It's The Economy, Stupid

As originally published in the Telegraph-Journal (Wednesday this week).
The term ‘mad men’ was given to the people involved in the advertising and public relations business back in the 1950s and 1960s because most of the firms were located on Madison Avenue in New York City and most of their professional workers were men.

Back in 1997, according to Statistics Canada, there were more than 700 people working in the advertising, public relations, and related services sector in New Brunswick. At that time, we had more people working in the advertising and P.R. business – adjusted for the size of our economy – than British Columbia, Nova Scotia, Alberta, Manitoba, Prince Edward Island and Newfoundland and Labrador.

That year, unfortunately, was the high water mark for the mad men (and women) in New Brunswick. Since then, the industry has been shedding employment at a rapid rate. By 2011, there were only an estimated 232 people working in the advertising and public relations business across the province – a startling 67 percent decline.

And this is not part of a national trend. Across Canada, employment in this sector has grown by 32 percent since 1997 adding more than 11,000 workers. Nova Scotia and Manitoba have shed advertising and public relations employment too but Ontario witnessed a significant 66 percent increase in mad men (and women). Alberta, British Columbia and Quebec all had modest increases in advertising and public relations employment between 1997 and 2011.

It is hard to say exactly why employment in this industry in New Brunswick has essentially collapsed in just 15 years. Certainly the takeover of the NBTel by Bell resulted in a moderate loss of advertising and P.R. activity. There has also been some consolidation of the industry within Atlantic Canada resulting in a net loss of employment in New Brunswick. However, it’s hard to see how these two trends could have led to the loss of nearly 500 workers.
According to Statistics Canada, annual operating profit margins in New Brunswick’s advertising, public relations, and related services sector have averaged 7.9 percent from 2001 to 2010 which has been the second lowest in Canada among the 10 provinces. The industry in Nova Scotia has witnessed a much more robust 12.4 percent average annual operating profit margin over the decade.

Some people might think this is no big loss. For them advertising is superfluous and public relations is nothing more than professional deception.

But this industry is at the epicentre of the creative economy. It employs graphic designers, writers, photographers, audio/visual artists and increasingly Web and social media developers. For the most part, the industry offers intense but rewarding careers.

There was a time I actually believed New Brunswick could grow its advertising and P.R. sector by providing services to the national firms based in Toronto and elsewhere. When I put this idea to one of New Brunswick’s leading mad men, he told me “no Toronto firm would outsource work to little old New Brunswick”. Little places like New Brunswick cannot compete with New York, Chicago and Toronto.

The funny thing, however; is that a number of smaller jurisdictions in the United States have very impressive advertising and public relations industries.
According to the U.S. Bureau of Labor Statistics, Vermont and South Dakota are in the top five states for the concentration of public relations specialists and advertising sales agents. Minnesota has the second highest concentration of graphic designers among the 50 U.S. states.

We should convene those who are left in the industry to figure out what went wrong and brainstorm a brighter future for the sector.

If we are serious about building the creative economy in New Brunswick we should start by figuring out what went wrong with our mad men (and women).

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Invariably, when a call centre closes or cuts its staff I get an email or two decrying the McKenna call centre effort with the usual “big companies come here exploit our people, take our tax dollars (incentives) and then leave”.

Sigh.

If you read my earliest writings on this years ago you will find I said total employment in this sector would peak and then start to level off and slowly decline as a result of customer interaction moving online.  In 1999 when Marriott set up in Freddy how many hotel rooms were booked online?

However, this certainly doesn’t invalidate the call centre initiative.

CBC reports that Marriott employed 265 in Freddy.    The company started smaller but added 95 in 2001.  Assuming the majority of those were full time and at the industry average wage that means somewhere between $50 and $70 million in direct payroll between 1999 and 2012 and if you roll that up to operating costs and put a very conservative multiplier on it you are looking at around $150 million worth of economic activity for the Freddy area during that time period.

Not a bad return on investment for whatever the government put in (usually a few thousand per worker – one time).    I can’t give you an exact amount of public investment because the Lord government was known for being particularly vague about the public investment in these projects.   The press release from 2001 doesn’t mention government incentives.    There may have been n0ne – but I suspect there were.

