It's The Economy, Stupid

My wife and I decided to spend a few days in Spain.  I’ve been working like a dog for about six months or so and we needed a little break.

When we arrived, there was a general strike – so just about everything was closed including taxi service from the airport.  We are told they are back in biz tomorrow.   They are just staging these day long strikes to make their point.

The unemployment rate here is 20% and there are some visible signs of the economic downturn although by the number of cranes and public infrastructure work I see here – it does look like they are following at least for now the stimulus route.

It’s not a particularly good time to leave New Brunswick as the unexpected results on Monday night are sinking in.  I think most people thought the Tories would win after the polls showed a wide margin but I am not sure anyone predicted such a romp.

My very limited survey of economic development types so far would indicate there is optimism that Alward’s government wll have a strong economic development focus.    I think the risk would be that other challenges will overwhelm the economic development file.  Investing in economic development is a longer term effort with no guarantee of success.  Slashing spending and moving back to a bare bones model might be recommended by some.

It is worth pointing out that McKenna’s greatest economic development successes occured in the middle of the last recession. Companies were rethinking their customer service and back office models (consolidation, new technologies, outsourcing, etc.) and that opened up an opportunity for NB to carve out a niche.   I think it is harder to define those niches now but it is mandatory that we do so.

Spain is an excellent example of why Alward has to reduce and eliminate the budget deficit.   The higher the debt (and the uncertainty about future deficits) drives down your credit rating and drives up your interest rates.  We are in a relatively low interest rate environment right now (generally) but that is likely to change in the next 1-2 years and as the province has to issue more debt, the cost can be significant.

Every single point on the province’s debt servicing costs can add up to millions of dollars that are needed just to pay for the spending of the past. 

So, Premier Alward has to deeply cut the rate of spending growth, develop a bold new economic development agenda, fix a broken energy model, address the worst demographic crisis every to hit New Brunswick (for every person 60-65 years of age, there is only 0.8 between the ages of 15-19), and keep a cranky, populist leaning caucus in line.  He may also want to throw in municipal reform if he is into self-flagellation (likely a good thing that Baptists don’t believe in that method of punishment).

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In the spirit of consistency I’ll say today what I said after Graham defeated Lord in 2006.  Congratulations to the victor and I’ll thank Shawn Graham for his service to New Brunswick (and other losing candidates last night).

Politics is a tough business – I think that is what keeps a lot of candidates from running.  There were signs springing up all over Moncton talking about how Graham Sold Out New Brunswick and my 14 year old daughter wanted me to explain it to her.  I mumbled something unintelligable  and then asked about Justin Beiber.

My mother used to say “there is many a slip between the cup and the lip” and that applies here.   The self-sufficiency agenda was the right strategic framework  – I maintain that and hope the new government sticks to the spirt of it if not the label.  Or should I say reinvigorates it as we never did move much towards self-sufficiency.

For the new team, I hope they don’t see this election win as a win for mediocrity.    Graham’s team put out a lot of big ideas – most were roundly rejected by New Brunswickers.  That could signal to the new team that they shouldn’t do anything bold -just move forward and hope for the best.  That would be a mistake.

The other interesting fact of this election – is that it is not a whole new slate of Tories.  It is likely that most of Alward’s cabinet will be the same as those in Lord’s cabinet.  This isn’t 1999 or 2003.

What do I like about the incoming Tories – from their platform?

InvestNB – we need to refresh the entire economic development model – hopefully this will be done.    We spend a huge amount of money between $200M and $300M on economic development each year in this province.  I think we could have a much better model.

Energy – I was part of the consultation process and liked much of what I was hearing.  I didn’t like the three year rate freeze – that was the most politically motivated decision of the election.  NB Power is ‘under water’ – it has more debt than the book value of its assets.  It would be like you having a mortgage for $200,000 on a house worth $125,000.  In addition, that house is coming up for major renovations in the next 10 years or so and you don’t have the money to pay for it.  The three year rate freeze would be like you moving to paying just the interest on your mortgage and pushing off the principal payment for three years. 

Deferring problems is an all to common reality in New Brunswick politics.

