It’s The Economy, Stupid

I was in the Census database today for a client and found some interesting stuff relevant to the NB Power discussion.  The table shows the average wage for a full time/full year worker in the electricity biz in New Brunswick (2006 Census) compared to everyone (all full time workers).   In NB this industry has a 70% wage premium over everyone else (compared to 53% across Canada).

And it isn’t tied to labour productivity.  We have 8.7 workers in the sector per 1,000 employed persons (all workers) compared to 6.0 Canada wide (44% more workers in NAICS 2211 compared to Canada as a whole). 

NAICS 2211: Electric Power Generation, Transmission and Distribution
 

Source: 2006 Census.

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I see that New Brunswick is not sending a single athelete to the Vancouver Olympics.   I think there are parallels here to my thinking on economic development strategies - small provinces need to focus.  We can be mediocre at a wide variety of things or very good at a few things.

I think this is a metaphor for the broader challenges in New Brunswick.  In a wide variety of areas, we have never been able to concentrate funding and effort - not regionally, not sectorally, not infrastructurally, not with R&D, not with education, etc.

If you strive for mediocrity you get mediocrity.  No one is miserable.  No one is thrilled.  The picture province.

I think that if there was a coherent, focused strategy you could bring the wider public along.  For example, one of the main reasons why there is no appetite to provide some form of tax free zones in Northern NB is that southern NB would react negatively.  We see this demarcation across a wide range of potentially beneficial areas.   But the province could have a substantative health research effort that would be more beneficial to a place like Saint John and at the same time have an industrial tax free zone in Belledune that would be more beneficial to that Northern port.   It’s a kind of quid pro quo. 

But back to sport - and culture - in general.

I haven’t spent too much time on this blog discussing this topic mainly because I haven’t studied it that much - with the exception of the Richard Florida  creativity dribbling into culture phenomenon.

But I think there is something to a province focusing its resources in this area.  I think we need to have heros - sport, music, writers, etc. that identify specifically with New Brunswick.  I am not sure you can engineer this but there must be policy levers that could be used to create an environment where this stuff bubbles up.

I can say from observation that people do not seem to be as attached to New Brunswick as they are to Newfoundland or PEI or even Nova Scotia.  I welcome discussion on this but there is almost a “once a Newfoundlander always a Newfoundlander” mentality whereas many of the New Brunswickers that left this place easily integrated into their new home.

What do ex-New Brunswickers miss about this place? Are there specific foods?  Music?  Landscapes?  What is it about New Brunswick that would make people miss it if/when they leave?  Do we have heros?

A little rambly this morning but I think that I need a better understanding of this link between culture - broadly defined - and economic development in the long term. Do we need to try and engineer more Anne Murrays and Rita MacNeils?

Don’t forget if you aren’t seeing your comment show up in the thread send me a personal email.  I have changed some settings here and a couple of people have had some problems.

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If you like economics - particularly economic theory  - check out this new rap video.  It is a very accurate rap version of the debate between Keynes and the Austrians.

It’s fun.

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I don’t know if I ever mentioned this before (likely as I have been writing this blog for going on six years now) but after graduating with an MBA I came back to New Brunswick and tried for months to get a job in the province (a career starting job).  I sent out hundreds of letters and received no interest.  I still remember a telephone call with NBTel and the lady telling me they got 300 qualified applicants for each available job.

So I headed out west, grew a ponytail and worked for six months flipping burgers at a greasy spoon with my MBA in tow.  During that period, in the kitchen I listened to Bruce Springsteen’s Born In The U.S.A. album over and over again the entire six months.    I must have listened to it at least 10 times a day for 150 days or more.  So I heard the same music 1,500 times in a row.

I raise this because since then I have only listened to that music a handful of times in 18 years.  Yesterday I put on a Springsteen revue in the car driving back from Halifax.   Here are a sample of the lyrics:

From Hometown:

Now Main Street’s whitewashed windows and vacant stores
Seems like there ain’t nobody wants to come down here no more
They’re closing down the textile mill across the railroad tracks
Foreman says these jobs are going boys and they ain’t coming back to your hometown
Your hometown
Your hometown
Your hometown

Last night me and Kate we laid in bed
talking about getting out
Packing up our bags maybe heading south
I’m thirty-five we got a boy of our own now
Last night I sat him up behind the wheel and said son take a good look around
This is your hometown

From Downbound Train:

I had a job, I had a girl
I had something going mister in this world
I got laid off down at the lumber yard
Our love went bad, times got hard
Now I work down at the carwash
Where all it ever does is rain
Don’t you feel like you’re a rider on a downbound train

In this album and others he grappled with the dislocation from globalization and its effects on mainstreet America (mostly New Jersey).   It is possible that subliminally this music has stuck in my craw all these years.

