It’s The Economy, Stupid

A couple of weeks ago Macleans magazine ran a story on the secret U.S. dossier about the Airbus affair that everyone in Canada is familiar with by now. I’d like you to read this quote and then my comments below:

“A central thesis of the U.S. dossier is that the Mulroney government tilted the playing field towards the Airbus bid because of the consortium’s plans to funnel parts work for future production versions to Bombardier-owned Canadair plants in Quebec. By 1987, the Tory hierarchy was convinced that “Quebec and Jobs” were the cornerstone for another federal election victory, says the document, and went to great lengths to ensure that the planned investment work take place.”

The article goes on to desribe a meeting between th PM, the Ambassador to France and multiple senior government officials brainstorming in room together about how to get this done.

Now, put aside alleged kickbacks, bribes, power mongering, sleeze, etc. and think about this allegation for a minute.

The Prime Minister and the top leadership of government were so desperate to get high paying jobs in Quebec that they would risk the wrath of the Americans and possibly do illegal and/or unethical things.

I find this amazing. I even find it powerful.

Imagine if the Prime Minister of Canada, the Premier of New Brunswick, the Ambassador to Germany and top government officials were in a room brainstorming how to get that new Volkswagen plant into New Brunswick?

Imagine if the Prime Minister of Canada, the Premier of New Brunswick, the Ambassador to Switzerland and top government officials were in a room brainstorming how to get that 1,500 job Nestle plant (that went to Arkansas) into New Brunswick?

Imagine if the Prime Minister of Canada, the Premier of New Brunswick, the Ambassador to France and top government officials were in a room brainstorming how to get that next aerospace plant into New Brunswick?

It’s laughable prima face but really it shouldn’t be. Aerospace has become a cornerstone of the Quebec economy and continues to receive hundreds of millions in federal funding (consider the Tory $150 million for Bell Helicopters).

While Quebec’s population grew by something like 8% in the last 10 years, New Brunswick’s has actually declined.

Sure, Quebec has economic challenges - major challenges - but having 25,000 aerospace jobs - seeded by government effort - is certainly not the problem.

Now you cynics are going to say that New Brunswick doesn’t have the ‘political’ clout that Quebec has (and had). You will say that there has never been a large scale manufacturing plant supported by the Feds set up in New Brunswick. Ever. You will laugh at my naivete.

But is everything politics? Would it kill the Prime Minister to get on a plane with the Premier, meet the Ambassador to Germany and plot a strategy to attack Volkswagen?

I have an alternate (and niave) view. I think that if the PM took economic development in the Atl. Provinces seriously, it would bolster his image across Canada. It is not healthy in a large and spread out place like Canada to have entrenched areas of underdevelopment - for decades. It threatens national unity. It leads to resentment on all sides. And it is an economic drain on the national economy to require such large scale transfers of wealth from one area to the other.

But that’s just me.

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There are only a few ways that government can impact economic development. Admittedly, they can have profound effects - positive or negative - but you can boil down the options:

Direct funding of economic development (incentives, R&D, direct training, marketing, etc.)

Focused funding on things that influence economic development (education, roads, rail, etc.)

Regulatory/legislative issues

Something I would call embedding a culture of economic development within government

This is an example of direct funding of economic development. A billion dollar fund taken from oil profits directly to fund research and development and to attract large R&D players to the state of Oklahoma. On a population base of $3.5 million, that’s about $286/per person. Certainly not Ireland in its spending, but a good figure. Remember, this is not all ‘economic development’ spending, just this initiative to encourage more R&D in the state.

Contrast that with New Brunswick. Bernard Lord set up the ‘Innovation Foundation’ to be the catalyst that would move New Brunswick from last in R&D spending to in the ‘top three’ in Canada. Then he funded it with $25 million (or about $33/per person) - nine times less than the Oklahoma initiative.

I had calculated then, an easy calculation really, that if New Brunswick wanted to be in the ‘top three’, it would have to spend at least another $100 million per year (not over many years like the Innovation Foundation’s $25 million). It’s a clear calculation. Either you a) ante up the bucks yourself as a government or b) you go get it - federal government or private sector.

Simple, really.

My point is that all this talk of self-sufficiency doesn’t mean much without commitment. And just getting economic development spending back to mid 1990 levels (as a percentage of the budget) would require 10s of millions more each year.