Every year in New Brunswick, hundreds of businesses shut their doors or go bankrupt – from mom and pops to large firms.

In general, the government should do nothing to try and stop this.  Businesses close because of business conditions and trying to prop them up makes no sense.

There is an exception, of course.  The CBC report states that the “Marriott also has call centres in Saskatoon, Sask. and Sarnia, Ont., as well as several centres in the United States.”   This is an important statement.  The question for economic developers (and his Worship) needs to be why close Fredericton and not Saskatoon or Sarnia.  The U.S. equation is more complicated.

The broader point is that we need to be marching on.  What are the new growth sectors?  Where is the investment coming from?   What is the most intelligent role for government to play?

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I’m going to start publishing my TJ columns here a few days after they run in the physical paper.    Here is the one from Saturday:

A few weeks ago three young men from a small town in New Brunswick bid farewell to their families, got in their pickup truck and set out for Alberta. They didn’t have a job waiting for them.

They just expected to find good-paying jobs after a long ride in the truck.

I thought about those three guys when I saw the Twitterverse light up Thursday with images showing hundreds of people lined up for a job fair in Fredericton hosted by oil and gas firms from Alberta. According to media reports, more than 1,000 people showed up to get a crack at high-paying oil and gas jobs out West.

You can’t help but see irony all over New Brunswick these days.

North Dakota oil – most likely extracted using hydraulic fracturing – is being brought in by rail to be processed in New Brunswick’s oil refinery while two of New Brunswick’s three main political parties are falling over themselves to try and stop our nascent natural gas development industry in its tracks.

While our sons and daughters line up to leave for the oil and gas industry elsewhere, some of New Brunswick’s most visible mayors are serving up tasty but ultimately hollow quotes such as “our water is more important than gas” and making grand statements during council meetings about protecting New Brunswickers.

Apparently watching our kids leave to frack elsewhere doesn’t bother them much.

Who can blame our young people for wanting to leave?

The unemployment rate among those 15 to 19 in New Brunswick is over 21 per cent. At nearly 15 per cent, New Brunswick also has the dubious distinction of having the second-highest unemployment rate among the 10 Canadian provinces in the 20-to-24 age group.

What we really need from our politicians, local mayors, community leaders, academics and anyone else who cares about New Brunswick is to spend less time demonizing one of our greatest natural resources (70+ trillion cubic feet of natural gas) and more time trying to figure out how get it out of the ground.

If we can’t get it out – for either commercial or environmental reasons – it should be considered a great tragedy, not a cause for celebration.

A delegation of Quebec farmers recently went to Alberta to see how natural gas extraction using hydraulic fracturing is done alongside the agriculture industry.

Maybe one of our mayors should lead a delegation of concerned New Brunswick citizens on the same pilgrimage. That would be far more helpful than one-line zingers on prime-time Monday night Rogers TV.

Some of the most respected environmental groups in the United States are – albeit grudgingly – providing their view as to the best conditions for developing the shale gas industry.

They have realized their time is best spent trying to ensure effective regulations and environmental safeguards rather than trying to bring the industry down. That’s a helpful role.

Of course the oil and gas industry will not be a panacea for New Brunswick. If we are serious about fostering prosperity here, this industry is one piece of the puzzle. I am told it could provide a steady flow of high-value economic activity for 50 to 60 years.

But the broader issue is whether or not – deep down in our collective soul – we really even care about economic development. We give it lip service, but after generations of New Brunswickers goin’ down the road, I think most of us are just resigned to the fact.

One colleague recently told me that all three of his kids left. “Look on the bright side,” he told me, “at least now I have some interesting places to visit.”

For me, that’s not good enough.

I want our kids to have the choice – stay or leave – but you decide. For far too many young New Brunswickers there isn’t any option.

David Campbell is an economic development consultant based in Moncton. He writes a daily blog, It’s the Economy Stupid, at www.davidwcampbell.com.His column appears every Wednesday and Saturday.

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John Ibbitson isn’t tiptoeing through the tulips in his column last Sunday.    He equates Quebec and the Maritimes (he has dropped Newfoundland from his critique in recent years) to the Mediterranean – “The euro zone could become, in effect, a mirror image of Canadian federalism, with the Mediterranean playing the role of Quebec and the Maritimes.”

