It's The Economy, Stupid

After I tweeted about the Keane Inc. expansion in Halifax I got one tweet and one email that are instructive.

Referring to the payroll rebate offered to the firm, the tweet said: “So that’s $2,770.95/job/yr not counting interest or opportunity costs etc. 5 years & out. When will governments learn.”

The email said:  ”This is exactly the type of firm we need in Atlantic Canada.  The company offers high wage, engaging career opportunities in the knowledge economy.  I hope we see much more in the near future as Nova Scotia surely needs it.”

These are the bookends.  I talk to more people about economic development that just about anyone around and I can tell you there is more polarization today than at any time in my 20+ year career.   A growing number of people believe that government should not be involved in economic development at all – even more believe the government shouldn’t be in the grant/loan/tax break game.  On the other side, there are folks saying governments – particularly in the Maritimes – aren’t doing enough and what they are doing is not working.

So I come back to this issue I have blogged on before and may some day turn into a book and that is this issue of determining the value from economic development.  Not wishy washy, feel good rhetoric but actual dollars and cents.  We put in $X and we got out $Y.  We spent $20 million on economic development this year and we estimate an incremental $40 million will be generated in new tax dollars.  NSBI puts $3.5 million into Keane Inc. but that project will generate $20 million in tax revenue for governments over the five years of the agreement (or whatever – that last one is fictitious).

Now this approach won’t necessarily change people’s mind on the role of government in economic development.  Those against will still talk about opportunity cost, disincentives, ripple effects, etc.  However, at the very least, we would know if there was a positive tax benefit for tax dollars invested.  Then we could have the debate about all the other things that people worry about.  Right now we don’t even know if there is even a basic economic rationale for all the bucks we through into economic development.

Of course, the biggest concern with this – and it comes up just about every time I talk with folks in economic development organizations – is that most of what they do ‘can’t be measured’ in the way you would measure the tax impacts of a new Keane expansion.

But I am increasingly hard lined on this.  While you may have a hard time measuring the value of chunks of activity – the overall ROTI must be positive or the public is right to question why we put the money in.

Heck, maybe someone can make a case that a negative ROTI is acceptable in certain cases.  Maybe they will say I am not considering the huge social costs associated with weak economies (i.e. social assistance, et. al.).

Maybe they are right but if we have the numbers, then we can have the debate.  Without the numbers we will continue to argue the points mostly on rhetoric.

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My column in the TJ took a look at the latest data from Statistics Canada on university and college enrolments in Canada for 2009/2010.  I won’t recreate that column here (although I have to see if I can republish here?) but there are a few charts that are not in the print edition.

The first table shows total enrolment in New Brunswick by program area.   More than 4,600 enrolled in Humanities and 486 in math and CS, nuff said on that.

The second table shows the comparison of university enrolment across Canada adjusted for population size.  NB went from above average in 2001 to well below average in 2009.  Check out BC.  It’s a fascinating trend.  That province dramatically ramped up bums in seats over the decade.  They used to just take NB graduates.  Now they are paying for their own.  It’s interesting that SK is shifting to much more college level training in the midst of their resources boom.

The graphic just shows the enrolment in NB Universities over time.

The last table shows community college enrolment adjusted for the size of the population for just mathematics, computer and information sciences programs.

Total Enrolment by Major Program: NB Universities (2001, 2009)

Source: Statistics Canada.

Total Enrolment: Canadian Universities (per 10,000 population)

Source: Statistics Canada.

Total Enrolment: NB Universities (1992-2009)

Source: Statistics Canada.

Total Enrolment: Public Colleges (per 10,000 population) – Mathematics, computer and information science programs

Source: Statistics Canada.

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There are a few points I want to address this morning based on conversations over the past week.

