It's The Economy, Stupid

We have dicussed this ad nauseum on this blog over the past few years but I still think that it remains a valid question.  To some, Equalization is a perfectly legitimate – and if you remember former Premier Lord’s fiery defence – a Constitutionally protected – source of revenue for poor provinces that need it to provide a similar level of public services to citizens as richer provinces.

But if it is a perfectly legitimate source of provincial revenue similar to sales tax or income tax, why then is Equalization a knock on Premier Doer’s record as Premier of Manitoba?  From an editorial in today’s Globe & Mail:

The Winnipeg Free Press noted that he failed to wean his province off equalization payments, which last year made up over 20 per cent of provincial revenue.

Let’s be clear.  The Globe & Mail is not a bastion of right week ideology and neither is the Winnipeg Free Press but the default position is that it is a negative that Doer “failed to wean his province off equalization payments.”

It seems to me that Equalization has never been considered legitimate.  Instead of being viewed as a way the federal government (taxing Canadians not Albertans or Ontarioians) supports an equivalent level of public services across the country, equalization is positioned – squarely (not withstanding Lord’s position) – as a negative subsidy where money is being taken from residents of rich provinces to subsidize poor ones).

I have been tracking this issue in the national press for almost as long as I have been writing this blog and I can tell you that this is the first time I have read that it was a negative for a Premier not to wean his province off equalization.

Shawn Graham was right to make weaning off equalization a fundamental part of his government’s strategy.  The writing is on the wall, folks.  The problem is that we have only increased our need for equalization in the past three years.  In the 2006-2007 budget, we received $1.43 million.  By the 2009-2010 we received $1.69 billion in equalization.  An 18% increase in three budget cycles.

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I love government spin.  It’s fun:

From Bloomberg:

New Brunswick had its debt rating cut by one level to Aa2 by Moody’s Investors Service Ltd. because the Canadian province will record a “sizable” increase in its borrowing over four years, the rating company said.

The downgrade will affect about C$11.2 billion ($10.4 billion) of the province’s debt, Moody’s said in a statement today. The rating company also said the province’s rating outlook is stable.

The province’s financing requirements will rise to C$1.2 billion in the 2010 fiscal year and C$1.4 billion in 2011, Moody’s said. This will increase its debt-to-revenue ratio to 150 percent after a four-year fiscal plan is implemented, compared with 106 percent in 2009. The province, home to about 747,000 residents, will record deficits equivalent to 10 percent of its revenue over the next four years.

The credit downgrade was the first action by Moody’s since it boosted New Brunswick’s grade to the second-highest rating of Aa1 in November 2006, up two levels from the previous Aa3.

From the government:

New Brunswick maintains its leadership spot in having the highest overall credit rating of any province east of Ontario, despite a Moody’s Investors Service revised credit rating from Aa1 to Aa2 issued on Monday, Aug. 24, acting Finance Minister Jack Keir said today. The province’s rating has a stable outlook, according to Moody’s. Both Dominion Bond Rating Service and Standard & Poor’s recently maintained the province’s ratings at A (high) and AA-, respectively, with stable outlooks from both.

So which one is it?  A ballooning of the debt-to-revenue ratio up 43 percentage points over four years, 10% deficit to revenue ratio and a debt rating cut (the first since 2006) or a prudent, leadership spot?

I guess we shall see how the media spins this one tonight and tomorrow.

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Somebody sent me this.

Oregon Looks to Clean Tech for Revival

The Oregon Business Development Department’s network of about 45 economic-development officials has more than doubled the time spent reaching out to clean-tech companies since 2008, said Bruce Laird, clean-tech recruitment officer in the department.

As a result, Oregon’s incentives for attracting clean-tech firms — those that make alternative energy or energy-efficient products — are among the most aggressive in the nation. The state’s business energy tax credit funds 50% of a renewable-energy manufacturing facility’s cost, up to a total credit of $20 million per project. That dwarfs similar incentives in states such as Hawaii, which caps credits at $2 million, according to the Database of State Incentives for Renewables and Efficiency. From 2006 to mid-2009, Oregon spent $386 million on tax credits for clean-tech companies, according to the state Energy Department.

According to a recent Pew study, Oregon had 19,000 clean-tech jobs in 2007, up 50% from 1998. About one of every 100 workers in Oregon works in the clean-tech industry, the largest percentage in the nation.

This is an instructive example of targeting an industry.  Here are a couple of observations:

1. It’s going to be tough to compete in this space with states like Oregon.  They issued $386 million in tax credits in three years.  Adjusted for population, that would be like New Brunswick issuing $100 million in tax credits – to one industry.

2. They have doubled their clean tech industry employment in 10 years.  That’s the kind of target we need for growth sectors in New Brunswick.

3. If you read the full article you will see many examples of multinational firms attracted to the state.  We must be able to attract anchor firms into our targeted growth industries.

