It's The Economy, Stupid

I received the following  note about my column on Saturday entitled Gerry’s Kids.

David – I read your article on Gerry’s Kids (Oct.29th) and was appreciative of your shining the light on one of the biggest job creation forces in Atlantic Canada ( not to mention the spirtual leader of innovation). To add to your reference to “and many more”..Chris Keevil- President of Colour (Halifax), Karen Radford – former VP at Telus, Dan Doiron – Professor of Innovation and Entrepreneurship at UNBSJ, Joe Mosher- VP Marketing Bell Aliant (retired),Paul Eisner- VP Harris Corporation, Stacy MacNeil- Marketing executive HP in Palo Alto; the list is long. The seeds from the Gerry Tree ( as I think Ian C.coined it) have fallen far and wide, the impact of which over time is profound!

I am pretty sure that Gerry Pond isn’t much for flattery but once in a while a little flattery is required to make the important, larger point.

Uncategorized

Check out this new report on the technology sector in New Zealand.  Here’s the relevant piece:

New Zealand’s technology sector has broken through the $7 billion mark for the first time.  The annual TIN (Technology Investment Network) 100 list, sponsored by Industrial Research, NZ Trade & Enterprise and the Ministry of Science and Innovation (MSI), found total revenue of $7.014 billion for our 100 largest tech companies for year ending June 30, 2011 – a 5% increase over 2010′s $6.7 billion.  Of that $7 billion total, $5.103 billion was generated in export receipts – a 2% increase over 2010′s $4.9 billion.

We talked about the importance of exports to an economy because it brings in money rather than recirculating it.  This applies as well to the tech sector although it can’t be compared to other sectors.

For example, if a new restaurant opens up in town and shifts (recirculates) money from the other five restaurants to itself, there isn’t much economic expansion there.  However, if we see a big shift from restaurant spending to technology adoption, that could lead to more productivity, innovation, etc.

However, we don’t want to only be a consumer of IT (or in the case of NZ they include life sciences as well) – but an exporter.   This is the way to expand an economy – and as we have talked about many times here before New Brunswick’s economy right now is not big or robust enough to pay for our public services, fully utilize our infrastructure or even allow for a modest growth in population.

In my view, if we ever got to the point where we were exporting $5 out of every $7 in technology activity, we would be doing quite well indeed.

Uncategorized

I spent close to an hour with a Statistics Canada economist on  Friday trying to frame how we could assess the economic impact of a specific industry in the province.  It’s fun interacting with the hard core practitioners of the dismal science.  I am a pretender to the role (MBA only) but I have probably analyzed more economic and demographic trends in New Brunswick that just about anyone.  Interestingly enough, this obsession with data started when I came back to NB and joined the team trying to attract multinational companies to set up in the province.  It was fascinating to see VPs of big companies looking at our ‘business case’ for their specific company in New Brunswick.  That data intensive, targeted approach was central to convincing firms that an NB facility could be successful.

I took this concept to a larger audience through the blog and columns but the public at large seems to be less persuaded by data.  They find it interesting but form opinions on a softer set of criteria compared to those VPs from big companies.    We soldier on.

We have been talking on these pages about the role of older workers helping to addressing emerging labour market challenges.  I see Statistics Canada is now estimating that the average 50 year old can expect to work 3.5 years more now than back in the mid 1990s.

Again I don’t see this as a problem.  I interact with a number of post 60 year old, already retired once workers.  They have more flexibility in their work but seem to enjoy it even more than before retirement.

The next step will be to assess the quality of life of those who eschew Freedom 55 and work into their 70s.  The conventional (and current – watch the Sun Life advertisements) wisdom has been that work is dreary and people can’t wait to retire (I used to know someone who was in their late 40s and had their retirement date posted on their office wall).  I wonder if that is true.  My father-in-law is 76 and expects to work in his full time job until 80 (and then do part time work).  When I asked him why he told me he would ‘drop dead’ within six months if he retired.

I guess my point is there must be enough data out there to assess this.  Are people that work longer happier (on average) or less happy compared to those who retire at 50, 55 or 60 (I put the caveat in here to state I mean retirement as fully stop working – many people retire and go into another job, part time/part year/some passion they enjoy)?

Even the actuaries at Sun Life would end up wanting people to work longer.  They are having to build into their models the fact that people can live these days – if they take care of themselves – well into their 90s.   If you need to extract monthly income from Sun Life for 30 years – someone will have to pay for it.