We didn’t see that in budget #1, I doubt we will in budget #2.

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I had a long conversation with someone today who expressed considerable frustration with what he called the lack of good public policy analysis in government these days. He complained about the lack of internal public policy analysis skills and was even more critical about the consultant business and the long, technical reports that get published obstensibly in support of public policy but that don’t really help to move the ball down the field.

His suggestion was that the government should set up an internal research and public policy shop that would generate ideas and provide support to government in the development of good public policy.

Now, I’ll tell you what I tried to tell him - but disaggregate this to economic development public policy because I don’t know if the same concepts apply to health care or social programming or education.

I think the problem is that most of the ‘experts’ internally and externally look at things using some version of the scientific method. That is, they are always trying to disprove the hypothesis. So with any good idea that comes along the immediate reaction is skeptism and efforts to explain why things can’t work. Consider the previously proposed energy park for Sussex that I had some involvement with. The feedback from all parts of government that were involved and the consultants that were hired was essentially negative. The idea was shelved and everyone moved on.

But if you think about it for a minute you could quickly make the case why auto, aerospace, animation, eLearning, IT outsourcing, financial services, data centres and just about every sector of the economy (except the dreaded tourism) can’t work in New Brunswick. We have no ‘critical mass’. The government doesn’t have the money to invest. Our institutions are not capable enough. Our workforce is not skilled enough. So, using the scientific method, we are royally screwed.

But economic development public policy should not be about ‘ruling out’ options, it should be about the art of the possible. New ideas should be eagerly pursued and promoted - not in a cavalier way - not in a stupid way - but in a well thought out but development-oriented way. You may say this is semantics but I say it is foundational. Most of the folks I talk to and read about - even in the think tanks and external public policy groups - are finding ways to kibosh ideas. Or they are serving up trite analysis with these swooping kinds of statements. AIMS is especially good at this. Governments MUST do this or MUST do that. Well, Bernard Lord cut your friggin’ small business tax rates to the bone and the result? The second worst small business creation rate in North America.

So, I’d like to see New Brunswick get a whole lot better at idea generation and pursuit. Fill the hopper with ridiculously crazy ideas (like being the launching pad for space tourism - ooops, Cape Breton beat us to that one) and winnow them down based on the art of the possible. And then pursue some innovative approaches with vigour and determination.

So to tie this back up to the top. More public policy analysis and better research may be part of the solution but unless you marry that with a deep understanding of economic development, you will just get 100 rejections instead of the 10 rejections you get today.

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Just got back from my trip to the States. It continues to fascinate me, the US of A. It’s by far the most affluent and successful place in the world and yet everyone seems angry. For my periodic dose of shock culture, I listened to Glen Beck, Rush Limbaugh, Bill O’Rielly, Shawn Hannity and Howie Carr on talk radio. Actually, I listen to snippets and then have to turn it off before my brains melt and dribble out my ear.

It’s a weird place. The TV and radio pundits state with emphatic distain that the U.S. presidential race shouldn’t be about ‘race’, ‘gender’, ‘age’ or ’socio-economic category’. “We are above that in 2007, they say”. How dare you play the ‘race card’. “Moving on, and now let’s look at those latest poll numbers and we will break it down by race, gender, age and socio-economic category.”

Hmmmm.

It seems to me, and this is just an observation, that prejudice these days is way more aligned with socio-economics than race. Black, white, hispanic lawyers all play racketball at the same club with little or no friction and their kids attend the same private schools but you don’t see many intersections between the rich and the poor. At least, in my limited observation, that’s what I see. I guess on a prorated basis there are more ‘poor’ among black and hispanic groups so that seems to be race thing but I think the underlying reality is more about economics.

But it is still the largest and most influential country in the world. The federal government down there spends far more on R&D than our guys and they are calling for much more (Romney is pushing this). They dominate in culture, and innovation - I just like to walk around the mall and see the stuff that will find its way into Canada six to 12 months out.

So, I hope they get their mojo back. I hope the anger subsides. There is no reason, really, to be that angry. Sure, Iraq turned out badly. Now they need to find an exit strategy that doesn’t make things worse. Sure, they have some issues with health care and immigration. But on the whole, this should be viewed as almost a golden age down there and when I go, it’s all apocalyptic. Of course, my lense on the U.S. world is radio and TV - specifically radio and TV news - but I still think that finds its way into popular culture and society.