4. This case study made the Wall Street Journal.  I am not that ambitious but I think if New Brunswick is successful in building growth sectors – it will get noticed.  When was the last time we had a story in the national press about a specific growth sector that is booming in New Brunswick?  I read stories about tax cuts, forestry problems, Bernard Lord’s political future, etc. but I can’t remember the last time the national press picked up on a specific sector growth strategy.  I will say there have been several energy hub stories in the national press but most of them were forward looking (new refinery, second nuclear plant, energy corridor) not a backward evaluation of a success story.

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The Miramichi Leader is running a series of stories on the area’s history and this one is entitled The timber industry becomes a driving force in the Miramichi (19th Century).  I wonder when historians are writing about this period what will they be saying?  When you think about this stuff from an historical perspective it does help clarify things.  I suspect the vast majority of government initiatives in Northern New Brunswick will fade into the background and hardly be a footnote in history.  Will there be a breakthrough initiative?

My mind always turns to this Emmerson guy who was a federal Cabinet Minister when the CN Shops burned down – I think it was around 1911.  There was a push by Montreal politicians to move the whole thing to that city – even way back then but as the history goes Emmerson fought to keep it in Moncton and that facility remained an economic anchor for the area for several more generations.

That’s what we need right now for Northern NB – and I would argue all of NB.  A breakthrough effort that will be remembered 100 years from now.

This is from the Tribune today about Restigouche in 1909:

If the ICR Commission had been here last evening they would probably reluctantly have acknowledged that the present ICR depot was not of sufficient size to accommodate traffic at all times and could serve for some years. The traffic last evening broke all records. The station and walks were crowded and the train being late, many were the complaints of lack of accommodation. Nowhere to sit to rest, and jostled on all sides, mothers with children endevouring to keep them near, baggage on trucks on the platform, train tenders dragging hose and ladders along crowded walks. Altogether it was not very pleasant for the travelling public.

Much of the local traffic was due to summer visitors returning to Montreal and Quebec from Gaspe ports, both steamers having arrived in port early today. Many are also going to Toronto and the West.

There was a time – 100 years ago – when the train stration in Restigouche county was overflowing.

Ancient history.

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There is an article today in the TJ where a Fredericton businessman worries the “province risks losing its head offices as business leaders look abroad for companies to acquire their firms.”

This is not as cut and dry as some will say.  This paranoia over foreign ‘takeovers’ is much exaggerated.  Sure there is risk but there can be considerable reward from becoming part of a national or international firm.  GTech buys Speilo and grows it.  The former owner banks a couple of hundred million and sprinkles much of it around New Brunswick.  On the flip side, Oracle buys Whitehill and we are unsure of the final outcome.

The truth is that New Brunswick can’t try and insulate itself from the global economy.  We have tried this and how’s that working out?    I looked at this and by my calculation New Brunswick has the lowest percentage of firms either publicly traded or with non-bank capital sources from national or international sources.  We could use an infusion of cash and the kind of market development opportunities that come from being better connected internationally.

As usual the New Brunswick ‘thinkers’ get this wrong in this article but the expert from McMaster gets it bang on:

Benson Honig, an entrepreneurship professor at McMaster University’s DeGroote School of Business, agreed that encouraging startups is of greater concern to jurisdictions across Canada that lack the scale of investment available in the United States – over succession planning for existing firms. “In my view, the premier of New Brunswick should be thinking, ‘How come we don’t have 50 new startups in a year,’ instead of worrying about, ‘Who’s buying our old companies,’” Honig said.

This is the fundamental issue.  Not whether or not a few of the “old faithfuls” like Neill and Gunter get bought out.

And by the way Honig is not talking about mom and pop start ups. He is talking about 50 new Whitehills or Speilos.  That is what will drive the economy and if a few of them get bought out by global firms, clap clap.  Don’t spend it all in one place.

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I may be just getting old so allow an old geezer a reflection.  When I was finishing high school and doing the obligatory review of potential universities I distinctly remember UNB positioning itself as one of Canada’s top computer science schools (this is circa mid 1980s). 

Economic development usually happens in cycles and it seems to me that many of the top universities in the C.S. area (Waterloo comes to mind) back in the 1980s were catalyts for the development of a significant IT clusters in their communities.

Did UNB play this catalytic role in the creation of a large IT cluster in Fredericton?  I know there are a few firms such as CARIS but are there dozens of world class companies emerging from the research at UNB? 

I really don’t know the answer here.  Just asking the question.  Someone remarked to me offhand the other day that UNB CS has been woeful at spinning out IT startups and leveraging research.  That same person suggested that something like half of all UNB CS grads over the last 20 years have left New Brunswick to work elsewhere.

Anybody know more about this?

You, of course, realize my interest.  I think that universities should be critical players in a community or province’s economic development.  If we want to build a cluster in – you pick the topic – UNB should be at the front end of the value proposition for that cluster – churning out students, setting up research chairs, attracting global companies as research partners, incubating spinoff companies, playing a key role selling the community/province to investors, etc.

I guess all this stuff I was told about UNB and its computer science faculty troubled me.

