It's The Economy, Stupid

Bill Belliveau is making the case for high speed rail around New Brunswick.  Live in St. Stephen, work in Saint John.  Live in Miramichi, work in Moncton, etc.   Belliveau is a thoughtful guy and mostly makes sense.  This idea also has some merit in the long term but as I have said before with the exception of highways – governments in New Brunswick rarely build infrastructure out front of growth.  When was the last time the government invested in rail?  How about ports?  Even airport investments are done begrudgingly.

High speed rail around the province would only cost something like five years’ worth of annual EI payments in New Brunswick.  I have no idea what the real number would be but we spend $700 million in a typical year on EI in New Brunswick mostly as a seasonal wage supplement and I figure that $3.5 billion would go a long way towards the cost of a high speed rail system.

As Belliveau speaks, I hear bureacrats all over Fredericton shuddering.  The idea of building 1,100 kms worth of track from Edmundston to Tracadie down to Moncton and Saint John and then down to St. Stephen and up to Edmundston is a frighteningly expensive concept with huge annual subsidies to run it forever.

I think we need to have a serious economic renewal that generates thousands of new jobs around the province.  Then we can start thinking again about how to manage growth rather than how to manage decline.

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Someone sent me a link re: the last post saying that $50 million in incentives for 500 jobs seems like a lot of money – particularly in light of my emphasis on ROI for government dollars invested in projects like this.  Without knowing the specifics of the deal and the amount of tax revenue generated from the project it is hard to know but don’t forget that the government of New Brunswick gave the same level of incentives (on a per job basis) to Molson, A.V. Nackawic and those northern textile mills.

But for newbies to this blog, let me restate my guiding principles relating to government incentives for economic development.

First of all, I completely disagree with this notion of having a ‘fund’ of money for economic development like the Miramichi fund or the Acadian Peninsula fund.   This approach limits your ability to support a large project if one comes along and – worse – governments feel the need to spend this money whether it is on good projects or not.  You end up with what the TJ calls ‘sprinkling’ money around with no focus and no real understanding if it is leading to an economic transformation in Miramichi or the Acadian Peninsula.

Instead of a fund that needs to be spent each year, I believe the government should enact legislation that allows it to access a variety of ED programs on a case by case basis.  For example, if you land a $2 billion car plant, you should have the legislative flexibility to put a competitive deal on the table. 

Secondly, I don’t like cash and I don’t believe that most companies – at least the large ones – like cash either.  There are tax implications and other baggage associated with cash incentives (like forgiveable loans or outright grants).  I like tax breaks (i.e. you create 200 above average wage jobs and you will get a 15 year break on your corporate tax bill).  I like free land and other infrastructure support that costs the government virtually no cash out of pocket.  I like rebate programs like Nova Scotia’s payroll rebate program which is cash but only after the company has generated economic activity in the community.  I like training support.  When a company comes to town and needs 300 people to work putting together solar panels, I think we should have boot camp community college programs to help assist in the training of the workers.  I like recruitment support.  If a company comes to New Brunswick and part of their workforce needs includes 10 Phds, let’s have a program to help recruit these people to New Brunswick.

For larger projects, I like the idea of industrial revenue bonds or some other mechanisms (i.e. like the NB Investment Corp) to issue bonds or even take an equity stake that is bought out over time – if it enhances the attractiveness of New Brunswick.

This brings me back to that big plant announced for Tennessee (last post).  If the bulk of that $50 million deal was tax breaks, that is money that Tennessee wouldn’t have received anyway if the company didn’t set up in the state.  So the state forgoes corporate and property taxes but gets several million a year in payroll-related taxes. 

My overarching principle when it comes to incentives is simple.  I have heard BNB Ministers, DMs and ADMs say for 20 years that ‘we can’t compete with Nova Scotia on incentives’ or ‘we will never be able to  match the incentives offered in Alabama or Ontario’.  In my mind that attitude explains a lot.

I don’t like giving out tax payer dollars but I will never recommend that New Brunswick take some moral high ground while 80% of the states and provinces across the U.S. and Canada are doling out the gravy.  When everyone else stops giving incentives, so should we.  Until then, we should be as ‘competitive’ as we need to be understanding that all projects must provide an ROI on the government funds invested.  In other words, if we put money into a project that there was a strong likelihood would never generate a payback, we are wasting the taxpayers’ money.

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German chemical company Wacker Chemie is investing in a new $1 billion plant in Cleveland, Tennessee. Local officials say the deal will bring at least 500 jobs.

Gov. Phil Bredesen says Thursday that the deal with the Munich, Germany-based company will bolster Tennessee’s status in the field of clean energy technology. Wacker is among the world’s largest producers of polysilicon, a material used to make electronics and solar panels.

Bradley County commissioners approved a $50 million incentives package in December for what they described as an international manufacturer that would create at least 500 jobs.

