McKenna 20 years later: Learning from his legacy

In recent weeks I have been working on a project that has led me to chat with a bunch of business and government folk that were prominent in 1980s/1990s New Brunswick.  In all cases the conversation eventually got around to Frank McKenna.  It always does.   Thirty years ago this month, Frank was elected as Premier and 20 years ago yesterday he stepped down as Premier – keeping a promise not to stay in power more than 10 years.

I have written a lot over the years about McKenna.  He reined in public spending.  He championed New Brunswick across Canada and beyond.  Who can forget the stories of taxi cab drivers in Toronto invoking his name or of him hustling CEOs on Team Canada trade missions much to the consternation of other Premiers.   In general, he spent a lot of time trying to convince New Brunswickers that we were just as good as any other Canadian.

In many ways his post-Premier career has been even more influential.  He hobnobs with Bill Clinton and other global leaders.  He is highly visible on many national issues.  His perch at the TD Bank has provided a platform to continue championing New Brunswick.

What is his legacy?  It’s hard to say.  The fact that Mckenna is a top 100 baby name in Canada for girls may or may not have anything to do with the guy called “the tiny, perfect Premier” back in the day.

There are certainly few people in New Brunswick who were adults in the 1980s and 1990s who don’t have a developed opinion about him one way or the other – I would say mostly a good opinion although I run into people who are still bitter about amalgamations, forced RCMP, etc. and even some who continue to believe he was too focused on attracting industry and not enough on helping poor, old NB small businesses.

My only beef with McKenna – stated at the time and many times since – was that he didn’t leave much infrastructure behind when he left.   McKennaism wasn’t embedded in government – not political or bureaucratic.  Bernard Lord actually ran on  a platform that repudiated McKenna’s economic development program talking about a “made in New Brunswick” solution instead (ironically, of course, Lord benefited from even more call centre jobs than McKenna as most firms attracted here in the mid-late 1990s only reached full expansion by the early 2000s).

This is the challenge with the cult of personality.  It can be a wonderful tool for change at a moment in time but can lead to an ongoing overhang – every Premier since McKenna has been compared to him – and not favourably.  One Premier told me he was dogged by McKenna’s shadow in office.  Fair enough.  U.S. Presidents get the same treatment.  All Republican Presidents get compared to the Gipper.

We should learn the lessons of Frank McKenna:  1) There is value in having a determined, charismatic leader during times when big changes are needed; 2) New Brunswickers can and should be #NBProud; 3) New Brunswickers can compete and win when it comes to attracting global firms; 4) true political success happens when change is embedded into the system – which did not happen with McKenna.

 

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If we want to be globally competitive, we have to take that term seriously

The City of Saint John recently released a study they had completed looking at the property tax system that makes some interesting recommendations most notable for a significant rise in taxation of heavy industry, the assessment of equipment and machinery as part of the overall property tax assessment and an increase in municipal control over rate setting.   If we are going to have these debates we need to do so armed with good data.

My big theme these days is that New Brunswick is far more exposed to the global economy than ever before.  It competes with other jurisdictions with the export of our products and services, on the attraction of talent (everything from home care workers through to Phds), for federal government and private sector funding, for business investment, and for general influence over policies that can have profound impact on us.

In this environment it becomes incredibly important for us to know who our competition is and what set of policies and efforts are required to ensure we are competitive?

I am particularly concerned with smaller urban centres across Canada.  There is a growing body of data that suggests that many of them are at high risk over the next 10-20 years of slow and even negative growth.  Across Canada, the largest urban centres are growing employment at a rate 2.7 times faster than urban centres with between 50,000 and 99,999 in their employed workforce and 14 times faster than the smallest urban centres (with under 50,000 workers).
Employment growth between 2010-2015 by size of employed workforce
All urban centres across Canada (CMA/CA)largeurbs
Source: Statistics Canada CANSIM Table 111-0007.

