It’s The Economy, Stupid

Add this to the pile of little every day coincidences.    The TJ has a story about a Sackville software firm that is expanding:

Sackville software developer Kleinmundo Solutions Inc. has inked a partnership agreement with a large U.S. firm that president Patrick Langlais says should help bring his young company’s head count to 12 this year.  The New Brunswick company provides document automation software to legal firms so they can format outgoing bills to clients, as well as reporting, electronic billing, data transformation and data management and manipulation services.

Langlais said Kleinmundo recently netted one the top 20 legal firms in the U.S. - the name of which he promised not to reveal - as a client. Among those clients that have agreed to let Kleinmundo name them on its website are Blank Rome LLP, Fox Rothschild LLP and Cox Smith Matthews Inc.

So this firm has large U.S. law firms as clients.  You will recall that another Moncton firm, Whitehill, built its business by targeting U.S. law firms.    It is interesting to note that another tech firm in Moncton, ShiftCentral, has a number of U.S. law firm as clients.

What gives?  Of all the software and technology firms targeting the U.S. legal market, how come three Moncton firms have made such great inroads?

Maybe it’s nothing.  Maybe it’s something. It is a bit strange.

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I am a bit surprised the Tories are claiming to reverse the tax cuts but by only doing on on the very rich they don’t lose a lot of votes.  The most recent data I have shows 1,170 people in then entire province earning declaring more than $250,000 in income.  The CBC article says:

Alward said he could save $120 million over the next four years by withholding the tax cuts for people who make an average of $450,000 a year.

First, there is no tax bracket specifically for those earning $450,000 and up so unless Alward is going to establish one, the reversal of the tax cut would have to apply to the highest tax bracket which would be $118,000/year which would mean over 12,000 persons.

But let’s say he does just raise the tax rate on those earning $450,000 or more.  I still don’t see how he gets $30 million in more taxes per year. This study for the Canadian Labour Congress estimated the tax cut was worth $27 million per year to those earning $250,000 or more.

But, I could be wrong - it would be nice for them to release how they are calculating their expected taxes but that would be too much to expect from any political party.

As for the corporate tax cuts - Alward is going to “cut small business tax rates to stimulate job growth and economic development”.

Sigh.  After former Premier Lord cut the small business tax rate to the bone, New Brunswick had third worst rate of small business growth (decline) in North America among the 60 provinces/states -according to a Fraser Institute study.  Further, total employment growth among small businesses with less than 20 employees actually dropped after the small business tax cut.   Note that over 17,000 of the net 19,000 job growth came from employers with 500 or more employees (that includes government).

There are an estimated 45,000 businesses in New Brunswick and an estimated 87% of them have less than 20 employees.  The only reason to cut small business taxes is political.  These small business owners vote and many of them contribute to political parties.

Employment Growth/Decline by Size of Employer (2000-2006)

Source:
Statistics Canada. Table 281-0042 - Employment by enterprise size of employment (SEPH) for all employees, unadjusted for seasonal variation, for selected industries classified using the North American Industry Classification System (NAICS), annual (persons) (table), CANSIM.

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I have been following elections in New Brunswick closely since the 1991 election and in my opinion economic development has always been a boilerplate issue but the parties have rarely proposed any bold new ideas - or even how they would actually foster job creation and economic growth beyond high level statements.

This election it seems will be no different.  Premier Graham has teased us with specifics about his 20,000 jobs - talking about energy, and targeting sectors.   So far the Tories have been very opaque about economic development.  I searched the website and found very little.  I did find this Bob Goguen commentary in the newspaper where he says:

Dave Alward’s plan for job creation involves supporting New Brunswick businesses that reinvest and create New Brunswick jobs.

He will do this by making sure that New Brunswick-based businesses have a fair chance to bid on taxpayer-funded contracts.

We can create sustainable jobs here in New Brunswick simply by ensuring that New Brunswickers benefit from provincial government spending.