The government of New Brunswick spends more than $10,000 per elementary and secondary school student each year (from the 2012/2013 budget).  So, in 2012 dollars, the New Brunswick taxpayer spends roughly $10,400 per student per year.  Over the course of 12 years, the taxpayer will pony up $125,000 to educate each young person (in 2012 dollars).

Then some will go on to university where the taxpayer will end up paying roughly $64,000 for each New Brunswicker going through a four year program (in 2012 dollars).   These are order of magnitude estimates as I can’t get break out the exact number of New Brunswickers in NB universities (I can back out foreign students but not other Canadians).

So, the New Brunswick taxpayer will spend over $189,000 per student (in 2012 dollars) only to watch a large chunk leave and go work and pay taxes in Ontario and other Canadian provinces.

You would have to ask Dr. Haan at UNB for exact numbers but suffice it to say that tens of thousands of NBers over the past 40 years have been educated here and used that education elsewhere (mainly Ontario).

If Ibby wants to cut off Equalization, what should we charge him for training his workforce in Ontario?

There are many more examples.  How about federal government spending on science and technology – a subject that makes Ibby break out in goose bumps.

From just 2007 to 2011, the federal government spent $17.5 billion on science and technology (just intramural by the way – not including the billions spent funding other sectors) in Ontario (the province and Ottawa’s share of the Ottawa/Gatineau CMA) or about $1,460 per person compared to less than $350 per person in New Brunswick.  In just the four years 2007 to 2011, that is a $754 million deficit to New Brunswick.  In other words, if the feds had funded science and technology in this province as in Ontario, it would mean another $754 million just between 2007 and 2011.

There are many other examples from arts and culture funding to the large federal government corporate incentive programs but I think the point is clear.

Ibby’s main point in his column was that Germany’s Angela Merkel should avoid Canadian style mutualization of debt lest her country end up like Ontario in Canada.

Slow that down – Ontario – in – Canada.

Ibby would say that New Brunswick has been lucky to be in this Canadian model – that should be avoided by Germany at all costs.

But I ask you.  Which province – Ontario or New Brunswick – has benefitted more from the ‘Canadian model’?

If you understand basic math, Ontario has made out like a banshee and New Brunswick has suffered under an oppressive transfer system that overspends the ‘good’ money (R&D, etc.) in Ontario and overspends the ‘bad’ money (Equalization) in New Brunswick.

At least that is the counterpoint to Ibbitston’s simplistic analysis.  You and I both know this issue is far more nuanced.

But we soldier on.

If Germany follows Canada’s lead and Germany becomes Canada’s Ontario, Germany will boom for the next 50 years while whole regions of the EU will suffer.

So, by that logic, Germany should embrace Canadian-style transfer systems with open arms.

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Someone asked me if there was a subtext to my TJ column this week calling for all of our economic development organizations to  get in the boat and start rowing in the same direction.  I listed off a few and I definitely include industry groups and other private sector stakeholders.

It seems to me that decisions need to be made – future of the Enterprise agencies, future of NRC, new innovation agenda, etc. and we need to get on with it.    I hear a lot of talk about the feeling that  things are still in ‘limbo’ out there and that seems to me to be a problem.

Now is the time for intelligent economic development.  The feds and the province should come together and agree on an approach and how each one fits.  This is too small a province to do otherwise.  And we need to have strong local leadership around economic development.    Whatever is done with the Enterprise agencies it should lead to greater capacity and mobilization on the ground in the  communities.  Economic development occurs in communities – not in provinces.  As I have said before 95% of the decisions that need to be made around a new business investment are decisions related to the local community – operating cost structure, labour market, real estate, supply chain, etc.

In a small province you have to centralize things.   You couldn’t have an ‘Invest NB’ in every little community around New Brunswick.  You can’t have an Innovation Foundation in every community.  But you can have engaged local stakeholders and folks eager to build a stronger value proposition for investment.

You make hay while the sunshine but you plant the seeds in the spring.  It’s springtime in New Brunswick.

