Forgotten People and Forgotten Places in the Age of the Intangibles Economy (remarks from September 29, 2019)
Thank you for the introduction. It’s an honour to speak to such an impressive group.
I’m going to talk tonight about my recent work on what I’ve come to refer to as “Canada’s forgotten people and forgotten places.”
I’ll start by discussing structural changes in our economy that are reshaping where our economic activity comes from and who participates in it. Then I’ll tell you about the people and places who are succeeding in the modern economy and those people and places who are falling behind. And then I’ll conclude by talking about what I think policy-makers in general and conservatives in particular need to do to develop and advance an agenda that responds to these trends and in so doing fosters inclusive, broad-based growth.
So as to not bury the lede, let me state my thesis upfront:
· I think the transition from a goods-producing economy to an intangibles economy is putting real pressure on certain people and places in Canada who are rightly questioning if they’ll continue to be able to find work and opportunity in an economy that seems to value less and less what they bring to the market.
· I think we need to sustain and strengthen the types of industries and work that can provide these people and places with economic opportunity and financial security.
· And I think this agenda will ultimately need to be advanced by conservatives but only if we’re prepared to make some adjustments to our basic economic framework.
I’ll spend the next 25 minutes or so unpacking these three arguments for you.
A TRUMP-INDUCED INTROSPECTION
But let me start at the beginning. Like most stories, it starts in a bar.
I was with my good friend and former colleague in the Prime Minister’s Office, Shaun Webb. Shaun, who tragically passed away months later, had, as many of you know, an encyclopedic mind for politics and policy.
We were sitting in the near-empty bar finishing our drinks and waiting for Donald Trump’s victory speech. He had just been declared the winner in the 2016 presidential election. We were both pretty speechless. And not just because of the alcohol.
I remember feeling shaken by the whole experience. Trump had won the Republican Party’s primary and now the presidency on a message and an agenda that seemed incompatible with what I understood about conservatism.
You see, so much of my intellectual and political identity was invested in the idea that American conservatism — with its rich network of institutions, journals, and thinkers — was our ideological lodestar. It thus felt like a fundamental rebuke of what I believed by an anxious and restless American public, including millions who self-identified as conservatives.
Trump hadn’t just defeated Hilary Clinton that night. He had stood down the entire conservative movement. So, as I waited for him to take the stage, I sat there holding my drink in a state of discomfort and disbelief.
I start with how I felt that night with Shaun because it’s been the catalyst for so much of the work that I’ve done in the subsequent 35 months or so. I felt pretty down during those early days. But I’ve since come to see my role as contributing to a conversation amongst conservatives about how we ought to think about and respond to the economic forces that produced such an improbable election outcome.
Call it a Trump-induced introspection. It’s certainly prompted serious rethinking on my part with regards to economics, politics, and public policy.
THE TRANSITION FROM A GOODS-PRODUCING ECONOMY TO AN INTANGIBLES ECONOMY
In particular, I’ve focused on how structural changes in our economy are manifesting themselves in differing labour market outcomes for different industries, communities, and people.
I’ve come to the view that we’ve underestimated the political economy effects of the declining importance of goods-producing industries and the rise of the intangibles economy.
We used to have an economy where some people were rewarded for their cognitive skills and advanced credentials and others were rewarded for their physical strength and technical aptitudes. Whether you worked with your brain or with your back, you could reasonably assume to find work and to earn a decent living. But this is changing.
The old, goods-producing economy was broad-based. It was less specialized and had a greater demand for low- and mid-skilled labour. The gap between rich and poor was therefore much narrower in the post-war era. It cultivated a middle-class economy and an accompanying middle-class ethic.
The rise of the intangibles economy is far less broad-based. It’s hyper-specialized and places a high value on a smaller number of credentials and skills. The gap between a so-called “knowledge worker” and a low-skilled service worker, for instance, is significant. San Francisco, which is the epitome of the knowledge-based model, is a self-evident example. It’s been rightly described as a “one huge metaphor of inequality.”
Economists refer to this transition as “skills-biased technological change.” It means, in a nutshell, that we increasingly have an economy that’s paying greater and greater returns for certain credentials and skills and producing fewer and fewer opportunities for those who don’t have them.
A combination of technology, innovation, and globalization is responsible for pushing us in this more specialized and less broad-based direction. The “servitization” and now “digitization” of our economy is reshaping where our economic activity comes from and who participates in it.