….being more aggressive and innovative in how we approach potential investors; taking advantage of the strengths of our communities, as we work to help all regions in our province grow and prosper; and refocusing our efforts by pursuing lasting, meaningful economic development that will positively change our communities, rather than focusing on changing headlines.

These are all good but, again, very vague.   New Brunswick companies already get the vast majority of government contracts.  I am not sure how much more business is to be had there - and if it means sacrificing quality or price, is it worth it?  Maybe - I honestly haven’t studied the issue.  To be sure this is not going to drive economic growth in New Brunswick.

“Being more aggressive and innovative in how we approach potential investors” is an interesting phrase but I hope they will try and flesh that out a bit more.

Refocusing on “lasting, meaningful economic development” is even more vague but if they are suggesting a stop to propping up ‘troubled’ companies - I think they should just come out and say it.  It’s a tough policy issue - probably the right one - to say you (as a government) won’t help a company that is going under when it is a good provider of jobs in a smaller community in New Brunswick (the PCs gave piles of cash to AV Nackawic, Atlantic Fine Yarns and many more when they were in power). 

I don’t expect much detail on economic development.  The voters prefer catchy phrases like “investing in New Brunswick companies” and “taking care of our own”.  That typically will suffice.  Any party stupid enough to talk about attracting multinational firms here would likely lose votes over it.

In the end, the public would be wise to think a tad more about this stuff.  In Casablanca, Rick says “I just lost 20,000 Francs, I’d like to get it back” when making the bet with Captain Renault.   I say we just lost $1.7 billion in non-refined oil exports, I’d like a strategy from government to get that back.

I continue to lament the fact the time to act on this stuff was 7-10 years ago.  I remember talking with U.S. companies that just couldn’t find workers - for manufacturing, for IT, for just about anything.  They were paying $11.50/hour to start for McDonalds employees in Vermont.  I would argue that much of the work that was outsourced to India couldn’t have been done in the U.S. anyway.

Now we hear about U.S. companies looking for basic computer programmers and getting thousands of applications.

They are lining up around the block for a chance at $11/hour manufacturing jobs in Alabama.

But that doesn’t mean we give up.  We have to focus tightly on the business case for investing in specific industries in New Brunswick and then chase the potential investors (here, across Canada and around the world).  It will be more tough now but it doesn’t mean we don’t try.

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Election time again.  I am feeling a little old - this will be my seventh provincial election.  Now I have a little different role - I will be writing three colums a week in the Telegraph-Journal on election topics - Tuesday, Thursday and Saturday.

It seems to me the defining issue hasn’t really surfaced yet.  The various parties are trying to define one but I don’t see an “auto insurance” or a “toll busters” or a “CoR” defining issue as of yet.

The first poll of the election cycle shows 41% undecided and a relatively small spread between the Libs and the Tories.

It’s interesting to note that the NDP, People’s Alliance and the Green Party are expected to be influential.  CRA’s poll shows almost 25 per cent of decided voters are planning to send their vote to one of the third parties.

The question is where will they take voters from? 

It will be interesting.

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Several people have asked me to comment on the NDP proposal to scrap Business New Brunswick.  I have resisted because it really is a red herring - the NDP would just find other ways to do its brand of economic development. 

But there are some learnings here.  I think the question does need to be asked whether or not our collective economic development efforts are achieving what we want them to achieve.  If you were to ask BNB or any Enterprise Agency or ACOA or the CBDCs or any other of the groups doing ‘economic development’ in the province they would say they are achieving their vision and mandate.

I think we need to set the bar higher.  Determine growth sectors, set serious targets for investment and jobs and then work backwards to determine what policies need to be development, where each of the organizations fits into the effort and then create a strong value proposition for investing in those sectors.

The second point is the sprinkling.  Since I have been involved in economic development - 20 years now - BNB and its predecessors have played the role of a bank providing funds to companies around the province.  I think we need to have more focus.