Uncategorized

Everyone these days is on an innovation kick.  Innovation is the new hot idea – the next big thing.  Even the provincial government is talking about an internal innovation agenda within the bureaucracy.

I hope NB cities don’t miss the point.

Innovation at the city government level should also be part of this innovation agenda.  I worry that cities will grind down any kind of spending that might have been used to be innovative as they are relentlessly pressured to focus on ‘core services’ such as snow removal or garbage collection.

In the last year or so I have travelled a lot – Chicago, Toronto, Boston, Sao Paulo, Halifax – and I had a devil of a time finding free WiFi in the downtowns.  Moncton, however, just about everywhere I go in the downtown, there it is.  Free WiFi.

Again, the core services crowd will scoff at this – a luxury Moncton doesn’t need.  They would say the city should eliminate WiFi on its buses and downtown and shave $0.0001 off its tax rate.  They would take this fine grain comb to all city spending – culture, parks, tourism, even economic development – and would end up saving a few cents on the tax rate but gutting the city’s ability to be part of the innovation agenda.

There is more to innovation than WiFi.  Innovative thinking is needed when it comes to municipal water systems, worker pensions, downtown development, and a host of other important cogs that keep the machine working well.

But if you grind down spending to the bare minimum you will get core services but also atrophy.

I hope our municipal leaders keep this in mind in this era of austerity.

Uncategorized

I see the CFIB is crying foul over the government’s new way to lower the cost of large industrial customers by allowing them to sell renewable power back into the grid at a good rate (hydro, co-gen, etc.).  This seems reasonable to me as they (the government) are quick to pay up to 14 cents/kwh for take-or-pay wind power so why not pay a good rate for other renewable energy that actually creates good paying jobs in the province?

The CFIB is a bit of a strange beast to me.  They have to be among the best resourced organizations I have seen.  They have talented people in every province.  They do detailed economic analysis.  They are constantly polling their membership.  Their workers are talented and articulate.

But they seem to miss some very obvious points.

It is true they are advocates for small business.  I get that.  But ignoring the link between big and small business (i.e. advocating policies that hurt the big guys) is like biting off your hand to spite your foot.

Think about CFIB members in the Miramichi for a minute.  After the two big mills closed, it had a cascading effect that lead to a  collapse  in the forestry business supply chain (see chart below).   It also lead to a more than 16 percent decline in the total number of businesses – most of them small businesses in the Miramichi region.  This included a 20 percent decline in the number of firms in the professional services sector, 14 percent decline in retailers, 11 percent decline in construction-related establishments.

Of course electricity rates were not the only reason why UPM exited New Brunswick (they still have forest products operations in countries around the world).  There were other concerns about long term wood supply and the obvious market conditions.  However, electricity rates were one of the main reasons cited by the firm.

The CFIB may be betting that firms like Twin River, AV, Irving, etc. will buck up and swallow the high electricity rates.   In other words, a kind of Russian roulette with energy as the gun.

I don’t like playing games – deadly games – with important industries.

I wonder what the CFIB’s position was on wind energy?  Is it okay to give lucrative, long term take-or-pay contracts for renewable wind energy – with virtually no economic activity – but a crime to give good rates for renewable co-gen and hydro from companies with thousands of employees – mostly  in rural NB?

By the way, last point – when NewPage closed and NS Power lost its largest customer – the utility said rates for everyone else would have to go up.  Just another bullet in that gun.

Uncategorized

I am talking about energy economics later today and not just your basic wellhead to city gate pricing or OPEC price fixing.   These days energy economics is more complicated than ever.    Think deferred revenue (the pseudo-asset), take-or-pay wind energy, the cost of wind and solar energy load balancing, winter peak heating, co-gen, off-grid, carbon pricing, not to mention local content rules relating to renewable energy systems.

Here are a couple of tricky examples.  Some folks in Nova Scotia were indignant that NewPage was being ‘subsidized’ by other – mostly residential and small business – rate payers.  Within a week of NewPage taking its 200 MW? (I am not sure of this) offline, Emera was saying it would have to raise rates everywhere else to make up the lost revenue.   I won’t answer this because I have before on these pages.

Then there is wind energy.  Under take-or-pay NB Power has to take the power when the wind is blowing -whether it needs it or not.  So, in the middle of the summer when it has more than enough baseload generation to more than cover its power needs, it is forced to pay 11 cents? 14 cents? /kwh for wind energy it doesn’t need.

Wish me luck.