Other than that, I am not sure.   The promise to consult, I guess, is good but there are New Brunswickers that are never going to like tough decisions.  Raising taxes, cutting spending, raising electricity rates, closing hospitals, municipal government reform – these things are going to get push back  – a lot of push back but governments have to make tough decisions.

It’s a new day in New Brunswick.  I hope it’s a fresh start.  I wish Alward and the team the best of luck as they begin to take on these challenges.

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I real the editorial page of the New York Times just about every day.  I am fascinated by the battle that plays out each week between the Nobel prize winning economist Paul Krugman and his nemesis David Brooks. 

Krugman is trying to steer America into a bold new world of government-led economic management.  Sometimes he is preachy, sometimes wonky and sometimes condescending but he vacillates from teacher to denouncer and lately he has been in the denouncing stream – Tea Partiers, GOP, dissenting economists, Obama (for not doing enough), – they all get hammered.

Brooks, on the other hand, is trying to slowly and deliberately reorient American thinking – at least those folks who read the NY Times.  Every column is a light lesson in American fundamentalist ideas – the free market, the pursuit of happiness, government as playing field leveller not guarantor of success – all done in a centerist, calm way – he uses references to popular culture – stories that resonate with the reader.

While Krugman comes across as increasingly apoplectic – Brooks is calm and methodical.  If you ever watch these two on the TV news talk shows, that is how they come across on screen as well.  Krugman as the brilliant but a bit hysterical one and Brooks the slow talking, patient interlocutor trying to persuade you with references to a better day.   Krugman is impatient with anyone who doesn’t agree with him.

I raise this because I struggle with my posture on things here in New Brunswick.  My tone has been increasingly Krugmanesque (it varies over the years) but my soul is essentially Brooks.    I think we have to find a way to come to a gentle consensus on what needs to be done.  I am not sure brilliant hysterics works much anymore.

I think it animates small groups of partisans (to the ideas) but the masses chafe against the tone and tune it out.

Most folks don’t sit around thinking about things like economy, demographics, deficits, out-migration, immigration, etc.  They are living their lives and preoccupied with their own micro-universe of issues – job, family, social groups, neighbourhoods, health, etc.  And so they should be.

But most people feel in a general sense that things are ‘good’ or ‘bad’ or ‘unsettled’.  This general tone is set by informal conversation, by interaction with media, and increasingly by content on the Internet, etc.  I continue to wonder what the average joe or jane thinks when they read the comment threads on CBC.ca or the Telegraph-Journal.   I would say 95% of all comments are angry, frustrated or cynical screeds from anonymous venters that add very little to the core issue but add a lot of noise.

But my fundamental premise is that the public needs to be brought along – a la David Brooks – to a set of  ideological core ideas  - not by a Krugman-style beatdown but by patient reasoning.

New Brunswick has just sort of drifted along for many years now.  When the call centre and forestry jobs were booming in the early 2000s, things were pretty good – the structural issues were there but on the surface things were pretty good.  We spent all the new fed transfers beefing up public services which gave an additional economic boost.

I think we need to figure out a way to convince people that New Brunswick can be more than just a collateral player in the larger Quebec narrative in Canada (remember the Equalization and EI changes that injected hundreds of millions into the NB economy were primarily focused on garnering Quebec votes). 

There is no inevitability here.  New Brunswick could be a place that is attracting people into good paying careers and building a national reputation as a significant player in ‘industry a’ or ‘industry b’.   

I think I’m going to swing my writing more Brooksian and less Krugmanesque.   I still like to pivot off data and statistics to prove my points but the core narrative will be less about apocolypse and more about choice. 

Because New Brunswick is not a large part of the Canadian economy, it doesn’t much matter in the national narrative what happens here and that core premise, I think, has embedded itself at a cultural level here.

There is more shoulder shrugging than fist pounding.

I’m now focusing on the eyebrow raising.

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I had a long chat with a guy a couple of days ago who thinks this election cycle was the most acrimonious he had ever seen.  I am not sure about that – I think we tend to forget the tension and the heated rhetoric that occurs most elections.   Certainly, New Brunswick is tame by U.S. standards.