The numbers are quite striking.
· Just consider that service-based industries now represent more than 75 percent of Canada’s economic output.
· Or that intangible assets are now 70 percent of the Toronto Stock Exchange’s overall value.
Irrespective of what one calls it, it’s self-evident — or at least it should be — that it’s invariably affecting people and places differently. As David Autor, one of the world’s leading labour economists, has put it: “Changes in the nature of work — many of which are technological in origin — have been more disruptive and less beneficial for non-college than college workers.”
I think of my grandfather in Thunder Bay. He was born in 1940. He left high school and entered the workforce when he was 15. It’s never been clear whether he left voluntarily or because the principals and teachers were sick of him. But, either way, he was entering a job market that valued what he brought to the table. Physical strength, a strong work ethic, and technical aptitudes were valuable forms of human capital in a mostly goods-producing economy. My grandpa worked on ships, then in grain elevators, and ultimately rose the ranks to be regional director for Manitoba Pool. In so doing, he laid a foundation for my dad to go to university and for me to succeed in the intangibles economy.
I wonder what would have happened if my grandfather was born 45 or 50 years later. What would he do now? Would the market value his aptitudes and skills? What opportunities would he have? How would he participate in the intangibles economy?
These questions are, in my view, at the root of Trump’s election. It seems to me a major reason that he won is that millions of people like my grandfather instinctively feel threatened by an economy in which goods-producing industries represent a smaller and smaller share of the economic pie.
They don’t see a place for themselves in the modern economy. They aren’t going to be coders and they know it. They also don’t want a universal basic income or some other form of welfarism. They want to work and be productive. They want to make things. And they know that secular trends may ultimately put that at risk. Feeling desperate, they turned to a blunt-force, political instrument to do something about it.
Their political judgement may have been mistaken. But their interpretation of the economic trends is broadly correct.
I’ve sought to understand how these dynamics are manifesting themselves in differing labour market outcomes for different people and places here in Canada. The goal has been to discern who and where among us are most vulnerable to the effects of skills-biased change and what policy-makers should do to create the conditions for broader-based work and opportunity. I now believe that these are the most important political economy questions facing our society.
FORGOTTEN PEOPLE AND FORGOTTEN PLACES
My most recent work is about drilling into the headline economic data to better understand who and where we’re missing. Think of it as an inquiry into the economic circumstances of Canada’s forgotten people and forgotten places in the age of intangibles.
It’s predicated on the assumption that our politics and policy are shaped by the headline economic data and in turn we risk missing the people and places whose experiences deviate from the averages — particularly at a time when our economy is undergoing structural changes.
This isn’t just a hypothesis. I know it’s true from my time in politics.
Every month a small group of us in the Prime Minister’s Office would wait impatiently for the economic growth or employment data to arrive. When the information finally got to us — especially if it was positive — it was like a dopamine shot.
Our hope, of course, was that the data would affirm that we were on the right track. It would enable us to boast about our economic programme and warn about the risks of the other parties. All we ultimately cared about was that the overall figures were positive. We spent virtually no time considering the distributional effects by industry or educational level or even region.
The Trudeau government is no different. They boast about their economic record but their commitment to the “middle class and those working hard to join it” comes with some big caveats — including oil sands workers or small business owners or rural Canadians or anyone else who doesn’t fit their economic narrative.
This is precisely how the American political class came to neglect the millions of people who were struggling in places like Erie or Rochester or Youngstown. We can’t afford to make the same mistake here.
I’ve sought therefore to drill down into Canada’s headline data in order to disaggregate the overall economic picture and to see who and where are struggling through the transition from a goods-producing economy to an intangibles one.
What do we find?
Although Canada’s overall labour market performance has been generally positive over the past two decades, the disaggregated picture is much more complicated. There are various fault lines — including gender, education level, and the urban/rural divide — that at least in part reflect disruption caused by the transition from a tangibles to an intangibles economy.
The truth is most of Canada’s labour market gains over this period have been concentrated among women with post-secondary qualifications. Their recent performance has been stronger than men with post-secondary degrees and markedly exceeded the performance of non-educated men and women.
Just consider, for instance, that 30 years ago women with post-secondary qualifications had a lower employment rate than men without post-secondary education by about 10-percentage points and now their rate is 10-percentage points higher than that of non-educated men. That’s a 20-point swing in less than my lifetime.