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As I have said before, we all have to deal with our own ideological contradictions.    One of the most challenging positions is the one that is dead set against free trade.  There is no doubt that free trade has formed basis of an economic revival in much of the world from China to Brazil to Africa but all the benefits that were supposed to accrue to the rich countries – that’s a harder sell.  Sure, we have seen a fairly high number of jobs created in higher end occupations and, for a place like Canada, a greater demand for our natural resources.  There is also no doubt that global trade has kept the cost of a lot of products from cell phones to underwear much lower than they would have been.

But we are in relatively heavy debt – public and private, we have entitlement programs that are taking an ever increasing share of our economic output and we are well below full employment across Canada with some areas much worse than others.

I remember discussing global trade back in my MBA days – in 1989-1990 – and even then thinking it would ultimately be more beneficial to the have-nots than the haves but I thought then, and now, that maybe a little belt tightening in the rich world for the benefit of the poor part – not a bad trade off.

But as the dust settles and we look forward, we need to be thinking about how we foster economies that create at or near full employment and enough revenue to pay for our public services and infrastructure.    If the rich world has to belt tighten more and more  - it is reasonable to assume that eventually we will get more protectionism, more stifling of trade and investment flows and more bitterness between countries.  The optimists will retort that as countries like China get richer, they will need more and more products/services from the rich countries and it behooves these countries to get good at stuff the Chinese want.  Canada is lucky enough to have oil and potash and other minerals.

We probably should also have some high value services or produced goods.

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There are a few people who are determined to throw me in the camp of the hard right  zealots.    For example, I got a couple of emails this morning suggesting “what is wrong with the social safety net”?  Do I want to throw old people  and the unemployed out on the street?

Not really.   In fact, if you read the column you will get to this exact quote:

“I am not criticizing the social safety net. In a developed and prosperous country such as Canada, it is laudable that we carve off a portion of our national income to provide for the elderly and the poor and to provide programs such as unemployment insurance and workers’compensation. ”

My point is that we need to have x people working and earning employment income to pay for the social safety net used by y people.  It seems reasonable to me that we need to understand this dynamic and start to show some concern when the ratio between workers and those receiving government transfer income starts to narrow.

Take Ontario for example.  Every single CMA and CA area in the province saw a worsening ratio of employment income to government transfer income between 2001 and 2010 (note that the Ottawa CMA includes part of Quebec so it is not in this table) while every single CMA/CA in Alberta saw its ratio of employment income to government transfer income widen from 2001 to 2010.

But there is a broader point that was made to me by a journalist not that long ago.  He said my problem was I am not controversial enough.  I only have 700 or so Twitter followers and maybe a few hundred that read the blog from time to time.  He told me that if I made my message more ‘edgier’ I would get far more traffic and commentary.    In a world of Fox News, CNN and MSNBC – I’m CNN and CNN has the lowest ratings of all.

He told me I should even think hard about my Twitter feed.  A bold and controversial comment is far more likely to generate clicks than a normal statement.   Most people have hundreds if not several thousand Twitter feeds they are following and unless you shock them, they won’t click.

I thought about this a lot.  I am not really in the controversy game.  My message is that places like New Brunswick need to have a stronger economic agenda because communities need a solid economic foundation on which to achieve other social and community objectives.   We need to have enough economic activity to skim off the taxes needed to pay for good quality public services and infrastructure.

That’s not really a fringe position – it’s just a mostly ignored position.

After almost a decade of writing this blog and hundreds of columns in local, regional and national press – I’m not sure we are any more serious about the kinds of fundamental reform to our economic policies than we were before.  In fact, the old timers have spent a lot of time suggesting that New Brunswick was more proactive in the 1960s and 1970s than now.   I don’t know if there is data to back up that position.

Besides, remember when I was doing the video weekly blog a couple of years ago?  It got very little traffic and the guy that produced it said if we really wanted traffic we needed to introduce it with a scantily clad lady.

But that’s not my audience.  I’d rather have a couple of hundred people that are really concerned about the subject matter than thousands of people trolling for pretty girls.

So don’t expect much lunacy coming out of this corner any time soon.