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A regular reader of this blog asked me to comment on the new Conference Board report assessing Canada’s innovation track record.  The Board gives Canada a D and ranks us 14th out of 17 countries.

The Conference Board used 12 indicators to measure innovation performance. From the summary:

The indicator choice was guided by the Conference Board’s definition of innovation as “a process through which economic or social value is extracted from knowledge—through the creation, diffusion, and transformation of knowledge to produce new or significantly improved products or processes that are put to use by society.”

Knowledge production is captured by indicators measuring the number of scientific articles, patents (patents by population and share of world patents), and trademarks.

The transformation of knowledge is gauged by indicators examining technology exchange (the technology share of total exports and imports), the share of gross domestic product produced by high- and medium-high-technology manufacturing, and the share of GDP produced by knowledge-intensive services.

Market shares of selected knowledge-based sectors (aerospace, electronics, office machinery and computers, pharmaceuticals, and instruments) examine, for example, the share of Canada’s aerospace exports in total 17-country aerospace exports relative to the share of Canada’s total economy exports in total 17-country exports.

The trademarks per million population is a new indicator this year. This is a useful indicator of innovation because it allows us to benchmark services sector innovations and non-technological innovations not captured by data on patents.

I’ll just make a couple of quick points:

For the most part I agree with the Conference Board - an innovation agenda is both public and private investment in R&D but also broader public policy to encourage innovation. 

But to the chagrin of some, I don’t agree with the CBoC when they state this:

Innovation policies promote “creative destruction” of the old and hasten the transition to the new. Many of Canada’s industry sector policies are designed to preserve existing industrial production—such as forestry’s pulp and paper sector and auto assembly manufacturing—rather than generate new, highly innovative ones. In effect, these policies are short-term job protection policies that consume important resources that could be used to support long-term innovation. As a result, they work at cross purposes to innovation. Rather than shoring up fading oldsters, long-term innovation policies would help transform existing industries into new ones—such as turning the forestry industry into a bio-chemical sector—and would create new-to-world industries.

I have never understood the Toronto-centric fascination with this topic.  Why can’t forestry, auto manufacturing, etc. be innovative?  The implication of the CBoC and many think tanks is that innovative industries must be biotechnology or IT.  I would suggest an innovation agenda should pivot off our traditional sectors rather than the oft recommended abandonment. 

I think we all agree that bailing out failing business models is a bad idea - in any sector including biotechnology and IT but the forestry industry will always be needed in North America as long as we build homes, read anything in traditional print, heat our homes, etc.  The public policy agenda should be about encouraging world class innovation in traditional industries not their elimination.

I think the CBoC would be wise to make a similar distinction because sometimes policy makers are literal thinkers.

Another point made to me was that the countries that rank high on the innovation scale have a long term commitment to innovation. As my colleague pointed out “Countries that made overall improvements since the 80s, none went from a “D” or “C” rating to an “A” rating in under a decade”.   I have said before that we should avoid the marketing gimmicks “worst to first” etc. and set up the foundation that will have long term impacts.  I am completely in favour of short term milestones - we need to be moving the ball down the field but in the business of transformation - things do take time.

Where does New Brunswick fit into this?

There are a few points.  This should be a nationally driven thing.  Many of the indicators are driven by federal policy but a national innovation agenda does risk putting provinces like New Brunswick at a disadvantage.

Example:  When I asked a colleague of mine one time while something like 90% of the federal dollars from the sustainable technologies fund went to Greater Toronto area companies I was told “that is where they are located”.  When I asked why New Brunswick companies only got $700k out of the $5 billion Technology Partnerships Canada fund (at the time) I was told there were not any good applications from New Brunswick.  Same thing for federal R&D.  When I asked why New Brunswick gets virtually no federal health research dollars, I was told there is no capacity here to receive it (i.e. the best researchers and infrastructure are not here). 

My point is that an innovation agenda, from the vantage point of New Brunswick, needs to be about seeding innovation as much as nurturing it.

Gotta go to a meeting - ran out of time.  Hope that last point sticks.

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I had an interesting conversation yesterday with the owner of a small but growing computer animation/games development firm located in the province.  We were talking about his industry in New Brunswick and opportunities for growth.

We talked about the example of Boulder, Colorado which has built up a very strong base of high tech industries (biosciences, IT and aerospace) in a fairly remote place (relatively speaking). 

The Boulder, CO Metropolitan Statistical Area has a population of just over 280,000 and it claims to have over 16,000 people working in IT at an average wage of over $100,000 per year.

I think they do just about the best job of integrating quality of life as a business attraction feature of any place I have studied.  Reading their promotional materials, you would want to move there - and you would be sure that you could attract top notch employees there too.