Which brings me to the third point which is around measurement.   It’s relatively easy to measure the effectiveness of tax payer dollars being used in health care, education, transportation, policing, etc.  There are measurable criteria.   Economic development is not so easy to measure.  At a provincial level, I would like to see a rigorous incremental tax base measurement methodology put in place.  For every dollar invested in economic development, we get $X back in new tax revenue to the provincial government.

I realize this is likely never to happen although it is being used as a metric in Ireland, Quebec and other places.  The idea that economic development should be tied to growing the tax base should be a no brainer but you will find very few takers in the economic development system - which is too bad.

But implementing my measurement model would put to rest the whole question of BNB or not to BNB.  If the organization was clearly showing a return on taxpayer dollars invested - who could question that?

I suspect it is easier to talk vaguely about jobs ‘created’ or ‘retained’ and then about all the throughputs - counselled companies, funding announcements, training, etc. rather than on some end objective such as tax base growth.  But, in the end, what is the point of economic development if not to grow the tax base and support business investment?

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I think this is a good initiative.  I’ve talked with senior provincial government bureaucrats (past and present) that say the first thing cut in the past has been policy development expertise in the departments and that many of them do not have the internal horsepower to properly evaluate and support policy decision making.   Tapping into this external expertise makes good sense.

Of course that does sound self-serving coming from a consultant -but I suspect there is not a whole lot of work for me on the social policy front.

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From Moody’s report released yesterday, the following is their table on the changing nature of government revenue in New Brunswick.  I don’t have the link to the original document - I can’t find it online.

I think this speaks for itself.  Irrespective of the need to eliminate the deficit, we have got to figure out a way to boost own source revenue.Â
CONSOLIDATED OPERATIONS (C$MILLIONS, YEAR ENDING 3/31)

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I’m not sure why but I enjoy talking with these old guys.   This is an op/ed by a guy who interviewed an 89 year old economic developer from Nova Scotia.  Yes, there were lots of people doing economic development even back in the 1950s and 1960s.  There was more focus on attracting industry to the region back then.  This guy,Robert Manuge was general manager of Industrial Estates Ltd.

Here are some juicy tidbits (if you don’t want to read the full piece):

New industries are pouring into Nova Scotia at a prodigious clip. “Nova Scotia Moves into the Mainstream,” reads a headline in the Financial Times of London in 1965.

IEL’s “record makes impressive reading,” says Time magazine in 1962.

The Financial Post commented that IEL should succeed “if only by sheer audacity.” The audacity part was Manuge, along with industrialist Frank Sobey who served as president of the arm’s-length agency.

Always on the hunt for potential clients, a chance encounter with a person remotely linked to Michelin Tire on a plane trip led Manuge on a hunt — described by the Financial Post as an “international cloak and dagger thriller” — that finally got the secretive company here for its first North American landfall, against the wishes of French president Charles de Gaulle who wanted it in Quebec. A similar encounter landed India’s first major international investment, the Anil hardboard plant (now Georgia-Pacific) at East River, Lunenburg County.

And there was the first European car assembly plant, Volvo. One report has Manuge “literally chasing after Reynolds International chairman, J. Louis Reynolds,” to land Canada’s first aluminum can factory. His secretary kept count. He logged a million miles from 1961 to 1971 hustling business for Nova Scotia.

He’s quite cranky about things these days.   Not too big a fan of NSBI.  Doesn’t like the regional development agency.  Hates giving grants to business.

To be fair to the current crop of economic developers, it’s always easier to remember the positive of an earlier age than the negative (people want to put a positive spin on their past accomplishments, naturally). 

But I think there is something to the underlying point here.  Someone just sent me something that shows NB is forecasting to spend $345 million on ‘economic development’ in 2010.  That’s a huge pile of dough. 

I have felt for a number of years that sprinkling taxpayer money around the economy in the form of grants hasn’t worked very well.   Regardless of what you think of the use of grants, there doesn’t seem to be high level evidence of results.    There are isolated cases of very good success but many more where the outcome is questionable.  

