It's The Economy, Stupid

Jason Kenney has been in Silicon Valley peddling the new Start-up Visa.   He tweeted at least a couple of dozen times about it including this picture in front of a new ‘cheeky’ billboard.

The issue for New Brunswick and the Maritimes is whether or not we will use this visa program to attract bright immigrant entrepreneurs to this region or whether or not all the benefits of the program will accrue to Toronto-Montreal-Vancouver.  I suspect the Minister wasn’t pitching Moncton or Truro while in Silicon Valley.

It’s up to us to put this program to our advantage.  Our VC programs – groups like the NBIF should immediately indicate they are willing and able to provide the needed funds for immigrant tech entrepreneurs (to get the startup visa you need to have VC interest).   We should look to integrate immigrant entrepreneurs into our incubator/accelerator programs. Our universities should think about how they can play a role here.

In the end, if this region was able to attract 20-30 tech entrepreneurs from abroad via this new startup visa, it will be a big deal indeed.  Or we can sit back and follow the traditional path.

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This is an age old issue and one that stirs up debate on all sides.  The government spends a lot of money on suppliers.  Even in a place like New Brunswick, the amount spent on all suppliers from all levels of government would likely run into the hundreds of millions of dollars per year.  Further, you could mount a case that a lot of stuff the government does inhouse could just as easily be done out-house (without the outhouse results) as with Sweden and its private sector providing health care service within the public health care system.

I think it is fair for governments to consider the economic development benefits of a large supplier deal as part of its overall assessment of procurement opportunities.   I don’t mean that we should sacrifice the quality of the product or service in the name of a few jobs but if there is a way to leverage further economic activity I think it is worthy of the effort.

For example, the Nova Scotia government recently outsourced its SAP activities to IBM with the explicit goal of IBM making Halifax a global delivery centre for IBM.

I realize this was somewhat controversial as it meant moving some jobs from the public service to a private contractor (media reports say no one was fired – everyone was either reassigned or went with IBM) but I like the idea of using this base of business to leverage a larger opportunity.

The Coast got a copy of the contract which I downloaded.  It’s heavily redacted but it seems like a fairly straightforward contract.

However, it’s an interesting social media moment.  The news editor of the Coast has asked his readers to look the documents over and comment on them.

There is no inherent reason why government needs to manage its IT and related services in-house.  I’m sure it can be done well in-house or out-house.  If Dexter is right and IBM makes Halifax a global delivery centre for SAP services – it could turn out to be a great move.

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Believe it or not this is actually one of my more controversial views.  I think it is important for communities large and small to have a few large, anchor employers – respecting the fact that ‘large’ is a moving target.

I read this morning in the TJ that a company is looking to set up in Bathurst and hire something like 1,300 people.  I have no idea if that is a good project but as a general rule if it is a good firm paying good wages that would be really good for the Bathurst area as it has lost a number of its large, anchor employers in recent years.

When the Miramichi lost UPM, a number of folks told me they would replace it with small businesses.  I didn’t see that working then and I don’t see it now.  As we have discussed 95%+ of small businesses generate all their business (or substantially all) in the local market.  If a large anchor leaves and pulls $50 million in payroll and supply chain spending out of a community how do you replace that with small businesses?  As one KPMG guy told me yesterday when commenting on why they were in a local community “we come to feed”.  They go where there is a local market for their services.  That’s a good metaphor for small business.  The come to feed.  If there is no local market for them or a diminishing one many will close and that is exactly what has happened in New Brunswick.

Now it is true that a small cohort of small businesses do export and do have growth potential and we have numerous programs to help them do so.  But to replace a UPM you would need dozens of small business exporters to boost their exports big time.  It’s a tough proposition.

I’m not saying anchors are a panacea and I’m not saying we should ‘buy them’ to move into local communities.  There still has to be a firm business case under any project – large or small.

But we have to understand the framework for successful and vibrant communities in the long term and I believe anchor employers are a key part of that.

