It's The Economy, Stupid

I actually got quite a bit of feedback on my column suggesting that we still need to focus on jobs for those that need them while at the same time looking for high quality jobs (the quality vs. quantity debate).  My point of view is that we still need a significant number of jobs for folks that aren’t in the highly educated column or that don’t have a very specific skill set.  If you look at the unemployment rate by education level you see the bulk of unemployment in the province is still facing folks with less than a high school education.  Focusing only on high quality jobs won’t do much for them.

For example, the unemployment rate for males with grade 8 or less education is 22%, it is 18.2% for those with only some high school.  With a university degree, the unemployment rate for both males and females is only 4%.

Unemployment rate (%) by education level (2010)

Source: Statistics Canada Labour Force Survey.

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There is a scene in one of my favourite odd ball movies – The Three Amigos – where the German bad guy blows away a half dozen people because one of them makes a comment.  His response “anyone else with a comment?” sticks in my mind.

As you know I turned off the commenting feature on the blog a few weeks ago.  Now, I will explain my rationale.

I had hoped the blog would have been a venue for debate and dialogue and, in truth, there have been a few folks who post thoughtful and time consuming posts here.

I was talking with someone yesterday who lamented that the problem – in his view – with social media is that it exacerbates the long tradition of only those with a gripe speaking up.   In the old days, newspapers would get 20 letters angrily protesting an issue for every one supporting it.  Now that has morphed to the Internet.

I see this trend a bit myself – maybe not pervasive.   I gave up reading comments made about me on other sites – such as my columns or when I am quoted in articles because some people are downright nasty.

But fundamentally that was not why I stopped allowing comments here.   I stopped allow comments here to stop being harassed.    For long time readers, you will know about this but there is a small group of people that send me extremely offensive blog comments – one guy is really bad – and I cannot turn them off.  Every time I try to tweak my system here, they find a way through.   It is annoying and grinding to get these comments on my Blackberry on a daily basis.  This has been going on for more than four years.

Since I turned off commenting, I have not received a single nasty commentary in my inbox.  Not one.  It is the longest period in four years where I have not been subjected to this kind of malicious language at least a couple of times a week.  The cowards that write this drivel don’t want to send me emails directly because they are traceable.

It has been refreshing.  Very refreshing.  It’s hard to be swore at, called names, belittled and faced with racism and bigotry on a daily basis.  There are very disturbed people out there and I can’t find any other way to turn them off.  If you think I am thin skinned you try it sometime.  It’s not fun.

So, someday I may turn commenting back on.  Otherwise you can certainly tweet your comments or send me emails directly.

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I’m a big fan of the U.S. Government Accountability Office (GAO) – Canada has a version of this but not as wide ranging – the agency used to monitor government spending and to test the veracity of program spending and tax promises.

In this short review of the potential for duplication and fragmentation in federal economic development programs, I heard echos of what I have been talking about in New Brunswick. The GAO concludes:

…we have found that

(1) the design of each of these economic development programs appears to overlap with that of at least one other program in terms of the economic development activities that they are authorized to fund;

(2) Commerce, HUD, SBA, and USDA appear to have taken actions to implement some collaborative practices but have offered little evidence so far that they have taken steps to develop compatible policies or procedures with other federal agencies or to search for opportunities to leverage physical and administrative resources with their federal partners; and

(3) the agencies appear to collect only limited information on program outcomes–information that is necessary to determine whether this potential for overlap and fragmentation is resulting in ineffective or inefficient programs.

You might expect some duplication and a lack of collaboration across multibillion dollar agencies that service a country of over 300 million people but we see much of the same here in New Brunswick in a jurisdiction of 750,000 people.

The provincial government is in the middle of a large scale review of who, what, why and how economic development is done in the province (including looking at interactions with other levels of government).  This will hopefully lead to a more streamlined and effective approach.  In addition, this issue of program outcomes – and I am not talking about x interventions and y $$ spent but what did we actually accomplish – is critical and there is work being done on that as well.

My wish list includes:

-Far fewer separate government funding programs – in an ideal world there would be one ‘bank’ providing financing where there are gaps in the private market and to respond to competitive realities in the market.  I don’t see why there needs to be more than a dozen different departments and agencies that are giving out money to industry – in a tiny province smaller than most mid-sized urban areas across North America.

