It's The Economy, Stupid

Premier Alward seems to understand the challenges facing NB on both the economic and demographic fronts.  I could have written his speech and it wouldn’t have been much different (including the reference to Frank McKenna).

However, using substantially different language, former Premier Graham seemed to ‘get it’ as well.

And going back to Bernard Lord, after ignoring demographics until the 2001 Census showed the first drop in population in New Brunswick since its founding, he seemed to ‘get it’ as well – setting up a Population Secretariat (however, his disinterest in economic development was a problem).

As I showed in this blog with that 1996 report, even Frank McKenna and his advisors understood the longer term implications of demographics and the underlying economic issues.

But none of them really made any substantial progress on addressing either demographics or economic development.

It’s always easier to spend money than to make it and that has applied to successive governments.   Making it in this context is economic development.

I sound like a broken record but we were told that twinning the Fredericton/Moncton highway would lead to ‘economic development’.  Has it?  We were told that cutting taxes would lead to economic development.  Has it?  We were told that opening up New Brunswick to natural gas (circa 1999) would create enormous economic development opportunities.  Has it?  The universities will say that dramatic increases in post secondary funding will lead to economic development.  Is this true?  Or will it just ramp up the incubation for Ontario and Alberta’s workforce?

I’ve moved in my thinking to a parallel model where on one track you try and get the long term fundamentals right – tax policy, infrastructure investment, education -things that are foundational but not enough on their own.

On the second track, we think about specific efforts that can help grow specific high growth potential industries here.

In other words, we don’t leave it to chance.

Just like most successful jurisdictions.

To be fair, many of the big winners in recent years have been lucky rather than overly smart – Saskatchewan, Newfoundland, Wyoming, etc.  Finding treasure under your feet requires some smarts but not nearly as much as competing on brains.

In the end, we need leaders – and increasingly that means more than government – that have the guts and strive to foster change.

If change was easy, it would be easy.  How’s that for profound?

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My column yesterday reviewed highlights from a report published 15 years ago warning of grave consequences if the province’s demographic challenges were not addressed.    Most of the reports demographic predictions were right on the money – but the fiscal consequences that were hinted at in the report have not really manifested themselves.  The NB government does have a large fiscal deficit but I would argue most of that – to now – has been a cyclical deficit not a structural one.

It seems to me that predicting the future is extremely hard if not impossible.   The report’s authors in 1995 were basing their future predictions on past performance of the economy.  Remember in 1995 we were still trying to dig out of huge budget deficits and we had faced fairly hard recessions every 7-8 years in the previous three decades.  I am not sure any economist in 1995 was predicting Canada was at the start of the longest sustained period of economic growth in the past 140 years –  1993 to 2009.   I don’t think any economist was predicting Alberta would have 15 years of China-style economic growth from its oil and gas boom.  Further, in 1995 Saskatchewan was an economic basket case – and it has gone through an enormous period of economic growth due to its resources – oil, potash, etc.    And even Newfoundland, though a small province, was crippled under a huge debt/GDP ratio and the largest per capita equalization payments in the country.  Now the province is equalization free.

I think it is fair to say in 1995 we didn’t think that this huge resources boom would drive up the Canadian dollar (one of the factors) and put the squeeze on Ontario’s manufacturing sector (our forestry sector as well got hit hard).  There has been a bit of Alberta’s gain is Ontario’s drain in this period but Ontario has done quite well on many measures – it just hasn’t been nearly as strong as the two main oil provinces – SK and AB.

So that is why I alway couch my future predictions because there are too many unknown variables.  In 1995, the Internet was just starting to crank up.  David Foot’s demographic crisis across Canada was mitigated somewhat in Ontario, Alberta, Quebec and BC with a huge increase in immigration.  And we had the aforementioned resources boom.

But if we were to write the demographic report now (redo the 1995 report projected to 2026) the numbers would look even more scary.  The median age of the population is going to increase to over 50 years old (from 24 years old in the mid 1970s).    Health care costs will consume 90% of the discretionary budget (it can’t get to that, however).    It’s impossible to predict the broader fiscal implications of this but a rudimentary assessment would indicate New Brunswick will need dramatic increases in federal transfer payments.

But, maybe, we will get a 1993-2009 style economic growth boom.  Maybe oil will go to over $200/barrel and royalty revenues will drive the economy (Dutch disease).  Maybe Ontario will be able to adjust to the high value of the Canadian dollar and build an export-based IT and services economy (because a struggling Ontario could drag down the rest of Canada even with $200/barrel oil).  It is likely that the resources boom will continue for the foreseeable future although I believe there are structural reasons why oil will not get to $200 anytime soon (not the least of which is the price of natural gas which has decoupled from oil in recent years).

But are we willing to take that chance?  Are we willing to roll the dice and hope that economic growth elsewhere will fund the consequences of New Brunswick’s demographic crisis?