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Like most organizations, the cost of labour (payroll) tends to make up the bulk of government spending so any attempts to look at cost control will turn to either cutting the number of public sector workers (and by that I am talking about all public sector workers – education, health care, not just public administration), freezing or cutting wages or a combination of both.

Some people will say that the Lord government was making up for the lean years under McKenna but there is no denying that public sector wages rose dramatically under Premier Lord.

There are some potential ways to control costs – looking at other governments and the private sector for answers.  Beyond the draconian 25% cut that some people have tossed about in the media.

Several U.S. states have moved to either a four day work week or they have rotating days off (without pay).  Check out Utah here.

Many goverments – most in the U.S. – have moved to a defined contribution plan to at least curb the growth in non-wage costs.  The NB public sector union has been very much against this approach but it is the way things are going.

I happen to be a big fan of the public service and of the importance of doing work for the community and the public at large.  I think there is sometimes too much bashing of the public service. 

The truth is we need a highly competent and equally important engaged civil service if we are to pull out of the chronic rut we are in.  So in the short term government needs to do what it needs to do to manage costs but in the longer run, I’d like to see far more effort on engaging the workers in the public sector to be part of the solution.   If we want to turn the ship around, we will need the public sector to be a major player in the process.

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I don’t know why this toll issue is coming up again.   There is no way any government in New Brunswick is going to propose toll highways after what happened in 1999.

Sure, I know that Nova Scotia has tolls and so does PEI.  I realize that most eastern seaboard U.S. states have toll highways.  Ontario as well. 

But the evidence is clear.  The public unions and Al Hogan would crucify any government proposing tolls so it is not in the cards.

Although I will say that one of my more astute readers told me that a public sector toll highway would be okay for the unions.  It’s just the notion of a – gasp - private sector toll booth operator that gets them all riled up.

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A couple of days ago, CBC had a interview with an advisor to President Obama on energy and climate change issues.  The guy singled out Manitoba Premier Gary Doer and said he had been working with California on clean energy strategies.  The Premier of Manitoba.  He also said that Manitoba was positioning itself to be the clean energy (hydro and wind) Saudi Arabia to the United States.

Today, the Globe has a story about Saskatchewan possibly buying the federal government’s stake in AECL:

Saskatchewan Premier Brad Wall says he is keen to forge a partnership with Atomic Energy of Canada Ltd. to develop reactor technology and other business from the province’s vast uranium deposits.  “It’s a natural fit. We are the Saudi Arabia of uranium for the world,” he said in an interview at his Saskatoon office.  “We’d be open to different partnerships or dynamics with other levels of government or companies to make sure Saskatchewan is a leader in this regard.”

This is what it means to be an energy hub.  Not just a few capital intensive but limited economic impact after the construction.  Manitoba’s vision is to have thousands of megawatts of wind energy on the same grid that takes its hydro to the U.S. market today.  If you throw in wind energy systems manufacturing and R&D, Manitoba could turn this into multi thousands of good paying jobs and hundreds of millions each year in new tax revenue.   Nuclear energy is a high value business.  Like it or not, nuclear engineers get paid more than regular engineers.  Nuclear welders get paid far more than regular welders.  Everything is on steroids in order to insure safety and security. 

What is New Brunswick’s vision of an energy hub?  500 more jobs at the refinery in SJ and 300 more at a second reactor?   My question would be how do we turn the energy hub concept into 25,000 jobs over the next 10-15 years and then work backwards from that.

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There are a few old grizzled veterans around like the 80+ year old Hal Fredericks and the younger but knowledgeable Donald Savoie that truly understand the scope and scale of economic development efforts in this region going back 40 years or more and can also make salient points as to why we haven’t kept pace with the rest of Canada.

I read an article in Progress magazine quoting Frank McKenna as saying this region has made tremendous advancements in the past two decades.  In many ways he is right and I am glad that he has morphed into the Cheerleader in Chief for the region.  But he doesn’t say that compared to everyone else we are actually losing ground.  Unemployment is down. This is true but it is fuelled as much by increased out-migration as job creation.  If population decline leads to a lower unemployment rate – that is a bittersweet outcome.

Constantine Passaris up at UNB is another old grizzled veteran.  He has an interesting commentary in the DG today.  In it he quotes from 1982 former Premier Hatfield:

I recall a conversation I had with Premier Richard Hatfield in 1982 at which time he poignantly observed that the federal funds flowing to our province as a result of equalization were not a handout but a financial dividend that New Brunswick had earned for joining Confederation.

Let’s put aside the fact that a party that is supposed to be built around ‘conservative’ values seems to be the champion of federal welfare.  My confusion with the PC party in New Brunswick is well known and gets exacerbated every time I debate my family members – mostly devout PCs.  I argue that the PCs should be the party about self sufficiency, about government cost control and about economic development.  But that is an argument I seem to be losing.