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I’ll pre-empt some emails and calls by further explaining my data for the column in the TJ today.  In it, I raise the issue of the discrepancy between the estimated annual new immigrant numbers to the Saint John CMA compared to the number of persons in the 2011 Census that said they were born outside of Canada.

These data come from two different sources.  The former is based on tax filer data and the latter from the Census.  However, when there is a big spread in the numbers it likely means a lot of immigrants flowed out via intraprovincial or interprovincial migration.

The table below shows the average annual immigrant estimates from the components of population growth table published by Statistics Canada for the years 2006-2007 to 2010-2011 and the number of persons living in the CMA in 2011 that moved to Canada between 2006-2011.  For the Freddy Beachers you are not here because we haven’t been able to get your urban area designated as a CMA.

*PS – “based on the 2006 Census” means that Statistics Canada uses 2006 as the base  year from which to estimate subsequent annual population changes.

Comparison of estimated annual immigration to actual immigration to CMA areas

Sources: Statistics Canada 2011 Census and Statistics Canada CANSIM Table 051-0047 Components of population growth by census metropolitan area.

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Victor Boudreau is one of my favorite politicians but his comments in the paper reflect the challenge we face when trying to have a substantive debate on EI.   He says:

“No amount of training will change the fact we have seasonal industries,” Boudreau said. “No matter how well-trained our workforce could be, you can’t fish lobster, grow potatoes or draw tourists to our beaches in January. So there’s always going to be a need for a federal EI program that will assist our seasonal industries.”

That might actually be true but even it if is how many of the 100,000 NBers who collect EI each year are employed in these industries?  They haven’t told us.

We do know from Statistics Canada, in an average month there are 4,100 persons working in agriculture across the province and we know there are only 11,900 working in forestry, fishing, mining, quarrying, oil and gas combined.   There are another 30,000 working in manufacturing but how many of those are seasonal?

In addition how many of these seasonal industries are important enough to offer large subsidies to keep them running?  They haven’t told us.  How many of these industries could be served by other segments of the labour market – yes – including the dreaded temporary foreign worker program?  They haven’t told us.

So we dance on while very few folks have any real data on which to draw their conclusions.

Take the guy this morning who wrote how shocked he was that businesses were allowed to use the temporary foreign worker program in areas with high EI usage (this guy was very left of centre – it wasn’t a right wing diatribe).  If he actually talked to one or two businesses he would realize that the high EI usage is precisely why they are using the TFW program.  Many of them can’t get workers to work year round.

Dancing in the light is hard enough (trust me my wife and I have been taking dance lessons for two years).  In the dark it’s almost impossible.

The most compelling argument, of course, is that we shouldn’t abandon these folks.   We get back to that de facto policy of slowly emptying out rural and small communities and ensuring there are government funding programs to ease the pain of decline.  One bureaucrat told me this a couple of years ago.  Let the young people leave and have these programs that will fade away over time as people age.

The trouble with that vision is the bulk of EI users (55%) in New Brunswick are under the age of 44.  Again, we don’t know the age demographic of the annual users of EI because they haven’t made that data public.

I reiterate my view that we should go back to the drawing board on this.  Start with the stated goal of dramatically reducing EI usage – that’s fine.  Maybe we have as a goal moving seasonal industry support right out of the EI program completely.  Whatever.  We start with a goal.  We have as a guiding principle not to make things worse and then we get down to business – with very good data to support the discussions.

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I read a lot of biographies.  In the last six months I have read biographies of CS Lewis, Calvin Coolidge, Catherine the Great, Genghis Khan, Thomas Jefferson, Rasputin, Glenn Gould, Lyndon Johnson, ExxonMobil, Winston Churchill and a book that was essentially a biography of FA Hayek and Milton Friedman.  You will note that all of these folks plied their trade at least a generation ago.