I prefer a New Brunswick-based solution that leads to significant economic growth here, the creation of a new class of export-focused entrepreneurs, the attraction of global firms and an aggressive strategy to fuel the workforce and population needs that will come with that economic growth.

We could be stuck in that paradigm where we think that coming out of this recession we will go right back to the growth of the late 1990s and much of the 2000s.  Just like those in 1995 were using 1982-1993 as their reference period.   But as the U.S. Treasury Secretary said recently, it is likely going to be a decade or more before the U.S. finally sorts out the effects of its housing collapse.  That right there would auger against any kind of U.S. boom that would be felt in Canada – as much of our recent boom was dependent on U.S. growth.

In the end, New Brunswick is going to always be somewhat at the mercy of global forces.  But if we build a stronger foundational economy here – it would be better for the long term.

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I am on the record saying that the subsidy and tax incentive battles that rage between states and provinces to attract business investment is biased against small provinces such as New Brunswick.  Further, I have said I would approve of a North American wide complete disarmament of all corporate incentives.  What I stridently do not approve of is unilateral disarmament where a place like New Brunswick says no to any kind of tax breaks or incentives and competitor jurisdictions rake in the business investment, jobs and ultimately tax revenues.    My caveat is that all tax breaks/incentives used must show a clear return on investment for the taxpayer.  Why dole out tens of millions in incentives only to get millions in tax revenue?   That’s when you are chasing your tail and only trying to keep things from getting worse.

There is a good discussion of this in the NY Times today.   It basically casts a negative view of any of the attempts to lure business – a view I am sympathetic to.

There is one positive outcome of the competition, however.  Just like most things – when you have competition it forces you to be more sharp.  I still remember the former governor of New York talking about how he had cut or eliminated 90 different taxes or fees on business to stop the flow of investment to the south in the 1990s.  I didn’t even know there were 90 different taxes or fees.  But the competition goes way beyond tax breaks, jurisdictions have to hone their education and workforce development efforts, they need to be able to attract people, etc.  If we were to remove competition between states, provinces or cities for that matter what would happen?

To push the point a bit I think much of Atlantic Canada’s economic malaise is due to its inability to think about competing for investment.   It’s easier to ask the Feds for more transfers than it is to try and compete – seriously compete – for business investment, or private research dollars, or highly skilled talent or whatever.   Smallness is no excuse.   Many of the fastest growing U.S. states are the smallest states.

So I am in favour of looking at ways to reduce – across North America – the incentives game but I believe vigorous competition for business investment is, on the whole, a good thing.

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When I got my MBA 20 years ago McGill’s Henry Mintzberg was considered to be one of the top management and strategy thinkers of the time.  His books on management were required reading in many MBA programs.  He continues to remain one of the top read and quoted management theorists.

He has started his own A.B.C. campaign advising people to vote for anyone but Harper.

I don’t know his politics.  I can assume from this campaign that he isn’t much of a fan of the Conservatives but what was strange to me was the National Post’s savage attack on his professional credibility.  I’ll let you read the NP attack on Mintzberg but I will comment on the summary conclusion:

Management gurus should stay away from economic declarations. The idea that shareholders pay corporate taxes is a misunderstanding held by even bigger minds than Mr. Mintzberg. Shareholders assess their investments on the basis of long-term after-tax net profits. Shareholders will make that money, in a market economy, come hell or high water.

The idea that Henry Mintzberg, a guy who has done case studies and interviewed more corporate leaders than a 100 economists, wouldn’t have some insight into how CEOs think is just stupid.  Economists study data – including corporate survey data – but Mintzberg actually knows how CEOs think.    So whether or not someone agrees with Mintzberg’s view on corporate taxation or not his bona fides on how CEOs might react to various tax rates are about as good as you are ever going to see.

And I would also say that trying to frame Mintzberg as some kind of Marxist is also laughable (example – “Prof. Mintzberg is a McGill management guru who slices his ideological toast somewhere between Karl Marx and Adam Smith, with not much Smith remaining on the plate at the end of the slicing.”).    He has been doing more to help perfect the capitalist model – the real nuts and bolts of corporate strategy and management – than any economist ever will do.  He just happens to believe – from studying hundreds/thousands of actually companies and their managers – that there are good and bad firms and managers out there and that corporations should pay some taxes.  I guess these days that makes you a pinko communist.

Look, my political views run right of centre.  On the continuum between a full scale Nanny State on one end and full scale Libertarianism on the other I come in a little to the right of the midpoint.  I have made no bones about that but I do not worship at the alter of laissez-faire capitalism.    I think there needs to be rules of the road and I think that the corporate sector should bear a share of the tax burden.  I think this tax level should be set in a competitive context – relatively high taxation could discourage investment but we have to be sane about it too.  There are a number of U.S. states that charge zero state corporate income tax and company investment hasn’t been pouring in.

