be ticking away.

I would just like to hear from you folks what you believe, in view of the description, are the levers of the federal government in fiscal policy and regulation that are available, from your perspective, and appropriate here in the context of the household or family income scenario. What would be the wise mix of government responses to reduce this exposure risk that we're hearing about for the personal family financial situation?

You know, government must make choices, and sometimes those choices might be to do nothing, perhaps, or to do less, or to stay away from a particular activity, or to stop doing something, rather than particularly cranking up a new program, or getting involved more significantly in income transfer, or whatever. Certainly today's description is a worrisome picture, or that's the summary I get.

As you know, the Prime Minister said just a little while ago that we're going to be into a federal election within 12 months. I think that was the quote. I suppose we're going to have this big national conversation about what the federal government should be doing on the fiscal side to respond to the problems you've so ably described.

In our party, we have prescriptions. Every party in the House has a prescription to respond to somewhat the same goal that we describe, but certainly it's going to be quite a national conversation, argument, and debate about how we get there.

You're providing a fair amount of expertise from a variety of backgrounds and disciplines. I noticed Mr. McCracken earlier outlined some of the problems, but said it's up to us to try to figure it out.

I'm going to just take a moment to ask each one of the presenters a few questions: What are you really recommending government do? What is your advice? In view of the description of where we are—and you've done a good job of that—what should we do?

I anticipate perhaps some conflicting advice. Maybe we could just have some short action points from each of the presenters, not only specifically what should be done but perhaps outlining what should not be done.

The Chair: If the presenters can add to what they've already said, with two or three points each, that would be great.

Mr. McCracken, we'll start with you.

Mr. Michael McCracken: I'll see if I can set the style and keep it brief.

It strikes me that consumer debt, the particular problem you're focused on, and many other problems that you will no doubt have other meetings on, would in many cases disappear in an environment of lower interest rates, nominal and real, and ones in which real income grew more rapidly for consumers as a result of more of them working, receiving higher real wages, and receiving, for those who are indisposed, adequate transfers and/or tax reductions.

• 1705

What we're talking about is an unemployment rate at, instead of 6.8%, for example, 4% or less. We're talking about real interest rates in the order of 2% or 3% rather than 4%, 5%, 6% and going up, as they are currently.

It strikes me that the environment will make the difference, the environment that, without that change, is going to be one where we're going to have this meeting repeatedly to talk about the unstable debt situation or unstable asset position for the consumer, for government, for debtors, or, for that matter, internationally.

That's a simple, straightforward set of levers you can work on—not that I expect the government to move in that direction anytime soon.

The Chair: Professor Seccareccia.

Prof. Mario Seccareccia: I agree with what Mike was saying about the need to have lower real interest rates, because it does in fact lead to explosive debt situations, basically, when you have high real interest rates coupled with low growth.

The other side of the coin, of course, is that we need higher growth. Indeed, by raising interest rates, as we saw today, that's not going to help in terms of the building of growth in incomes, especially real personal disposable income. As I was suggesting earlier, we have to be able to get that up.

The other element I wanted to highlight has to do with the fiscal side here in terms of the large macroeconomic picture, which even Warren had alluded to—the fact that running a surplus basically leads to private sector deficits. Hence, what you have to be able to do is not follow that route somehow, and specifically do whatever is necessary, which in the U.S. they've been pushing for, to abolish the surplus rather than abolish the deficit, the cry of the earlier times.

It seems to me that's one element we need to kind of refocus on to get the bigger macroeconomic picture in place.

The Chair: Professor, I just want to jump in here for a second and piggyback on this question.

According to your chart 6, on personal sector debt, Italy has quite a low personal sector debt.

Prof. Mario Seccareccia: That would be....

The Chair: Sorry, it's Statistics Canada.

Prof. Mario Seccareccia: Yes.

Mr. Michael McCracken: And a high public debt ratio. That's the point; your success one place is going to show up as a difficulty—

Prof. Mario Seccareccia: It's going to show up elsewhere.

