Canada's Time to Pull out of America's Shadow?

Canada's Time to Pull out of America's Shadow?

Fifteen years ago Caleb Howard could have been a poster boy for Canada's brain drain epidemic. In 1993 the University of Waterloo-trained mathematician and computer animator visited Los Angeles and was stunned by what he saw. Movie studios were clamouring for workers with his skills, and they were willing to pay three times more than companies in Toronto. So Howard joined thousands of other highly skilled Canadians who flocked to the U.S. in the 1990s. He went on to design special effects for video games and blockbuster movies - he's particularly proud of the fire and smoke he fashioned for the rocket-launch scene in Apollo 13 - and built a prosperous life with his Canadian wife and their two children in Santa Monica. From time to time, the topic of returning to Canada came up. But California's unbridled energy and sense of opportunity made it difficult to leave.

Early last year, all that began to change. Signs of the coming economic crisis were everywhere. House prices were plunging, and so too were the couple's retirement savings. Soon even their well-educated friends were struggling to find work. As the energy fizzled and jobs dried up, the couple sold their home. Then, just like 14 years earlier, they packed up and headed to where the opportunities looked most promising: only this time, that meant Canada. "It was with an acute awareness of the decline of the American economic situation that we came back," says Howard, now a computer graphics supervisor at Electronic Arts in Burnaby, B.C. "We couldn't have picked a better place to return to."

For Canada, a country that has spent the better part of 20 years nervously wringing its hands over its perceived inadequacies, the dramatic reversal over the past year has been striking. Our banks were once seen as lacking innovation; now world leaders hail the boring Big Five as being among some of the safest and most profitable banks in the world. We fretted that our economy was overly reliant on commodities; now our rocks, oil and gas are seen as a natural hedge against havoc in the manufacturing sector. We worried that Canada's strict MORTGAGE rules were a drag on our HOUSING market; now we can brag that we don't put people into homes they can't afford. Almost any way you look at it, Canada is uniquely positioned. So as other developed nations struggle, the question is: will we squander this once-in-a-generation opportunity or take advantage of our good fortune to punch above our weight?

"You'd have to go back to those golden early TRUDEAU years of '69, '70 to find a time when things were aligned so well," says Glen Hodgson, chief economist at the CONFERENCE BOARD OF CANADA. Last week the board predicted that next year Canada will see a huge leap in our ranking by international economic performance, from 11th place out of 17 countries in 2008, to fifth. Canada's rise will be driven by GDP growth, improved employment growth and increased foreign investment.

Our rise will be helped by a rock-solid banking system that U.S. President Barack Obama has called "striking." Brian Cowen, the head of Ireland's government, has vowed to adopt "the Canadian model" for his country's banks. And when Finance Minister Jim Flaherty and BANK OF CANADA Governor Mark Carney travelled to China last week, it was to showcase our "excellence" in financial regulation. For those who just can't get their fill, the New York Times website has even been running a "Canada Regulation Series."

No one is saying this country isn't suffering through a deep RECESSION. Just ask employees in the forestry and automotive sectors. But Canada's economy was on solid ground before the recession hit, putting us in the pole position for a recovery. UNEMPLOYMENT was already at a 30-year low and Canada was the only G8 country to consistently balance its books. Assuming annual deficits of $30 billion over the next decade, Canada's debt as a share of GDP will hover around 35 per cent, according to CIBC World Markets. The INTERNATIONAL MONETARY FUND warns that America's debt, on the other hand, could hit 100 per cent of GDP by 2019. Britain could get there in half the time. "Other countries, most notably the U.S., face large tax increases to address more serious debt and deficit burdens than Canada's, again opening up competitive room for Canada," CIBC economist Avery Shenfeld wrote in a report last month.