This, of course, isn’t to lament the labour market performance of educated women. The three-decade trendline represents tremendous progress for women in our economy. And as someone recently married to a smart, dynamic lawyer, I’m the direct beneficiary of these trends.
But it’s to highlight the limits of judging the labour market based on an aggregate picture. The real story here is that the strong performance of educated women has essentially offset the serious challenges facing men without post-secondary qualifications.
The situation becomes even more acute if you back out a small number of major, urban centres whose labour market performance has consistently exceeded the national average. It’s striking, for instance, that rural employment is still below pre-recession levels from 2008/09 and yet it’s up by close to 15 percent in our bigger centres. That’s not a short-term blip. It’s a sustained period of secular stagnation for our rural and remote communities.
Now more than 60 percent of Canada’s economic output and national employment comes from cities with 500,000 or more residents. That puts us above the OECD average but even this is incomplete. Toronto is responsible for roughly 20 percent alone. And its share is growing given the intangibles economy’s tendency towards what Richard Florida has called “winner-take-all urbanism.”
The point is that the transition from a goods-producing economy to an intangibles one is concentrating more and more opportunity in a smaller number of places across the country. This trend is amplified by a process of labour market sorting. Our urban/rural populations are increasingly marked by economic self-selection through patterns of in- and out-migration.
As our economy places a greater emphasis on credentials, the wage bonus for higher levels of education keeps going up and is causing people with in-demand aptitudes and credentials to cluster in a small number of major centres. These places get richer and more dynamic. But the places that these people have moved from experience a negative feedback loop of stagnation and decline. The result is a growing economic bifurcation rooted in place. American scholar Will Wilkinson calls it a “density divide.”
The role of education — or what may be better described as credentialism — is obviously key to these trends. The educational wage premium in Canada is significant. The median income for working-age men with a bachelor’s degree is one-third higher than those with only a high school diploma.
This education premium is only growing in the intangibles economy and it’s producing stratification among people and places. It’s notable, for instance, that while Canada has the highest educational attainment rates in the OECD, we also have the largest urban/rural education gap among OECD countries.
Think about the economic implications of this educational divide. More than 40 percent of Toronto’s working-age population has a bachelor’s degree or higher. Thunder Bay’s share is barely half of that. Which place is better positioned to flourish in the intangibles economy? The answer is painfully obvious.
And the people in Thunder Bay are hardly alone. We mustn’t forget that there are still 6.7 million working-age Canadians without post-secondary qualifications which is roughly the equivalent of the combined populations of Alberta, Saskatchewan, and Manitoba and even larger than the total population in the Greater Toronto Area.
The number will fall somewhat as our population ages and post-secondary access is expanded. But it’s worth emphasizing that even among younger cohorts the share of the population without post-secondary qualifications is still roughly 30 percent.
It’s nearly enough to elect a majority government in Canada. And yet I would argue that this cohort is the least represented group in Canadian politics.
The recent campaign is a good (or bad) example. We had the various parties tripping over themselves to promise free tuition, larger tax preferences, and more generous student grants for those who choose the post-secondary route. Yet no one was talking about the three-in-ten who will choose a different path and are more at-risk in the new, intangibles economy.
A camping subsidy or frankly a buck-a-beer isn’t good enough. We must do better in light of the magnitude of the economic trends that I’ve described.
HOW SHOULD CONSERVATIVES RESPOND?
Let me conclude then with some thoughts on how conservatives can put these people and places closer to the centre of our agenda.
I place an emphasis on conservatives because I think that the solutions here will ultimately need to come from us. The center-left moved on from the goods-producing economy a long time ago in favour of the knowledge-based economy which is greener, more urban, and involves more highly-educated, progressive workers. And the far left has no incentive to reform capitalism since its interests ultimately lie in growing public agitation towards freedom and markets.
Therefore it’s up to us to develop and advance an agenda focused on the needs and interests of Canada’s forgotten people and forgotten places.
Champions of Paid Work
The first step is to recognize that the answer doesn’t lie in more redistribution and greater state dependency. We can’t just pension these people off. It’s not a sustainable economic, political, or social strategy.
