It's The Economy, Stupid

I was surprised to read in the NY Times that 47 percent of Americans don’t pay federal income tax.    I checked the Canadian data and 37 percent of Canadians with income don’t pay federal income tax here.  The argument is that Americans pay higher payroll taxes (regardless of income level) which is true but Canada has the HST which hits everyone although there are HST rebates for lower income folks.

The Times editorial was outraged at the comment by a Republican presidential candidate suggesting that everyone should have ‘skin in the game’.

I haven’t really given this much thought.  It is interesting that a higher percentage of Canadians pay federal income tax.

I do like the idea that people fortunate enough to earn higher incomes should pay a higher rate. As someone who studies this stuff, I have looked at data that suggests very high income taxes on persons with higher incomes will lead them to to try more to avoid taxes.  We have talked in the past of incorporated vs. unincorporated small businesses as one way to do this.

I like the idea of skin in the game but I like the idea of a society where those with lower incomes are not forced to pay a lot of taxes.

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I came across this while doing some research this morning.  This is U.S. firm is working with someone in New Brunswick to establish “our first integrated commercial scale open-ocean algae biomass production operation.”

HDS International Corp. (OTCQB: HDSI), a provider of industrial ocean-based biomass production and other high-value eco-sustainability solutions, today provided an operational update with respect to its exclusive technology license covering the territory of Back Bay, New Brunswick, Canada (“Back Bay”).  Situated off of the Bay of Fundy, Back Bay is located within a region known as having some of the world’s highest water level differentials between tides. The result is significant naturally occurring water exchange and constant nutrient replenishment available for open-ocean platform algae provided by the tidal displacements, eliminating certain production costs found in competing open-pond or lab-based commercial algae production systems. The geographic characteristics of the region also provide for favorable harvesting conditions during low tides, from which the Company expects to derive incremental operational benefits.  “Back Bay is home to carbon emitters interested in reducing their carbon footprint that recognize the value in doing so in conjunction with biological sequestration systems like ours,” said Tassos D. Recachinas, HDS International’s CEO. “Coupled with widely available open-ocean, the availability of willing potential project partners across the production vertical and the demonstrated support of the local government for our type of value proposition within the region, Back Bay is an attractive location to establish our first integrated commercial scale open-ocean algae biomass production operation.”

The Company is currently in discussions with potential project partners and other vendors within the Back Bay territory.

Located in Canada—a ratified member of the Kyoto Protocol implementing regulations for carbon dioxide emission caps—the Company expects projects developed within the Back Bay region to ultimately generate revenues from, among other things, the sale of renewable algae oil and residual biomass, as well as from the generation of carbon reduction credits.

About HDS International Corp.

HDS International Corp. (OTCQB: HDSI), based in Providence, RI, is a green technology company providing carbon capture and sequestration solutions, as well as industrial, all natural ocean-based algae farming solutions for the production of renewable, sustainable, and economically viable biofuels,  bioproducts, and carbon elimination. Our licensed technologies provide us with an attractive strategic position and competitive advantages within our markets, which include renewable energy and environmental and eco-sustainability.

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It seems economists are befuddled as to why we can have high unemployment and rising wages.   This doesn’t fit the standard models – weak labour markets = less upward pressure on wages.

What amazes me is that we can have a discussion with multiple economists and labour market types and the following data is not mentioned.  A main reason New Brunswick has upward pressure on wages and a weak labour market is that a large segment of the population is not really interested in work (at least year round).  There were 109,000 persons in NB that collected EI income in 2009 and 396,000 that earned wages/salaries/commission income.  The ratio of EI collectors to wage income earners in Moncton and SJ was about the same as the rest of Canada.   Back those two areas out and for every wage/salary earner there is one EI collector (one in three) – this is 85,000 people* collecting EI outside of SJ and Moncton.

We don’t have the Freddy Beach data but it is likely lower than Moncton and Saint John which could push this ratio in the rest of NB to 40 percent or higher.

If the economists actually asked employers in rural and smaller communities in NB they would hear this story.  There is a large segment that won’t work year round.  Now there is one caveat here – as was sternly pointed out to me recently – if this cohort (the 85k) was offered $20/hour or more many would likely switch to year round work.

*Please note that a few thousand of these would be parental leave.