But apart from politics, Passaris also talks about his involvement way back when with the New Brunswick Development Institute which rightly concluded in 1985 that “our provincial government should wean the provincial economy away from federal transfer payments because they were proving to be insufficient and unreliable.”

Passaris concludes:

At the end of the day, self-sufficiency is not the impossible dream, but an imperative for a prosperous New Brunswick. It is about empowering New Brunswickers to gradually remove their dependence from federal fiscal transfers and the political mood swings of Ottawa.

But I’m not satisfied with those trite motherhood statements anymore (although I am guilty of them in my columns as well – I don’t want to be the total Scrooge of economic development).  I’d like to ask Passaris why we haven’t been able to wean ourselves off transfers over that 24 year period?  I’d like to ask him what went wrong?  Why have we gone from a relatively strong population growth in the early Hatfield days – when he was cutting his teeth on economic development issues – to a population decline today?

I’d like nothing better than to get that old brain trust – throw in guys like Stephen Wheatley who I believe was involved with the Bricklin file way back when -in a room and ask them to tell us why we failed.  Why when Canada was booming – adding three million people to the population – New Brunswick actually slipped into population decline.  Ask why government spending has to grow at three times the rate of inflation.  I think we have to ask hard questions of the leaders in the past in order to make the tough decisions for the future.

But I guess I just slipped into the motherhood mode myself, didn’t I?

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Someone told me today that he hears the provincial Liberals are thinking about calling an election this year.  The idea is to get a new mandate out front of a few potentially difficult years and provincial budgets.  It’s an interesting thought given that recessions tend to be hard on politicians but snap elections in New Brunswick tend to be harder.  Think Camille Theriault in 1999 and Bernard Lord in 2006.  Both had internal polls showing them with a strong lead going into the election and both came out losers.

It will be interesting to watch.  The Liberals have not shown much appetite for pain in their first couple years in office.  For example, I thought health care spending was out of control with the Lord government and its growth rate has only increased under the Libs.  Cutting – even moderating the growth of – government spending is not something we have seen in New Brunswick since the mid 1990s.

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From the TJ today:

Tom Mann says it’s time to make New Brunswick’s public pension plans work for the entire province by turning the public dollars into government bonds that will keep money in the province instead of investing in the stock market and elsewhere.

Mann is a bit like the alien taking on Sigorney Weaver.  He is flailing away in a desperate attempt to protect his membership from ‘cuts’. 

I have been talking about the potential of using the public pension money for economic development right here.  My suspicion, turns out mistaken, would have been that guys like Mann would want the money invested as far away as possible.  Why risk the future pension of the NB civil service on a declining market like New Brunswick.  Now, of course, I realize how twisted that is.  That the province where the civil service actually works is not good enough for its pension monies.  The people in charge of the province don’t believe in it enough to invest even 1% of its pension monies here.  But I realize that is just hyperbole and cheeky talk on my part.

The truth is that the people investing this pension money have a mandate and it turns out can’t find enough projects in New Brunswick to even invest just 1% of public pension monies.

The challenge is  simple.  Obviously, right now placing public funds in low risk, low return investments like bonds to finance public works projects makes sense.  These funds are getting hammered in the equity markets.  But when (if?) the markets return, the best returns will continue to be in high growth markets and New Brunswick is not and never really has been a high growth market. 

I do think that when the government pension fund looks at New Brunswick investments it should consider the economic benefits beyond the direct ROI.  If the civil service retirement funds can make 15% in India and only 7% in New Brunswick but that 7% leads to thousands of new good paying jobs this should be a consideration.

Wishful thinking?

Back to Mann.  It seems to me this he is actually dipping his toe in the water of economic development.  This is new ground for public sector unions.  Maybe they will finally figure out the link between economic development (i.e. taxes raised) and the ability to pay for the large and growing public sector.

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HSBC Bank International’s “Expat Explorer Survey” was done to find out what countries are favorable for expatriates, how well they adjust to local conditions and how well they become friends with the locals.

The study surveyed 2,155 expats from 48 countries spanning four continents early this year. The respondents were asked to rate the country in four categories: Ability to befriend locals; whether they joined local community groups; those who learned the local language; and those who bought any local property.

About 95 per cent of respondents said Canada is the most welcoming country of all; Germany came next with 92 per cent; and Australia was third with 91 per cent. The United Arab Emirates finished last in the survey and was found to be the most difficult for expats, as only 54 per cent were able to make friends with locals.

American respondents found Canada to be the most favorable country; language is not an issue except in French parts of Canada, low government corruption and cultural diversity all made it easy for them to settle in Canada, according to Patricia Linderman, editor of Tales from a Small Planet, an online newsletter for expats.

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