The first is on the elect-ability of the NDP.  I was having a conversation with a colleague who is a devout NDPer about the Broadbent Mulcair feud this week.    In my opinion, when the NDP adopts a more ‘centrist’ approach, that is when they can get elected.  Darrell Dexter in Nova Scotia is an NDP – he raised taxes, implemented labour friendly policies and expanded specific social programs.  Some folks are furious with him as evidenced by the editorial pages of the Chronicle-Herald.  Yet, he has for the most part been a sober, centrist leader with a strong focus on economic development and making a more efficient government.  They are pragmatic about natural resources development – a senior person in the government told me they are glad to be a “couple of years behind New Brunswick” when it comes to shale gas development but they are moving ahead to develop that resource as well as other mining – and a big push for more offshore oil and gas exploration.

In New Brunswick, the NDP – my aforementioned colleague partially agrees – is comfortable as the conscience of the left with no real ambition to form government.    If they elected someone like Dexter as a leader, they could be in power – IMO – within one or two election cycles.     As a permanent, marginal leftist party they can take hard stances on BNB (scrap all incentives), taxes (raise ‘em on the high income earners), environment (no to anything that involves digging holes or cutting trees), etc.    In my opinion, a healthy democracy features parties that cater to a broad spectrum of views but in our system – you can’t form a majority government – like the NDP has now in four? five? provinces – if you sit out on the fringe.  Now, my friend tells me that he thinks the public in New Brunswick is more left leaning than I give them credit for and they will embrace most of the platform although he doesn’t believe the party will form government any time soon.

While it’s not a good segue, I will address the number of shale gas reports/stories that people are sending me.  I get a couple a week referencing potential environmental problems with shale gas and a couple talking up the economic benefits and lack of environmental concerns.  I am not qualified to arbitrate this issue in any way – others posting to this blog have much more direct experience – so I appreciate the links but I likely won’t comment that much on specific reports/studies unless there is something new.

Suffice it to say there are concerns but right now they are more hunches than hard data.  Certainly there are the traditional environmental risks associated with any nat gas development such as leaks but the broader concerns about water contamination, localized earthquakes, etc. are hotly debated and will likely be well into the future.

Finally, I saw an interesting statistic this week that I thought I would pass on to you.  While New Brunswick still has far fewer high income earners (no matter how you define that), we did see a spike in the number of people reporting $100,000 or more in total income between 2006 and 2009 (the most current time frame for available data from Stats Can).  I thought this was mildly interesting.  The trend actually holds going back to 2000.  New Brunswick has seen a faster rise in the number of folks earning $100k or more in that nine year window even though the economy has been quite weak through the period.  Median income is up 43 percent in NB versus 34 percent across the country.   I don’t want to speculate on what is driving this growth but I might look into it deeper in the weeks ahead.  Certainly a tightening labour market drives up wages as a general rule and the recession didn’t hit here as hard as a place like Ontario but there could be other things going on as well.

Increase in the number of high income earners (% change 2006-2009)

Source: Statistics Canada.

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After the Moncton Chamber of Commerce provided its highly qualified support for the potential of shale gas development, the leading group trying to get the industry banned came out with a letter asking for people to boycott chamber members.  It said, among other things:

“Unconventional shale gas exploitation is a Ponzi scheme that will destroy this province just like it has everywhere else it has been used. Banks don’t write mortgages and insurance companies won’t insure properties within range of drilling leases, making everyone’s homes worthless in these areas.”

I understand that this rhetoric will act like red meat to a small group of folks in New Brunswick but I have to think that the average person in this province will be increasingly wary of this kind of way-over-the-top language.  In fact, the shale gas industry is active in hundreds of communities across more than 20 U.S. states and Canadian provinces and most of these communities are benefiting from good paying jobs and tax revenues.  There are some issues that have come to light and governments, industry and environmental groups are working to ensure that regulatory frameworks address them.  The notion that shale gas will ‘destroy the province’ just like ‘everywhere else’ – will ring hollow to anyone who does even the most basic research.

I understand why they are doing this.  They know where to hit.  In the Miramichi there are signs saying that shale gas will wipe out salmon.    In the end, people are not as stupid as some other people think.

Right now the activity in shale gas is in the R&D phase (just like Quebec, by the way).    The commercial drilling using fracking is likely several years away if not further.  We have time to get the regulatory and oversight framework right and as the Moncton Chamber says to figure out how to maximize the benefits to New Brunswickers.