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I like the wording of the mining section of the new Nova Scotia strategy:

Mineral exploration
Exploration is an important part of the mining cycle and is necessary for a sustainable mining sector. Nova Scotia competes with other places in Canada and around the world for investments in mineral exploration and development. Therefore, we must be strategic in attracting and working with investors. Mineral deposits, by their very nature, are mostly hidden below the earth’s surface and can only be identiied by costly exploration methods, such as high-technology geophysical and geochemical techniques and rock-core drilling. Since 1990, investors have spent between $5 million and $20 million per year on mineral exploration in Nova Scotia. Since the discovery of new deposits sustains the industry, the Department of Natural Resources should continue to identify and promote new opportunities for mineral exploration. In addition, the department should continue to provide technical and financial assistance to prospectors to help them attract investment for mineral exploration.

And then from the action plan:

23. Help prospectors attract investment for mineral exploration and development. We will consult with prospectors to determine the best ways to help them to attract investment for mineral exploration and development. Then we will put those measures into practice.

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Ah that old contribution margin sneaking up on NS Power the way it did for NB Power. I noticed the following tweet from a CBC reporter yesterday:

Witherscbc Paul Withers: NS Power and stakeholders consider the future of power rates without NSP’s largest customer: NewPage. “Situation very serious.” #cbcns

There continues to be a fairly large group of folks who believe that large industrial power clients are ‘subsidized’ by the poor small business and residential customers.  And it it strictly true that large customers pay less (just like just about any business under the sun there are volume discounts) but if you back out the power utilities fixed or semi-fixed costs, the very large customers are eating a huge portion of these costs that will not go away when the large customer goes away (i.e. that is why they are called ‘fixed’ costs).

Large industrial power customers could be charge a rate structure based on ‘contribution margin’ – that is they could be charged a rate that was lowered down to the point of the variable cost component – at that point other rate classes would be in a real subsidy mode.

This is a bit obtuse this morning, I guess – I hope it makes some sense.  The bottom line is that residential and small business customers will have to pay more for energy if NewPage stays offline for a long period or closes forever.

I have argued that the best approach would be for NB Power and NS Power to treat the very large customers separately – maybe even a separate utility – where rate structures could be set to align with an average of competitor jurisdictions.  Maybe we should let these companies buy power directly from a merchant supplier or some other solution.

Playing chicken with them where the choices are either ‘pay a high rate’ or ‘go under’ doesn’t seem to make sense to me.

A while ago I looked at several big U.S. forest products firms and they were increasingly producing their own power (directly).  Maybe we should look at this although if we do – we will end up with more tweets about the eventual cost to other ratepayers.

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PEI has become the latest jurisdiction to offer a tax credit for investing in small businesses.

The Community Economic Development Business program (CEDB) offers Islanders a new method to invest in the economic development of their own communities, Sheridan said.  Through the CEDB program, an eligible business obtains equity financing from fellow community members and the Province provides a 35 per cent personal income tax credit, the Community Development Equity Tax Credit, to the individual.

I have said before that I offer qualified support these types of programs but I think people need to understand the limits to their efficacy.  The vast majority of small businesses are providing services in the local community or area in which they operate.  They are plumbers, electricians, dentists, consultants, hair dressers, car repair shops, coffee shops, etc.  Encouraging others to invest equity in these firms will likely strengthen many of them and have other positive effects but it won’t necessarily lead to new jobs and a broadening of the tax base.  These come from growing the economic pie not from injecting new capital into the dentist sector.

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Here is another way to allow to possibly wind energy optimization.

Last fall, Rubenius purchased 346 acres (140 hectares) at the Silicon Border development near Mexicali in Baja California, Mexico, for the installation of a large utility-scale energy storage operation. Rubenius calls it “the world’s first mega region energy warehouse,” aka Energy Warehouse No. 1, and plans to roll out similar complexes in other emerging economies around the world. Ultimately Rubenius plans to install 1,000 megawatts (1 gigawatt) of sodium sulfur (NaS) energy storage batteries at a fully commissioned cost of over US$4 billion.

“The reason Rubenius chose this location is the U.S. grid is under expansion in the area, and at the Mexican border, the [Mexican] grid crosses our property into the U.S. and connects to the U.S. grid,” says Daniel Hill, CEO of the 4,000-acre (1,620-hectare) Silicon Border technology park. “So from that location you have a lot of potential customers in California and even Arizona. And of course you’re connected to the Mexican grid, which has large switches across the street from us.”

The storage space in Mexico will be offered to energy companies and utilities in both countries, and ostensibly will make deployment of wind energy and solar energy more viable.