It's not just Ottawa's ledgers that put Canada ahead of most other nations. Our housing sector is showing signs of firming up, and some economists have declared that Canada's brief housing meltdown is already over. Whether it is or it isn't, we can at least smugly boast that we didn't have government-backed mortgage companies like Fannie Mae pushing zero-down, 30-year subprime loans for years on end. Instead, we had the CANADA MORTGAGE AND HOUSING CORPORATION, the federally owned mortgage insurer, which only briefly danced with subprime until a stern rebuke from former Bank of Canada governor David Dodge. By 2006 subprime mortgages made up 21 per cent of all new mortgages in the U.S., but as little as one per cent in Canada. America may pride itself on its tradition of personal responsibility, but it's only in Canada that homeowners who default on their mortgages face the consequences of having their wages garnisheed. In America homeowners can walk away from their obligations, which is exactly what thousands of them do.

Canadians are also better positioned for a rebound in our wallets. According to a recent report by CIBC economist Benjamin Tal, disposable incomes in Canada have been rising at more than twice the rate they are in the U.S. since 2005 - at 11 per cent versus five per cent. "So quick was the revival of Canadian income that in a short four-year span, per capita real income in Canada was able to wipe out no less than 15 years of income underperformance vs. the U.S.," Tal wrote. With commodity prices expected to climb as the global economy recovers, Tal believes Canadians are poised to significantly out-earn American workers once the recession ends.

Meanwhile in the U.S., some pundits are worrying whether the country will ever regain its former glory. Those who predicted the recession, like New York University professor Nouriel Roubini (also known as Dr. Doom), say the U.S. economy could bottom out this year, but it still faces a glacial rebound. Many expect American unemployment to keep rising well into next year, while house prices continue tumbling on a year-over-year basis, and more banks go bust. The nation's finances, already in shambles before the recession, have hit rock bottom with multi-trillion deficits projected for years to come. Whole states, like California, face bankruptcy without huge tax increases and deep spending cuts.

Compared to the U.S. and many other countries, Canada has done well and we should be proud. But it's one thing to gloat, and another to exploit our relative lead. If Canada really is in a better position than it has been in decades, how can we make sure we take advantage of that going forward?

For starters, we should use our current high standing to attract the best and brightest workers from around the world, say experts. According to Liam Clifford, managing director of London immigration consultancy Globalvisas.com, it shouldn't be that hard. "Canada is held up as such a fantastic destination here in the U.K. because it's the strongest economy of the G8, and it's often voted to have the highest standard of living of any country," he says. "Our offices in India, South Africa and the U.K. all find Canada to be the most sought-after destination." Visa inquiries for Canada, in fact, have already jumped 65 per cent from last year.

That could be because, as Jim Milway, managing director of the Institute for Competitiveness and Prosperity, points out, the U.S. is turning away talent like never before. Companies that get U.S. stimulus funds now face restrictions on hiring foreign-born workers - even M.B.A.s. "This is a big opportunity for Canadian schools and banks to get down there and recruit," he says.

Canada could also attract new industry with a little-known fact: we'll soon offer a more attractive tax climate for businesses than America does. The U.S. already has one of the highest tax rates on new business investment in the world, and many expect its corporate tax rate, currently at 35 per cent, to rise further. Yet Canada's combined federal and provincial corporate tax rate will fall to 25 per cent over the next two to three years. That's already prompting companies to shift their headquarters here, pumping additional revenue into government coffers. In June, Tim Hortons Inc. moved its corporate headquarters back from Delaware to Oakville, Ont., to save on taxes. "Americans just seem intent on shooting themselves in the foot, and we shouldn't stand in their way," says Milway.

It's true that Canada still has its problems: our productivity, for instance, still lags the U.S.'s by a long shot. But when you look at the overall picture: employment rates, wages, standard of living, debt levels, financial stability, Canada has never been in a stronger position. It's a stunning about-face from just a few years ago.

When Howard chased the bright lights to Hollywood, it was a foregone conclusion Canada couldn't hold a candle to America's better pay and job prospects. "The great Canadian brain drain was a point of some minor shame for me, because the government paid for my education and I immediately went south and paid American taxes for 15 years," he says. Now the roles are reversed. "I got the best experience in the world in L.A. for 15 years. Now I'm able to bring it back and apply it to Canadian industry."

Maclean's August 31, 2009