The Chair: Which is what you were saying.

Prof. Mario Seccareccia: That's essentially the problem.

Mr. Warren Mosler: It's the same line, just upside down.

Prof. Mario Seccareccia: It's like a hot potato. I mean, if you shift it away from the public sector, you're going to put it onto the private sector somehow. That's basically the problem here.

The Chair: For a second I thought Italy was a land of miracles.

Voices: Oh, oh!

Mr. Warren Mosler: Let me just say that Japan, I think, has clearly demonstrated that a zero interest rate does not cause accelerating private sector debt, and it's not inflationary. They've had it for five years and it hasn't done a thing.

I'm not saying that will be the case at all times. Mario and I have been saying this for 20 years, I know, but it's nice to have someplace that has finally demonstrated that's the case.

Europe, with rates down at 3% for an awfully long time, did not generate excess credit growth. In the U.S., credit growth, when rates were 3%, was not excessive. In fact, it didn't go up until after interest rates went up, in which case the Fed said, “See? We were ahead of it. We did the right thing, because see how this started to grow?”

But I'm not so sure that the high rates don't cause credit growth. In fact, M2 money supply correlates best to the short-term interest rate than anything else, because all you're doing is compounding interest.

The thing I would recommend as policy I only have time to give you the answer on, and not the reasons, although they're in these pamphlets, which actually got published in a real economics journal.

What you want to be prepared to do is to offer a minimum-wage public service job to anyone who wants one. Right now you're not going to get a whole lot of takers. That's fine. It effectively ends your unemployment. It maximizes your output. It is not inflationary because you're only catching people who fall. You're not saying you're going to hire 2 million people and pay whatever the market wants. You're just setting out a wage, like a buffer stock.

• 1710

What that will do is that when the non-government sector does desire to save more—and right now it doesn't—it will have a means of doing it. People will be laid off, they'll show up for this, and you'll have a counter-cyclical force in place to maintain maximum output.

I have a few of these to hand out.

Mr. Paul Forseth: Just for the record, could you cite what that document is?

Mr. Warren Mosler: It's called Full Employment and Price Stability, written by me, reprinted from The Journal of Post Keynesian Economics, volume 20, number 2, winter of 1997-98.

Mr. Paul Forseth: Thank you.

The Chair: Mr. Wells.

Mr. Stewart Wells: Statistics Canada prides itself...well, not prides itself, particularly, but is very careful about not making policy recommendations, so I have to be fairly careful here.

The Chair: Mr. Glossop, a comment?

Voices: Oh, oh!

Mr. Stewart Wells: I haven't quite quit, okay, if that's all right? I just want to be careful.

I'm the oldest person in the room. One of the punishments you get for being old is that you have things that you remember from long ago, and I really want to offer a cautionary note here.

When I first got out of graduate school and came to work in Ottawa for the Bank of Canada, there was an enormous amount of concern about the level of household debt, which was 50%. They thought the economy was about to go crashing on that basis.

I agree that there is some level that we don't want to reach, but my advice to the committee would be to be careful about focusing too wholeheartedly on that.

I also remember back in the early seventies when we were terrified or desperately concerned that the savings rate was so high. What were we going to do in this country? Now here we are worrying about it being so low. What are we going to do in this country?

In themselves, then, I don't know as those things ought to worry us. I do think that the problems that are most prominent in this country are the distribution of income, the level of employment. How one best achieves that is not something I will comment on, but I do think if we focus on those, or if you focus on those, the debt problem would probably take care of itself.

The Chair: Mr. O'Hagan.

Mr. Patrick O'Hagan: No, I think Stew....

The Chair: Yes, you want to play it safe.

Mr. Glossop.

Mr. Bob Glossop: In your own background statement, you expressed a concern similar to what I said earlier on. You said “although” Canada has benefited from robust economic growth and succeeded in a variety of those economic measures, the level of household debt has been rising, as though it was an irony.

