It’s The Economy, Stupid

After reading the piece on Lise Ouellette this morning in the TJ  it got me back on theme I have written about before - what is a Tory in New Brunswick?

It seems to me that a fundamental opportunity would be for the Tories to take up the empowerment of local regions within New Brunswick mantle - a la the Finn Report but I have heard many Tories argue against the principles of that report.

David Cameron got elected talking about transforming the way government is done in the U.K. by pushing decision making and authority down to the local/regional level.  

The argument in New Brunswick has always been that we are ‘too small’ and you can’t have all that ‘duplication’ and that is why - take a stab at it - 95% of all government decision making is done in Fredericton.  Even municipal funding is primarily controlled by the province.

A city manager of one of the big three municipalities in the province once told me he hadn’t seen a single official from the provincial department overseeing local government in three years.   I won’t say which city or which government but I think you get the point.  

While that seems like a relevant point - that scale matters and that is why everything is done in Fredericton - the reality is that people live in communities.  Economic development happens in communities.  Schools are in communities.  Hospitals are in communities.

When I went on my cross province interview tour last year for a project I was struck by just how quick everyone from Saint John to San Quentin was quick to blame Fredericton (and secondarily Ottawa) for their problems.  It seemed to me that it has become easy and convenient to do this.

I’d like to see the Finn Report debated, maybe tweaked and then brought into power.   What do we have to lose?  When the county system of government was scrapped back in the 1960s, Northern New Brunswick’s population was growing at a healthy rate.  Now it’s in fairly steep decline.  We have equalized government service delivery, yes, teachers in Tracadie now make as much (within a range) as teachers in Moncton but we have extracted any control over the destiny out of these areas and placed it in Fredericton. 

The hope is that a beneficent leader will come along and save us (whomever us is). 

I think it is worth a try.  I don’t want a situation where the government sets the Acadian Peninsula apart like a seperate administrative district such as Northern Ireland.  We still need the horsepower and capacity of the provincial government in Fredericton to work for all areas of New Brunswick.

But we need to find a way to have the local community put skin in the game.  They need to feel like they own it and they have some control over their destiny.

And I think that’s at least partially the message of Lise Ouellette.

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The People’s Alliance Party is really tapping into a small but poignant populist sentiment.  This bit about not wanting to vote for “those who have destroyed us” is taken from a column written by a PANB candidate in the Miramichi.

There in government money spent in the Miramichi than ever before.  Almost 20% of total income in the Miramichi comes directly from government transfers - a rate well above most other small urban areas across Canada and that doesn’t include all the non-transfer government spending on new hospitals, roads, whatever in the area.

But the truth is that people don’t want to live in an area that is going down and I feel for that.  I want people to fight for their communities.

But I think Mr. Gullison risks falling into the same trap with his focus on “private woodlot owners, farmers, small business, and seniors”.    I don’t know enough about the first two on his list to add much to the debate.  I am not sure what government policy can drive up the price of private woodlot owner wood. I have said that I think the farming sector in New Brunswick might make a comeback and I support efforts to promote the use of local produce and agricultural products - even at a higher price.

Chronic economic challenges create structural changes in the business environment.  We need to forceably change the narrative in the Miramichi and one of the ways that is done is by achieving some measure of economic development success.

I guess the point of this ramble is has government really ‘destroyed’ the Miramichi?

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I see that New Brunswickers want more doctors and more health care workers.  At some point we are going to have to realize that the health care system cannot be fixed by massive new cash and new hires.  The system just absorbs all new resources like that weird looking vortex in the original Star Trek series.  The number of workers in the health care and social assistance sector is up by over 24% in 10 years.  Actually it is up 27% in eight years if you want to be specific.

It seems to me that the ‘fix’ to health care will be elsewhere.  I think governments should commit to providing stable, inflation-level increases to the system each year (it’s been close to triple the rate of inflation in recent years) and then look to innovation in service delivery, systems, and even revenue models.  It’s no secret that I support some form of nominal user fees for those that can afford it as a moderating force on the system.  I don’t think that wil fix the system but it will make us think about health care costs a little more directly.

Health Care & Social Assistance Employment Growth in New Brunswick

Source: Statistics Canada Labour Force Survey.