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I have always thought that Equalization was holding back the economic development potential of New Brunswick.  I believe the same thing about EI.  It’s easier for the feds to cut a cheque than it is to work with the province on a long term vision for economic development in a place like New Brunswick.   However, when I used to discuss this here and in columns I was told that my views were confused.  One NB university economist directly rebuffed me saying that Equalization had “nothing to do with economic development”.  The following is from a thoughtful paper by former BoC head David Dodge on Equalization and transfers:

However, transfers can also play a counterproductive role if they act to mask inexorable structural change, delay necessary adaptation and create the illusion that the unsustainable can somehow be sustained indefinitely. Ultimately, they can destroy unity by creating resentment, disrespect and distrust. In the long run, unions can be sustained only when all members are able and willing to fully participate and contribute to the union.

Equalization is a zero-sum game of income redistribution that increasingly generates more resentment than satisfaction. Adopting some or all of these technical changes to the equalization formula may mitigate the problem but will not be a sustainable solution to today’s unprecedented challenge – a challenge that is not cyclical and destined to quickly disappear, but structural and longer-term.

We believe the “solution” lies elsewhere: we need to focus less on the equality (or comparability) and more on the quality (or adequacy) of public services; less on federal transfers that redistribute income to “equalize” fiscal capacity, more on federal investments that will create more income and build the fiscal capacity of today’s lower-income provinces. We need policies that promote positive provincial convergence and the development of competitive manufacturing and service industries, and that also reflect the practical reality that Canada’s economic prosperity and political equilibrium ultimately depend on the economic strength of all provinces, especially populous Ontario.

In short, we need to think and look outside the equalization and transfers box, outside the narrow confines of subsection 36 (2) of the Constitution Act, 1982, and look to the broader economic objectives of subsection 36 (1).

Of course, Dodge inserts “especially populous Ontario” because just about no one cared about this stuff until Ontario joined the have-nots.  Now it’s front page news.

It’s no secret that New Brunswick’s economy and society has sputtered along for far to many decades.   It has become the poster child for transfers – Equalization and EI alone generate $2.6 billion worth of revenue for New Brunswick ($3,500 per person).

Unlike my economist colleague, I prefer to have bring economic development directly into the conversation about Equalization.  I’d like to see long term strategies to reduce Equalization – joint fed/prov – with milestones, investment targets, immigration, etc.   As Dodge says, “Canada’s economic prosperity and political equilibrium [key point] ultimately depend on the economic strength of all provinces”.

It’s long overdue.

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Just a few quick points in response to several emails I received on my latest G&M post.   First, here is the full table of all CMA and CA areas for the reliance on government transfer income and average income tax contribution.

I also want to say that I am not drawing any conclusions here about the government transfer income per se.    All government transfer income – CPP, OAS, EI, workers’ comp, social assitance, child tax credits, etc. is there for a reason.  That debate is for another day.  I am just saying that the ratio between employment income and government transfer income matters.  The national average is 18 cents worth of government transfer income per $1.00 of employment income.  As is shown in the chart, there are now many communities in the 25, 30 and up to 72 cents range (Elliot Lake).

I think most people would agree there is some threshold where this ratio starts to become a problem.  Is it 20 cents?  30 cents 40 cents?   All I am saying is that we are there already with a number of communities and those same communities - for the most part – also contribute well below average income tax revenues.  That was my definition of a ‘have not’ community – well above average reliance on government transfer income and well below contribution to income taxes.

To those who think the analysis was ‘high level’ – I agree.  These columns are a place to discussion issues and trends – not to fully exhaust a large scale public policy issue.

I think this type of analysis is needed and should be part of our debate.

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I talked with someone recently that visited the UT and saw this one pad natural gas well site and was told it generated significant revenue for the university.  This is from a recent article on the project:

“Since wells on campus started production in 2008, the University of Texas at Arlington has received nearly $10 million in royalty payments,” said Kristin Sullivan, assistant vice president for media relations at UTA.

Sullivan explained that UTA was approached by multiple oil and gas companies in 2007 when energy companies realized that the urban centers of Fort Worth and Arlington sat atop the “sweet spot,” an area that has yielded trillions of cubic feet of natural gas in the past decade.

In 2008, the first six wells on went into production on the north Texas campus.

The 420-acre UTA campus has 22 natural gas wells and one pad site. The site is located on the southeast corner of campus in downtown Arlington, less than a mile from the Dallas Cowboys Stadium.

The university receives 27 percent of all natural gas produced. The funds support undergraduate scholarships and graduate fellowships, as well as the retention and recruitment of faculty and staff.

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