It's The Economy, Stupid

The monthly labour force survey put out by Statistics Canada is an estimate of employment in any given motnh and, in fact, on a monthly basis, there can be fairly wide swings (remember 1,000 jobs as a percentage of 350,000 jobs is only 0.3%).  In other words, many of the monthly swings in employment are probably within some margin of error.  I prefer to focus either on year over year comparisons (Feb 2009 to Feb 2010) or annualized data – comparing September 2010 to May 2010 is not a good idea, IMO.

Anyway, Stats Can finally got around to adjusting the base data from 2001 to 2006 which shows a fairly steep decline in total employment in the province.  This was to be expected.  The estimated population in 2006 in NB was something like 750k – based on the older trending.  The actual population from the Census was something like 729k.  The changes they are making now are attempting to rectify the 750k to the 729k.

But this change does nothing to impact real life although there can be implications for transfer payments that are based on per capita data.  You might remember the big flap after the 2001 Census when NB turned out to have less population than was estimated when calculated transfers.

In the end, the numbers earlier on were based on more optimistic projections.  Now they are revised to reflect reality.

The current reality.

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I think the government should ask Frank McKenna to be the first chairman of Invest NB.   He is unique in that he has been on both sides of the decision – as the person selling NB and the person being sold to (in his role as Vice Chair of TD).    He is likely the most influential and high profile business person from NB these days – outside NB.  And, not least, it would show Alward is sincere with this bit about ‘doing things differently’. 

I’m not sure if McKenna would say yes but I think he could be convinced.  I believe he still has a strong passion for NB and I always felt he had ‘unfinished business’ when he left in 1997.  This could be an excellent way for him to help his home province without a lot of effort.  The chair role would involve a few meetings a year and, hopefully, some strategic support on the large investment files.   It would be great if Bob MacLeod could trot in McKenna, Ganong, etc. when trying to court a high profile multinational firm.

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In the past year or so I have been doing more work in smaller communities and rural regions.  I’m in Nova Scotia this week on a project to help a rural area figure out a better way for its economic development efforts.

It seems clear to me that much of this comes down to the quality of the people involved – staff, boards, partners, volunteers, etc.    You have to get the strategy and structure right but, ultimately, it’s people that make things happen.

I watched a video from the Ideas Festival where the guy who headed up the Own the Podium project for the Vancouver Olympics provided a good overview of how that initiative was so successful.  I am impressed how they were able to marshal so many different organizations and personalities with relatively little funding.

Economic development is always about marshaling other related stakeholders – it is rarely about single organizations doing all the work themselves.  There are too many moving parts for it to be fully controlled by one organization.  But the best economic development organizations can bring those moving parts together and have them work in unison.

It’s a bit high level this morning but at some point high level is important.

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According to Statistics Canada, in 2008, 390 people in New Brunswick had an after tax income (from all sources – employment, dividends, capital gains, etc.) of $250,000 or more.  New Brunswick had the fewest people in Canada reporting income (after tax) of over $250K among all ten provinces in Canada – by a wide margin compared to provinces such as Ontario and BC (adjusted for the size of the population).  It is interesting to point out that Alberta had nearly 10 times as many people reporting that level of income.

 There were only just over 5,000 persons reporting $100,000 or more in after tax income from all sources (or 913 per 100,000 persons with income as shown in the chart below).

I have heard a number of people talking about sticking it to the rich with any tax increases needed to balance the provincial books.   The point I have been gently trying to make is that in New Brunswick there ain’t a lot of rich folks to be had.   You could stick it to those 390 folks who made more than $250k – even if you charged them another $100k in taxes each – you would still only raise $39 million in new taxes.    

The bare facts of it are simple and the folks at the Dept. of Finance, I assume, know this.  The place to look for new taxes – in large numbers – is in the middle class.  Folks at the lower end (rightly) pay very little tax and there are not a lot of folks at the higher end.  There are nearly 140,000 folks with after tax income between $35k and $100k.  If you took an average of $3k each in new taxes from this gang, you would have well over $400 million in new tax revenue each year.

Source: Statistics Canada. Table 111-0043 – Neighbourhood income and demographics, taxfilers and dependents with after-tax income, by sex and age group, annual.

