Productivity. Some editors hate the word, reckoning that nothing could make for duller reading. Some politicians banish the word, fearing it could scare voters. Some economists argue over the word, because it can be defined in different ways.

Hate it or fear it, productivity is Canada's most important challenge. Without improving it sharply, no chance exists for narrowing the widening gap between Canadian and U.S. incomes.

Tired of such invidious comparisons? Okay, then productivity gains are the best way of raising incomes, period. And without higher incomes, forget about more public money for this or that, including Canada's social programs.

Is productivity Darwin's revenge? To improve it, do we all have to work longer, break up union protection, climb on Charlie Chaplin's wheel? No, longer hours and even weaker worker protection would not help.

We need as a society to work smarter, innovate more, educate ourselves better, stop doing dumb things with taxpayers' money, and rejig a system that taxes incomes (corporate and individual) less and consumption more.

This week, a bunch of smart people turned their minds to productivity. The venue was Ottawa, the conference organized by the Toronto-Dominion Bank, and the media coverage nil.

Charles Baillie, TD Bank chairman, had given speeches setting a target for Canada: raising incomes to U.S. levels in 15 years. So his bank and the Conference Board brought the people together.

A complete consensus obviously did not emerge, but no one bettered the alternative to productivity improvement offered by CAE president Derek Burney: Canada as "North America's cottage country, a place whose physical beauty masks a slowly declining standard of living and quality of life among the locals."

The raw facts, as outlined by Andrew Sharpe of the Centre for the Study of Living Standards? Canada's per capita GDP is 84.7 per cent of the U.S. level. Personal income is 78.6 per cent. Personal disposable income (that is, after taxes) is 70.4 per cent. All of these gaps widened from 1980 until the last year or so.

Canada does not have to lower its tax rates to U.S. levels. We can provide services collectively (health, for example) that Americans do by paying individually. But the tax gap between the two countries stood recently at 9 per cent of GDP -- too large, in other words, in an integrated North America.

Almost everyone agreed that education and skills upgrading are critical for closing the productivity gap. How to do it? One constructive suggestion came from the Canadian Labour Congress.

Why not, the CLC proposed, allow workers who pay into employment insurance to create a fund for themselves to finance study leaves for skills upgrading under accredited programs, with management and unions supervising the leave? After all, the EI program is raking in vastly more than it is paying out. And Ottawa has already abandoned an idea for individual registered training funds announced several years ago.

Of course, the flip side of using EI constructively is using it to impede labour mobility by granting it to frequent users and adjusting it for seasonal and regional factors. Almost every serious study of productivity finds this use of EI to be perverse, but the local politics of EI usually obstruct change.

Here's a serious conundrum. Canada has one of the world's most generous tax treatments for research and development, yet we do less of it than most of our competitors. We also have trouble turning innovations into commercial use.

Government debt, although declining, remains a drag. Ottawa is burdened with about $40-billion a year in interest payments on the debt. Just imagine what we could be doing if that annual payment were, say, $20-billion. That we can't reflects the terrible legacy of 1975-1995 when yearly deficits inflated the debt.

Today's productivity gap vis-à-vis the U.S. is about 20 per cent. That's roughly the same gap as the per capita average income gap. The link is strong and clear: Unless the productivity gap closes, the income one will remain.

So the only way to close the income gap is to boost annual productivity to above U.S. levels -- and to keep it there for many years. Bettering U.S. productivity is something Canada has not achieved for two decades.

Maybe Canada will get lucky. Maybe the Americans' stunning productivity gains of the 1990s are a thing of the past, and a lower U.S. rate will give Canada a chance to catch up.

Productivity. Perhaps it makes for dull copy. But it's Canada's most important long-term challenge.
jsimpson@globeandmail.ca