It is true that politicians try to boil stuff down to hot buttons that will trigger a reaction in the swing voters.   The truth is that there is a group of folks that will virtually always vote Liberal, a core constituency for the PCs, and the NDP.    That (ever increasing) middle is what they are vying for.

I haven’t made it a secret that I dislike when politicans run roughshod over complex but potentially important public policy debates for political gain.  Scrapping the toll highway has cost New Brunswickers hundreds of millions in lost revenue and increased debt servicing costs – and how many votes did it really get Lord in the end?

The Liberals promising a public auto insurance system – did it really swing the balance?

The NB Power/Hydro Quebec deal was the most juicy hot button of all.  Only 17% of New Brunswickers in the last poll said they had a good understanding of what was being proposed and yet a vast majority were against the deal. 

We will never know, but that might be the costliest of all.  I’ll probably write more about this in the coming days.  Someone sent me a snide email this week saying “I’ll bet you are changing your view on NB Power now”. 

Nope.  I still haven’t seen anything to convince me that selling NB Power to Hydro Quebec was bad public policy.    As I said all along, we needed to clarify a few things such as the rate escalation methodology and the sourcing of power outside the Heritage Pool but the general idea of plugging into HQ’s lower cost structure and eliminating all of the debt was too important.    New Brunswick, in my opinion, will be paying more for electricity now than it would have under a HQ model and we all are going to pay – either as ratepayers or taxpayers.  

No matter who wins tomorrow, I’ll be out there chipping away on the economic development file as I have for years.    I’ll be against the government on many issues and I’ll be supportive of others.  Just like the last administration, just like the Lord government, and, quite frankly, just like the McKenna government.

While it was pre-blogging days, I was not happy with the way that Premier McKenna exited and the economic development agenda just collapsed.  One BNB worker told me it was like someone popping a ballooon.

McKenna should have spent more time grafting a culture of economic development focus in government instead of vesting it in himself.  To this day, everyone in the system seems to be waiting for the second coming of Frank on a white horse.

He’s not coming.  We need to get away from the charismatic leader idea of economic development.  

Don’t forget to vote tomorrow.  While it may sound cliched, it really does matter in a democracy.

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I have reported on these pages over the years about studies from Calgary and Ottawa-based think tanks arguing that the solution to Canada’s problems is more labour mobility.  There was one study out of Ottawa that went further and recommended the government provide incentives for people to move from places like New Brunswick to Alberta. 

In a single variable universe, I guess that might make sense but we live in a multi-variable reality.  Over the past 15-20 years all four Atlantic Provinces have witnessed fairly significant net out-migration- more moving out than in. 

As wished by the think tanks, that has pushed down the unemployment rates – probably not as far down as they would like but they are at record lows.

But I said then, and now, what about the law of unintended consequences?  These economists and gurus forgot about the impact of this out-migation.   They must have assumed, for example, that the cost to provision public services would decline porportionately to the out-migration.

But that’s not how it works.  The cost of health care, for example, has been rising in New Brunswick about the same pace as in the fast growing populations of Ontario, BC (not as much Alberta).    There isn’t a one-to-one correlation.

So, essentially, we have just forced more of the social costs of NB on taxpayers in Alberta, BC, etc. (many of whom are ex-New Brunswickers). 

I warned back then you can’t have it both ways.  It is very hard to have a national commitment to equivalent levels of public services in every province unless you have some parallel economic development commitment.  That’s not to say that places like New Brunswick will ever grow at a same pace as a place like Ontario (it hasn’t happened in 300 years) but we need better calibration over time between tax/revenue generation and the cost of public services.

So what happens now? 

I have to reiterate that the wheels aren’t falling off the bus.  New Brunswick will chug along but these macro-factors will  inevitably hit us. 

I guess my final point here is that it would be nice for these think tanks to come to the conclusion (as I have) that the national agreement breaks down without a baseline of economic growth in the regions. 

I think the accelerate migration from poor to rich provinces model hasn’t achieved what they thought it would.  There may be better labour market equilibrium but there is significantly increased dis-equilibrium in many other areas.