Here’s a neat little thought experiment/forecast that will never happen but it is interesting to look at trends.  Right now there is one health care worker and social assistance worker for every 10.5 other people in the population.  To put it another way, when you attended the Paul Anka concert, more than one person in each row was a health care worker.  By 2050 following the same trends there will be one health care worker for every three other people in the province.  That gives the term ‘family practice’ a whole new meaning when there is a health care worker per family.

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There’s an interesting story in the TJ today about New Brunswick’s debt and a poll done by CRA to find out how New Brunswickers want to pay for it.

There was almost no appetite for any new tax increases and very low interest in cutting government services and spending.

Go figure.

The problem with polls, as I have said many times before, is they don’t force a hard choice on people (usually).  For example, a typical poll will ask whether something is a good idea - without setting it in a context.

Would you like a cut in taxes? - will get you almost A 100% YES response but Would you like a cut in taxes? if it means we have to close your local hospital will get a completely different response rate.  Of course, the direct line between tax cuts and hospital closures is never really there but the respondent to a poll should at least be given a set of outcome options.

But back to the debt issue.  The truth is our debt load is manageable - relative to most other provinces.  As I shown elsewhere it is growing faster than most other provinces so we will catch up within 5-7 years if we don’t get it under control but right now it is not as bad as Nova Scotia, PEI, Quebec, etc.

And people don’t connect the dots on this stuff because the “every New Brunswicker owes $11,500″ is not exactly true.

Every natural gas user in New Brunswick ‘owns’  over $15,000 worth of Enbridge Gas NB deferral account exposure because that is the per customer amount sitting in that account - which, by definition, will be paid down through future revenue taken from said customers.  But people don’t connect those dots because they can just walk away from Enbridge and go back into the loving embrace of NB Power.

I would argue that at a basic level, people see NB’s debt the same way.   Canada is a free country.  People are mobile.  If I don’t like what is happening here, I will just move to Saskatchewan or Alberta just like my siblings, my cousins and my great uncle Pete.

Alberta has something like $60 billion in the bank.  In other words, if I move to Alberta - using the logic of this story - I immediately have $12,000 in the bank.  Lucky me.  I leave my $11,500 in NB debt and immediately claim my share of the Alberta surplus just by moving from Moncton to Hinton.

My point is we need to connect people at a different level.  We need them to think about their community and think about whether or not they want their government to do things that will help it survive and thrive into the next generation.  If you could get 90% of New Brunswickers to feel strongly about this, you could get buy-in for a whole lot of decisions - including a broader focus on economic development.

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I’m surprised that economic development is getting fairly heavy play in this election.  Don’t get me wrong, in every election the parties will have an economic development component but so far it seems to be more of an issue.  Starting with the NDP calling for BNB’s demise and the Tories’ plan to set up an InvestNB organization.

It’s a good thing that economic development is on people’s minds and it’s a good thing the Tories are actually talking about attracting investment.  You will recall in 1999, the Tory plan was for a “made in New Brunswick” approach to economic development.  Now, it seems, they realize we need to be a province that has both a strong focus on local entrepreneurship and the business case to attract national and international investment.

The NDP plan is not particularly realistic although they haven’t told us the mechanism they would use to push forward economic development.

I think there does need to be a serious debate in this province about taxpayer dollars being used to ‘retain’ or ’save’ jobs.    In the wake of the recession, that terminology is all the rage but we really have to think this through.  There may be times we want  to ’save’ a company but that should be rare.  In general economic development has to be about growth and moving ahead - not holding on to the past. 

Think about UPM.  It is clear now they received millions of dollars in taxpayer funding just to prolong the inevitable.  I have talked to folks in the ‘Chi who told me the same thing - including the final $5 million given by former Premier Lord to get them to hold off through the last election.

If there were structural business case issues with UPM that made it uncompetitive to operate in New Brunswick -access to fibre, infrastructure, energy costs, etc. - then the role of government is to decide what, if any, public policy tools could be used to address these issues - industry wide.  For example, I have no problem with NB Power having a large industrial rate as an economic development tool or I have no problem with taxpayer dollars invested in crown forestry development, etc.  That, it seems to me, is a far different thing than giving $5M, $10M or $35M to a firm in the hope it will stay open a few years more.

At the end of the day, economic development investments must have a payback to the taxpayer - a clear, financial payback to the taxpayer or why do it at all?    I have heard all this crap about how “it would have been worse” without us - in several contexts.  I don’t buy it. 

We need a tad more ambition for our economic development organizations than just “it would have been worse” without them.