Taxation is one factor in a complex combination of factors that decide investment decisions.  His politics aside, I would trust Mintzberg’s view on how CEOs think and react more than any economist.

As for his A.B.C. campaign, as a public figure, I think questioning that is fair game for the media and having him set his political views in the context of his life’s work of studying CEOs and corporate strategy is a very worthwhile exercise.  The National Post opted for the easy and frivolous way out.

I think there is a broader point here about the role and place of credibility in our society and our politics.  You can disagree with Mintzberg without needing to try and paint him as a charlatan.  This is the world we live in today.  If someone – with a lifetime of expertise – disagrees with someone else – the latter will jump right to the charlatan card.   You see this on the left and the right.   I heard an old scientist – nearly 90 years old – who was a pioneer in climate related science questioning  some of the methodology behind climate change predictions and he was pilloried – the charlatan card was played yet again.

If we end up degrading all professional credibility in our society we will end up with the Rush Limbaughs of the world setting direction.  I remember hearing him wax on about the Bolsheviks one time and it was clear he had never read anything more than the “Soviet Union for Idiots” book and here he was positioning himself as an expert.

We need to get off that train.     We need to respect the credibility of experts while realizing that they can, and many times are, wrong.  But, on balance, we need to have experts to help us calibrate how we move society forward.  Heaven help us if we end up having policy set on the editorial pages of the National Post – or the Toronto Star.

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I don’t dip much into politics on this blog because I don’t understand the mechanics of the political process – every time I think I have it more or less figured out – some new twist emerges.  I’m at the point now where I think there isn’t really a formula for a successful election – parties make it up on the fly.

Having said that, I am surprised by the federal Liberals in this campaign.  It seems they are running hard to the left on a lot of issues and I think that would alienate a lot of middle ground voters.  Back in the 1990s a lot of folks that I know who would identify themselves having some affinity to Republicans and that like the Yanks in general would have easily voted for the Liberals in Canada.   Now, you hear ‘Republican’ or ‘American-style’ epithets hurled by Liberals on a daily basis.    There have been a number of issues where I was surprised at the left wing view.

I guess the Libs feel threatened by the NDP and the Bloc but if they ever want to be a majority party again, they will have to get back to that centre concept.

Maybe they should recruit the new mayor of Calgary to lead the party.   He’s a business guy, a Muslim and an urban thinker.  He could probably secure a lot of votes in western Canada and would be appealing in central Canada as well.   I suspect his French isn’t that good but flawless French hasn’t helped Iggy much.

Who knows?  Maybe the natural governing party is now doomed to be a marginal party with no clear ideological position.     On a wide variety of social and economic issues, the vast majority of non-Quebec Canadians identify themselves squarely in the centre, even a bit to the right of centre.   If the Libs are fighting with at least three parties for those on the left of centre, it could be a long time in the wilderness.

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I see that Asurion is expanding its Moncton call centre.   There have been a number of downsizings in recent months and years but some of that has been offset by expansions.    It’s hard to have a completely accurate view but I would suggest that Moncton is probably down 300-400 or so call centre workers (net) in the past three years.

The truth is that there will be call centre activity – in North America – for the foreseeable future.  The amount and intensity of that activity in New Brunswick is the question.  My sense is that the internal, inbound customer service centres will stay and thrive but they might end up shedding some jobs as the work moves from taking calls to interaction by email and social media.

Wage rates will continue to rise putting pressure on firms to get more efficient or move to a cheaper location but the latter option always comes with risk.

As I have said before, it would be interesting for New Brunswick to rebrand itself as a social media hub – the evolution of the call centre hub.  If we could gather some data on how much of this activity is currently underway at the big call centres and add in Radian6, Lymbix, etc. we might have an interesting story to tell.

It would get even more interesting if the NBCC started churning out social media copy writers in both English and French and if the universities started R&D projects associated with social media.   Some argue clusters are organic – I argue you have to prime the pump.

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For anyone who follows the energy discussion in New Brunswick, you know that the distribution rate for large users of natural gas is the highest in North America – by a wide margin.    The largest industrial users are paying two times the cost of the gas itself in distribution charges (on the first huge block of gas usage).  I have been arguing this rate structure means it is highly unlikely that any large users of natural gas will ever invest in New Brunswick (although I hear there is the possibility of a workaround).

This was in the back of my mind when I read this article about Cavendish on PEI.

