Tuesday, February 19, 2013

“Real Wealth is Built Through Innovation”

I’m getting to like Mark Carney more and more. He was recently quoted as saying “Real wealth is built through innovation, and it’s gained through hard work.”. He’s spot on with the real source of improvements to our lives over long periods of time. Commenting on Canadian housing prices, he continued “It’s not through some magical asset inflation.”

On a macroeconomic scale, the wealth gains we’ve had over the decades have been driven by hard work and innovations that make our lives easier and better. These innovations destroy some jobs and create others. The net effect is that we collectively get more for less effort.

When governments create jobs through make-work projects or financial stimulus, we are getting short-term solutions. True long-term improvements come from innovation. When it comes to promoting or thwarting innovation there are no purely good actors or bad actors, but generally speaking, the enemies of innovation are large organizations that fight to maintain the status quo such as governments, large unions, and the largest businesses in Canada.

Carney’s concern with his remarks was that Canadians are building debt backed against inflated housing prices. He predicts that we will see more downward adjustments to house prices. I have no opinion on the direction of house prices, but I agree with him that “Canadians shouldn’t count on home prices to be their main source of wealth gains.”

It wouldn’t be so bad if Canadians were selling their homes and going on spending sprees with the resulting cash. The problem is that too many Canadians are borrowing against their homes to spend. If these homes do go down in value, the debts still need to be repaid in full.

No comments:

Post a Comment