Closer reading of StatsCan report troubling for middle class

TheStar.com – Opinion/Commentary – Most of the net worth increase in Statistics Canada survey is due to phenomenal inflation in home values, not in income growth.
Mar 02 2014.   By: Eugene Lang, Frank Graves

The right-wing commentariat has spoken. The truth has been revealed. The notion that Canada’s “middle class” is suffering financial strain is nonsense, an artifice of progressive political parties looking for an angle to exploit in the next federal election.

This claim is allegedly based on the conclusions of a newly released Statistics Canada survey, which shows median real (adjusted for inflation) net worth of Canadian family units was $243,800 in 2012, up 44.5 per cent from 2005. This net worth fact has been cited as proof that Canadians are better off than ever. The middle class cup runneth over.

When reading such interpretations of this survey, one is reminded of that old axiom, “all numbers are wrong and some numbers are useful.” In this case, the right has appropriated certain useful numbers to make their case. A closer reading of the StatsCan report reveals a much more troubling picture, one that is consistent with what Canadians, as demonstrated in opinion survey after opinion survey, believe about their own financial and economic security.

First, most of this net worth increase is due to phenomenal inflation in home values. The median value of residences was up almost 50 per cent since 2005, which includes the period in which Canada was in recession (when, other things being equal, one would expect house prices to flatten or decline). Anyone who thinks these increases are normal and will continue indefinitely believes in Santa Claus or still holds stock in Bre-X.

The part of the StatsCan study that hasn’t gotten much attention yet is more worrying. Mortgage debt, for example, is reported to be up $650 billion since 2005. Total debts on lines of credit have almost doubled since 2005. The median line of credit debt increased by about $5,000 over seven years. Loans on owned vehicles were up 45 per cent since 2005, to almost $76 billion. About 40 per cent of Canadian family units carried an outstanding balance on their credit cards in 2012, with the median amount of that debt having increased 11 per cent since 2005. Student debt in 2012 was up 24 per cent over 2005.

Do these numbers suggest a financially thriving middle class? Hardly. They paint a picture of a population that has unprecedented access to credit at historically low interest rates. The principal residence has become a new version of the ATM machine, allowing people to access credit against equity in their house to fuel consumption. This is a relatively new phenomenon in Canada. But is it a good and sustainable thing for personal finances and the national economy?

These astronomical personal debt levels were the reason former governor of the Bank of Canada Mark Carney expressed concern a few years ago about the risks to the economy posed by such debt, given inevitable interest rate increases.

So what about income growth for the middle class, as distinct from net worth? According to economist Andrew Sharpe at the Centre for the Study of Living Standards, who cites data from the 2006 census, median real earnings of individuals working full-time on a full-year basis between 1980 and 2005 increased from $41,348 to $41,401 (in 2005 constant dollars), a paltry $53 over 25 years. Over the same time period, labour productivity in Canada rose 37.4 per cent. Economic theory would suggest earnings growth should track labour productivity growth, but this evidently did not happen over that quarter century.

Since 2005, it looks like earnings growth roughly approximated productivity growth. But this is cold comfort given Canada’s abysmal productivity growth performance over the past decade (about 1 per cent), a rare area of the dismal science where there is broad agreement that this is a serious structural problem for the Canadian economy that threatens our standard of living.

Earnings growth numbers, therefore, do not reveal a financially thriving middle class.

Perhaps most fundamentally, irrespective of what the economic data say, Canadians are exhibiting a nearly universally gloomy outlook. Half the population thinks we are still in recession five years after the recession ended. Those who self-identify as middle class have dropped 20 points in recent years. For the first time since polling began, parents think their kids will be worse, not better off, financially. It sounds like people see the end of progress around the corner.

Pessimistic perceptions like these, and the lack of confidence they engender among consumers (which affects spending and investment decisions of people and firms) matter hugely for an economy.

Do the data show that the Canadian middle class is in existential crisis? No, at least not yet. But are most Canadians doing swimmingly well economically in absolute terms or relative to the past? Absolutely not, and the StatsCan survey proves that point.

If we are going to have an intelligent policy discussion on these middle-class issues, let’s make sure we consider carefully the complete evidence picture, not selective parts thereof.

Eugene Lang is BMO Visiting Fellow, School of Public and International Affairs, Glendon College, York University. Frank Graves is President, Ekos Research and Associates

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