It’s The Economy, Stupid

I listen each week to New Books in History - a really interesting podcast that someone on this blog alerted me to a while ago.  This week’s podcast is an interview with an historian from Nippising University in Ontario about WW2.  Her name is Hilary Earl and the book is The Nuremberg SS-Einsatzgruppen Trial, 1945-1958: Atrocity, Law, and History.

Don’t worry, I am not diverting into blogging about the the second world war.  I try to keep things relatively on topic here.

No, my interest as it relates to this blog is Dr. Earl’s description of her early life.  She grew up in New Brunswick and attended UNB before moving away.

The interviewer is from Iowa so she was using the standard ways to describe New Brunswick as a small place, east of Maine that no one has ever heard of.  She went on to say that “most Canadians don’t even know where New Brunswick is”.  However, she had high praise for her education at UNB.

This is another great metaphor for New Brunswick.  A place no one has heard of (even Canadians) with some good universities that are incubators for folks looking to leave.

One can’t help but appreciate the irony of her comments in the context of her now living in Northern Ontario.  One suspects that both Nippising University and North Bay are not exactly the topic of household conversation in Kelowna or Red Deer.   But I digress.

She’s obviously a talented scholar and like so many NBers did have to leave to pursue her career.

I hope that some day her description of New Brunswick will be more flattering - something about a really neat place in eastern Canada that is doing really interesting stuff……   It would be interesting to have 1,000 expatriate New Brunswickers describe the province as they remember it.

While some would say this is beyond the scope of an economic development blog I am more convinced each day that culture, connectivity and roots matter in the context of economic development. 

I’m just having some difficulty connecting the dots but there is something about how Dr. Earl described New Brunswick that crystallizes 140 years of history.

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CP is reporting that Daewoo is looking to take over TrentonWorks and the Nova Scotia government just gave a $20 million loan to the Halifax Shipyard to help it expand.    Both of these projects (the first one has not been formalized) could lead to hundreds of new, high paying metal bashing jobs in Nova Scotia.

I have said for a long time (remember Bryan Adams - “played it til my fingers bled”) that there is no reason why New Brunswick (and the Maritimes) couldn’t build a thriving and successful industrial economy.  There are alll these experts running around -including the heads of prestigious universities - saying the industrial economy is dead and we need to make New Brunswick a tech economy.

While the desire to make New Brunswick a tech economy is fine, saying the industrial economy is dead is silly.  Until “beam me up Scotty” is a reality, we are going to need cars, ships, planes, heavy machinery, energy equipment, barges, bridges, and thousands of other physical things that are fundamental to society.

That stuff doesn’t have to be manufactured in or near the largest urban centres - in fact there are good reasons why they shouldn’t.

The other point that shouldn’t be forgotten is that these industrial jobs (for the most part) are high wage jobs.  That is where we should focus.  I don’t see much future in trying to attract or foster the growth of low end manufacturing.   But the high skilled, high value stuff - certainly.

I’ll be interested to see the incentive package for the Daewoo project.  In the U.S. these wind turbine plants are getting tens of millions in grants from federal and state programs and also being guaranteed lucractive supply contracts (think Samsung in Ontario).

The last point has to do with the regional competition thing.  I think this is good for the region.  New Brunswick should point to Daewoo as an example when it is out pitching to a global audience.

And who know?  When Hyundai gets around to another manufacturing plant in Canada, maybe we will get a serious crack at it.

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I liked Sheila Copps in an Elizabethian Weir kind of way.  The kind where you disagree with them on most ideas and policies but like them as persons and as political figures.   Some people are just likeable - both Copps and Weir were scrappy too - maybe that’s another reason I liked them in their public roles.  Liz Weir would stand up in the Leg and thunder at Frank McKenna - it was fun.

Anyway I was thinking about Sheila yesterday after reading another diatribe in a western Canadian paper about the lazy and unmotivated Atlantic Canadians and how Albertan money is a crutch holding us back from our true potential.

When VIA Rail ran into some financial trouble a few years ago, the federal government was going to bail them out and Sheila proposed that instead of a bailout, we give all Canadians a return ticket on VIA Rail as long as they promise to visit a part of Canada they had never been to before.  Do you remember this?

She was, of course, laughed at and dismissed but I liked the idea. 