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My Globe & Mail Economy Lab blog this week talks about self-employment trends in Canada – in honour of the rollout of Startup Canada.   I make the case that entrepreneurship and new startups are important to the economy.  I use my favourite example of the pizza industry which I have always thought is the ideal example of a well functioning sector of the economy.

But self-employment, a pretty good proxy for entrepreneurship, has been waning somewhat in Canada in recent years.  The ratio of self-employment to employees has declined by 12 percent since the late 1990s – not a huge decline but it is a trend given that from the mid 1970s the relatively intensity of self-employment rose steadily (increasing by 50% from 1976 to 1998).

There are only three industry groups that have increased the intensity of self-employment since the late 1990s: education, information and the biggest gainer – finance, insurance, real estate and leasing.

Historically, the stronger provincial economies have tended to have higher self-employment levels.   Newfoundland and Labrador still has the lowest ratio of self-employment to employees in the country – it will be interesting to see if that culture changes now that the Rock is a growing economy.

I use the ratio of self-employed to persons employed in a business or other other organization. I could have used self-employment as a percentage of the total but increasingly I like these hard number comparison.  It is relatively easy to visualize 100 employees on the one hand and 18 self-employed persons on the other.

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I find this stuff very interesting.  I know there are a number of ways to slice this and various influences but it is interesting to see which occupations and industries have done well and no so well in terms of average weekly wage growth before and after the recession.

Overall, in typical NB style, the recession didn’t have much effect on wage growth trends.  From 2003 to 2007, wage rates grew by 15%  and from 2007 to 2011 they grew by 15%.  But, there were big winners and losers.

Senior management occupations saw a sharp increase since the recession as did sales and service occupations, wholesale, insurance and related occupations.  Financial and clerical wages also went up much faster post 2007 than pre 2007.

On the downside, professional occupations in business and finance saw only modest wage growth since 2007 – Wall Street impacts hitting home up here?  Check out health occupations.  After well above average growth rates for years – going back to the late 1990s, health care occupations are among the worst for wage growth since 2007.

Average Hourly Wage Growth 2003 to 2011 by Occupational Group – New Brunswick

Includes overtime and both full and part time employment.  Source Statistics Canada.

On an industry basis, the goods producing sector continues to suffer the effects of recession.  Wage growth has been below average for all industries in the goods producing sector.  On the services side, transportation and warehousing is witnessing strong wage growth as is the finance and insurance industry.  Because professional occupations in business and finance are not doing well (chart above), the wage growth must be among non-professional staff (theory).

A couple of other interesting industry wage trends.  Check out business, building and other support services.  This is where the call centre industry sits (for the most part).  It looks like the lower end wage jobs are going away and that is pushing up the overall average.   Interesting that public administration wage levels have grown more strongly since 2007 given what is happening in allied public sectors – health care and education.

Average Hourly Wage Growth 2003 to 2011 by Industry Group – New Brunswick

Includes overtime and both full and part time employment.  Source Statistics Canada.

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My blog to be published later this week in the G&M Economy Lab talks about the potential implications of the Internet and how it will negatively impact employment in Canada.  If you look just at the sector of the economy where the outsourced call centre jobs are categorized (NAICS 5614), employment has declined by more than 32,000 across Canada just since 2007.  Now much of this decline is due to the “do not call list” but the broader trend of Web-based customer interaction is potentially far more influential in the longer term.

Employment Trend: Business Support Services (NAICS 5614) – Canada Wide

Source: Statistics Canada Table 281-0024.

The number of these outsourcing telephone call centres picked around 2008 and has dropped since.  From 2008 to 2011, there was a drop of more than 160 of these estalbishments across Canada with declines in all provinces except nova Scotia.  Ontario lost 73 of these establishments.

Number of Telephone Call Centres in Canada (NAICS 56142)

Source: Canadian Business Patterns.  Statistics Canada.

There are easily 3.5 million jobs in Canada that are based in large part on the telephone.  That is just among non-professional occupations.  Of course all these jobs are not going to disappear over night and in fact many of them have been increasing in recent years.  However, in the medium to long term the Web is going to displace a large chunk of these jobs and replace them with Web copy writers, Web designers, etc.