I think one of the compelling messages or lessons that I've learned from this conversation is that it's not curious, that there is a necessary relationship. That's come true. So when government manages to get its fiscal house in order, there is a cost, in a sense, to be paid at the level of private household and family spending. I think that's an important lesson.

Now, I've heard suggestions about interest rates. I agree with those. I've heard suggestions or cautions about governments building up surpluses. I would agree with those.

I was impressed by Armine's reminder of the importance of a national housing strategy as well as a really critical look at the nature of our federal investment in post-secondary education.

I would remind you that housing policy in Canada a long time ago was in fact designed to help Canadians fulfill that long-held aspiration to own a family home. I don't think housing policy in Canada at either the federal or provincial level has had that aspiration in mind over the last 15 years. It might be time to look again at it.

Both of Armine's suggestions suggest that we need to again look at this question of what is the role of government. We have now, as she put it, lauded the possibility that the market can address some of the economic fundamentals, but the other economic fundamentals about what goes on around the kitchen table in Canadian families are not addressed solely on the basis of tax cuts.

I would add to the agenda investments in the national children's agenda and a child care program. I think it might be wise for the finance department to go back and take a look at Minister Martin's early recommendation that we use a 50-50 formula with regard to new program spending, debt reduction, and tax cuts, which I believe we departed from in some significant measure in the last budget, despite some positive measures that were made in the last federal budget with regard to child poverty and full indexation of the system.

That's it.

• 1715

The Chair: Armine.

Ms. Armine Yalnizyan: Even though I thought I was crystal clear in my recommendations, let me just say, again, I think there are two types of debt you have to worry about. Maybe it's not a problem if an individual household has a debt load of 114% if they have a grand mansion that they're actually building up their assets in. The type of debt you have to worry about is people who are falling behind. That's why the distribution of income and the distribution of access to opportunity is so critical.

We've talked a lot about the interest rates, which I agree on the macro level is helpful. We seem to be lowering interest rates; we seem to be moving in the opposite direction. We've also talked about the importance of not having surpluses. That's part of what these recommendations might deal with.

But this committee has traditionally been the champion of fiscal levers. I guess what I'm asking you to do is to be the champion of something more than just a fiscal lever, to be the champion of what should be the role of government.

You have an enormous amount of authority in these types of scenarios to be able to bridge that gap between social and economic policy and make the economic fundamentals, the fundamentals not just to a system but to people. That's what I'd like to bring you home to, that economic fundamentals have to be based on people, not only on systems operating properly.

What's the role of government? Social cohesion. The role of your recommendations has to be to make sure that all Canadian citizens belong and have a future in this country.

Hence, what are the two most critical recommendations I can make to alleviate the bad type of household debt, the problematic type of household debt? Make sure everybody has adequate housing in this country and make sure everybody has a crack at improving their prospects for the future through post-secondary education.

The Chair: Mr. Nystrom.

Mr. Lorne Nystrom (Regina—Qu'Appelle, NDP): Thank you very much, Mr. Chair. I'd like to welcome everybody here this afternoon. I find it really very fascinating.

I want to first of all ask Mr. Mosler a question about how household debt in the United States compares with the household debt in Canada. Is there anything we can learn from what's happening in the U.S.?

Mr. Warren Mosler: What's happened in the U.S. is that with our large.... Let me give you the equation, because when we talk about savings, it's really an accounting term.

The budget surplus is over 2% of GDP, maybe 2.5%. The trade deficit is probably something a little bit larger, maybe close to 3%. Sure enough, the private sector deficit is 5.5% or 5.4% of GDP, which is beyond an all-time high and growing at certainly an unsustainable pace. Now, whether that means it has another half-hour or year or two, I can't tell you.

If you look at the market action, it may be that the household just can't buy any more stock no matter how much it wants to. But we won't know that until after the fact.

Mr. Lorne Nystrom: Yesterday we had the Governor of the Bank of Canada, Mr. Thiessen, before the committee, along with one of his top aides, Malcolm Knight, who's rumoured to be a possible successor to Mr. Thiessen. I asked them about household debts being at a very high level.