First, this is a fairly small timeframe – 2010-2015 – doesn’t mean we can project out for the next 20.  But it is a long enough time to allow us to speculate.  If you look at the data closer you see that many mid-sized urban centres in the orbit of the largest urban centres (such as Guelph, Waterloo, Drummondville, etc.) are doing quite well as are those that have a core, high value geography-specific industry (such as Estevan, Okotoks and Camrose) but urban centres that don’t fall into these two categories are struggling a lot more.

Why?  There are few possibilities.  First, historically these smaller urban centres relied almost exclusively on natural population growth and intraprovincial migration – very little immigration – to grow (BTW this is more of an eastern Canada phenomenon).   Now those two sources of population growth are drying up and they have to compete with the largest urban centres to attract immigrants – a much harder proposition.  The tightening labour markets are leading to the loss of industries that don’t “have to be there” for lack of a technical term.  Eventually it could lead to much greater decline.

Secondly, these communities are facing even more competition as discussed above.   I could list off for you more than a dozen firms in New Brunswick that have expanded manufacturing and other operations outside the province in just the past few years because in their calculus it made more sense to expand out there than back home.  I get that and government shouldn’t try to brow beat firms into bad business decisions.

But, we need investment here.  According to KPMG’s annual report on competitiveness around the world, New Brunswick firms already pay high property taxes (see example below).  Now, there are lots of debating points here: 1) property taxes are not a huge part of overall operating costs; 2) this particular metal fab firm may not be ‘heavy’ industry as defined in the new report; 3) If Saint John had the flexibility of U.S. jurisdictions it could selectively reduce taxes for ‘strategic’ industries, etc. etc. etc.  So, I understand the debate.

Let’s just make sure that when governments make decisions – they have the best data to back up those decisions – and that data should be focused on our competitiveness as a jurisdiction.  And not just for business.  We’re going to need to attract 150,000 people to our shores over the next 15 years (Campbell forecast) – they will want to come and stay in communities that are ‘competitive’ – taxes, quality of life, quality of schools, green spaces, etc.

Annual property tax bill from a 100-person metal fabrication facility*proptaxsj

 

Source: KPMG 2016 Competitive Alternatives.  Based on a 100,000 square foot facility on a six-acre site.   Shown in U.S. dollars.

 

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Chasing Amazon? May I suggest you consider Facebook instead?

The competition to attract Amazon H2 and its 50,000 jobs is reaching a fevered pitch.  Some experts have suggested the total value of the incentive deal will reach $5 billion ($100k per job) or more.  Amazon has even stated that it expects a massive incentive deal.  Some jurisdictions will undoubtedly waive all corporate taxes – income, sales, property, etc. and also offer some kind of personal income tax rebate (i.e. a grant to the firm based on how much personal income tax is expected to be generated).

As I have said before this amounts to lottery-mania.  All the Governor ‘war rooms’ established and all the gimmicks (remember the town that renamed itself Google on a temporary basis to attract that firm?) will end up being a fun distraction (and a costly one).

May I suggest, as an alternative, that you consider attracting Facebook instead.

Facebook has already announced it will be hiring several thousand new staff to monitor content and one expert suggested this would only be a drop in the bucket – he indicated 10,000 or more may end up being needed around the world to ensure all that fake news you click on or like is put into context or deleted outright (did Bill Murray actually benefit from New Brunswick’s legendary kindness?).

New Brunswick has a cybersecurity cluster.  It has a long history with back office and customer interaction centres.   It is rapidly boosting its immigration to ensure a future pipeline of workers.  It is almost a certainty that a 1,000 person Facebook cybersecurity/content centre would thrive here.  As a cherry on top the NBCC and CCNB would be thrilled to churn through hundreds of graduates from a customized content moderation/security training program.

After all, like the lottery, winning $100 million would be nice but the free tickets, $10 and $100 prizes are in large part what keeps us coming back for more.

 

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We need more investment: A lament for Energy East (?)

 

One of the reasons why the New Brunswick economy has been so draggy in recent years has been the lack of big scale capital expenditures.  For the better part of 30 years, starting with the Confederation Bridge, at any given time New Brunswick could count on having several of these large scale projects going on at any given time.  We had pipeline construction, new energy infrastructure, Lepreau refurbishment, a $2.4 billion new potash mine, a new LNG import terminal, wind energy investment, etc.  In the past few years, however we have had very little of that big scale investment.

