It's The Economy, Stupid

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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I think this is a good initiative.  I’ve talked with senior provincial government bureaucrats (past and present) that say the first thing cut in the past has been policy development expertise in the departments and that many of them do not have the internal horsepower to properly evaluate and support policy decision making.   Tapping into this external expertise makes good sense.

Of course that does sound self-serving coming from a consultant -but I suspect there is not a whole lot of work for me on the social policy front.

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From Moody’s report released yesterday, the following is their table on the changing nature of government revenue in New Brunswick.  I don’t have the link to the original document - I can’t find it online.

I think this speaks for itself.  Irrespective of the need to eliminate the deficit, we have got to figure out a way to boost own source revenue. 
CONSOLIDATED OPERATIONS (C$MILLIONS, YEAR ENDING 3/31)

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I’m not sure why but I enjoy talking with these old guys.   This is an op/ed by a guy who interviewed an 89 year old economic developer from Nova Scotia.  Yes, there were lots of people doing economic development even back in the 1950s and 1960s.  There was more focus on attracting industry to the region back then.  This guy,Robert Manuge was general manager of Industrial Estates Ltd.

Here are some juicy tidbits (if you don’t want to read the full piece):

New industries are pouring into Nova Scotia at a prodigious clip. “Nova Scotia Moves into the Mainstream,” reads a headline in the Financial Times of London in 1965.

IEL’s “record makes impressive reading,” says Time magazine in 1962.

The Financial Post commented that IEL should succeed “if only by sheer audacity.” The audacity part was Manuge, along with industrialist Frank Sobey who served as president of the arm’s-length agency.

Always on the hunt for potential clients, a chance encounter with a person remotely linked to Michelin Tire on a plane trip led Manuge on a hunt — described by the Financial Post as an “international cloak and dagger thriller” — that finally got the secretive company here for its first North American landfall, against the wishes of French president Charles de Gaulle who wanted it in Quebec. A similar encounter landed India’s first major international investment, the Anil hardboard plant (now Georgia-Pacific) at East River, Lunenburg County.

And there was the first European car assembly plant, Volvo. One report has Manuge “literally chasing after Reynolds International chairman, J. Louis Reynolds,” to land Canada’s first aluminum can factory. His secretary kept count. He logged a million miles from 1961 to 1971 hustling business for Nova Scotia.

He’s quite cranky about things these days.   Not too big a fan of NSBI.  Doesn’t like the regional development agency.  Hates giving grants to business.

To be fair to the current crop of economic developers, it’s always easier to remember the positive of an earlier age than the negative (people want to put a positive spin on their past accomplishments, naturally). 

But I think there is something to the underlying point here.  Someone just sent me something that shows NB is forecasting to spend $345 million on ‘economic development’ in 2010.  That’s a huge pile of dough. 

I have felt for a number of years that sprinkling taxpayer money around the economy in the form of grants hasn’t worked very well.   Regardless of what you think of the use of grants, there doesn’t seem to be high level evidence of results.    There are isolated cases of very good success but many more where the outcome is questionable.  

I have been calling for a thorough review of the who, what, when and where of economic development in New Brunswick and I think an election is the perfect time to trigger such a review.   I think we have gotten into a stream of activity  and are spending more and more in that stream each year – and I am not sure it is the right stream. 

I won’t dive back into all my concerns here – read the past few months worth of posts – but it has something to do with vision/focus, something to do with effective measurement (i.e. tax dollars generated per e.d. dollar spent) and something to do with passion – people being fired up about economic development at all levels.

I think we need to focus on a few key strategic sectors, build infrastructure, R&D, talent, promotion and excitment around them – and then sell, sell, sell – to anyone local – national – international that will listen.

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