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Add this to the pile of little every day coincidences.    The TJ has a story about a Sackville software firm that is expanding:

Sackville software developer Kleinmundo Solutions Inc. has inked a partnership agreement with a large U.S. firm that president Patrick Langlais says should help bring his young company’s head count to 12 this year.  The New Brunswick company provides document automation software to legal firms so they can format outgoing bills to clients, as well as reporting, electronic billing, data transformation and data management and manipulation services.

Langlais said Kleinmundo recently netted one the top 20 legal firms in the U.S. - the name of which he promised not to reveal - as a client. Among those clients that have agreed to let Kleinmundo name them on its website are Blank Rome LLP, Fox Rothschild LLP and Cox Smith Matthews Inc.

So this firm has large U.S. law firms as clients.  You will recall that another Moncton firm, Whitehill, built its business by targeting U.S. law firms.    It is interesting to note that another tech firm in Moncton, ShiftCentral, has a number of U.S. law firm as clients.

What gives?  Of all the software and technology firms targeting the U.S. legal market, how come three Moncton firms have made such great inroads?

Maybe it’s nothing.  Maybe it’s something. It is a bit strange.

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I am a bit surprised the Tories are claiming to reverse the tax cuts but by only doing on on the very rich they don’t lose a lot of votes.  The most recent data I have shows 1,170 people in then entire province earning declaring more than $250,000 in income.  The CBC article says:

Alward said he could save $120 million over the next four years by withholding the tax cuts for people who make an average of $450,000 a year.

First, there is no tax bracket specifically for those earning $450,000 and up so unless Alward is going to establish one, the reversal of the tax cut would have to apply to the highest tax bracket which would be $118,000/year which would mean over 12,000 persons.

But let’s say he does just raise the tax rate on those earning $450,000 or more.  I still don’t see how he gets $30 million in more taxes per year. This study for the Canadian Labour Congress estimated the tax cut was worth $27 million per year to those earning $250,000 or more.

But, I could be wrong - it would be nice for them to release how they are calculating their expected taxes but that would be too much to expect from any political party.

As for the corporate tax cuts - Alward is going to “cut small business tax rates to stimulate job growth and economic development”.

Sigh.  After former Premier Lord cut the small business tax rate to the bone, New Brunswick had third worst rate of small business growth (decline) in North America among the 60 provinces/states -according to a Fraser Institute study.  Further, total employment growth among small businesses with less than 20 employees actually dropped after the small business tax cut.   Note that over 17,000 of the net 19,000 job growth came from employers with 500 or more employees (that includes government).

There are an estimated 45,000 businesses in New Brunswick and an estimated 87% of them have less than 20 employees.  The only reason to cut small business taxes is political.  These small business owners vote and many of them contribute to political parties.

Employment Growth/Decline by Size of Employer (2000-2006)

Source:
Statistics Canada. Table 281-0042 - Employment by enterprise size of employment (SEPH) for all employees, unadjusted for seasonal variation, for selected industries classified using the North American Industry Classification System (NAICS), annual (persons) (table), CANSIM.

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I have been following elections in New Brunswick closely since the 1991 election and in my opinion economic development has always been a boilerplate issue but the parties have rarely proposed any bold new ideas - or even how they would actually foster job creation and economic growth beyond high level statements.

This election it seems will be no different.  Premier Graham has teased us with specifics about his 20,000 jobs - talking about energy, and targeting sectors.   So far the Tories have been very opaque about economic development.  I searched the website and found very little.  I did find this Bob Goguen commentary in the newspaper where he says:

Dave Alward’s plan for job creation involves supporting New Brunswick businesses that reinvest and create New Brunswick jobs.

He will do this by making sure that New Brunswick-based businesses have a fair chance to bid on taxpayer-funded contracts.

We can create sustainable jobs here in New Brunswick simply by ensuring that New Brunswickers benefit from provincial government spending.

….being more aggressive and innovative in how we approach potential investors; taking advantage of the strengths of our communities, as we work to help all regions in our province grow and prosper; and refocusing our efforts by pursuing lasting, meaningful economic development that will positively change our communities, rather than focusing on changing headlines.

These are all good but, again, very vague.   New Brunswick companies already get the vast majority of government contracts.  I am not sure how much more business is to be had there - and if it means sacrificing quality or price, is it worth it?  Maybe - I honestly haven’t studied the issue.  To be sure this is not going to drive economic growth in New Brunswick.