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Look at Minnesota all growed up and playing with the big boys.  It seems to me that Minnesota has a little New Brunswick look and feel.  Cold, lots of huntin’ and fishin’ – lots of skeeters.  Maybe we can learn a thing or two about economic development:

Minnesota is home to 19 Fortune 500 companies and ranks ninth among all states with these sought-after giant entities.

Minnesota ranks third in the United States in wind energy production capacity and fourth in ethanol production.

In science, Minnesota is home to the world-renowned Mayo Clinic in Rochester. It positions the state as an international leader in biotech and medical genomics.  Fifteen minutes from Mayo, plans are now underway to develop Pine Island’s 200-acre Elk Run biobusiness park, part of a 2,325-acre master-planned community.

In science, Minnesota is home to the world-renowned Mayo Clinic in Rochester. It positions the state as an international leader in biotech and medical genomics.  Fifteen minutes from Mayo, plans are now underway to develop Pine Island’s 200-acre Elk Run biobusiness park, part of a 2,325-acre master-planned community.

All told, Minnesota’s 94 announced expansion projects in 2008 are worth an estimated $3 billion, and will add or retain an estimated 4,000 jobs.

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I know this is an old report but I doubt the numbers have changed that much. I pull it out everytime some smart pundit or politicians worries that New Brunswick could end up like Alabama or West Virginia (like this op/ed today).

It shows both Alabama and West Virginia ahead of New Brunswick for their average standard of living (page 10). 

I know some will question the study (Industry Canada put it together) and others will question whether or not PPP GDP per capita is a good measure.  Others will talk about the gap between rich and poor, environmental issues, etc.

The last time I checked, the percentage of persons living in low income in Alabama was lower than New Brunswick (can’t remember the West Virginia numbers).

I don’t know enough about the environmental situation in West Virginia to comment.

But the truth is that on this one measure – widely used to compare economic standard of living – New Brunswick is at or near the bottom in North America.  If people like this columnist want to frighten us that New Brunswick will end up like province or state x, they are going to have to find new examples.

Final point.  The columnist (along with a litany of others) talks up the potential of tourism – particularly in rural New Brunswick.    Do you think replacing forest product mill jobs with tourism jobs will enhance the standard of living of the average New Brunswick?

It’s time we started realizing that “Alabama North” wouldn’t be that bad if you look at issues like income levels, lack of poverty, attraction of new industries like steel and auto, etc.  It’s also time to realize we can’t rely on tourism as a primary economic engine for the province.

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I had a lively chat a few years ago when Molson announced they would be putting a plant in Moncton (with a large grant from the province).  The person I was discussing this with was insistent that it wasn’t economic development because the plant was primarily going to service the local market (Maritime) and would end up just taking market share from other local producers (see story about the firm’s growing market share here).

Import substitution is an important economic development concept.  I don’t believe we should put up barriers to protect local producers, but in a free market context if a firm (like Molson) was manufacturing product elsewhere and shipping it into the Maritimes decides to move the production here that is indeed incremental economic activity and therefore economic development.  If they increase their market share here and reduce the market share of other local producers that is not strictly speaking economic development because they are just taking market share from other producers (not new economic activity).

In fact, I would like to see import substitution explored more fully as an economic development driver.  If there is a captive market in the Maritimes for a product or service – we should be encouraging companies to fill that market by setting up here.  An example might be Walmart’s distribution activities in the Maritimes.  Right now all their product is shipped in from warehouses elsewhere.  If that distribution activity was done locally in the Maritimes it would add incremental economic activity (say 150 good paying jobs) here.

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I had an interesting talk today with someone about this issue of celebrating failure.  I have said in the past, and many others as well, that we need to be a society that encourages entrepreneurial risk – particularly in the technology-based fields.  The old adage “nothing ventured, nothing gained” comes to mind.  However, there is a huge difference between celebrating entrepreneurial risk taking and celebrating bad business practices.  

I am a self-professed fan of entrepreneurship and I promote on this blog business success and the incredible importance of that to the province’s economic development but that doesn’t mean that there are not ‘bad’ businesses or companies that have bad business models or bad management practices.

When a business goes bad, technology-based or IT business as well, we shouldn’t automatically celebrate – particularly if there was taxpayer money involved.

Entrepreneurial risk is about finding a new way to do something or to exploit some interesting market niche in a new and innovative way.   If the business fails because of lack of market acceptance or some other reason related to normal business risk – fine.   I think we need to see more of that and we need to have access to more of that risk capital here. 

But if the business fails because the entrepreneur didn’t understand how to manage cash flow or blew through the angel financing without alignment to revenue potential or was an outright bad boss and couldn’t rally the troops, we shouldn’t celebrate.

In fact, we need to be more deliberate with young entrepreneurs that success is more than having ideas and more than having ideas and being able to convince VCs or angels or governments to invest in you.    That’s when the real work begins.  At that point it’s about good business practices.

That should be the role of incubators, mentors, etc.  I think that these small technology startups should have a small, active advisory board of folks from the same and other industries that can help the entrepreneur through the grit of running a business (as opposed to visioncasting). 

But let’s not automatically applaud business failure – that’s not the point.

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