Do you think there will every be a day when a guy like Rush Limbaugh will make $20 million by being nice? By fomenting love thy neighbour? Maybe. Oprah has done it I guess in some sense.

Maybe that’s the next evolution. Remember in the 80s/90s it was all Donahue, Geraldo, Gerry Springer taking the fringe and parading it in front of our TV eyes. Talk radio does that with ideology. Maybe things will turn. Who knows?

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The City of Edmonton has just published its 2007 Residential Property Taxes and Utility Charges Survey. Moncton is not included but Fredericton and Saint John are included. Here is how they fare according to the survey (these are quotes):

St. John’s had the lowest total property tax per person at $792, followed by Surrey at $845, and Laval at $1,012. Toronto had the highest property tax per person at $2,001, followed by Fredericton at $1,883 and Victoria at $1,814.

Edmonton’s total property and business tax per person was $1,252 per year, and ranked the eighth lowest in 2007. This was 10% lower than the twenty-four cities’ average of $1,389 and 12% lower than Calgary’s $1,418. Surrey had the lowest combined tax per person at $845, followed by St. John’s at $1,001 and Laval at $1,012. Toronto had the highest combined tax per person at $2,001, followed by Fredericton at $1,893 and Victoria at 1,814.

Saint John is not mentioned in the narrative but in the tables is close to Fredericton.

Monthly utilities charges in both Freddy and SJ are at the median level.

It’s a pretty detailed study. I encourage folks to have a look at the calculations and see what it might mean for public policy.

The truth is that this type of survey is done in a vacuum without indicating other sources of municipal funding or charges. In addition, smaller municipalities may have larger per capita costs because of the lack of critical mass.

Interesting stuff, nevertheless.

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I am in Portland, Maine today. Toronto the last couple of days. Not much time to look around.

I, like most economic developers, am following the continuing saga of the auto industry in Ontario. It is, behind oil & gas, probably the single most important industry to Canada’s economy. If you look at our export numbers you will see that that O&G accounted for $66 billion in exports in 2006 while auto exports accounted for $50 billion (if you throw in auto parts and trucks you are up to $65 billion). The next closest export category is petroleum at a mere $15 million. Aerospace is at a paltry $11 billion.

But it is an industry that relies on the government gravy train. From today’s Globe & Mail:

General Motors Corp. has scrapped plans to build some rear-wheel-drive cars at its giant operations in Oshawa, Ont., a move that could threaten the long-term future of the largest vehicle assembly plant in Canada and thousands of jobs.

The move comes as GM prepares for crucial contract talks with the Canadian Auto Workers union this summer and seeks government financial help for an investment in St. Catharines, Ont., on top of $435-million Ottawa and Ontario have already agreed to give the company as part of a $2.5-billion plan to upgrade its Canadian operations.

This is a Gordian Knot-type problem for Conservatives who don’t mind using ‘tax breaks’ for industry but tend to chafe at the notion of direct subsidies.

But to the advocates of targeted subsidies, the ratios work here. $435 million is only 17.4% of $2.5 billion. I don’t remember the incremental jobs associated with the expansion but I think you could make a case that governments would receive an adequate ROI in terms of taxes back on this investment (that’s an ideological-neutral statement just a fact).

Consider New Brunswick’s parallel. We give between $5,000 and $7,500/per job for the rural call centre jobs. This is about 40% to 60% of the total costs of setting up the call centres.

17.4% or 40%. The percentages are low but the absolute dollars are high.

However, just for argument’s sake, let’s say that GM plant generates $150 million/year in taxes - all levels. After three years, the $435 million is paid back to the government’s coffers. Then from that point on (presumably until the next ’subsidy’), the government gets $150 million in net new taxes per year.

Or about 10% of the self-sufficiency gap. In one plant.

Consider the alternative. You can go here to calculate the income taxes paid to government from a $20k or a $25k/year call centre job. To get to $150 million in taxes? Who knows. But on $25k jobs, the NB government gets only about $1,800/year in income taxes and the call centre sector has almost no economic multiplier. 20,000 call centre jobs @ $25,000 generates about $36 million/year in provincial income tax (that table above shows the combine fed/prov income taxes paid).

I suspect that the NB government has little or no interest in attracting an auto plant. In fact, I doubt we will ever see a $100 million deal in New Brunswick let alone a $435 million deal.