-Far more involvement of the the private sector in development efforts – and not specifically on a vested interest basis.  We want more expertise at the table not just open hands (I admit the lines on this are sometimes hard to find).

-An encompassing focus on finding and exploiting specific economic development opportunities.  The competitive environment for attracting investment has never been more complicated in the 20 years I have been involved.  We need to have clear value to sell – both internally and to the wide world – regional warehousing, energy projects, mining opportunities, biosciences testing lab, the Belledune free trade/tax free zone – whatever. but just saying “golly gee, we have hard workers down here” is not good enough.

-Much more accountability and measurement – based on fair and transparent metrics.

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Doing a little more research on this issue of Maritime Union, I wanted to know how much affinity New Brunswickers have with the concept of New Brunswick.  Because of a lack of immigration, New Brunswickers have the second highest percentage of third generation (or more) Canadians.  Just under 90% of us belong to families that have been here at least three generations (it is 60.5% across Canada and well below that in Ontario).  Does that give us a stronger affinity to provincial identity?

3rd Generation Population (% of Total)

Not necessarily.  The Association for Canadian Studies in Montreal did a survey in 2009 where people were asked to define themselves relative to national versus provincial identity.  While the data was not broken out for New Brunswick, Atlantic Canadians were 80 percent more likely to define themselves as ‘Canadian first but also New Brunswicker’ compared to the national average.  At the same time, only Quebeckers had less identification as ‘Canadian only’ among the regions in the study (and only Quebeckers had a higher ‘Quebec first, then Canadian’ (by a wide margin) than Atlantic Canadians.  No Atlantic Canadians (0 percent) identified themselves as ‘New Brunswicker’ only.

For this one study, at least, it would seem that Atlantic Canadians see themselves primarily as Canadian but still have a strong sense of provincial identification.

I find the identity stuff fascinating.  Some people are deeply wedded to ‘place’ and others could care less.   Most of us are somewhere in between.

Certainly if we are to start talking about Maritime Union, we will have to create a new level of affinity – to the ‘Maritimes’.

I have said it many times before – the political and business ties among the Maritimes are not nearly as strong as you might expect.  I have talked with many businessmen/women from NB who say it is harder to do business in Nova Scotia (for example) than in Ontario.  We have a historical relationship but also a ‘beggar thy neighbour’ relationship.    Instead of celebrating when another Maritime province enjoys some success, we resent it (we in the generic sense).    Misery loves company.

It could be done.  We could become ‘Maritimers’.  I just don’t think people are up for even micro changes these days – think about the furor over the sale of NB Power (a tiny issue in the overall scheme) or shale gas (SWN wasn’t even drilling – they were doing seismic testing) or municipal reform (the outrage in Gagetown that it might be forced into the embrace of Freddy Beach).  Something far more grand – Maritime Union – would take a level of good will, cooperation and public discourse that we haven’t seen.

In the end, I think the better course of action is for New Brunswick to get its act together.  To address municipal reform.  To foster growth sectors (responsibly in the case of natural resources).  To develop a sustainable trajectory for  public finances.  To bend the cost curve on public health spending (public – I reiterate – if the Boomers I see driving around Moncton in their Lexus’, Mercedes, Caddies, etc. want to pay copious amounts of their stored wealth on health care – like the Yanks – I say fill your boots – but to expect the Hyundai driving Gen Xers to foot the bill indefinitely is not realistic).

If we build a sustainable province here – then Maritime Union could be a longer term option.

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I usually don’t like calling out specific people on this blog because they might not appreciate it one way or the other but occasionally I feel the need to do just that.

When I first moved to Moncton in 1997 I met three bright young entrepreneurs: Louis Phillippe Gauthier, Frederic Gionet and Marc Maurice.  They were engaged in interesting tech and info business ventures but what struck me was that they were a) information junkies – they read and studied voraciously, b) they were ambitious and self-confident and c) they worked fluidly in both French and English.

Now they are all – as Frederic told me recently “in the game”.  They have a passion for economic development but now they are in the game – Frederic at Enterprise Greater Moncton, LPG at Invest NB and Maurice is doing very interesting work with the NRC (on contract).

More often than not guys like this are leaving NB to pursue their careers elsewhere.  These guys have stayed and are taking on important positions in the economic development biz.

Bravo.