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This election cycle, there has been a lot of articles, commentaries, op/ed pieces, etc. about the complex fiscal, demographic and economic challenges facing New Brunswick.   Even my stuff has been increasingly shrill (cough, cough).

The problem is that it is hard to translate this to retail politics.  As long as people have a job, a reasonable income, etc. they are not too concerned about issues of debt, NB Power’s long term health, the aging population, etc.

And we do have fairly low unemployment for New Brunswick standards.  If you realize that the unemployment rate is biased upwards structurally in New Brunswick because of our seasonal industries, it is really very low in absolute terms (assuming folks in seasonal jobs are not ‘really’ unemployed – they are just waiting for their job to start up again).

There are pockets of high unemployment like the Miramichi but most of the talk about job creation is not tied to current need but to the realization that our economy needs to create more wealth to pay for public services.    And and equally pressing reality that for everyone New Brunswicker about to leave the workforce (60-64 years old) we have 0.9 about to become workforce age (15-19).  The chart tells the tale.  In 1971, there over 3 people aged 15-19 in New Brunswick for every person aged 60-64.  Now there is less than one-to-one and this is projected to get much worse by 2020. 

Ratio of Workforce Entrants to Exits – New Brunswick
Number of persons aged 15-19 per person aged 60-64)

 The following chart shows the percentage change in this ratio over the forty year period.  It actually improved a few years in the 1980s but since the late 1990s, it has dropped steadily.

Ratio of Workforce Entrants to Exits – New Brunswick
Percentage Change in the ratio – year over year

We need the jobs, but unlike Hatfield, McKenna and Lord, we will have to stop the out-migration and start attracting far more people as well.

This adds another degree of complexity to our economic development efforts.  It was one thing in 1995 to go out and tell UPS, Xerox, IBM, Exxon, etc. that we had lots of available bilingual workers.  It’s quite another to go out and tell companies that if they set up here (or expand here), people will move here for the jobs.

So back to my original point – people are right to be ratcheting up the tone of things because it is worse today than it was 10, 20 or 30 years ago on a variety of fronts.

But the public doesn’t really feel it yet.  We haven’t had to cut public services.  We haven’t raised taxes (we’ve lowered them).   The low spread between young and old populations actually drives down unemployment so we don’t feel that as acutely as before. 

And the tiny attempts at cuts or changes during Lord and Graham were met with swift negative reaction.  I still remember the small consolidation of hospitals under Lord’s time.  People were livid.  The Upper SJ River Valley has more beds now and more services than ever before but because they have to drive 15 minutes further to get to the hospital – angry.  Same in the Peninsula.

It’s going to be tough times but it’s not all bad.  We live in Canada and no matter what happens to the provincial fiscal situation, our essential public services are protected.  Worst case scenario, people leave – move to Alberta.  Tens of thousands of senior citizens are moving to Kelowna and the temperate B.C. climate in that area.  This is Canada – people can come and go as they please.

I think that the main point is there are some folks who want a better future for New Brunswick.  New Brunswickers – for the most part will be fine whereever they end up (comparatively) but New Brunswick – the place – has some tough times ahead.

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It’s kind of strange but in 2006 there were a fairly large number of drive by commentators to this blog during the election cycle.  The readership also spiked significantly.    But this time around, there are almost no comments – except for regulars.

I wonder why?  I have requested to see my traffic to see if readers are up or down.

Since 2006, Twitter and Facebook have emerged and maybe that’s where people go for their daily political dose and commentary.  

I haven’t commented that much on the election here – mainly because I have three columns a week in the TJ for the election period.

But I wonder if there is a broader shift away from blogs to the micro-blog Twitter and the relatively closed social network Facebook?

Or it could be just this blog.   It is interesting to note that NBpolitico has very few comments, The Bruce report few, and several others very few as well.

Maybe people are a) less chatty, b) there’s less anger around – remember the tone of the conversation in 2006 at least here, c) moved to Twitter and Facebook.

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The NDP is saying economic development that generates increased taxes for government is ‘revenue neutral’ in terms of the province’s fiscal situation because the feds just ratchet down Equalization as own source revenue goes up.

We have discussed this probably as much as any other theme on this blog.  New Brunswick gets more money from the Feds as a reward when the economy weakens and less money when the economy strengthens.