I'll quote from yesterday's transcript part of what Mr. Knight said in his answer, and then maybe I can get a comment from Armine or from Michael or from whoever wants to respond to this.

He said:

It is true that household debt has risen. Household assets have also risen over the past few years, and there have been some capital gains as well. Actually, the service on household debt relative to household incomes is significantly lower now than it was in the late 1980s and early 1990s. That is because interest rates now are a lot lower than they were at that time. And that in turn, I think, is because the inflation rate has been kept low and stable. That's an important difference in terms of the way households would see interest rate movements at the short end at this time.

In other words, interest rates are lower, inflation is lower, therefore servicing of debt is lower, and therefore it's less of a problem now than it was in the past.

What's your response to that? Are we worrying about something here that's not really something we should worry all that much about? Is Mr. Thiessen's deputy accurate and right? What's your response to that?

Mr. Bob Glossop: My immediate response is that interest rates were lower yesterday than they are today, and as Mike McCracken says, they're going to go up. So as long as you can sustain relatively low interest rates, you may not have the immediate problem, but it doesn't mean the economy is going to keep percolating as it has for the last five to ten years. There could be trouble, big trouble, I think, down the road.

• 1720

The Chair: Armine, do you have a response to that?

Ms. Armine Yalnizyan: Yes. I would go back to my comment that there are two types of debt, the stuff that's discretionary and that interest rates... —you know, there's a certain price elasticity to how far deep you're going to get into debt and how that relates to interest rates—and the other portion of the population. As I tried to point out, we have more and more people in this category where they're struggling at the bottom end.

That's the type of debt that isn't discretionary, and it's not interest rates that are driving that. It's rental housing, the cost of shelter, that's driving it.

As well, if you want to get ahead, your investment in post-secondary....

You know, it's really weird talking to him while he's talking to somebody else.

At any rate, trying to invest in post-secondary education in that particular dynamic is also not an issue of interest rates; it's whether people will even engage in undertaking that kind of debt load, period.

Mr. Warren Mosler: I think the situation is that the U.S. consumer has been driving the world economy, I think, and by going increasingly into debt...and you may be more vulnerable to a problem with a U.S. consumer than with a Canadian consumer. There's not a whole lot you can do about that except be prepared for it with independent fiscal policy and independent monetary policy.

Mr. Lorne Nystrom: He also said as part of his answer to the question I asked that household assets have also risen over the last few years. There have been capital gains as well.

The Chair: Michael.

Mr. Michael McCracken: It seems to me that if you look at the household sector as one, as a single entity, you can boil all this down to a view that net worth has been going up, and it has been. Assets have been growing more rapidly than liabilities.

But it ain't the same household. I think that's the problem. Within the household sector, within the 12 million or 13 million households, you have quite different performances going on.

We're looking forward, with great anticipation, to this survey to really get a handle on this finally. The last survey was in 1984.

The suspicion, from the indirect evidence and from what was tabled here today by Mr. Glossop, is that a lot of that is at the high end. That's where the gains have been going. That's where the capital gains have been achieving. Those who own homes have had capital gains in their homes, but these haven't helped the rentals. These haven't helped the people who aren't participating in the markets.

Real interest rates today on the consumer side are quite high. I mean, the credit card rates are today roughly in line with what they were in the 1980s. Real rates, again, are roughly the same for mortgage and consumer rates. So he ought to look at, I think, the fact that....

All these rates are substantially higher than the growth of consumer incomes. It's that differential that is creating the instability in debt ratios, and that, of course, is exactly the problem. That's the problem that we have had in the past on government debt. That's the problem we are currently having on consumer debt and what makes it difficult for small business and others who are in debt to keep their head above water with high real rates relative to their real growth. So none of those problems are going away.

