It's The Economy, Stupid

My father-in-law went to a reception yesterday with Minister Ed Fast, Canada’s Minister of International Trade.  Apparently there is a big trade mission from Canada going on right now here in Brazil. 

Brazil is a growing market there is no question.  It’s population is larger than all other South American countries combined and it plays the same role down here that the USA plays everywhere else (e.g. bully).

I was asked if Brazil holds opportunity for New Brunswick.  It’s hard to say.  This is a tough market to make inroads but there are many Canadian firms that have done well down here.

I am interested in the FDI angle as well.  Brazil is increasing its external investment (think Vale Inco).  It might be interesting to see if there are opportunities for Brazilian firms to set up new mining, manufacturing or other types of operations in New Brunswick.

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In my favourite movie, Casablanca, Rick tells Ilsa that the problems of three little people don’t amount to a hill of beans in this world (or something similar).  In the less famous Hot Shots, Charlie Sheen says “but this is our hill and these are our beans” (or something similar).

Every time I travel I am reminded of how small New Brunswick and Atlantic Canada is in the big picture.  It’s not hard to understand why national politicians or even senior bureaucrats mostly ignore the region.  It’s tiny and somewhat marginal.

However, it’s our hill and our beans.   We need local politicians, community and business leaders to step up and take on our challenges – economic, demographic, etc.  It may not mean much in the big picture but it means a lot to the people in Moncton or Woodstock or Campbellton.

And ultimately, a country is a collection of provinces, cities, regions.  If enough of them suffer it brings down the lot.

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I promise I am not going to turn this blog into cheer leading for shale gas development.  However, it is a potentially important industry and the question that those for and against need to answer is “why not New Brunswick”.   Shale gas is being extracted in over a dozen US states and two Canadian provinces and there are plans to double the number of jurisdictions in the next few years.  So the question is why not here?   If there is a good set of regulations and provisions that flow some of the revenue back to the local communities, why not here?  Is there something about our land or rocks or density of residential spaces?  Is there some other unique reason that we would turn away our share of this industry?

And to the media, I ask them to set context.  I worry that sometimes we in the media debate these issues as if it was Angelina Jolie deciding what colour dress to wear to the Oscars.  It’s a fierce debate blue or red but in the end it means nothing.  With these big files, it means a lot.   Poll after poll in western Canada shows massive majority support for oil and gas exploration – because the public has a direct understanding of how that industry impacts their communities and their society.

The public here need to be subjected to thoughtful media on this important subject because, quite frankly, in an era of “no uranium mine” and “save our NB Power”, I think a government could be brought down over shale gas.  It seems quite easy to whip up public anger over these types of flash point issues.

I suspect, but hope I am wrong, the Liberals will try to make this an election issue.  A shame, really.

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It’s kind of funny.  Minister Leonard makes an impassioned defence of NB Power in this opinion piece today positioning the company as a paragon of fiscal management.    He never mentions the stranded debt.  Never mentions the industrial power rate structure compared to other provinces and states with heavy industry.   The last time I looked, NB Power was one of the most debt laden electricity utilities in North America as measured by debt per MW of generation capacity and on a per customer basis.

But has never really been what has bugged me about NB Power.  The Minister can pick and choose his words carefully to construct a version of NB Power that he needs.  I get politics.  I understand this.  What I will never understand is how guys like Leonard and most of his predecessors never talk about NB Power as an asset for economic development.  Never.   Sure, they talked about the economic development from wind energy (which, by the way, is minimal) but never more than that.

Since the 1920s, public energy infrastructure has always been developed through the prism of economic development.

Now, it seems that when we need economic development the most, we take NB Power off the table.

I have called for the government and NB Power to come up with a plan for low cost industrial power.  I was talking with a guy involved in the energy industry here in Brazil and he told me that large industrial customers receive very low electricity rates relative to other classes of customer.  He said it only makes common sense.  Not here.  The last time I looked (admittedly nearly two years ago), the rate spread between NB Power’s largest industrial customers and its residential customers was among the tightest in North America – again particularly so compared to jurisdictions with heavy industry.

NB Power could convert Colson Cove to a nat gas fired plant and offer that power at very low rates (comparatively).  Call it NB Power Industrial or something similiar.  I know the province doesn’t particularly like data centres but considering that Canada is considered the second most attractive location in the world for them, wouldn’t it be nice to at least make an effort.  I can’t see the downside from having Google, Yahoo!, Microsoft, Amazon, etc. here even if it is with relatively few jobs.

But NB Power has never been interested in economic development – only, I guess, in the abstract.  In fact, I would go further and say that NB Power resents economic development and equates it to government intrusion in its business.  Economic development = political interference.