As you can tell, I prefer to read about folks whose legacy has marinated a bit.  I have read real time bios in the past but I find they can be coloured with the direct biases of the writer (for or against) whereas when the writer doesn’t rely on his or her direct experience it tends to be a better product.  But I heard Malcolm Gladwell urging folks to read the Steve Jobs biography and he is right.  It is a tour de force.  Well worth the read.

It, among other things, prompted this column that ran in the TJ yesterday:

Do we need more jerks?

I recently finished reading the biography of Apple founder Steve Jobs.

There is no way to sugar coat it. Steve Jobs was a jerk.

He was tyrant as a boss and belligerent with his colleagues and partners. He would berate the stupidity of ideas put forward by staff and subsequently take credit for them as his own. He didn’t even like customers much and detested market research and focus groups. This nastiness extended into his private life. He would purposely park his car in spaces reserved for handicapped people. He abandoned his first child, backstabbed long -time friends and despite his enormous wealth had virtually no interest in philanthropy.

Steve Jobs will go down in history as one of the world’s most successful entrepreneurs as a result of his successes with Apple and Pixar. More importantly for me, these companies generate tens of billions of dollars in tax revenues every year for governments around the world.

While Steve Jobs was an outlier there is ample research on the personality traits of very successful entrepreneurs and it turns out most are not particularly nice people. They are narcissistic, single-minded, passionate and highly driven and they expect everyone around them to be the same. They will run roughshod over employees, partners and anyone else that gets in their way. They can’t stand incompetence.

Contrast that with the personality traits of the typical New Brunswicker. We are nice to a fault. When you ask someone in Toronto or Calgary to describe a New Brunswicker they will use terms like ‘friendly’ and ‘laid back’. Is there a fundamental incompatibility between highly ambitious entrepreneurship and the very cultural attributes that we work to nurture in this province? Could this be a main reason why we turn out so few highly successful entrepreneurs? Of course the reality is not so simple. While virtually all successful entrepreneurs and leaders are driven and push those around them to strive for excellence – not all of them are jerks. Conversely, there are lots of disagreeable people around that do not build great companies or transform lethargic organizations.

But this is still an important question worth asking. Do we need more hard-nosed, risk averse, narcissistic entrepreneurs prepared to step on a few toes to move their companies ahead?

I extend this argument even further. Do we need this kind of leader across New Brunswick society in government, education and public institutions? Do we need tough guys and gals that push back against incompetence and relentlessly drive their organizations to be world beaters?

I suspect many New Brunswickers would say no. They would say our laid back and friendly demeanour is the best part of our culture. The last thing we need is a bunch of hard drivers making the world uncomfortable for everyone else. But a little discomfort may be just what we need right now. In his excellent new book, Antifragile, Nassim Taleb describes how organizations atrophy and eventually waste way if they are not in a constant state of stress or discomfort. It’s the stress on our bodies when we exercise that makes us stronger. The same holds for companies, government departments, educational institutions and, I would argue, for New Brunswick as a whole.

For most folks, it’s pretty comfortable these days in New Brunswick. Maybe the EI reforms will inject a little needed stress. Maybe the tightening of public spending will help people start to better understand the link between a vibrant economy and their personal quality of life.

But more than the ‘what’, even more importantly, ‘who’ is going to shake us out of our comfort zone?

Maybe we need a few more jerks starting companies and occupying key leadership positions to shake things up. If we don’t have them already, perhaps we should attract them here.

Calling all jerks with a demonstrated track record in leadership or successful entrepreneurship…. have we got a job for you.

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I hope you get a chance to read my column today in the TJ.  I will post it hear sometime next week.  It’s a bit clunky and the argument is thin but the kernel of the idea is one worth exploring.  I was chatting about it with Nadine Duguay, the energetic head of 21 Inc. the other day and that conversation formed the basis of the column.

Do we need more jerks?  There’s a large body of evidence to suggest that a lot of highly successful people are not particularly nice.

I think we should talk about this.