I have been grappling with the issues of national identity and patriotism for some time and I still haven’t resolved anything in my mind but I do think that being part of a country means something - and maybe having a basic understanding of that country is a starting point.  There are millions of new immigrants to Canada that have never been to Atlantic Canada - and wouldn’t be able to name a single city here.

I don’t know if you can force feed culture or national identity or patriotism.  I tend to think those things sort of bubble up over time. But I do think that we should at least make some limited attempts to understand our country and its regions.

I think Sheila was on to something.

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There seems to be a growing number of vacant buildings in downtown Moncton.  I walk from home to the downtown for meetings a few times a week and it is becoming quite noticable.  I read that Downtown Moncton Inc. is working hard to try and fix this.

There are some folks that aren’t too worried about downtowns but I am not one of them. 

Back in the 1990s I had to pick up a guy at the airport at 10 pm.  He was coming to town to evaluate the community as a place for a large new investment. By coincidence or luck when we drove into downtown Moncton at 11 pm the place was booming (this was a weekday). Something had just ended at the Capitol and people had flooded the streets and bars and cafes.  We stopped at the hotel and went for a walk and he was amazed at how ‘vibrant’ Moncton was. 

Vibrancy is something that is difficult to measure but it matters when it comes to business investment.  Most companies want to be in places that are dynamic and that can attract workers. 

The downtown can/should be a concentration of a community’s vibrancy.  There might be lots of optimism and entrepreneurialism and innovation and excitment in the universities, in companies and in cultural insitutions but the downtown should be a concentration of this vibrancy.

In our zeal to contain costs or expand our business parks, let’s not forget the broader impact that a downtown has on the town itself.

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Sometimes I chafe at simplistic summaries of real issues but as a columnist I realize it’s hard to fully make the case for anything in 600 words.  But his underlying point that New Brunswick companies need to get a whole lot more productive is a good one.

New Brunswick has relied on ‘cheap’ labour and lower costs for a long time.  I have speculated that a major reason why so many NB firms are against attracting national and international firms here is that it will drive up wages and costs - an objective of economic development but not one that interests many firms in the province.  In fact, just last week I had a conversation with a great company in the Maritimes doing very interesting things but the boss was adamantly against any efforts to attract firms like his to the region because they would just raid his workers and drive up costs.  My argument about the cluster effects from having many similar firms in a local market fell on deaf ears.

So, it makes logical sense that we need to figure out how to be more productive but I think that has to be thought through - at a firm and industry level - very carefully.  I have witnessed first hand how companies can blow through hundreds of thousands on I.T. and it not get them anywhere (greased with government grants).

The broader issue is really about redefining the value proposition for targeted industries in New Brunswick.  The province should have lower costs - not deeply lower - but lower costs because that is relatively normal when comparing large urban areas to small urban areas.  But the value proposition needs to go well beyond cost if we are to be effective going forward.

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I see that the State of Maine is running tourism ads on Canadeast.com.  What I don’t understand is the words and pictures look exactly like New Brunswick.  Why would people want to go to Maine to cross country ski, walk in the woods and stake on ponds?   There must be some niche ideas they can pitch…..

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I can see both sides of releasing the CENB report suggesting that the provincial government spends more money on the south than the north in this province.

But as someone who has staunchly fought for a new, serious and credible economic development strategy for the north, I feel this is a mistake.

First, the debate between the North and Fredericton looks an awful lot like the debate between Fredericton and Ottawa.  We know Ottawa spends far more - even per capita - on R&D in Ontario but the Feds will tell Fredericton that New Brunswick gets far more Equalization, EI and other income propping up money.

Sound familiar?

Because it is exactly the same argument in New Brunswick. The average adult in Gloucester county receives 24.5% of his/her income from government transfers.  The average adult in Saint John county receives 16.3% of his/her income from government transfers.

What does that mean?  It means across Northern New Brunswick, each year the federal and provincial governments spend several hundred million more on income support in Northern NB than in Southern NB.  And, if you take into consideration the lower average income (hence lower taxes paid), the subsidy is exacerbated.

My point is not to pick on the North.  This is exactly the same argument that Ontario would use against New Brunswick.