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One of the things that folks who think a lot about economic development in New Brunswick focus on is the significant economic leakage from a small province such as New Brunswick. Visualize a ‘closed’ economy where almost all the economic activity stays inside the box – all the products and services you buy are produced in your closed economy. All the investment dollars flow inside the box.

New Brunswick is like a box full of holes – huge, gaping holes – but if effective – comparative advantage means that for every leak out of one hole, you get something poured in another.

Take a look at the following table. It is based on the Stats Can 2007 I/O tables and shows how much of the national GDP that is created from one dollar of output in New Brunswick stays in New Brunswick. For example, 99 percent of the economic activity generated from elementary and secondary schools (as measured by GDP) stays in New Brunswick.  Most of the economic activity generated by universities, health care services, etc. stays in New Brunswick – which makes intuitive sense.  It is interesting that potash mining, oil and gas extraction have relatively high in-province GDP.

On the flip side, most manufacturing in New Brunswick is creating a lot of GDP elsewhere in the economy.  At the absolute bottom of the table are the refinery and the film industry.  For each dollar spent in the film industry in New Brunswick, only 36% of the total national GDP created stays in New Brunswick.

What’s interesting about this table is the comparatives.  Look at Ontario.  91% of the national GDP created from the film industry stays in that province compared to 36 in NB.  Look at Nova Scotia.  Something is really wonky with the NS numbers – there must have been something strange going on to generate such a low contribution to GDP – but the point I think is quite stark.  Ontario across the board generates more GDP per dollar of output than other provinces – although Quebec and BC are right there as well.

What does this tell us?  Nothing we really already didn’t know.  Supply chains for this region are tied to Ontario and Quebec.  Specialized legal services, financial services, etc. are mostly outside the region.     It seems to me this just shows we have to work harder to generate GDP here than in Ontario and Quebec (per dollar of output).

This does not say that sectors with a low in-province GDP ratio are not important sectors.  The refinery is a very important economic driver -so is manufacturing – the point is that these sectors are tied in nationally (and internationally) more than others.

Percentage of National GDP that stays in the province  per $1 of exogenous output shock in that province

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I had the opportunity to take part in a session today looking at the growth potential in one of the province’s most interesting industries – life sciences. There was an expert brought in from the U.K. to discuss her experience with cluster development. In chatting with her I was struck again at how important just a small handful of people and organizations can drive the growth of an industry. These are determined – like a dog with a bone – kind of leaders and I don’t know how many of them we have in New Brunswick.

There are successful companies – and organizations – but there are not that many cases of industries or specific sectors that have come together and fought passionately to grow something bigger and better.

Gerry Pond is a one man wrecking crew – but he is literally growing his own cluster of IT firms.

It takes more than government money. Or institutions. It takes more than a few successful firms. It takes some kind of drive from deep within to build something bigger and better.

Folks achieve their Maslowistic self-actualization in different ways. Some pursue wealth, some pursue music/arts, academics, teaching, community service – etc. Some folks are just happy to live life and they don’t feel a passionate desire for grander ambition.

It seems to me we need a few folks who want to take on this bigger project – of turning NB around and building a stronger economy for the future. I have come to the conclusion that this needs to happen at the specific sector development level. If we could get some private sector leaders to really step – really step up – someone from PEI today said they have a full time job and a part time job building the cluster.

Wouldn’t it be neat if there were hundreds of NB leaders with ‘part time’ jobs working on the New Brunswick Growth Project. We can’t just leave it to government. Government has an enormously important role to play but it has to channel the ambitions of the rest of society. It’s easy to step back and whine about ineffectual government. It’s harder to step up.

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I have thought through the economic development problem in New Brunswick from just about every angle over the years. I hadn’t advocated for a separate Invest NB organization. I had argued that a private sector-led economic development agency with a broader mandate than just investment might be a good idea.

But times change and my views evolve. I just listened to a Freakonomics podcast tonight while I was cooking supper and it was an analysis of why experts are usually not much better at making predictions than anyone else – this has been validated by research. The reason for this is that the experts have a viewpoint and they follow it hard even when new data starts to show they are wrong. Thomas Khun did a lot of work in this area – I studied his theory of paradigms in college.

Anyway, I evolve and now think that Invest NB – separate, focused, lean, etc. is a good and elegant model for investment attraction. I think, however; it will be critical for the agency to be deeply networked to the key players that will influence their ability to be successful such as NB Power, BNB, Department of Finance, Future NB, etc. And the Premier will still have to crack the whip to get some of these groups working closely together.