That is why the longer term goal of bringing New Brunswick into better balance between own source revenue and expenditures should be a shared objective between the feds and the province. 

In the mid to longer term, significant economic growth that fixed New Brunswick’s structural fiscal problem would be very beneficial to the feds.  It would reduce their costs. It would start to address the concerns of the ‘rich’ provinces and it would generate a lot of goodwill in New Brunswick towards the feds.

The joint levels of government could set five, 10 and 20 year targets (just like the EU with Ireland) and set up a serious model to work towards those targets.

Barring this, however; Greg Byrne is right.  We still need to focus on economic growth and the clawback is not one-to-one.

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Comments on the article I wrote suggested I was wrong about the population decline in most of NB municipalites.  You can disagree with me on interpretation, analysis – anything and most people do but you can’t argue with facts.  The following is a table of municipalities in the province and their change in population between 1996 and 2006.  In case you see yours missing, there were about 10 or so that had a boundary change and are excluded from this list.

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 We continue the debate about the role of small business and economic development.  I suspect we will not come to a consensus any time soon.  On the one hand, we have those who say “small business is the engine of the economy” and “most new jobs are created by small business”, and so on.  These folks believe the way to fix the New Brunswick economy is to lower small business taxes, reduce red tape, provide more capital sources for small business and then watch the economy boom.

I have a different view.  I see the small business segment of the economy as fundamental to the success of a healthy and dynamic economy.  An effective small businesses environment creates competitive markets – keeping prices stable and forcing continuous improvement and better outcomes for consumers.  If there are 25 architects in Moncton that variety should create better ‘markets’ for the consumer.

It would be crazy to imagine a world where there were 2-3 Walmarts in every sector of the economy and they dominated things.  We would be back to Ma Bell – high prices, low productivity and very little innovation. 

In a healthy, functioning market easy entry allows small, niche players to come in and challenge the bigger, complacent guys.

And I would argue that is what 95% of New Brunswick’s small businesses do.  They are janitors, plumbers, convenience stores, coffee shops, consultants, architects, dentists, hair dressers, electricians and 700+ other categories of business.

I just don’t think the way to significant economic growth is to focus on how to grow these businesses.  The number of janitors in a market will sort itself out.  There may be a role in government to monitor local markets to make sure there are functioning in a competitive fashion – a sort of Sherman Anti-trust act at the local level.   I know that creeps some folks out but I believe that monopoly and even oligopoloy in many cases is not good for the consumer in a local market.

So, with that as a long winded lead in, I was surprised to find out that food and clothing (in particular) is so much more expensive here.

In developing low income measures for local markets, Statistics Canada uses what they call the Market Basket.  The MBM attempts to measure a standard of living that is a compromise between subsistence and social inclusion. It also reflects differences in living costs across regions. The MBM represents the cost of a basket that includes: a nutritious diet, clothing and footwear, shelter, transportation, and other necessary goods and services (such as personal care items or household supplies).

The following table shows some benchmark cities compared to Moncton against two of the main components – food and clothing.  According to this analysis, it is 25.8% cheaper to purchase your basic clothing needs in Quebec City than it is in Moncton.  It’s 11% cheaper to buy basic food needs.

While there may be a lot of things going on here, this could indicate we don’t have particularly competitive markets in the area of clothing.  Maybe there are a few large players that are keeping prices up.  I know that folks will be laughing by now because there seems to be a clothing store on every corner in Moncton but the data is what it is.

Market Basket Measure Thresholds (2008 base) for reference family (Variance from Moncton)

For 2008.  Source: Statistics Canada. Table 202-0809.

My point is that government policy towards small business (those working in local markets) should be to foster competitive local markets.  

The monkey wrench, of course, is that small business for the most part (just like large business) doesn’t like competition.  Some (many) would like to have a little cornered market for some profit cream skimming. 

But in the end, places like New Brunswick need to have well functioning local markets.  The consumer’s cost for electricity/water/fuel in New Brunswick has gone up much faster than the Canadian average in the last five years.  Prima facie that would indicate we may have some dysfunction in those markets that is adversely impacting consumers.

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