If you back out public sector capital spending (which is down but has remained quite high), public sector investment in non-residential tangible assets averaged well over $3.2 billion/year. Now it is down to below $2.2 billion/year.  That may not seem like much to some folks but if you suck out $1 billion/year in CAPEX it hurts the economy now and dampens it for the future.

The following table shows this CAPEX trends but expressed as a share of national capital expenditures.  For most of the past decade, capital spending in the private sector in New Brunswick averaged more than $18 out of every $1,000 spent across Canada.  That is now down by 41% to only $10.67 per $1000 spent across Canada.  Public sector spending is still roughly at par with the rest of the country as a share of GDP (NB is roughly 2.1% or so of national GDP or similar to $20.47 for those of you who can’t follow my confusing math).  Private sector CAPEX, by contrast, is half what it should be.

capex

 

And this matters for more than one reason.  First you lose the economic impact of the investment itself (construction) but second most of these large projects generate an ongoing stream of economic activity as the asset is amortized over time.

This is what I tell mayors in New Brunswick.  There are two kinds of building permits.  The first kind is reacting to what is going on in the economy (think residential) and the second kind is driving new economic growth (think a new manufacturing facility).  You can build all the new houses you want but it won’t lead to the creation of a new manufacturing facility but if you build a new manufacturing facility it will create the demand for new housing.

So, if New Brunswick had the same level of annual capital expenditures since 2010 as we saw the previous decade  There would be nearly $8 billion more deployed right now across the NB economy.  That economic boost would have been significant.

As we look to the future we need to encourage more investment.  The loss of Energy East is just another example of a project that would have provided some of that needed new CAPEX.

 

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A possible tax reform solution: Tighten the rules around equivalency

From the start the federal government has couched the issue of tax reform around fairness.  Why should two people earning the same income and doing the same work pay different levels of tax just because one uses a corporation to receive and distribute income?

If this is really the issue, then the solution should be to tighten the CRA rules around equivalency.  If you have two lawyers earning the same income, doing the same work for the same ‘client’ then maybe they should pay the same taxes.  The problem is that if you have one lawyer that earns $150k working for a government agency and another earning $150k working for herself – with no guaranteed income and facing costs not faced by the employee – there is no way they can be considered equivalent.

As for the active vs. passive income argument – small business owners should be given fairly wide latitude to store up income to be spent in the future.  And the sprinkling thing?  There are already rules around this.  Tighten them up a bit respecting that spouses do play an important role in most small businesses.

At the end of the day I believe there is a solution here that would make things more fair without taking away the risk premium that we need to encourage entrepreneurship.

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The Amazon headquarters sweepstakes: It’s fun to play!

Why would someone buy lottery tickets every week, week in, week out for years – even decades?  They know intuitively the chance of them winning the big one is infinitesimal but they get out there every week.  In fact, the larger the jackpot -and hence the more unlikely the chance of winning – the more people who play.

If you ask them they will say: It’s fun to play.

The little thrill every week from seeing if your string of numbers matches the winner is worth the investment.

The same process is playing out with the Amazon HQ that has been dangled around.  Never mind that some suspect that Amazon actually has already selected its  city and is trolling around to get a better incentives deal.  Even if it was an actual competition (which it probably is) the chances that your community will win the big one is infinitesimal.

Google the story.  You will find City Councillors and mayors from Biloxi to Halifax to Vancouver all eager to serve up a bid.  Many, like Vancouver, are hiring whizzy firms like Deloitte to craft the value proposition.  Paying tens of thousands of dollars for a chance at billions?  Why not?

It’s fun to play.

For a few weeks, economic development is front and centre.  Local newspapers are covering the story of the Halifax bid (actually the Canadian Press).  Detroit thinks Amazon will restore its former glory.  Windsor, Ontario wants in – talking a joint pitch with Detroit.  The mayor of Chicago wrote an op-ed stating why it should be in the Windy City.  Even Moncton should bid – jointly – a virtual HQ – everyone wins!