The old line from the 1990s that quality of life is a secondary consideration because the guys making the decision about where to invest will not be relocating - is losing its resonance.  Companies now know that being in a location that can attract people is fundamental to long term success particularly in knowledge-intensive industries.

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I’ll be glad with the NB Power generation assets sale is behind us.  It’s getting downright silly out there. 

David Coon and Elizabeth Weir are for the deal, Janice Harvey is bitterly against it.  People are planning to boycott Ganong because his panel supported the deal?

We get our oil from Hugo Chavez. And people are going to boycott David Ganong.

All new power coming on the grid in the past few years (wind, replacement power for Lepreau, etc.) all from outside suppliers like the proposed HQ deal.   Not one word of protest.  

I talk about a few of the more serious public policy issues in my column this morning.

I said way back when that the Heritage Pool idea was an excellent mechanism to encourage more energy conservation in New Brunswick.  Good to see that Elizabeth Weir thinks the same thing.  Conservation is a good idea regardless of the source of our electricity.  It will just make the rate freeze even more beneficial to residents.

I told someone yesterday that if I had come back to New Brunswick in 1992 and started to work in a company (one of the 300 I applied to and didn’t get even an interview), worked my way up that company and never had any interaction with NB Power, I suspect my first reaction to the NB Power/HQ deal would have been negative.  Like my biologist friend, I would also think it seems counter to the idea of self-sufficiency to outsource power production to another province. 

So I understand those that are opposed to this deal but I can’t envision a scenario where I would be bitterly opposed and deeply emotional about it.  I would trust the consensus view from experts.  I am sure of that.

The only way I wouldn’t was if I had something to loose.  So I understand Tom Mann’s disapproval (loss of unionized jobs), David Alward’s (political), some of the wind energy consultants, etc. 

But I have personally taken a number of blows on this that I am disappointed about. I don’t know why this had to turn personal.  We could and should just agree to disagree agreeably.

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I was reading the latest RBC Economics report on provincial economies earlier today and I came across some interesting narrative.

For New Brunswick, RBC reports that a massive government infrastructure program and income tax reform “has offered a substantial offset to the economic weakness in 2009, propelling growth in non-residential investment and contributing to New Brunswick being one of only three provinces expected to experience employment growth“.

For Prince Edward Island, RBC concludes: “Fortunately, this weakness [in tourism and seafood] is almost
entirely offset by significant growth in the province’s emergent technology industries, particularly aerospace manufacturing and bioscience“.

For an economic development guy like myself, this is a truly instructive example.  PEI pours tens of millions (with help from the Feds) into developing IT, biosciences and aerospace sectors essentially from scratch and now they are entirely offsetting the declines in tourism and seafood industries.  These sectors are not oil & gas, they are not based on natural resources, they are based on knowledge and building a value proposition.

Now, while I know that the RBC report does not cover the waterfront it is interesting to note they single out massive government spending on primarily road infrastructure and tax cutting in New Brunswick and specific ‘emergent technology industries’ on PEI as the reasons why these two economies faired reasonably well during the recession.

I will be quite happy when the day comes that RBC reports that “emergent technology industries” are driving growth in New Brunswick.

There are no shortcuts.  Spending $800 million more on pavement may be important and cutting taxes may be important but in the long run (again consider my personal biases here) building these “emergent technology industries” is far more important because they providing sustaining revenue.  The stimulus monies need to be paid back.  The new industries from good economic development policy and effort generate ongoing streams of revenue.

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I just listened to an excellent podcast featuring Jared Diamond and his latest publication Natural Experiments of History. Diamond is the guy who wrote Guns, Germs & Steel and another book I read called Collapse -both highly entertaining and informative.

The new work looks at a number of examples throughout history of why certain peoples or countries develop at a different pace.  He looks at Haiti vs. the Dominican Republic or whether or not Napoleon was good for the countries he took over. 

By modelling these natural experiments we can attempt to determine what large factors were influential to development and then try to apply the learnings.  Of course you have to make every attempt to control for other factors that were at play before the perturbation but I found the concept fascinating.

For example, think about Atlantic Canada.  When a few people dare to question whether or not joining Confederation was the best thing to do for this region, the typical response from central and western Canada (and many here) is indignation.  Atlantic Canada is part of one of the most successful and prosperous countries in Canada.  Furthermore, you (we) have been on Equalization for decades.  Where would this region be if not for its being part of the greater Canada?

I wonder what Diamond would think of that.  If you used his model you might find that Atlantic Canada might have been far more prosperous as a separate country.  If you read Donald Savoie’s work, you see clearly that many of the leaders at the time in Atlantic Canada predicted this region would wither and be entrenched as the poor region of the country due to Upper Canada’s political domination.  And it’s hard to deny that we have become the entrenched poor region of Canada in the intervening years.