Selected Non-Professional Customer Interaction Jobs (2006) – Canada wide

Source: 2006 Census.

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I just saw Monsieur Lazhar. I thought it was one of the best movies I have seen in awhile. It’s not a face paced thriller or a deep drama. There’s no great redemption at the end – no Hollywood ending here. No need, really.

It’s just a simple story but it touches on numerous themes – mostly a light touch – but enough to make you think.

I have been doing a lot of research lately into immigration and many of the subtleties in this movie made senses to me.

The truth is that New Brunswick is going to have to attract a lot of immigrants in the coming years. We shipped off 40,000 young people in the past 25 years or so (net out) and we will need to replace them with immigrants – just to meet the demands of the workforce.

I think this is an overwhelmingly good thing for New Brunswick but it will come with challenges. Some prejudices are hard to overcome. We will see an interaction of cultures like never before in our history as a province as even the early waves of immigration to the province were fairly homogeneous.

I joke with my daughter that she is like a delegate at the U.N. In her circle of friends there is a Tunisian, several Koreans, a couple of Chinese, a Yankee and even someone from Bouctouche. Not to mention the fact that two of her good friends speak Portuguese and German respectively. When together in a room, it’s like a New Brunswick Tower of Babel. This is coming for all of New Brunswick in the years ahead.

See Monsieur Lazhar. Just a simple story. No grand solution.

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Someone asked me this week about the fuss over high energy costs for industrial users.  They were referring to natural gas but we have had the same conversations about electricity in the recent past.  The truth is that decisions made by government can make or break the business model for some businesses and industries.

The energy file is just one example.  Take the following simplistic tables.  The first assumes a very high energy cost relative to sales.  This would be the case for a large forest products mill or fertilizer plant or any industrial process that uses tremendous heat.  A data centre might have a power cost ratio similar to this as well.  Assuming a base case where energy costs are 25% of revenue and the pre-tax profit margin is 7.5%, a significant increase in energy costs can kill the business model.  The second table shows that a 40% rise in energy costs turns the business model decidedly unprofitable.  I have a second set of tables where energy costs are only 10% of revenue (still a high percentage) but even at that a 40% increase in energy costs cuts profitability in half and takes a business model with moderate profitability and moves it into a marginal one.

This applies to other cost elements under the direct influence of government as well.

My point here is that policy decisions need to be made with an eye to their impact on economic development.  You may still have the view that we should ‘put the screws to those big industrial players’ but you should at least understand the economic implications.

I use this same economic model approach when I look at tax policy – it allows us to skim off the ideology and clutter.  When I looked at the impact of the corporate tax cut on the average export-based business, the cost implications were relatively marginal (less than one percent of total costs).   You can see how a company would be frustrated by high natural gas costs and not so interested in a tax cut when you do a basic economic analysis.

I am not saying that policy impacts on the margin don’t count (i.e. small businesses were mad they didn’t get some deal on energy costs even though energy is only a few percentage points in the cost basket for the average small business) but policy decisions impact different industries in different ways.  For example, small business tax cuts have far more impact on local businesses that only serve local markets (because they pay all their provincial corporate tax here) than businesses that have operations elsewhere and primarily export (and pay taxes elsewhere).

The same analysis can be used with the minimum wage discussion but here I would apply some caution.  Because the vast majority of businesses paying minimum wage are only serving local markets (i.e. retail, restaurants, personal services, etc.) there should be a case they could pass the higher costs onto customers.  I know this is fiercely debated but my point is that public policy decision making that impacts the economy needs to understand the competitive landscape.  If all the coffee shops are now paying $11 rather than $10/hour – they all face the same competitive environment.  If a manufacturer is now paying 20% more than his competitor in South Carolina – that will have a broader impact.

Base Case: Energy Costs @ 25% of Total Revenue

Adjusted Scenario: Energy Costs Rise by 40%

Base Case: Energy Costs @ 10% of Total Revenue

Adjusted Scenario: Energy Costs Rise by 40%

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