In both cases it is irrelevant.  In fact, both the CENB report and my analyis auger for a more serious economic development effort in the North.  All the CENB and all the wizard economists need to do is look across Canada and they will see that government investment in physical infrastructure tends to lag economic activity.  They don’t build roads, schools, hospitals based on potential demand in the future (most times).  They wait until the need is there and then they invest. 

Government investment in R&D and specific industry growth efforts (like auto in Ontario, aero in Quebec and new media in British Columbia) tends to lead economic activity.

So the CENB, as I have argued, should spend less time arguing for more lagging government investment (roads, schools, hospitals) and more time arguing for leading government investment (i.e. sector development investment). 

Now I admit there is overlap here.  Government spending itself is an economic driver but the argument put forward by the CENB will be easily countered - as I have shown above - by the huge amount of income support in the North.  By any measure, government spends more in Northern NB across all spending areas - than in the south -with the isolated exception of Fredericton where the ‘head office’ of government is located.

I have spent several years slowly trying to convince stakeholders in the south that economic development in the North is a good thing for the province.  Every coffee, multiple columns, hallway conversations, blogs - but in the end it’s all about goodwill.  The population base in Ontario means that on a purely political level - the feds need to do very little in New Brunswick in terms of economic development.  The same holds true within New Brunswick.  If stakeholders in the North push too hard and the power base in the south pushes back - they will lose - and New Brunswick will lose.

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Hollywood actor and Web-savvy activist Ashton Kutcher says he will “crowd source” questions about the Kremlin’s push to develop a Russian Silicon Valley to his 4.5 million Twitter fans. The actor is part of a U.S. delegation of technology and social media leaders that arrived in Moscow as part of White House efforts to improve ties with Russia. Kutcher told reporters here Thursday that he will “translate the Russian voice to an American audience” and seek advice on Russia’s efforts to build its own high-tech centre.

I love the idea of getting celebrities involved in economic development.  They speak to an audience that old fuddy duddies can’t and they have credibility with the younger crowd.  I have always said that youth apathy/disinterest in New Brunswick’s economic development has been a barrier to growth. 

Maybe we can get Taylor Swift to endorse the Northern New Brunswick economic development strategy….

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Peter Lindfield made a really good point in his column this week in the TJ where he talked about the fact that the NB Power debate was essentially crowding out debate on a wider range of very important public policy issues.  I would take it one step further and say that, in a strange way, NB Power is providing political cover for the governing party and the opposition.

I am sure that if Premier Graham wanted to find a diversion, he wouldn’t have picked NB Power but it has meant that meaningful, thoughtful public debate on tax cuts, deficits, energy policy, etc. have been all but ignored in the public square for months.

And for the opposition, all they have to say when someone asks about their ‘policies’ is ‘NB Power’ and all is forgotten.  It’s amazing.  We have an election coming up in a matter of months and I haven’t seen any substantitve policy framework coming out of the Opposition.  It looks like they will fight the election on NB Power supplemented with a few platitudes about every other public policy issue from deficits to health care.

The sitting government also has been distracted by NB Power.  Their plan to reduce the deficit by 2014 (as I covered here before) is not credible.  They are forecasting spending growth to drop to almost zero and revenue growth to increase by something like 6% per year.   That’s not going to happen.

The federal health care deal runs out in a couple of years and the Feds have already said the go forward arrangement will be far less lucrative.

The feds have already hinted that Equalization and other transfers will start to be tightened in order for them to get their books in order.

We need to have a serious discussion about this tsunami of economic forces touching down in New Brunswick and at the same time rectify a genuine need to invest seriously in the kinds of public investments that will lead to more business investment, job creation and economic growth (and the tax revenue to pay for our public services).

Even people that are supportive of the NB Power deal (as I am) need to realize that the pocket book implications for the average New Brunswicker are far greater from these other issues than from NB Power.  In fact, getting NB Power behind us should be the #1 priority of both the government and the opposition. 

I haven’t changed my mind on this at all.  I think that the deal with Hydro-Quebec will take NB Power off the table as a concern for at least 10 years - and probably more.   If we keep the status quo (as Volpe pointed out) NB Power’s problems will be compounding the rest of the problems.  But even if NB Power’s asset sale gets scuttled, it won’t change the broader facts.   It will continue to be a problem for government going forward. 

