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Canada Turns the Tables on the U.S.

February 13, 2013 by Ike Brannon

A recent paper released by the Aspen Institute throws new light on the path towards greater economic growth by examining the decades-long economic boom of Canada. Our northern neighbor has long been thought to represent the modest antithesis to the turbo-capitalist United States, but that stereotype no longer fits: The country’s response to its own debt crisis and economic malaise in the 1990s —which happen to resemble the situation that now threatens our own future — stands in marked contrast to what our government has pursued over the last three years. Canada’s journey towards economic prosperity began in the 1990s, when it became obvious that federal budget deficits in excess of 10% of GDP and the economic malaise in its wake could no longer be sustained. The liberal government acted decisively by slashing spending across the board, cutting $7 of spending for every dollar in revenue increases. The economy boomed, tax revenue skyrocketed even after the modest tax increases were repealed, and the country returned to solvency straightaway. The Canadian federal budget has posted surpluses for seven out of the last 10 years. Canada also later cut its corporate tax rate in half in an effort to increase its competitiveness in the global economy. Canada has also aggressively encouraged domestic oil production with great success, providing the country with a valuable export and reducing their reliance on oil-producing countries in the Middle East. Canada’s immigration policy fosters growth as well, focusing on the acquisition of human capital in the form of highly skilled and specialized workers who add value to the economy. Needless to say, this set of policies contrasts poorly with the path chosen by the current administration, which still sees no reason to rein in spending after four years of trillion-dollar deficits. On the other hand they have been avid advocates of increasing the top tax rates on small businesses and upper-income taxpayers, despite the fact that nearly 30 million Americans work for businesses that will see a boost in taxes if the Bush tax cuts for the top two tax rates are repealed. The administration may have the pro-drilling rhetoric down, but the raft of regulations coming from the Interior Department and the EPA suggest otherwise, as companies battle to get drilling permits both in the Gulf of Mexico and on federal land. What’s more, the Administration’s attempt to move the regulation of hydraulic fracturing from the state to the federal level, where it can sit on it and stop natural gas from making alternative energy uncompetitive, continues apace. Canada doesn’t have it all figured out yet — it still lags the U.S. in productivity growth over the last two decades, for example — but it figured out how to renew economic growth and dig itself out of a fiscal hole. It’s a pity we apparently have to learn that lesson on our own.


Author

Ike Brannon
Ike Brannon

Ike Brannon served as an Economic Growth Fellow of the George W. Bush Institute from 2012 to 2015. He has a Ph.D. in economics from Indiana University and a B.A. in math, Spanish, and economics from Augustana College. View his full bio

Full Bio