The last point to pick up on is that we shouldn't forget that the measures we've been focusing on here—disposable income, etc.—do not include capital gains, realized or unrealized. It would behoove us to try to replicate this analysis by bringing that information to bear. It's not information that is readily available in the national accounts system, but there are estimates of it that I think could be used perhaps to shed some light on it. The national balance-sheet work that Patrick has done in the past certainly does provide some estimates of that, which would be very helpful to add to it.

I don't think they'll change the nature of the problem, but I think they will help you understand that capital gains are not the answer to all of the problems and have specific problems on income distribution.

The Chair: Mr. Mosler.

Mr. Warren Mosler: The financial engineering drives the debt creation, makes things affordable, which drives the asset values. You get this kind of asset bubble that can develop. On the other hand, the government's taking more out of the cookie jar than it's putting in by running a budget surplus, and sooner or later the equity gets removed from the system.

Mr. Stewart Wells: You can get some information on the capital gains from the balance sheet. We are hoping to improve that. There's a question of sorting it out on the tax data. We will be presenting that in conjunction with the behaviour of households in the future so that people can make some kind of allowance for that, or a better allowance.

• 1725

Mr. Lorne Nystrom: Maybe I could have just a quick comment from somebody on the role of taxation in terms of household debt. Does anyone want to add something there?

I mean, our friends on the political right, the Canadian Alliance, want to have a so-called flat tax of 17%

A voice: Single rate.

Mr. Lorne Nystrom: A single rate of 17%, yes.

Any comment on that or on the whole tax-cut mania that's sweeping the country right now?

The Chair: Perhaps you should deal with what your NDP wants to do as well.

Voices: Oh, oh!

A voice: Higher taxes.

Mr. Michael McCracken: What taxes?

The Chair: Social programs.

Mr. Lorne Nystrom: Exactly, very good. Good answer.

I wonder if you can comment on that, because it seems to be driving the agenda of most governments. There have been tax cuts in Manitoba and Saskatchewan. Well, maybe not as much as in Ontario and the federal government, but it happened there as well.

The polls all show that Canadian people don't want that. Canadian people want a reinvestment in social programs, health care, and so on, and governments are doing the opposite. Are they wiser than the people or...?

Mr. Michael McCracken: Certainly more political.

Voices: Oh, oh!

Mr. Michael McCracken: One of the issues that comes up in the whole tax area is the effectiveness of those taxes. The issue is the effectiveness of creating jobs or causing other impacts on the economy.

One of the things we do know is that improvements in capital gains taxation, for example, are not likely to have a very large multiplier associated with creating jobs. So if the purpose is to improve economic performance, as I was recommending, I wouldn't pick personal income taxes for high-income individuals as my key instrument, but rather tax cuts or transfer payment increases or direct spending by governments, which have much larger multipliers associated with them.

I think it is important, though, to recognize that when you're comparing across countries, you have quite different tax and transfer structures. It's not just one item that you can pick up; it's the whole structure of things.

For example, in comparing the U.S. and Canada in terms of what happens when interest rates go up, we have to recognize that an increase, for instance, in mortgage interest rates in Canada is going to have a much larger impact on more Canadians than an equivalent increase in interest rates in the United States is going to have, for two reasons.

One, most mortgages in the United States are long-term. They're not renewable daily or monthly or every one or two or three years. So-called adjustable-rate mortgages in the United States are only about 15% of their total, whereas our variable rates or terms of one or two or three years make up the dominant form of mortgages.

Secondly, in the United States, mortgage interest is deductible by taxpayers. In Canada it's not. So the net effect of a 100-basis-point increase on mortgages in the United States is going to hit a few people, and only on an after-tax basis it's going to be shared, if you will, with a loss of revenue to the federal government. In Canada there won't be any loss to the federal government, and it will hit almost all Canadians over a three- or four-year period.

So we should recognize the importance of tax structure as much as we think about minor rate changes. However, I don't want to be on record as recommending deductibility of interest on households, because it's not necessarily a good policy. It's often described as good politics and bad economics.