The evidence of the financial and non-financial benefits of work on one hand, and the corrosiveness of dependency on the other, are both overwhelming. The benefits of the former and the harms of the latter aren’t just limited to the individual either. They are transmitted through households, communities, and generations.
The centrality of the work must therefore be at the core of any conservative policy response. Championing paid work should be our animating idea and the starting point for policy development.
Natural Resource Economy
The next step is to recognize the natural resource sector as a major source of opportunity and work and to safeguard it from policies that would harm its capacity to produce jobs.
The sector has been an economic bulwark for men without post-secondary qualifications and for rural places without diversified economies for most of this century. UBC economist Kevin Milligan has even attributed the strength of Canada’s middle-class to resource-based jobs.
Yet this employment is increasingly challenged by a combination of taxes, mandates and regulations in the name of environmental objectives, Indigenous reconciliation and other public priorities.
Just consider climate policy for instance. Economists and scholars regularly talk about how stringent emission abatement policies will cause individuals and firms to substitute with lower-emitting alternatives. But no one ever analyses the employment substitution options for oil sands workers. Where would those who oppose oil and gas projects propose these workers go to find employment? What are their job alternatives?
It’s perverse for the winners in the modern economy to advocate for the destruction of opportunities for those who are vulnerable in it.
We need to flip the prevailing policy assumptions on their head. Our default position should be to sustain and strengthen our natural resource sector. Other priorities should be traded off accordingly.
It doesn’t mean that we shouldn’t be concerned about climate change or Indigenous reconciliation or whatever other priorities may conflict with the development of our natural resources. But once one sees the sector as Canada’s primary source of economic inclusion than the threshold for competing priorities is raised considerably.
The final step — and the most controversial particularly among conservatives — is that I think we need to be prepared to push the market economy to generate broader economic opportunity.
We regularly use public policy to increase the overall productivity of the economy. Think for instance of accelerated capital cost allowance for machinery or equipment or subsidies for business expenditures on research and development. These are cases of using policy tools to push market actors to engage in certain activities or allocate capital for certain purposes in the name of higher productivity.
I’ve come to the view that we should also be prepared to use public policy to help create labour market opportunities for people and places who are vulnerable in an intangibles economy.
I don’t say this lightly. I recognize the risks. Such an agenda can certainly be prone to various forms of “government failure” — including rent-seeking, cronyism, distortions, ineffectiveness, and so on.
But it seems clear to me that the market’s efficient allocation of resources in an intangibles economy may not produce enough work and opportunity for the vulnerable people and distressed communities that I’ve been talking about. I think that we owe it to them to try to nudge the market in the form of active place-based and pro-work policies.
Careful policy design will obviously be paramount. There will be a need for trial-and-error experimentation. But there are some current models that are promising and that conservatives should study.
One example is the Trump Administration’s Opportunity Zones model which is providing capital gains tax relief in order to encourage private capital to flow to roughly 8,700 designated zones across the country. It’s too early to judge whether the initiative will be successful, but the policy has been designed with a careful eye to minimizing distortions and creating the conditions for sustainable, long-term investment. Canadian conservatives should monitor its progress and consider how the model might be translated here.
Another is the Trudeau government’s Super Clusters Initiative which is attempting to use public dollars to catalyse different industries to cluster and collaborate on projects in undercapitalized communities. Early signs are that the government has micro-managed aspects of project selection and outcome-based measurement is weak but these shortcomings seem fixable. I’ve spoken to various participants in the initiative — particularly the manufacturing cluster here in Ontario — and they seem to be working on worthwhile projects that have attracted significant private capital. I think we should resist the temptation to be instinctively opposed and wait to see if it produces any positive results.
More fundamentally, though, conservatives need to recognize that the transition to an intangibles economy will require us to make some adjustments to our basic economic framework. This doesn’t mean throwing out Adam Smith or Milton Friedman. Our economic agenda will still be rooted in their enduring insights about the role of incentives, the laws of competition, the limits of state planning, and so on.
But, as the Cato Institute’s Arnold Kling has observed: “because of the dramatic changes that our economy has undergone in the past several decades, we can no longer depend on models; we must look at the world itself.”
And the world as I’ve come to see it since that night in a bar 35 months ago is one in which we cannot afford to neglect the challenges facing certain people and places among us. It’s up to conservatives to develop agenda that responds to these challenges and creates the conditions for broad-based work and opportunity.
Thank you for listening.