Whenever people talk like this the responses can be mixed.  I don’t think the sky is falling in New Brunswick - I haven’t felt this at all since I came back in 1992.   The system we have in this country means that there will be no massive hammer coming down on the province.  We have a fairly good debt to GDP ratio and governments will likely run deficits for the foreseeable future.  They will try to curb spending growth and they will raise taxes - that is unavoidable.  And we always have the federal government as the safety net.  If the economy in New Brunswick collapsed, the Equalization program would provide a cushion.

But I, for one, don’t want to spend the next ten years just sputtering along as a province.  Cutting here and there, tweaking taxes, hoping for the best.  The last 10 years or so should have been a great time of progress but we saw very little.  Canada wide from the mid 1990s to the late 2000s went through an unprecedented period of growth - economic, population, tax revenue, new industries, etc. 

I think we still can figure out a grand strategy for the province but I think it is far more likely we will continue to sputter along.

I have to close by taking another little swipe at the media (of which I am a part in some small way).  For much of the media in this province, NB Power is being covered like the OJ Simpson trial.  They have to get their one or two daily NB Power stories into every news cast.  It’s like the T&T’s Al Hogan and the toll highway in 1999.  Every single day for weeks there was a story hammering the toll highway - nothing new just a kind of written titillation.  Use pejorative words, quote another expert, hammer away until the public is sick of it.  That’s the NB Power sage.  Would it kill us to go two or three days without a single NB Power story?   The media justifies it because it’s such ‘an important issue’ while everything else is what - not important?

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I don’t like to step too far out of my comfort zone in terms of subject matter expertise. This historian in the Globe & Mail today I think steps outside his area of expertise.  He is making the case for raising taxes in Canada.  He says:

It seems to be conventional wisdom among tax experts and taxation enthusiasts that at least a 40-per-cent increase in the GST, back to 7 per cent, would generate the revenue to fight deficits and maintain social spending.  It’s seldom mentioned in these circles that the GST, being a consumption tax, is fairly regressive. Despite a few compensatory loopholes, the GST affects most people about equally. The poor pay a much greater portion of their income in sales taxes than the rich. Sales taxes also act as a break on consumption – which is why, in slow economic times, they are often cut to try to stimulate spending. It’s almost certain that, if the Harper government had not cut the GST before the current recession, all our experts would have called on it to do so as a stimulus measure.

It is true that broadly applied the GST or HST can have a particularly negative impact on the poor but the government has set up a fairly good mechanism to deal with this.  Almost 9 million people reported getting a GST/HST rebate cheque in 2009 and the total amount of money rebated was over $3.6 billion.   My point is that we need to protect lower income Canadians from the regressive nature of a consumption tax but to disqualify the consumption tax is a big mistake in my opinion.

His second point is that consumption taxes act on a break on consumption.  Exactly.  That is what they should do.  We consume far too much in this country and although I don’t like the shock of recession I would like to see us collectively over time reduce our consumption dramatically.  This may be my inner environmentalist coming out but I think we consume way too much as a society.  People talk about the Chinese elevating their consumption to the level of the West.  I say we should move in the opposite direction.

I have given this some serious thought over the years.  Governments need tax revenue and they have a number of ways to get it:

Personal income tax - taxing this too much can be a disincentive to hard work and innovation and forces people to find ways to avoid paying tax.  Remember when former Premier Lord cut the small biz tax rate to the bone - several thousand people incorporated as small businesses - to shift their income from personal income to small business income to take advantage of this.  I think personal income tax rates should be competitive. 

Corporate income tax - I have said and maintain that corporate income tax rates should not be a disincentive to investing here.  They should be competitive with other jursidictions but there is no real reason to cut them to the bone or elevate them very high.  In Canada, across Canada, governments get less revenue from companies that most OECD countries.  That’s just the way it is.  The Americans have been clamouring to get their federal rates cut to the level of Canada.

Sales/consumption tax - Again, I favour this one for a wide variety of reasons.  

Then there are a whole variety of other smaller government income sources such as property tax, gas tax (this is larger than you might think), royalties on natural resources, etc. 

Of all these the one I favour is consumption tax.  If we are worried about it being regressive than make it so people earning below some point pay nothing.  We do that with income tax now - and we essentially do that with the GST/HST through the rebate programs.

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