Cynics might say this is all just a waste of time and resources.  Over a two month period likely millions of dollars – maybe tens of millions – will be spent – time and effort on bids.  Why not focus your resources where you have a better chance of success?

I am not as cynical.  Having been involved in dozens of big ‘pitches’ over the years (including writing a proposal to attract a Mercedes manufacturing plant in the early 1990s), I believe they have the side effect of helping communities hone their value proposition for investment and uncover gaps that are holding back growth.  This intelligence – gleaned while buying the lottery tickets – helps down the line.

 

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The power of giving your time to causes that matter

Maybe it’s because I studied under a bunch of Libertarian professors in university but I have never been comfortable with the idea that government should have the exclusive right to try and solve all of society’s challenges.   A couple of years ago a friend of mine had occasion to see the IWK hospital up close and personal as his child required the specialized services.  He really appreciated how they helped his child and decided to get involved in fundraising for the organization.   He came up to me and another guy and asked about our interest in supporting the cause.  The other guy quickly stated “that’s why I pay taxes” and refused to offer any support.

I believe we rob ourselves of something very important when we outsource all of the good stuff in the local community to the ‘government’.  My daughter recently did a video documentary about several charitable organizations in Moncton and I drove her around while she taped interviews and got footage.  I was reminded just how many volunteer-led organizations there are and how important they are to the well functioning of Canadian society.

The data from Statistics Canada has not been updated since 2013 but the figures that year were not particularly encouraging.  New Brunswick had the second lowest volunteering rate in the country (only ahead of Quebec) and the rate was down significantly from the past two survey periods.


volun


 

 

A closer look at the data by age group finds that 25-44 year olds in New Brunswick volunteer considerably less than their counterparts across the country (as measured by the share who volunteer) and, strangely, those aged 55 to 64 – among whom only about 1/3 actually volunteer compared to 56% among the 15-24 age group.

give

 

As New Brunswickers get older this should open up a golden opportunity for us to give back.  We are more affluent now than ever before.  We will live longer than at any time in history.  It can’t all be about eating, golf, TV, easy chairs, vacations and drinking coffee at Starbucks.  Only one in three 55-64 year olds do any kind of volunteering at all in New Brunswick? We can and must do better.

In the modern world we try to achieve meaning in many different ways.  We travel the world and expose ourselves to different experiences.  Hiking in Tibet or laying on the beach in Cuba may give you a thrill but you might also find the meaning you are looking for right here at home volunteering at a soup kitchen, helping a child learn to read, coaching youth sports, teaching Sunday School or by helping an immigrant family adapt to their new country.

Why does a blogger about economic development care about volunteering?  Glad you asked.  We need to grow our economy in the coming years.  That will require more young people to stay and build their careers here and it will require the attraction of tens of thousands of young people and families from abroad.  In addition, we have many challenges – on the ground, right now like literacy, obesity, child poverty, etc.  We need mentors, we need teachers, we need charitable givers, we need those willing to give a helping hand.  It makes society stronger and strengthens the conditions for economic growth.

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Cry havoc, and let slip the dogs of entrepreneurship!

I had a conversation recently with someone who thought we could learn from China as with think about economic development in Atlantic Canada.  He was an admirer of all the state intervention, planning, the 20-year plans to be the world leader in shipbuilding, green energy, etc. etc. etc.   When I look at China I have a different view.

My perspective is captured nicely in an Economist article this week (behind a paywall) that discusses in detail the massive rise in entrepreneurship in China over the past decade.  There are more unicorns in China (startups worth $1B or more) than in the United States.   Chinese entrepreneurs are disrupting almost every sector of the economy: transportation, finance, health care – they have leapfrogged North America in the development of data-driven health care solutions.

While we could debate that all day I think most people would agree that entrepreneurship is key – both inside established firms and the new start-up variety.  And, I think there is a growing pile of data to suggest that New Brunswick in particular is not seeing that kind of ambitious, disruptive entrepreneurship.  Don’t get me wrong, we have some examples – but I am talking about on a scale that moves the needle.  And not just ‘tech’ startups – entrepreneurship and disruption should occur across a healthy and vibrant economy from construction to personal care shops.