“Being more aggressive and innovative in how we approach potential investors” is an interesting phrase but I hope they will try and flesh that out a bit more.

Refocusing on “lasting, meaningful economic development” is even more vague but if they are suggesting a stop to propping up ‘troubled’ companies - I think they should just come out and say it.  It’s a tough policy issue - probably the right one - to say you (as a government) won’t help a company that is going under when it is a good provider of jobs in a smaller community in New Brunswick (the PCs gave piles of cash to AV Nackawic, Atlantic Fine Yarns and many more when they were in power). 

I don’t expect much detail on economic development.  The voters prefer catchy phrases like “investing in New Brunswick companies” and “taking care of our own”.  That typically will suffice.  Any party stupid enough to talk about attracting multinational firms here would likely lose votes over it.

In the end, the public would be wise to think a tad more about this stuff.  In Casablanca, Rick says “I just lost 20,000 Francs, I’d like to get it back” when making the bet with Captain Renault.   I say we just lost $1.7 billion in non-refined oil exports, I’d like a strategy from government to get that back.

I continue to lament the fact the time to act on this stuff was 7-10 years ago.  I remember talking with U.S. companies that just couldn’t find workers - for manufacturing, for IT, for just about anything.  They were paying $11.50/hour to start for McDonalds employees in Vermont.  I would argue that much of the work that was outsourced to India couldn’t have been done in the U.S. anyway.

Now we hear about U.S. companies looking for basic computer programmers and getting thousands of applications.

They are lining up around the block for a chance at $11/hour manufacturing jobs in Alabama.

But that doesn’t mean we give up.  We have to focus tightly on the business case for investing in specific industries in New Brunswick and then chase the potential investors (here, across Canada and around the world).  It will be more tough now but it doesn’t mean we don’t try.

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Election time again.  I am feeling a little old - this will be my seventh provincial election.  Now I have a little different role - I will be writing three colums a week in the Telegraph-Journal on election topics - Tuesday, Thursday and Saturday.

It seems to me the defining issue hasn’t really surfaced yet.  The various parties are trying to define one but I don’t see an “auto insurance” or a “toll busters” or a “CoR” defining issue as of yet.

The first poll of the election cycle shows 41% undecided and a relatively small spread between the Libs and the Tories.

It’s interesting to note that the NDP, People’s Alliance and the Green Party are expected to be influential.  CRA’s poll shows almost 25 per cent of decided voters are planning to send their vote to one of the third parties.

The question is where will they take voters from? 

It will be interesting.

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Several people have asked me to comment on the NDP proposal to scrap Business New Brunswick.  I have resisted because it really is a red herring - the NDP would just find other ways to do its brand of economic development. 

But there are some learnings here.  I think the question does need to be asked whether or not our collective economic development efforts are achieving what we want them to achieve.  If you were to ask BNB or any Enterprise Agency or ACOA or the CBDCs or any other of the groups doing ‘economic development’ in the province they would say they are achieving their vision and mandate.

I think we need to set the bar higher.  Determine growth sectors, set serious targets for investment and jobs and then work backwards to determine what policies need to be development, where each of the organizations fits into the effort and then create a strong value proposition for investing in those sectors.

The second point is the sprinkling.  Since I have been involved in economic development - 20 years now - BNB and its predecessors have played the role of a bank providing funds to companies around the province.  I think we need to have more focus.

Which brings me to the third point which is around measurement.   It’s relatively easy to measure the effectiveness of tax payer dollars being used in health care, education, transportation, policing, etc.  There are measurable criteria.   Economic development is not so easy to measure.  At a provincial level, I would like to see a rigorous incremental tax base measurement methodology put in place.  For every dollar invested in economic development, we get $X back in new tax revenue to the provincial government.

I realize this is likely never to happen although it is being used as a metric in Ireland, Quebec and other places.  The idea that economic development should be tied to growing the tax base should be a no brainer but you will find very few takers in the economic development system - which is too bad.

But implementing my measurement model would put to rest the whole question of BNB or not to BNB.  If the organization was clearly showing a return on taxpayer dollars invested - who could question that?

I suspect it is easier to talk vaguely about jobs ‘created’ or ‘retained’ and then about all the throughputs - counselled companies, funding announcements, training, etc. rather than on some end objective such as tax base growth.  But, in the end, what is the point of economic development if not to grow the tax base and support business investment?

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