I wish them well. I counted a couple of dozen tweets kind of skeptical of Invest NB today. That’s fine. The Twitter world is one that lends itself to this kind of public discourse. I think we should hope Invest NB can do good things. The province needs it.

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I had an excellent conversation with this guy a couple of years ago. He is a professor at the University of Missouri-St. Louis and he was writing a book on the problems with industrial incentive policies in the United States.   He has an interesting example in his blog discussing a large industrial manufacturing plant moving from Quebec to Tennessee.

As I have said before, I would be in full agreement with a broad, global treaty meant to limit these kinds of industrial incentives but, like trade deals, you would need the vast majority of countries and provinces/states/cities to sign on.

In addition, it would be very complicated to define what is an ‘incentive’.   Grants – sure – how about loans?  How about low interest loans?  How about free or cheap land?  How do you decide what the definition of ‘cheap’ is?  How about tax breaks?  How about R&D money?  Governments around the world put billions into pre-commercialization R&D – is that an ‘incentive’?    There are dozens of other categories – training monies – welfare to work programs, agricultural subsidies, reduced fees on government services (incentive levels).

Defining incentives would be very hard, policing even harder.

And, at that, there would always be ways to work around any anti-incentive legislation.

I just think the mechanics of it would be almost unworkable.

We already have rules against this kind of stuff – between countries – written into free trade pacts.  The whole softwood lumber dispute was about so-called unfair, uncompetitive subsidization.  Canadian forest products firms were livid about the U.S. black liquor subsidies.

In the end, I think non-cash incentives are here to stay (tax incentives, for example, are almost impossible to quantify fully as they are based on expectations of future revenue/profits).  They may be able to draft rules around direct transfers between government and industry (cash) but in the U.S. very little of the incentive packages are in the form of cash.

I hope we keep discussing this because Professor Thomas is right – at a national level – or even North America level – these kinds of relocations are not value adding and may be value destructing (see his comments about the lowering of wage rates).

But efforts to make a jurisdiction competitive for investment – are very worthwhile and should be an important part of government policy.  New Brunswick is an example of a jurisdiction that has suffered from chronic economic underperformance and that has led to another kind of subsidization – the subsidization of government – federal to provincial ($1.4 billion in Equalization) and government income transfers to individuals ($450 million more worth of EI in 2009 than if we were at the national average).

Jurisdictions such as New Brunswick need to strive to foster the economic base required to generate the taxes needed to pay for the kinds of public services we want.  There are fairly simple ways to calculate this.  It was at the heart of the failed self-sufficiency agenda – remember that?

We may never reach this equilibrium in my lifetime but we at least should understand the target.

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Lisa Keenan’s op/ed in today’s Telegraph-Journal is an important contribution.    She ties it into the Atcon affair which is a little much given the pile of lost money given by the Tories to companies such as Atlantic Yarns which finally declared bankruptcy in 2009 after the government had put in in more than $80 million.  The Lord government put in nearly $70 million to AV Nackawic as well – which turned out so far much better than Atcon but who knew at the time?  Of course Bricklin is the most famous Tory-financed debacle – don’t forget I am on the record supporting Hatfield’s effort in that area, however.

But, the quick partisan slam aside, Keenan nailed the main reason why Ireland hit the skids.  It was the Irish banks that broke the economy and the government’s agreement to back stop them that broke the public finances.  It was not as so many have said – the boom of FDI that led to the failure.   The fast growing economy in Ireland did lead to a housing bubble – that contributed to the problems but the main reason was the Irish banking system which wanted to be a global player and bought billions in assets which ended up being toxic.

People see what they want to see and there are people who are against efforts to bring national and multinational firms to New Brunswick.  When Ireland collapses they were quick to say “see that’s what happens when you attract big bad multinationals” without even taking a first glance at the real reasons.

I still say the Irish example is very instructive for New Brunswick.  They positioned themselves as an excellent location for specific industries.  They crafted tax policy to support those efforts.  They graduated workers with the skills for those industries and the promoted the heck out of it.  They also worked Irish expatriate networks very well and other micro-targeted efforts.  There is lots to learn there.

If we ever get to the point we are growing so fast that we risk a housing bubble, come and see me.  That would be a great problem to have.

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