Prof. Mario Seccareccia: Regarding the question of taxation, as I was suggesting in terms of that fourth variable and what I was referring to earlier about the public sector surplus, if you wish, or deficit, whichever way you're looking at it, having an impact on those savings rates and so on, it's important to understand that you could do it either through lower taxes—for instance, if you want to reduce the surplus—or by increasing spending.

Now, you could work out the effects of that, but one thing that's very important here is that even if you were to really promote a policy of in fact reducing taxes in order to bring that balance from a surplus, to either a balance or to a deficit again, the key element here is that we should maintain the progressivity of the tax structure.

If you have, let's say, a flat tax or even one given percentage tax here, which is what is being proposed, for instance, well, the effect of that on distribution here will be very different.

• 1730

I mean, if you're going to, by that means, actually favour those households having higher incomes, then the effect on the savings rates, for instance, would be very different than if you were dealing with low-income households. You're going to have distributional effects that have to be taken into account.

Ultimately, I should say that it's not as if the end-all should be that somehow we need to push up the savings rates. I don't think the concern here is to somehow.... At least in my mind, the savings rate is what it is. It could be for good reason that it went down, as I was suggesting, or rather unfortunate bad reasons that it's gone down. It seems to me that the key thing to understand is where in fact the economy is not delivered, either because of lower personal disposable income or because of other elements in the system in terms of providing transfers to households and so on.

Those are factors that we should be able to handle, should, at least as a government, be able to deal with, and indeed bring that savings rate up. But it's not a necessary element here. And it's not as though savings rates per se mean....

I mean, there's a whole problem in defining them, and there's a whole problem in the meaning we could attach to these values, but it's important to understand that the plummeting savings rate should be a concern to the extent that in fact it has been caused by reasons that are under the control of the government here.

It's in that sense that we're saying, or that I was trying to argue here, at least, that if you're looking out on the fiscal side, there should be measures that should address that, but lower taxes can't do it if indeed we don't also address the distributional side of this. It's not usually something that, at least as macroeconomists, we're as concerned about, but it's something that is obviously very, very important for public policy.

The Chair: Thank you.

Mr. Mosler, do you mind answering a question with the bells on? Did you have a bad experience with bells, or...?

Voices: Oh, oh!

Mr. Warren Mosler: What we're talking about here is transactions taxes—a tax on the labour, which is an income tax, sales tax, and whatnot. You have to keep in mind that transactions taxes function to discourage those transactions. You're also talking about tax rates, not necessarily the tax revenue, of course.

When you look at these taxes, just keep in mind that what they are is discouraging the transactions. That's the whole argument behind that.

I'll just leave it at that.

Mr. Michael McCracken: [Inaudible—Editor]...big lottery, sort of a taxation on stupidity.

Voices: Oh, oh!

Mr. Warren Mosler: Let me just add that when we talk about free trade internationally with the United States, we don't want any tariffs on anything, and then we put a sales tax, which is a tariff, on each other every time we trade with each other. The same thing with an income tax. We don't want anything blocking free trade and we have the whole theory of comparative advantage and whatnot, and then with ourselves, we put a tax on every labour transaction in the country.

These things are all counterproductive, and you have to choose which ones you're going to use as the foundation of the currency.

The Chair: We have only 12 minutes left in this session, because we do have to go and vote.

Mr. Cullen, Ms. Redman....

You have a question, Ms. Redman.

Mrs. Karen Redman: Really quickly, I want to say how really informative and enjoyable this session has been.

Ms. Yalnizyan, I really enjoyed your presentation, and I find the recommendations quite compelling. Is the basis for the information the report you have?

Ms. Armine Yalnizyan: I'll leave both documents with the clerk.

Mrs. Karen Redman: Super.

My other question is sort of broad-brushed. Because you're all here, and are extremely interesting witnesses, I thought I'd ask you just how household debt relates, if it does, to productivity. It's something we looked at quite extensively last spring.

I was just wondering if you had any comments, any of you, on that.