I have been calling for a thorough review of the who, what, when and where of economic development in New Brunswick and I think an election is the perfect time to trigger such a review.   I think we have gotten into a stream of activity  and are spending more and more in that stream each year - and I am not sure it is the right stream. 

I won’t dive back into all my concerns here - read the past few months worth of posts - but it has something to do with vision/focus, something to do with effective measurement (i.e. tax dollars generated per e.d. dollar spent) and something to do with passion - people being fired up about economic development at all levels.

I think we need to focus on a few key strategic sectors, build infrastructure, R&D, talent, promotion and excitment around them - and then sell, sell, sell - to anyone local - national - international that will listen.

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My parents said similar things about me and their parents said similar things about them but, nevertheless, I am going to say this about the kids of today.

Here’s a story of a young girl from New Jersey who joined Al Gore’s “Inconvenient Youth” Advisory Group because:

“I was in Canada in July near Halifax/St. John’s and saw the ship building factories with smoke billowing in the background.”

I know this source isn’t the New York Times but St. John’s is about 900 kilometres from Halifax so it would be hard to be near either one at the same time.  Second, I am not sure what ship building factories are but the Halifax Shipyard doesn’t have smoke stacks.

Of course she could have just stayed in New Jersey where there are 10 times the smoke stacks.

My point is not to question a young teen’s knowledge of geography (nor the editor/journalist in New Jersey). 

We seem to be raising a cohort of visceral 140 character, black & white thinkers.  Instead of thinking all industrial activity is ‘bad’ while driving cars, watching TVs, running electricity from coal in houses, burning carbon to fly to Africa, the younger generation needs to have a conversation about what they want to give up.  Outsourcing smoke stacks to India and China should be as upsetting to Al Gore’s youth advisory group as phantom smoke stacks in Halifax/St. John’s.

They (we) should have a serious conversation about what they want to give up.  They (we) are consuming more products and stuff than every before. We are eating more. 

I’ve said it here and in my column that I am very happy to have a conversation about ratcheting down consumption and moving back to more local production.  My son has one video game player (Wii) while most of his friends have at least two of the systems.  There are multiple TVs in every house.  Most teenagers have cell phones, laptops, 20 pairs of shoes. 

What I am not for is outsourcing all of our pollution to India and then patting ourselves on the back for being eco-friendly.  If we are going to produce natural gas and use it - I think we should do it here - responsibly - but we should reap the economic benefit here. 

Lowering our carbon footprint has to be about lowering our consumption over time.  I heard a podcast ysterday where a guy was adamant that for the U.S. to dig out of its huge fiscal hole, it will have to grow its GDP by 4-5% per year for the next 20 years. The U.S. is already the most over consuming nation in the world and we are going to more than double the size of the economy again over the next 15 years or so?

If we shift away from consumption and back a little more to local production, if we massively ratchet down our expections (one car, smaller houses, one TV, 2 Webkinz instead of 20, etc.) I believe we could have an orderly transition to a less consumptive world without breaking the economy and our way of life.

That’s the discussion I want kids to have - and a little basic geography for journalists.

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This is one of the better blogs out there on economic development issues.   The author actually takes on important issues rather than just spin out the same old tripe.

In his latest blog he talks about how people retention initiatives can be ineffective and actually counterproductive which is a point I have made as well on several occasions. 

Trying to incentivize new university graduates to stay here with cash - when their best opportunity is elsewhere is not particularly good policy.  If you see some greater good by rebating some of their education costs, fine, but I don’t see much value in this policy.  If the jobs are here, the kids will stay and others will move here.

Same with more regressive efforts such as boosting EI in rural and smaller communities in order to incentivize people to stay.

The other one that is used is guilt.  I have heard this one quite a lot - “stay here even if you don’t want to as you owe it to your community”.

In the end, labour mobility is a reality and we shouldn’t have public policies to try and impede it - we should have economic development efforts that allow us to benefit from it.

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