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I just listened to another podcast featuring a debate between a devout Keynesian and a devout Hayekian about whether or not the U.S. stimulus worked or was large enough or even if we can know if it worked.  They lightly skimmed over the issue of how and where the stimulus money was spent – mainly that it wasn’t targeted to areas with the highest unemployment or to the sectors that – it could be argued – where demand was the slackest.    For example, there was money for research, to extend unemployment benefits, to support public sector wages (a sector with rock bottom unemployment already) while there was relatively litte for sectors like manufacturing (where unemployment is high).  They both kind of agreed there was a fear of ‘moral hazard’ where targeting the money to areas that most needed it would be rewarding bad behaviour (like rewarding excessive public spending in California or a housing bubble in Nevada).

Once again, it struck me listening to this how little economists think about economic development as a specific activity.  Economists think a lot about macroeconomics – price levels, GDP, inflation, etc. and even microeconomics – cost/price, scale, scope, etc. but I don’t know that too many of them are trained to understand how firms make locational decisions – at a tangible level in a world of unknowns and relationships.  

We almost need a kind of behavioural economics at the firm and industry level.    This may exist and I just haven’t seen much of it but ultimately I think this is important.    I also think we need to foster more understanding of this stuff at a provincial level – in a place like NB – which is part of a national economy and has very porous borders for both people and capital.

For example, the two of my biggest criticisms of the Graham tax cut were:

a) there didn’t seem to be real good thinking about how this generic idea (tax cuts stimulates economic growth) applies at a provincial level – particularly a small place like NB; and

b) the tax cuts were given disporportionately to folks who didn’t need them – in the sense they weren’t going to leave New Brunswick because of high tax rates.  I already put forward this notion but to reiterate if you look at the folks with in the top quartiles of income – they are in large part public servants, doctors, lawyers, engineers, accountants, consultants, etc. – all that generate their livelihood here in New Brunswick – entirely.  So the argument they will leave or not come because of high taxes is virtually irrelevant because the work is here – if a lawyer leaves because of high taxes – another one will fill the gap.  Same with public servants, engineers, etc.

It’s not quite that simple but at a theoretical level I think this should have been taken into consideration.  

Now it could be that governments think they will be stimulating the economy by cutting the taxes of those in upper income levels but as I have shown much of that spending will be on goods and services where the value is added elsewhere (TVs in Korea for example) whereas government spending – overwhelmingly – adds its value in the provincial economy (nurses salaries, for example). 

This is further compounded by the fact – as I pointed out – that companies with national and international markets are not only taxed in New Brunswick.   They are taxed based on a complex formula based on where they generate revenue and where they have operations.  For example, a firm in New Brunswick that exports all its product to Ontario will probably have a higher tax burden in Ontario than in New Brunswick.

So, if an economist tries to apply a generic model build for a national economy or a large provincial economy to New Brunswick – it is bound to falter.

This is another reason why we need to have New Brunswick or regional economists looking at these issues specifically from the New Brunswick or regional perspective. 

As for behavioural economics at the firm and industry level, I have studied Michael Porter’s work – I saw him speak twice in the past decade – and I like his stuff but even there I think we need to back off some of the hard issues and focus more on the behavioural side of decision making.

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I am always reluctant to wade into areas where I have limited knowledge but I am trying to understand this broader link between ‘pride of place’ and economic development – or lack thereof. 

So like most folks, I suspect, when I read this I was initially angered.   The National Art Gallery purchases 400 pieces of art over a three year period and not a single piece from New Brunswick.    Only one piece from all of Atlantic Canada made the cut according to this article.

Is New Brunswick marginalized and irrelevant – even in relation to our size?  Does it matter?

But then there is the broader narrative about no New Brunswickers making the Olympics,  New Brunswickers always underperforming relative to size in the music biz and a dozen other examples.  I have written in the past about the topic of ‘excellence’ and if it is important to promote it in a place such as this.

The small province argument gets thrown back whenever a discussion like this takes place – but even relative to size, we still tend to underperform.  Good old Matt Stairs is hanging in there but other than that….

There has got to be a right way to marry these issues of the drive for equality and the need to strive for excellence.  

Maybe we need to set a baseline of equality and then support excellence above than – and I’m not just talking about arts and sports.   Think about entrepreneurship too and other aspects of our society. 