Funny how all those jurisdictions from Oregon to Alabama have power companies eager to come up with lower rate classes for large industrial clients and I don’t hear much about ‘politicization’.

Anyway, this is a common theme here but I can tell you it doesn’t do much good.  Things have only gotten worse in recent years.

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The family and I are here for our now bi-annual pilgrmage to see my in-laws in Brazil.   I was here two years ago but in that short time the country had a significant growth spurt and significant foreign investment flowed in leading to a highly valued currency and eroding the value of my poor CDN dollars.  Bottom line?  Everything seems considerably more expensive.

I´ll still be posting to the blog and Twitter during my time here except for a short period when we venture into a remote part of the country for some interesting tourism.

I´ll start my remote posting with this.  I hope that wanna-be leader of the Liberal party Mike Murphy doesn`t play politics with the natural gas exploration industry in New Brunswick.  I have said here many times that there should be a good debate on this industry and people need to be informed on the current techniques, how the industry is working to overcome the problems, etc.   It is important to understand the economic development issues, etc. 

I have said here before that the Quebec rules now stipulate that for each successful well an amount (I think it´s $100k) goes back to the local community for local projects.  It is important that this industry benefits New Brusnwickers by a) creating good paying jobs for NBers, b) generates significant royalty revenue for the government, c) some of that money flows back directly to the local communities where the development happens and d) we try to look for ways to expand the economic potential further by using the gas for local economic development.

Anyway, I like Mike Murphy.  He seems like a smart guy and would likely make a good leader but there is a bad trap these guys get into where they think they have to oppose the current government just to prove there is daylight between the parties.  Issues such as shale gas can be injected with hyperbole and whip a lot of folks into a frenzy.  If he takes a hostile stand just to show his Tim Horton credentials, I will be disappointed.

We need this industry.  We need to get it right and as I have said here if we start to see problems, we will need to pull back but to shut down an entire industry – with serious economic potential – on speculation or on the fearmonger associated with the early stages of the industry´s growth (most of which have been addressed), would be wrong headed – particularly if it was just for cold hearted politics.

Look, I disagreed with the PCs on their stance on Hydro-Quebec and NB Power and if Murphy goes against shale gas because he smells political blood, I will disagree with him as well.

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I have made six different public presentations related to economic development in the past two weeks.  I am starting to feel a little bit like a travelling salesman.  I have my pitch lines down and I inject a little rah, rah, rah.  For a number of years now I have been giving these public lectures but usually I would only do around six per year.  Maybe I’ll end up roaming the province pitching the merits of economic development like a snake oil salesman.

It’s kind of fun.

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One of the interesting discussion threads yesterday at the Social Policy Research Network forum (at least in the groups I was in) was this issue of size.    Dr. Haan made the case that he can’t see much correlation between population growth and GDP per capita growth over time (he looked at Canadian provinces).  Others were suggesting that just boosting the population was not the answer – the “you can’t grow your way out of this” crowd.

I’m a population growth fan.  A big one.  New Brunswick has more paved highways than other provinces (and more kms of four lane highway), more schools, more hospitals, more firetrucks, more powerlines, broadband everywhere, more more more.  We have enough basic infrastructure to support a much larger population.  I don’t want 10 million people here but I think we could easily handle 1.5 million over the next generation with much of that growth – probably 90% or so in the urban centres and environs (this latter issue of smaller communities in the periphery of larger urban centres was also put on the table yesterday – by me at least).

I think this would be a wonderful time of renewal for New Brunswick.  It would breath new life into communities, it would bring young workers, young families.  It would drive new tax revenue to pay for increasing health care costs.

But to those that believe large urban centres (millions) are the only future (i.e. Richard Florida), I disagree.  There are lots of people who want to live in large urbans – a high percentage of the 20-30 year olds but there is a large cohort of folks who are happy to live in smaller urbans or even rural areas.  All the data and surveys bear this out.

In addition, if we go way back to Aristotle, we see the potential of diseconomies of scale associated with large urbans.  Aristotle was a fan of small cities. He said:

“Most persons think that a state in order to be happy ought to be large; but even if they are right, they have no idea what is a large and what a small state. For they judge of the size of the city by the number of the inhabitants; whereas they ought to regard, not their number, but their power”.

“….a great city is not to be confounded with a populous one.”

“Moreover, experience shows that a very populous city can rarely, if ever, be well governed; since all cities which have a reputation for good government have a limit of population.”

“For law is order, and good law is good order; but a very great multitude cannot be orderly.”

You are going to tell me not to take advice from someone who lived thousands of years ago but I got lots of confirmation bias from his view on cities so I think I’ll keep it.

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I got to see Dr. Michael Haan’s demographics presentation last night for the first time.  Haan is the Associate Professor and Canada Research Chair in Population and Social Policy at UNB.