Mr. Michael McCracken: Well, there's no direct link, because productivity is a concept at the firm level. That's where you find productivity. That's its address. It's how managers put people together, and with organization, etc....

The state of the overall economy matters to what kind of productivity you get out of firms. If firms are operating with a lot of slack, they're not going to be as productive as if they're pushed.

I suspect also that if employees, when they come to work, are concerned and worrying about their debt, they're not going to be as productive as they might otherwise be. If people are garnisheeing their wages in order to meet bill collectors and they're being chased around, that's not going to be very helpful. So I think there can be some influences but they'll be indirect ones.

• 1735

I think the other side of debt, of course, is that debt isn't by itself bad. It does enable people to buy, on credit, things they want that are of particularly lasting value—durable goods, or to take vacations when they want to, time-shifting their activities. So we shouldn't get negative on debt. I think the concern, though, is that it doesn't become something that becomes a burden they can't handle as individuals.

But in terms of looking for a productivity hook on it, I would say it's probably going to be a tenuous one.

The Chair: But productivity gains will increase incomes.

Mr. Michael McCracken: Oh, yes, in terms of the results of productivity gains. If consumers, as workers, get it in higher wages, it can be beneficial. But we haven't be doing that in the last decade. We've had productivity gains without real wages going up. So we've kind of cut the difference.

This is the difference between productivity, which is at a firm level, and the concept of prosperity, which is at the household level or at society's level. That's a question of how the productivity gain gets intermediated, and who gets it. If it goes to higher profits or to lower prices on our export products that go abroad, then the individual worker may not benefit from that. If it goes to lower prices for what consumers pay for, or if it goes to them in higher real wages, or higher nominal wages and hence higher real wages, then there is a benefit to them, which enables them to sustain their debts better, to pay off their debt and so on.

So, yes, you're quite right, Mr. Chairman, that the role of productivity in a direct way in income is something...which it's all about. But the key there is, do they get it?

The Chair: Mr. Glossop.

Mr. Bob Glossop: Unfortunately, that was a terribly good and complete answer Mike just gave.

In addition to the possibility that productivity will increase incomes—and that's only a possibility, because it can go in other directions—there is the fact that those increased incomes will make people feel more comfortable in thinking they can manage the levels of debt they are able to take on and therefore fuel consumption and make it possible that this will have a generally positive macroeconomic effect.

As well—this is my last chance—I think the progressivity within the income tax system is absolutely essential. I think it should be sustained and in fact enhanced. It has been deteriorating in the recent past.

I think an interesting question to put to the data that will come to us from StatsCan is whether or not changes in the degree of progressivity within the tax system has had an impact on the distribution of debt, which we are now concerned with in this committee.

There are tax cuts and there are tax cuts. Certain people have borne the brunt of restraint, and certain people have seen their benefits, particularly families with children, evaporate in the recent past. So if we're going to talk about tax cuts, I would like to think that we could differentiate between those who are most deserving of a tax cut at this point in time.

The Chair: Mr. Cullen.

Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Mr. Chairman, and thank you, presenters.

We're just about out of time, but I wanted to explore a bit the relation of the savings rate to the rate of investment and also this notion of the wealth effect, whether that's a new phenomena or whether it's just exacerbated with the new economy, the stock market activity.

I also did want to clarify the record in the context of Ms. Yalnizyan's comments about affordable housing, because the government has made some significant efforts in the area of affordable housing. You know, there was the $750 million last year on homelessness and affordable housing, the RRAP program, the offer in infrastructure to cost-share with the provinces and municipalities, and also some GST measures with respect to rental housing.

You know, if the notion is that the federal government should be back in the direct delivery of social housing, anything can happen, I suppose, but I don't see that. If there are any tax measures or instruments that would be useful, maybe that would be constructive to look at.

Just quickly, on the savings rate and the rate of investment, capital investment, what is the relationship?

I think, Mr. Wells, you made the point that we tend to worry all the time. In fact, listening today, thinking that we're in this huge economic good news story, I got a little depressed. But it's good that we're always pushing the envelope to address issues and move forward.