It’s a ramble here to be sure but think about the pride that Monctonians felt when they hosted a relatively trivial CFL game last year.    As a culture, we need symbols – we need to feel that this place can produce world – class – fill in the blank.  It helps reinforce this pride of place idea and I think that will be even more importatnt in the coming years.

I realize this topic is well outside the band of normal discussion here but I think it matters.

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My assertion that we need a few more big, exporting firms in our manufacturing, ICT and other sectors where there are exporting opportunities – generates a lot of criticism – many times from some of the people I have the most admiration for.   Thankfully, for the most part we just agree to disagree amicably.

Usually the argument is that we don’t need to attract exporters – we need to grow our own.  To that I say fine – I don’t care where they come from – we just need them.  In fact, local firms are more loyal and are more likely to reinvest their profits here than multinationals. 

So let it be written, so let it be done.    Somewhere between $4 and $6 billion spent in New Brunswick over the past 20 years (all levels of government) trying in large part to stimulate more SME exports and 95% of all exports are still generated by less than two dozen firms in New Brunswick.  Further, the total value of exports outside of those large firms is declining in real terms year over year.  Admittedly that doesn’t include services exports but other than call centres and a few high profile exporting ICT firms I don’t see much growth there – in fact call centre employment peaked in 2005 and has been dropping since.

So, we can agree that growing firms like Speilo and Radian6 are wonderful but we can’t figure out the alchemy required to generate 100 of them.

I’m not going to reiterate all my arguments around supply chains, the interconnectedness of large and small firms, the inflows of investment, the role of big firms as entrepreneur incubators, the capacity of big firms to undertake R&D, etc.  

I just want to again clearly state that I can find no example of strong and growing economy that isn’t attracting a share of the big firms.  Even the resource-rich provinces/states are fuelling much of their growth with large firm investment (firms like Vale, BHP Billiton, ExxonMobil, etc.).  There was an article in the Economist that confirmed just about every large oil & gas firm in the world is active in Alberta.

I think it comes down to a lack of belief.  Whle most might not be so blunt, they worry any effort to attract industry here to set up operations and export elsewhere (no one is talking about attracting firms to compete with local firms in local markets) will be futile.  They cite tepid efforts in the past as being ineffective and the only hope we have is with our local entrepreneurs.

I’m not such an unbeliever (yet).  I think we haven’t properly tried to build a strong value proposition for growth sectors and then sell those to the world.  For most economic developers, ‘investment attraction’ is a colourful brochure and attendence at international trade shows.

For me it is about determining a few growth opportunities and then leaning into them with tax policy, R&D spending, workforce development, infrastructure investment, supply chain buildouts – and then selling the crap out of them directly or through joint ventures or partnerships or whatever. 

If we ever get around to doing that (like animation/multimedia in BC) and we fail miserably then I will fold up my tents and join the all in on the SME crowd.  Until then, I will soldier on.

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It’s quite common to hear that Americans (and Canadians) are not much better off today than they were in the 1970s.  This assertion is based on income levels in real terms among the lower and middle income segments of the public.

Opponents to this view cite innovation and technological breakthroughs as a counterpoint to this view.  They say, in real terms, people eat more high value food, have more high value stuff, drive better cars, have much better telecommunications, better housing, etc.

But I heard an argument not that long ago that was even more interesting (it was on a podcast so I don’t have link to the research).  One researcher in the U.S. looked the immigrant population by source and concluded the average person living in the United States today earns considerably more average income (in real terms) than they did in the 1970s compared to where the people were living in the 1970s.

It’s a subtle but interesting argument.  If the millions of immigrants that have come to Canada and the U.S. are earning 2-3 times more on average (in real terms) than where they lived before that would mean a big increase in standard of living for the average American or Canadian – again compared to where they lived before.

I raise this because I am not sure how to see a real rise in the income level among millions of service industry jobs in North America.  The real income level in many sectors of the economy has risen through innovation and productivity (for example, high value manufacturing) and through union action (particularly in the public sector) but the majority of folks in service industry jobs such as accommodation, food services, personal services, etc. are not unionized and there are limited ways to achieve significant productivity gains.   For example, it takes a certain number of people to operate a hotel – there are limited technilogical breakthroughs to reduce time to do this.