One of the things you rarely see talked about is that NB’s wind energy is ‘take or pay’ meaning that NB Power must purchase it whether it needs it or not so in the middle of the summer when NB Power has no need for wind energy it has to buy it and in the deepest part of a cold winter – when it really needs the energy – the turbines may not be turning.  This inefficiency is not considered when talking about the cost per kWh.

I don’t know enough about this stuff but given the push around here for wind energy and given the size of the New England market and the upgrades to the energy corridor, maybe a large scale energy storage facility could be an option.

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It’s not every day that environmental activists and economic development advocates enter into a win/lose battle as it seems to be the case with shale gas gas.  If you consider other natural resources – forests, agriculture, fish, even other minerals – most environmentalists advocate a certain type of exploitation but are not calling for an outright ban.  I guess that is the most perplexing part of the whole process.  As I mentioned previously a group of top environmentalists in Pennsylvania wrote a report that started with the premise that shale gas would be an important economic driver for that state and then went on to advocate for very strict rules around its development.

In New Brunswick, groups like the Conservation Council  make no such admission that shale gas will be an important economic driver.  Economics, it seems, doesn’t matter – or at least is peripheral.

When SWN ceased drilling citing ‘safety concerns’, the Conservation Council tweeted with unmitigated glee  that this was a great day for New Brunswick and New Brunswickers.  For me, the Council would have far more credibility on this if their position would be as follows:

This is a bittersweet day for New Brunswickers.  We firmly believe that shale gas drilling at this time is not the right thing to do.  At the same time we realize there could be a significant economic loss from not developing the industry.  For the hundreds, ultimately, thousands of people that would have been employed directly and indirectly, we will need to work doubly hard to attract other kinds of development to the province – otherwise these people will be force to move out of New Brunswick and, ironically for us, many will end up working in the oil sands and the oil and gas industry in Saskatchewan and British Columbia.

For the millions in lost revenue to the government, we also advocate for economic development in other areas and for tax rises and spending cuts to ensure the province is fiscally sustainable.  In the future, when we are satisfied that the environmental risks will be minimal we will support shale gas drilling in New Brunswick.

You will never see this position from the Council because, for them, that is not the point.  They are leading the fight against – and any nuance would – in their mind – eat into their position.

The problem is that most people – including myself – are not on the fringes – we are in the middle and see the world in a pragmatic way.  Most of us see the oil and gas industry supporting economies all over North America and and the world (i.e. the North Sea) and would be excited if it could happen here.  Most of us also watch movies like Gasland and read media reports and wonder if shale gas is as dangerous as we are being told by some.

I still keep contrasting this in my mind with the Costco on a wetland in Fredericton.  That was a spirited battle where environmentalists were adamant about the outcome but the huge difference was simple – there was almost no economic impact either way.

We cannot debate shale gas as if it was economically neutral – like Costco building on a wetland.

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It’s nice to see the retirement funds for New Brunswick’s public service teachers and judges doing so well.

They’ve got over $100 million invested with Ontario government paper, millions invested in Verizon, Wells Fargo, Citibank – $30 million worth of Suncor Energy (at the time of these statements).  Nearly $11 million invested with Siemens, $21 million with Royal Dutch Shell, $10 million with Qwest, $13 million with Pfizer, $8 million with Pepsico.

Don’t look to hard for the New Brunswick portion of the $9 billion invested because you won’t find much. They say $63 million has been invested in the province but I can’t find the list.

We have discussed this before.  I don’t think that the NBIMC should be forced to invest a large part of its investments in New Brunswick.  I agree with the idea that it should invest where it can get the best return on the investment for the public servants.

There are, however; two points I would make.  If New Brunswick is not a good enough market for the investment of our public sector employees, that is all the more reason why we should be aggressively looking for investors who, in fact, could be interested in investing here.  There continues to be skepticism in this province about efforts to attract investment even as $9 billion worth of public pension monies flow out of New Brunswick (oh, by the way, in case you are feeling a little uppity, take a look at your RRSP investments – I did this a couple of years ago and it turns out my little retirement egg is almost exclusively invested outside new Brunswick as well).

Economic development is fundamentally about business investment.  Businesses invest their capital here and that capital generates labour income and taxation.  If most of our surplus money is flowing out of the province, we have to find other sources to bring in.

The second point is that it is not impossible that a little more of the NBIMC funds could be used for NB investments.  Quebec uses a far greater portion of its monies to invest in-province and, yes, I know this is controversial. Maybe we should ask the civil servants if some of their retirement monies should be invested in New Brunswick.

Then again, maybe guys like me should do the same with my RRSPs.

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