To many folks this is an inevitable consequence of history.  The Maritime region is in a bad geography.  It has relatively little oil and gas (at least until now).  It is physically far from the centres of power and control.  Too bad.   Every country has poor areas.  Accept your destiny.

But I think that is too simplistic.  If I had the cash, I’d get a guy like Diamond to look at it. Why didn’t Halifax become Boston?  Why did this region (and I guess we can include northern Maine) stagnate while other areas boomed?

As I said before I think the next 50 years will be less kind to Atlantic Canada (if you can use that term) in terms of the generosity of the federal government.  Notwithstanding the Constitution, there is less connection here with Ottawa than ever before and and increasing number of the those weilding the power have never even been to this region.  That will only increase over time. 

I know a lot of you bristle when I talk about this stuff but I think there are short, medium and long term policy issues that need to be discussed.  Short term, this region needs a serious economic development effort that leads to significant private sector investment and builds up the economy.  Medium term we need to become less dependent on the federal government (we are at 40% of our budget in NB coming from the Feds) and longer term we need to understand where this region fits in the Canada of the next 100 years. 

I don’t think it is acceptable that this region repeat its role as the labour market incubator for Central and Western Canada.  For one thing we are having far fewer children to send west.  For another, there are longer term structural challenges associated with this stuff.

I’ll get back to the nitty gritty of economic development again but I still think we need to talk about this stuff.

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When I first went to the States in 1985 to university as a 17 year old freshman, I remember having long talks with political science majors in the dorm late into the night.  I remember thinking some of the crazy ideas (to me at the time) they were putting out there such as ‘workfare’ and, somewhat paradoxically the merits of running up the debt to keep taxes low (this was in the Reagan years).

Just about everything they advocated came to pass eventually.  My point is that the ideas debated in universities today find their way into the policy making of tomorrow. 

From an op/ed today in the TJ:

In reality, equalization transfers cash from taxpayers in high-cost provinces to governments in lower-cost provinces. The program also allows for lavishly subsidized services where they ought not to exist and thus acts as an incentive to poor provincial policy.

Mark Milke is the director of research for the Frontier Centre for Public Policy

This is the smart new line of thinking among the growing anti-Equalization crowd.  Before the arguments were based on trying to make the point that Equalization is actually a disincentive for provinces to push for cost containment and economic development.   That didn’t get much traction so the new line out of western academia is that Equalization is fundamentally unfair to the rich provinces.  I didn’t post his full comments here but you should read it.

And if that doesn’t work, they will try other arguments.

The point is that there are clear warning signs that the Equalization program as we know it likely to be radically alterned in the near future (Bernard Lord’s constitutional protest notwithstanding).  I have argued that for years there already has been an unholy quid pro quo where the richer provinces get the bulk of the  economic-development-related dollars from the Feds (EI, Invest in Canada promotion, TPC, etc.) and the poor provinces get Equalization but the thinking out of the West is even more blantant.

What they want is a full reset.  Take the poor provinces of the equalization life support, let the migration begin in droves, reset government spending around a much lower equilibrium point in the poor provinces.

I have also predicted here that by 2040 or so there will be a ‘Royal Commission on the future of the Maritimes’ that leads to the amalgamation of the three provinces and a radically reduced government and subsidy model for the region.  Many folks scoff at this prediction and I may be wrong but I watch trends as much as anyone and with population stagnant and declining and the cost of government rising by upwards of three times the rate of inflation - increasing amounts funded by federal transfers - eventually something’s gotta give.

I have also said this timetable could be accelerated if there is a prolonged recession and economic stagnation in Canada.  We may be approaching that time.

That is why I agreed with the self-sufficiency agenda.  It was the right strategy - 10 years too late.  During the Bernard Lord period in office (and the late Liberals after the budget balancing act of the early mid 1990s), we had a golden opportunity to build a new economic development model in the province based on fostering the growth of higher wage industries and keeping our cost structure moderate - weaning off Equalization.  Instead we didn’t foster new industries and we spent like drunken sailors.  The NB budget rose as fast as the have provinces during that period even though our population stagnated.

I don’t have a crystal ball but it doesn’t look too good from the perspective of government.  $800 million deficit in NB, lower tax base to pull from, the federal government warning about serious belt tightening to come and not as much business investment across North America for which to compete.  Think about it.  Just five years ago, there was such a labour shortage in the US - we could have attracted dozens of wind and solar manufacturers and no one would have noticed - now those companies are the most sought after economic development projects in North America.  I could say the same for data centres.

I’ll end for now but any government in this province that thinks Equalization is going to save their bacon moving forward is mistaken.

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