Uncategorized

I have always had a theory that governments like having a byzantine, multi-layered and highly complex taxation system because a) it virtually ensures that no one ever really knows how much they actually pay in taxes and b) it allows them to use the tax code very strategically (surgically) to win votes.    Think about the highly targeted tax breaks offered by the Harper government in the past couple of elections.

A flat tax would eliminate both a) and b).  First, you pay x on your total income.  It doesn’t get much simpler than that.   Second, the flat tax model assumes no targeted tax breaks (or very limited tax breaks) otherwise the spirit of the thing would be violated.

Of course the big concern (which I share) is that flat taxes put more of the tax burden on lower income earners.   But I would still argue that the more income you earn, the more deductions you get and you end up paying far less than the marginal rates anyway.

In New Brunswick, I think the top marginal rate is over 50% – meaning that on anything over $130k or something you pay more than 50 percent in income tax.

However, we know from Statistics Canada, that the highest implicit income tax rate in New Brunswick is 18.9% – that is the highest quintile of earners only pay 18.9% on their total income (see the table).

Now, all we have to do is set the flat tax rate at 19% and then set the floor at a level where the other quintiles slide in.  The floor is the amount at which under – you pay zero income tax.  For example, if you set the floor at $20k per  year income, then a family earning $20k would pay no taxes at all and a family earning $25k would pay $950 worth of income tax (19% of the $5,000).  A family earning $300,000 would pay $57,000 in taxes – or about what they would pay now after their myriad deductions and accountants pouring over the books.

In essence, I think you could go to a flat tax and end up with families paying similar amounts of taxes they pay today but without the huge CRA bureaucracy, the multi billion dollar industry that has built up around tax filing, compliance, loopholes, etc.

Estonia has this model and it seems to be working there.

The biggest problem?  Again, come back to the first sentence.  There is a huge industry that would lose out if the system was simplified and I am not sure the government wants people to know just how much they pay in taxes.  The average middle class family is already paying an effective rate of around 8% of their disposable income on HST.   If they pay 19% income tax – they are paying more than a quarter of their total income on HST and income tax.  Throw in property tax, gas tax and other taxes the average middle class family could be paying more than 30 percent of household income in taxes.  Do you think government wants to make it that obvious?

Implicit Income Tax Rate (NB) – 2009*

Lowest quintile 2.5%

Second quintile 5.9%

Third quintile 9.3%

Fourth quintile 13.6%

Highest quintile 18.9%

*2009 for all family units.  Source: Statistics Canada.

Uncategorized

There is a good op/ed piece in the NY Times today that argues increased consumer spending is the way to get America out of its economic funk.

I want to look at this from the perspective of New Brunswick and the Maritime Provinces.  It is true that consumer spending drives the economy.  There is no question on this but increasing consumer spending comes from basically two sources: 1) getting existing consumers to spend more (save less) or 2) increasing overall income -a large  portion of which will automatically go to consumer spending.

Most economic development is focused on point 2) – particularly in a place like New Brunswick which already has one of the lowest savings rates around – and as I said recently very low discretionary income compared to the national average.  In richer jurisdictions trying to get Boomers to part with more of their accumulated wealth may work but in New Brunswick, I would argue, we need to work on increasing wealth and that will lead to more consumer spending and that will generate jobs and taxes for government.

Uncategorized

The Globe & Mail has a story today heralding the micro-business culture in Victoria, BC.   It claims that 75% of companies in that community have four or fewer employees.  I am not sure where that data comes from.  I have the Canadian Business Patterns CD which shows a much lower percentage for Victoria but they may be scrubbing the data in a different way (for example my charts below are based on establishment data and include the public sector).

Based on establishment data published by Statistics Canada, West Vancouver has the highest percentage of micro-businesses (among communities with at least 500 businesses).  BC and Alberta dominate the list.  On the flip side, Quebec has the most communities at the lower end of the scale.

On a provincial basis, Alberta and BC have the highest concentration of micro-businesses while Manitoba and Quebec have the least.

As with all data, this stuff can get tricky.  To be an ‘establishment’ you have to be submitting payroll data to CRA.    I don’t believe that a lot of self-employed persons would get picked up in this calculation (those that say on the Labour Force Survey they are self-employed and have no paid help).    However, Alberta and BC lead the way in that category as well.

Uncategorized

Just a quick update on commenting.  I have talked to my techies and they are going to set me up with Facebook commenting which means you will need to access your Facebook account to make a comment.  It’s  a bit of a hassle but it should help me keep the fringe elements at bay.

Thanks for your patience on this.

Uncategorized