But we will continue to see a $600 million deal. That’s a conservative estimate of the EI paid out in New Brunswick each year. And I see in the TJ yesterday, that Atlantic Canadian’s don’t see seasonal EI as the panacea that many rural politicians believe it to be.

On a side note, I see that BNB deputy Minister Brian Dick has responded to my recent commentary on self-sufficiency and the need to embed a culture of self-sufficiency across the civil service. I am encouraged by his comments. In most of my intersection with provincial bureaucrats, I haven’t seen much sense of urgency. There is a lot of back slapping and self-denial on the economic front - driven I think mostly from the political need to been seen as successful - but if their jobs were directly on the line, one would think the bureacrats would be a little more hungry.

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A couple of good news economic development stories this morning for Nova Scotia. Port Elgin’s Atlantic Windows is expanding in Amherst and nearly $300 million in contracts from Boeing and Lockheed Martin is flowing to Atlantic Canadian firms. None of those contracts were signed with New Brunswick firms.

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I was talking to someone yesterday about the closure of mills and attempts to replace these mills with tourism. He was citing several examples of rural NB mayors touting tourism projects. I have followed this trend but I have a hard time believing it. Who really thinks that you can replace $80,000/year pulp and paper jobs and the $50,000/year forestry jobs that are tied to them with $10/hour tourism jobs? How can that even be credible?

Exhibit A:

Weymouth’s economic strategy unveiled
The Nova Scotia Business Journal

“Weymouth was once a shipbuilding community.” Moorhead said. “We will be building on historic pilings to reclaim a bit of the past.” The Municipality of Digby plans to build a new library in the village and Team Weymouth is working to coordinate it into a unified plan for a revitalized downtown. “The library is an important part of this puzzle,” said Team Weymouth member Don Ruggles. “It will be a tremendous asset to the community, and a new building in the right place will serve as a year-round anchor for a vibrant downtown.”


This is amazing to me. A mill closes and the thoughts turn to waterfront development. Did anyone calculate the jobs lost/jobs gained from this effort? Did anyone calculate the wages lost/wages gained?

It is a knee jerk reaction. Oh, let’s use our beautiful coast line to stimulate economic development. Some would say it is because there are no other options. I say that is crazy. There is ‘waterfront’ development in every waterfront community around the globe. Just because you have water or a downtown or some inkling towards tourism doesn’t mean that should anchor your economic development strategy.

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A poster asked me to comment on Richard Florida’s blog called Guess who is buying America? So, I will.

First, foreign acquisitions by themselves are not greenfield foreign direct investment. I don’t have a problem per se with what you see in Florida’s charts but it is not the same thing. What I am calling for is greenfield multinational investment in New Brunswick. New manufacturing plants. New data centres. New animation studios. New back offices.

Second, this trend in the charts is directly related to the decline in the U.S. dollar which makes American firms relatively cheap. However, make no mistake, the U.S. is an FDI powerhouse attracting tens of billions in new, greenfield investment each year.

Third, I certainly don’t advocate concentration of ownership in any area. I have said many times before the concentration of power- political, economic, social or religious - can lead to abuse. Remember Lord Acton. So if sovereign national funds are taking concentrated positions in firms, I would be concerned. As long as the ownership is relatively spread, no problem. They worried about Japanese ownership in the 80s. Now they are worried about the Chinese. Maybe the Brits are next.

Fourth, I am not opposed to foreign purchases of New Brunswick firms. There are positives and negatives. It is true that decision making shifts out of province. It is true that the risk of higher paying jobs could migrate out (senior management). But on the plus side, I think it is about time to unlock some value. This is healthy. When Speilo sells, some of that capital gain finds its way into the local economy. The lack of publicly traded firms in New Brunswick, has inhibited wealth creation. As an example, if I own a $100 million firm - family business -and I harvest a million bucks a year out as profit - that’s a good thing - particularly if I share some of that with my workers. However, if I never give out equity or take the thing public, I never monetize the value of my firm. In other words, on paper I am worth $100 million but not in practical reality. Then, when some bubble hits and I go under, that value is wiped out. Again, I understand the nuance to this but, in general, I would like to see more IPOs, more targeted takeovers, etc. to slosh some more wealth around and give us better exposure to a wider market.

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