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I used to make the statement that bigger is not necessarily better and we may have to ‘right size’ the population of certain areas of Atlantic Canada to bring it more in line with the size of the economic pie in those areas.  I used the example of Miramichi which had roughly 30,000 population and I said that if it had 22,000 it would have very low unemployment and a healthy – if smaller – economy.  This view is widely held across Canada.  Economists and pundits from Halifax to Victoria told us in the 1990s that all Atlantic Canada needed was a large scale out-migration and that would solve our unemployment and economic problems.  I have speculated elsewhere that former Premier Lord’s inner circle held this view.

However, our theory was flawed (in fairness to me I knew the effect below but I didn’t clearly articulate it at the time in the essence of simplicity):

Take a economic area with a population of 45,000 people, an adult population of 30,000 and total employment of 15,000.  That leaves you with a very low employment rate of only 50% (although this is actually higher than some New Brunswick communities).

The theory states that if we reduce the adult population by 8,000 and total population by 11,000 through outward migration we will end up with:

Now we have an employment rate at the national average and a ‘right sized’ population and economy.  Wunderbar, right?

Wrong.

It turns out that 80% of more of the employment in a local community is actually based on the economic activity (and population) in that community – nurses, electricians, hairdressers, waiters, plumbers, taxi drivers, teachers, etc.

Therefore, if we reduce the population by 11,000, we reduce the overall local economy by a significant amount leading to widespread losses in the 80% of the economy that was hurt by the loss of those 11,000.

So we really end up with:

So we have done nothing to impact the low employment rate (and hence high unemployment rate) but we have unintentionally created other negative impacts.

The other deeply flawed assumption regarding the ‘rightsizing’ of communities is the linearity of public services and public infrastructure costs.     If you drop the population by 20%, the theory goes, you will reduce the cost of these services by 20%.  This turns out not to be the case.  In fact, you could argue that public spending goes up – particularly in the area of income transfers – where EI, social assistance and even workers’ compensation costs rise.  The insurance firms will quietly tell you the number of homes that burn down also rises as economic prospects fall.

The learning here is that we can’t shrink communities to economic health.

Or, to be more direct, we need to spend far more time on the 20% of the economy that is export-based.

The reality is that many of these economically challenged regions are in that place because of a steep decline in their export businesses.  The Miramichi is a perfect example.  The community lost its largest mills (and mining) and tried to replace it by encouraging local small businesses (i.e. the 80%).  It didn’t work.

This brings us full circle to my theory about the need to attract investment and foster more ambitious (i.e. export oriented) entrepreneurship.   Increasingly I include immigration as the third leg of the stool.

The proper ‘right sizing’ of a community will be focused on understanding the mix of local services and export-based activity needed to have low unemployment, moderate population growth and the economic foundation that will allow governments to carve off enough tax revenue to pay for good quality public services and infrastructure.  Further, it will involve having the wisdom to have a proper role for government that doesn’t exacerbate the problems.

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One of the interesting things about Canadian politics is the wide variation between the parties and their ideology depending on where you are within the country.  A Progressive Conservative in Alberta has only the most basic ties with a PC in New Brunswick. They may speak the same language but they face stark differences in the political landscape and in what they have to say and do to get elected and stay elected.

I’d say the same holds for the NDP.  The western Canadian NDP party with its support of uranium mining and oil and gas development seems quite detached from the NDP party in NB.  However, the Nova Scotia example shows that even down here if the NDP wants to win they have to tack to the centre.

The Libs seems to ebb and flow a bit more wherever they may be across the country.

Former Premier Bernard Lord was one such conflicted PC.  When he gave a rousing speech to the Conservative convention he was heralded as the next big thing.  Then, in 2004-2005 when he came out as a fierce, national defender of Equalization – saying in the national media that NB had a Constitutional right to some of Alberta’s oil wealth – he was technically right but he did damage to his conservative bona fides at least in Alberta.   Of course, he keeps floating the idea that he may run again after Harper steps down.  It will be interesting to see if he is able to whitewash that teeny leftist regression from his resume.