Governments could force up the wages in these jobs via hiking the minimum wage but the very powerful small business lobby has deeply resisted this saying they are unable to pass these increased costs onto their customers.

Not as much in New Brunswick but in most parts of North America that have been growing these jobs have been filled with immigrant workers which has enabled the real wage rates to remain relatively low (but for many immigrants much higher than the alternative).

I don’t want to get too wonky but I agree with the economists that say the only real wage gains (system wide) come from productivity and innovation.    Forcing up wages by union power or government action just shifts the costs onto the rest of the economy. 

When I lived in Alberta I knew two brothers with the same skills and background – one worked for a union shop and made $30/hour as a janitor (in the early 1990s) and one worked as a janitor in a hotel and made $9.50/hour.    If all the janitors made $30/hour and all the non-unionized workers made unionized wages without a corresponding productivity gain – that would just drive up prices to match the increase in wages.  Instead of paying $7 for a combo at McDonalds you would pay $12.

I don’t want to get into a big debate about economic theory except to say that immigrant workers have been used to mitigate wage and ultimately price increases and that when we look at income data over decades this issue of ‘are we better off’ is better set in the context of better off compared to where we lived before rather than better off compared to the set of people that lived in this geography.

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I really enjoy the writings of UNB economist Constantine Passaris.  The dismal science in New Brunswick seems to be heavy laden with left wing economists and I find Passaris to be a breath of fresh air.    Specifically, he doesn’t seem to be hostile to investment, exports, the importance of large companies, etc.  

Passaris seems to understand our need to grow our economic pie (through investment, trade, immigration) while so many economists are obsessed with trying to carve up the existing pie in a more equitable fashion.

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From Yarmouth to the Miramichi politicians are running around trying to reassure communities that the government is committed to help them.  Then comes the train of solutions – new cash, small business support, bailing out questionable companies, building infrastructure – all in the name of helping these regions. 

Yet, when the dust settles many of the same issues exist and when government is asked why? – the answer is “but we spent lots of money”. 

The fundamental issue in the Miramichi or Yarmouth or Cape Breton – indeed in the Maritimes as a whole – is a lack of business/private sector investment which is the foundation for jobs and economic activity.    Instead of jumping right to the small business card, economic developers and governments would be wise to step back and ask a different question.

Quite frankly, the modelling is pretty simple.  You could figure out on the back of a napkin what level of investment would be needed to turn things around in Yarmouth (where that investment comes from would take a pile of napkins).  But once that is figured out, then you get to looking at solutions.

In the Yarmouth case, they are convinced that the ferry to the U.S. is critical – that may be so I haven’t studied it in detail.  If so, maybe government should take a more serious look. 

Government is funny.  They will spend $50 million/year on seasonal EI in that area without even blinking but $3 million to subsidize a ferry – gosh,  no!

Or we will spend close to $400 million a year on seasonal EI payments in Northern New Brunswick every single year but a few hundred million to put natural gas infrastructure in Northern NB – gosh, no!

I’m not necessarily advocating for either – I’m just pointing out that government is far more comfortable cutting cheques to people than investing in big ideas.  The former is politically much more easier (how many times have you read about someone being outraged about EI payments?  Now think about the outrage if the government paid for natural gas pipes to ‘nowhere’).

These aren’t easy issues – if they were they would be solved by now.  You know my view on Nova Scotia.  I think the province needs an urban node strategy.  You can’t have roads to nowhere and that is the current model in Nova Scotia.  A hugely successful urban core with 42% of the provincial population and directly influencing over half the population – and everywhere else things are peetering out.  

I’d have a 50 year vision for NS that included an urban node somewhere in the Yarmouth/Digby area, one in Amherst and one in Cape Breton (maybe one in Pictou).  I’d make sure there was four lane highways/longer term trains, natural gas pipelines and other infrastructure connecting the urban nodes to the hub. 

That doesn’t mean ignoring everywhere else – I think the rest of the province would infill over time and it would be a far better model. 

Now, highway infrastructure starts in Halifax and literally peeters out as you get a certain distance away  – except towards Moncton because there is a connecting urban node.

Governments should have the longer term vision and should create the conditions where private industry can invest and flourish.  I know that sounds trivial but sometimes we need to come back to the highest level on this stuff.

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