If you look at the United States, with the huge amount of capital investment, particularly in the high-technology sector.... I mean, if we have a lot of savings but it's not being invested, is it an issue if we...?

• 1740

Could you talk about the rate of savings and the rate of investment, how they're related or whether one drives the other, etc.? Perhaps Mr. McCracken can go first.

Mr. Michael McCracken: Very quickly, there is, at the total level, an identity that tells us the investment ratio is equal to the saving ratio as a nation. If domestically we don't match the two of them, we make up the difference by non-resident borrowing. At the present time in Canada, we're running roughly a balance with our non-resident side. Let me set that aside for the time being.

By and large we think a higher investment ratio is a good thing. Again, that comes back to a driver, a growth in the capital stock. That may have a direct influence on productivity growth. If you're looking for structurally how you run an economy, you try to run one with a relatively high investment ratio. If you match that with a high saving ratio, then you're not relying on foreign investors to essentially break that link.

The personal saving rate, however, is only one of three saving rates that would in some sense equalize that investment ratio, leaving aside the non-residents—what's happening in the households, what's happening to business with their saving, and what's happening to government.

We've been moving from a situation where the government was running a very low saving rate, and indeed running, in some cases, a negative saving rate. We had business, which tries to run a slightly positive net saving rate, where it tries to finance its investment out of its cashflow. Sometimes, though, it's borrowing, sometimes it's accumulating net financial assets. Then the household sector, generally speaking, in the past has run a positive saving rate. It has been in some sense owning more and more of that investment that's taking place.

At the present time, what's been happening is a compression of the contribution that's been coming from the saving of persons, and through their pensions, and an expansion of the saving coming from governments, less reliance on the non-residents, and business also basically improving their net saving position.

But certainly overall we're interested in the higher saving rate if we can match that—and do match that—with a higher investment ratio.

Mr. Roy Cullen: So you're saying—and I'll give you a moment just to clarify something—that the rate of investment is not linked, really, in a sense to the rate of savings—

Mr. Michael McCracken: Not as individuals, no.

Mr. Roy Cullen: —that business will decide to invest and then they'll go to the savings pools, wherever they might be.

Mr. Michael McCracken: That's right.

Mr. Roy Cullen: So if persons aren't saving enough....

What is the macroeconomic impact, though, if we're having to go elsewhere for the savings? Does that have any macroeconomic impact at all?

Mr. Michael McCracken: Well, we have to pay the bills. They're not giving us the money, so we have to pay them for what we borrow abroad. If we earn more out of that investment that we make domestically than we have to pay abroad, then it's a good deal. We're wizards. If, on the other hand, we're earning 5% on our investment in Canada and paying 10% abroad, then that's a net drain on our society. We're losing out of that.

Mr. Stewart Wells: Quickly, I agree with everything Mike said. I would only add that there is very little evidence that savings drives investment. If whatever sector suddenly decides to spend less and increase its savings rate, that would normally not increase investment. If it had any effect, it would more be likely to decrease it, whereas the other way it does work. If you increase investment, you'll find that savings are, by definition, increased to match that.

Mr. Michael McCracken: That's mainly because you don't have interest rates serve as that device for equal-rating investment and savings domestically where we set those.

Mr. Warren Mosler: Yes. The way I like to put it is that savings is the accounting record of investment. If you invest, if you build a factory, it will show up somewhere in national income accounting of savings. That's how we account for savings. It's how we account for investment. As Mike said, what sector that saving shows up in is the next question.

The Chair: That's it. Sorry, but we have one minute to get to the House.

On behalf of the committee, I would like to thank you very much. It was a very interesting round table. We'll certainly use this information wisely.

Mr. Mosler, I would like to personally, and on behalf of the committee, thank you very much for making the trip to Canada.

Mr. Stewart Wells: And apologize to him for the bells.

Voices: Oh, oh!

The Chair: Yes.

The meeting's adjourned.