Take employment growth in small firms as one proxy.  Across Canada there has been healthy growth over the past decade in firms with less than 50 employees.  In New Brunswick, employment in small firms is down.  The spread between the national growth and the New Brunswick decline is substantial.

sme1

 

While this is not a perfect measure it is an important one.  If the province had hundreds of new firms starting up over the past decade driving innovation, new technology and business process improvement, we would be seeing growth in the number of small firms and their employment.

Now, I realize some of you will correlate the decline in small business employment to the stagnant economy and population.  That is true but I would argue it is getting increasingly hard to tease out causality here.

In the end I would like to see a new generation of entrepreneurs emerging in New Brunswick that want to shake up the status quo across all industries.

I’d like established firms to rediscover their entrepreneurial verve.  Many have gone for years floating on comfortable margins, building up a little wealth and they have lost that lovin’ feeling.  Do you remember what it was like to finish up a crisis planning meeting at 1:30 am?

The other thing about the Chinese is that they have global ambitions.  Just about all the firms discussed in the Economist article are already buying up firms across North America and Europe.   They might just be coming for you.

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Think Big. It is time for a little more ambition across the Maritimes

You might have heard that Amazon is shopping around a 50,000 person head office to U.S. and Canadian jurisdictions with one million or more in population.   It is easily the largest single firm economic development project shopped around like this in the past decade – maybe in my lifetime.  Conservatively those 50,000 jobs will boost employment in other sectors by at least double that amount and one economist said it would boost state-wide employment by 5x.  I’ve always been a little skeptical of those massive multipliers not least become some of the new growth will likely displace existing economic activity.

Anyway it got minds buzzing a bit even here in Atlantic Canada.  I received multiple, and fairly serious, emails asking me if there was any possible chance?   Nope.  In fact, my suspicion, echoed in the Economist magazine this week, is that Amazon already knows where it wants to go and is using this whole city bidding war to boost the eventual incentives it will get in the city that it already knows it will be setting up in.   But I can be cynical at times.

The whole ordeal prompted an overly excited columnist at the Times & Transcript to pen a surreal column about the entire Maritime Provinces putting in a joint bit to carve up the head office from Saint John to Lunenburg linked together by a high speed train moved along by pixies sprinkling their dust.

Pixie dust aside, I do believe a project like this – if phased in over 5-7 years could be easily done in a Halifax or maybe even a New Brunswick city as people will move to work in an Amazon head office.   When RIM (remember RIM?) announced it would expanding in Halifax it asked employees in Ontario if any would like to relocate and as it was told to me they were inundated with requests.  But no big firm is going to take a flyer on a small city and, BTW, no small city or province can stump up the billions of dollars that Amazon will receive to locate in Toronto or Atlanta.

But it does provide an opportunity to talk once again about ambition.

In the 1940s my grandmother told her sons they would have to leave the Miramichi if they wanted to be successful.   In the early 1990s I was told there is no way any auto manufacturer would ever want to set up in New Brunswick even as they set up in droves in the most podunk off-the-beaten track places in the southern United States.  Even the big firms that set up here got the usual “after the subsidies dry up they will be gone”.  FYI – they are almost all still here – UPS, ExxonMobil, Air Canada, Fairmont – all the big firms that set up in the early to mid 1990s.

In fact, I have heard this refrain my whole career.  Why would anyone want to move to New Brunswick?  Why would an immigrant want to settle here?  They will just get their PR and leave to find greener pastures.  Why would a national or international firm set up here?  There must be some backroom deal, some neutered labour laws – something or else they would not be here.  Why would an ambitious entrepreneur set up here?  They’d be better off just moving to San Jose or Waterloo.

Have a little ambition, folks.  Flip the question.  Why wouldn’t they want to locate here?  Look at this place – 10 minute daily commutes, buy a big house and a cottage on the water here for what you pay for a small house in Toronto.  Be able to pick up the phone and talk to a mayor or business leader – try that in Chicago.