Cavendish Farms plan to cut costs and greenhouse gas emissions with a switch to natural gas. In a press conference Monday at the company’s plant in New Annan. officials said the P.E.I. potato growing giant aims to cut production costs by 30 per cent and greenhouse gas emissions by 28 per cent. It’s also eliminating the use of 29 millions litres of heavy oil per year.  Robert Irving, president of Cavendish Farms, said the investment will be good for both business and the environment. “As with our investment in bio gas, we are always looking to reduce our carbon footprint while making our plant more competitive.” The company is receiving a $15-million loan, which is on a five-year term, from the Province to help build a receiving station for the natural gas, which is to be transported in large cylinders carried by truck. The gas will be extracted from the Maritimes and Northeast Pipeline in a location near Port Elgin, N.B.

You know the distribution system is messed up when a company can distribute natural gas by truck and still “cut production costs by 30 percent” while large users in New Brunswick like Flakeboard say their natural gas costs are dragging them under.  Maybe that is what we should do in New Brunswick.  Allow large users to back up trucks to the main pipeline and fill ‘er up.

I understand all the historical dynamics of the gas distribution system, the deferred revenue, the ROE, the SEUFs, blah blah blah.    As an economic development consultant, my concern is that New Brunswick is off the table for energy-intensive industrial projects because of massive gas distribution charges.

I hope the energy commission addresses this and the broader issue of energy competitiveness head on.

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I see that Halifax ranked second in the large cities category for “Large Cities of the Future” in FDI Magazine’s 2010/2011 ranking.   The city ranked /1 for quality of life and 6th for infrastructure.

Fredericton ranked #1 at the top Micro-City of the Future, top FDI strategy among micros and sixth for quality of life among micros.

A lot of people roll their eyes at these rankings but I think they add some value.  It is true that the methodology used to develop any of these rankings (Moneysense, Macleans, ICF, etc.) is somewhat arbitrary but when you are a city/province in relatively obscurity, these things can bolster credibility.  This magazine (FDI)  in particular has a wide circulation globally among folks in the international economic development area.

It does take time to get noticed.  Many of these rankings require a city to apply and there are ways to increase visibility in the others.  Most economic development agencies do some PR these days and it would make sense to fold this type of PR into the mix.

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Daulton McGuinty was on CBC’s The House today and asking for a fair deal from the feds on green energy support.  He argued that if the feds were getting in on the NL-NS Muskrat Falls project, they should be helping Ontario – the province that has the highest commitment to green energy (in the Premier’s view).

The host asked him to comment on Ignatieff’s musings about significantly expanding hydro-power in Northern Quebec and Labrador and using that clean power to completely replace all coal and gas fired generation in Ontario, Quebec and Atlantic Canada.

Daulton bristled at this and stated “we have our own plan”.

The truth is that green power in Ontario was only ever partially about carbon reduction and ‘green’ energy.  I believe the main driver was that Ontario wanted to build green energy as an economic development driver for the economy.

People that look at these things will say that hydro power coming out of northern Quebec and Labrador – if scaled – will be 40% – 50% cheaper than the solar, wind, gas, etc. electricity mix that Ontario has going now.

But, as I have discussed numerous times, McGuinty is willing accept the 40% premium in cost (not on gas but certainly on wind/solar) as a trade off to create tens of thousands of green jobs in Ontario and hundreds of millions in tax revenue.  I heard one Ontario cabinet minister saying this would be Ontario’s next auto industry.

In many ways it is a fascinating example of industrial policy.  If Ontario added a point to the HST and said that money was going directly as a subsidy to build a new industry, the public would likely be outraged but blending this premium into rates and wrapping it in a green blanket has so far been accepted by most Ontarioians.  Most households in Ontario are less exposed to the cost of electricity because of the wide use of natural gas (as compared to a place like New Brunswick) but the cost of building the green energy sector in Ontario will eventually cost the province billions over cheaper energy source (including clean hydro) but it will also generate billions in economic activity that otherwise wouldn’t have been there (over 20-30 years).

This fact is the main reason why I have been somewhat reluctant to support wind and tidal energy in New Brunswick.  Because here, like most other sectors, we just end up buying the technology and systems produced elsewhere so we pay the higher costs and don’t get the economic development benefits.  In that scenario, I would much rather have done a deal with Hydro-Quebec to bring down lower cost hydro power – but then again there is no need to re-flog that beast – we flogged it to death already.

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Missouri has a new economic development strategy.   I am particularly interested when states such as Missouri go through this type of exercise because they have a tough time differentiating themselves in the pack of U.S. states (sound familiar?).

While the strategy is fairly typical, two things stand out as interesting.  One, they have targeted broad sectors of the economy and then identified specific niches within them where Missouri has specific potential.

Secondly, “Missouri will optimize its tax, incentive and regulatory policies to best support the growth of high-value target sectors.”    As I have detailed before, this is a fairly common approach across North America – just not in New Brunswick.  We have very little ‘optimization’ of tax incentive and regulatory policies to support the growth of high-value target sectors.  I suspect there are many reasons for this such as a historical unwillingness from the Dept. of Finance, an aversion to ‘picking winners and losers’, etc.

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