His stuff is sobering and clearly shows the impact of out-migration from a demographic perspective on New Brunswick.

One of the most interesting areas of Haan’s research is his work looking at exiles.  He took a look at the economic performance of New Brunswickers who had moved away (using Census data) and found they were twice as likely to own a business, three times more likely to have a university education and four times more likely to earn over $100,000/year.

My father used to say “anyone with any get up and go already got up and left” – referring to a specific community but it is interesting.  There is more work to be done on this but it is a stark view on the question of who leaves?  Is it your best and brightest?

In the case of Haan, there is a good example of the best and brightest moving here.

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One of my first and most profound memories as a young government employee in the early 1990s was one where we were trying to determine the ‘available’ workforce in the province.  Essentially, we wanted to determine how many people would be available to work in jobs paying $30k or more.  We looked at the total unemployment workforce, the seasonal workforce (assuming many would be interested in full time work), the employment rate gap (assuming that we should have at least the national level if the economy was strong enough) and those working at $12/hour or less.  When we crunched all these numbers we came up with a ridiculous number of something like more than 50% of the entire current working population.

Anyway, in a meeting about this, a senior official at the department of labour told us there were “10,000 people in the Peninsula alone” that would not work year round even if it was an outstanding opportunity.   He further said around the province that would be well over 50,000 people.  He called them a ‘lost generation’.  They had become used to seasonal work and would not change their lifestyle.

I think about this quite a bit.  The availability of seasonal work is a fine idea.  There are those that would like to supplement family income with just a few months of work and would like to spend the rest of the year working on other pursuits.   The challenge has always been paying them EI not to work.  The assumption (and it is in the rules) is that if you are collecting EI you will take a job if one comes along.  The practice is different.

I raise this because I keep hearing from employers – particularly in rural NB that this issue is not getting any better and in fact may be getting worse.  There is a significant cohort of people who are not interested in full time, year round work even if it pays more than they would have made on EI.

As there are more and more firms bringing in immigrants to work these jobs, I have to wonder if it is not time to seriously rethink the EI system, its incentive structure, etc.   If a person is paid EI because there are no alternatives that is fine but if they are paid EI while jobs go unfilled, that is another.

Again, I want to reiterate I am not against seasonal work any more than I am against part time work.  These can be important options for workers.  Further, I think it would be fine to offer a pay as you go EI program where folks would pay in during their work weeks and collect during their off weeks.

But the subsidization of seasonal work by those who choose to work year round was meant to make up for a lack of work in certain communities.  Now that an increasing number of those communities actually have work – and no workers to fill the jobs – we need to rethink things.

It won’t happen, however.  This is too politically sensitive an issue.    Even if it is hastening the decline of many communities, it remains sacrosanct.

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Jack Mintz is spoiling for a fight with the CFIB. Providing low taxes and other support for small business has been public policy across Canada for years. Mintz is now suggesting that low small business taxes may be bad for economic growth:

In contradiction to the widely held view that small business tax concessions encourage growth, such small business tax relief could actually be antithetical to growth by creating a “taxation wall.” First, it could result in the breakup of companies into smaller, less efficient-sized units in order to take advantage of tax benefits even if there are economic gains to growing in size. Second, it could encourage individuals to create small corporations in order to reduce their personal tax liabilities rather than grow companies. And third, it could lead to a “threshold effect” that holds back small business from growing beyond the official definition of “smallness,” regardless of the criteria for measuring size (e.g., the size of revenue or assets, or the number of employees).

I don’t think I will weight too much into this issue but I will say that when former Premier Bernard Lord lowered the small biz tax rate to virtually zero a lot of unincorporated self-employed people switched presumably for tax benefits.  His other two claims seem intuitive but it is really hard to model this kind of thing because of all the other extenuating factors.

I think a better approach to the subject is a broader dialog on the definitions of small business, the roles they play in a local economy, etc.  This has been my approach and it is why I bristle when politicians cut small business taxes to ‘stimulate economic growth’.  Because 98% of small businesses operate exclusively in the provincial market it’s hard to see how cutting their taxes will lead to economic growth.  Now, if you could isolate the 2% that export and those that have breakout potential, that’s a different story.

Anyway, I thought this new report would be interesting to folks here because Mintz was also the architect of New Brunswick’s bold tax plan under Shawn Graham which was supposed to lead to dramatic economic growth.  While it may be coincidental, it is interesting that since the Mintz tax plan was rolled out New Brunswick, the province hasn’t seen a single net new job created.  Ooops.  Chances are Mintz is unlikely to revisit his thesis that deeply cutting taxes will stimulate growth based on the experience of New Brunswick.  I did hear him say that he had recommended an increase in the HST to offset the corporate and personal income tax cuts.

The wheels on the bus go round and round.

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