Our negativity about ourselves is part of the problem – it is self-reinforcing.  It’s like sharks smelling blood in the water.  If you don’t even believe in your community why would anyone else?

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Pitchforks protecting Plutocrats? Don’t mess with the entrepreneurial risk premium.

Angry-MobI’m fascinated by how the proposed federal tax changes meant to “level the playing field” and “ensure that the richest 1% of Canadians pay their fair share of taxes” is playing out in the media and in the public at large.

I am not exaggerating when I say that 95% of all the articles and commentaries on Bill Morneau’s tax crusade have been negative – not just in the National Post – in every newspaper and media source I have tracked on this.  And, further, all the comments on LinkedIn and Twitter have been overwhelmingly negative.  Almost all the economists quoted have been against the changes and the few that were positive seemed to qualify their support – there has hardly been a full-throated supporter other than Morneau himself.  Even the general public on my social media feeds – not business owners or wealthy people – are posting negative articles and commentary.

I’m actually not going to speak to the merits or not of these tax changes.  I only have one small contribution to the debate.

Don’t mess with the entrepreneurial risk premium.  We need public policy to ensure there are still lots of folks willing to plunge in and take the risk of becoming an entrepreneur.

As I understand it, Morneau wants to tax surplus income that is either left in professional corporations to avoid paying taxes or sprinkled around to family members who didn’t really earn it to lower the tax liability.  The government uses the example of the doctor who accumulates hundreds of thousands of dollars – even several million – in the professional corporation without paying much tax on it (or sprinkles it around) and compares that doctor to another who just draws a salary from the local health authority.  It’s ‘unfair’ that the latter will pay an effective tax rate substantially higher than the former.

The opponents to the tax changes say that potentially the vast majority of small businesses will get caught up in the new tax regime even those earning $70,000 per year.  Further, they suggest it will be almost impossible to truly determine ‘active’ versus ‘passive’ income.   Take the example of a small business owner who has accumulated $500,000 cash on her company balance sheet over a 10 year period.  Is she hoarding that income to avoid paying taxes or saving up for a big expansion?  How can you tell?  What rules could you put in place to clearly differentiate between active and passive income?

As for income splitting, there should be some rules around this but again it would be hard to say that farmer Jane’s husband and kids were not ‘earning’ the money they were ‘sprinkled’.

Without being a tax expert – by any stretch – I suspect the vast majority of small businesses will not be impacted by the tax changes.  Small amounts of sprinkling will likely be permissible and leaving profits in a small businesses for any kind of legitimate business reason – expansion, risk of a dry spell, etc. will be left alone.  They keep using the example of that poor old doctor – a radiologist say – that makes $1 million and leaves $700,000 in his firm without paying tax.

I’ll make a quick point before coming back to my main theme.   If a 20/20 rifle would suffice don’t use a bazooka.  I’ve seen this a lot in government recently.  They want to target a specific audience for some reason but make changes that impact everyone.  If you want to address what you perceived to be a highly specific issue – don’t cast a wide net.  If there is a very small cohort of people that are truly using corporate status in a way that you deem inappropriate – have that debate.

Don’t remove the entrepreneurial risk premium.

You want people that own small businesses to take entrepreneurial risk.  In New Brunswick, there are something like 25,000 business establishments with employees.  That is one business owner for every 30 people living in the province.  There are thousands more that are owner-operators – electricians, plumbers, consultants, etc. that have no employees.   These businesses are essential to the well functioning of an economy.  They serve niches that big firms can’t or won’t.  They keep big firms from bullying local markets by offering alternatives.  The range of small businesses – niche retailers, restaurants, franchise holders, etc. is impressive and should be encouraged.  Our economy is stronger and our quality of life is enhanced by having broad choices – choices made possible by all the small businesses.

Plus as I have pointed out elsewhere we need some of those small businesses to breakout and become large – serving national and international markets and generating export revenue.  Somewhere in Canada there was a single Hakim Optical.  Now Hakim has operations across Canada.

If an unintended consequence of these tax changes leads to fewer  entrepreneurs – people deciding it is just easier to work for someone else, the economy and our society will be worse off for it.

 

 

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