David Alward faces the same challenge.  Over 100,000 NBers collect EI during the course of the year.  Thirty-eight percent of families received at least some EI income in 2010.  In Miramichi, it was 48% of families.  In non-CMA/CA areas (out of urban areas), 52% of families received EI income.  I find it hard to believe the Premier of Alberta would take a different stance on EI than Alward facing that reality.  Then again, maybe she would have never been elected in the first place.

A Liberal friend of mine scoffed at what he called the hypocrisy of the NB PCs demanding the federal Conservatives roll back the EI reforms.

If you are an NDP in Saskatchewan or BC you are likely going to be a fan of uranium mining or natural gas exploration and production.   You may put a tougher spin on the development of those industries but if you take a hard line against them – good luck trying to get elected (as opposed to New Brunswick where the Liberals see political advantage from a hard line stance against the development of the natural gas industry – another interesting quirk of politics).

In the end, I think Premier Alward is taking the only stance he could if he wants to stay in power.  Some of the biggest name politicians in NB history have been thrown under the bus for even tinkering with EI (i.e. Doug Young).

It is unlikely the Feds will change their mind anyway but at least Alward will say he vehemently opposed the changes and hope that holds him in good stead.

I hope the Feds will eventually come to the conclusion that the process they used wasn’t the right one.  I’ve detailed my views on this elsewhere.  I believe the EI system is a barrier to economic development in rural and Northern NB but I think government has done virtually nothing to prove that and nothing to show it can be changed without hurting the economy even more.

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Outgoing BoC head Mark Carney had some interesting things to say about outsourcing yesterday:

Bank of Canada governor Mark Carney says the controversial temporary foreign workers program should not be used to drive wages down or to fill lower-skilled jobs. Speaking to the Commons finance committee for the last time before his departure for London in June, Carney said the intent of the program is that it be used primarily to fill needs for high-skilled jobs temporarily, until businesses can train Canadians to take over. He added that the program should concentrate on shortages of high-skilled workers, and not on service jobs and other lower wage categories that critics say are now being filled by foreign imports. The solution to that, said Carney, is for employers to pay higher wages and improve productivity.

Last Spring I went to a course in Boston and had the opportunity to chat with a number of Danes taking the training.  These were all folks involved in economic development in Denmark.  One of the senior officials told me there was a lot of frustration because there was a large segment of the population that didn’t work or only worked part of the year and weren’t open to retraining.    After chatting with her I checked the stats and Denmark has an adult employment rate of 76 percent – one of the highest in the world – New Brunswick’s employment rate is 56 percent (that is 56 percent of adults are working in an average month – I believe the methodology used to calculate this rate is a little different in Europe than here so the numbers may not be perfectly comparable).

But I took her point.  Folks like Carney view the labour market as a kind of machine that you can calibrate one way or another.  There are human factors at play here.

I say this because the temporary foreign worker has been widely used to bring in lower skilled workers – and into areas with high unemployment.  The government is clamping down on this and on paper that makes sense.  However, if employers can’t find workers from the local area – regardless of the headline unemployment rate – clamping down on the TFW program could just end up hurting their businesses.

I still remember a chat I had with an American who was adamantly in favour of legalizing the 13 million undocumented immigrant workers in the U.S.  He told me “these folks are doing the jobs ‘Americans’ don’t want to do” and helping to keep wages and prices in check.

My main point here is that the solution to skills shortages has to be partly about changing behaviours and attitudes.  The chart below shows the number of unemployed New Brunswickers per job vacancy across Canada during 2012.   In this province there were over 10 people unemployed for every job vacancy.  So why does the CFIB survey and other business surveys consistently show the lack of qualified workers as a top problem?  There are 10 available workers for every job.

We spend roughly $2.5 billion on education and training in New Brunswick every year (give or take a few hundred million).  This isn’t just a sorting or matching issue.  We have to understand this in the context of behaviours and attitudes.

What does this have to do with immigrants?  One employer in rural NB told me they work harder and are more productive and eager to get ahead.

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