Driving on the Don Mills Growth Way

Someone recently posted the pollster Don Mills’ Seven Actions to Grow the Economy.   Mills is primarily known as Atlantic Canada’s pollster as head of the firm Corporate Research Associates Inc.  In recent years, he has redefined himself as the Jeremiah of Atlantic Canada’s future – woe are we if we don’t get serious about economic growth.

For the most part, I think Mills’ seven jeremiads could come right out of one of my presentations:

1. Retaining our youth

2. Educating the world

3. Building an entrepreneurial environment

4. Increasing the population

5. Re-balancing the workforce

6. Creating urban centered economic zones

7. Developing an export oriented economy

I, too, have been putting a greater focus on education these days.  It’s a great way to attract people to the region to test drive living here and even if they leave after graduate – who cares?  The region benefited from the high value economic activity while they were here.

I am a little more wary about this ‘retaining our youth’  idea because many people use it as a euphemism for restricting immigration.  Besides, a lot of the most interesting people I know were born here but spent 5-10 years living elsewhere.  If I had a genie with three wishes one of them would be that every New Brunswickers live for a while in another place – I think it would broaden our collective perspective.

The export-oriented economy is also key – because when you look closely at the data we actually don’t export much other than the big stuff – fish, lumber, paper, refined oil, etc.  and there isn’t much growth in those areas.  I would like to see a lot more services sector exports – professional services, business services, etc.  We have some good examples already – engineering, contact centres, etc. – we should build on this.

Ultimately Mills’ challenge is that there are an increasing number of old timers driving the wrong way on the Don Mills Growth Way – I mean that literally and figuratively.

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The myth of the skilled immigrant (?) Leveling the playing field

The new Census figures on immigration out this week were not that surprising.  It confirms what we have been seeing – that New Brunswick’s urban centres are attracting more immigrants but having some trouble retaining them.

The more interesting data will come in late November (hopefully) when we see immigration by industry and occupation.  We are told that Canada only focuses on high skilled immigrants and that the points system favours those with a lot of education and skills.

Of course this flies in the face of actual data.

Take a look at the following chart from the 2011 National Household Survey.  This shows the ratio of immigrant workers to non-immigrant workers in Toronto (and Moncton as well).  You will see that Toronto’s highest concentration of immigrant workers -relative to non-immigrant workers – is the the lower skilled and mostly lower wage industries such as transportation and warehousing, administrative services, and other services.  There is a very high concentration of immigrant workers in Toronto’s manufacturing sector – but that sector is not necessarily high wage – the average annual salary in Ontario’s clothing manufacturing sector is $34,000, food manufacturing $40ish, metal manufacturing around $55k (in 2016).

The point – that I have been making for a long time now – is that the larger urban centres have been attracting immigrant workers into sectors where they are needed and smaller urban centres are more constrained to the concept of the ‘high skilled’ immigrant.

I’m hoping the 2016 immigrant data will show we are flowing more into the sectors where workers are needed in New Brunswick.

nhsimm

 

I’m a big fan of Herb Emery, the UNB economics prof – but I think – based on the article in the newspaper – he may be sending the wrong message.  His report concludes that policies to attract more immigrants won’t cause the growth of the economy.  His report is actually based on a pretty discrete chunk of data.  It is an important part of the conversation but I have a few counterpoints.

1.  How would he explain the fact Manitoba has the fastest GDP growth among the 10 provinces in recent years – and a massive increase in immigration?  How would he explain that the head of immigration said that a large share of these immigrants are going into the province’s business services sector – the only province with overall growth in that sector?

2. How would he explain the fact that the largest urban centres in Canada right now are driving employment growth across the country -and still attracting the lion’s share of immigrants?

To suggest that causality runs only one way is mistaken.  Export-based jobs will attract migrants leading to increased local demand and more jobs.  We agree.  But tightening the labour market to the point that employers decide not to expand in your community is an increasing risk.

I guess the common ground here is that I am not advocating we boost immigration without a plan.    As I have outlined elsewhere we need to fill empty jobs first – particularly in export-based industries.  We need a more intelligent approach to immigrant investment.  We should boost immigrant numbers in our PSE that align with our growth sectors such as cybersecurity and insurance.  This will send a strong signal to the national and international firms already here that the talent pipeline is expanding.

But I also maintain that immigrants themselves create demand.   Depending on the economy, 70% of all jobs are based on local demand.  If the population or overall wage growth is not strong – this dampens local demand.

It’s seems like we are left fighting the same old, tired battles we have been fighting for years.   I’d rather flood New Brunswick with immigrants and just see what happens rather than constrain immigrants and watch the provincial economy slowly dry up.  The worst case many of these immigrants move on to Toronto.  If so, who cares?  The best case many of them stay and help us build our economy.

Which side of the argument are  you on?

 

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Making sure Taintville doesn’t fall through the cracks

There is a place in the Miramichi area known as Taintville.  Someone from the area told me it got its name because it’aint Newcastle and it’aint Chatham (anyone knowing the real story can send me a note). It seems to me that ‘Taintville’ stands as a good metaphor for communities that have lost or are losing their economic reason to exist.

If you aint’ Newcastle and you ain’t Chatham what are you?

In my opinion every village, town, city and urban centre needs an economic rationale for its existence.  Originally, every place was settled for an economic reason. Farmers, fishers and forest industry workers needed a central place to conduct commerce and access services.  Urban centres because centres for public services – education, health care, etc.  For those with growing populations or the ability to attract population from outlying areas, urban centres became places where entrepreneurs set up manufacturing activity. If the community was centrally located in a wider geographic area, they became higher order centres for commerce and services.

Nowadays we have the potential for many Taintvilles across Atlantic Canada and the country as a whole.  These are communities for which the drivers of the economy over 10,20,30, 40 years or more have shifted significantly and they are not finding their role circa 2017 and beyond.

They used to be able to rely on a steady stream of young people entering the workforce.  For decades there was a surplus of young people – and many of them left to find work.  Now there are fewer and many of those that come out of the education system do not want the jobs on offer so they leave for greener pastures.  Partly this misalignment in the labour market has been manufactured by public policy.  I recently looked at the available jobs in a small urban centre and only 8% of the jobs on offer required university and 20% a college diploma.  The other 72% required neither.  Yet we highly encourage our young people to pursue university or college and then are shocked, shocked, when they leave the community or region after graduation.

I’m not suggesting we discourage young people from pursuing post-secondary education – far from it – but the people that used to work the 72% of jobs  – second income earners, students, newcomers, etc. are not as plentiful as they once were.  If the labour market cannot supply needs across the spectrum – all jobs that absolutely don’t have to be in the community are at risk of disappearing – moving to communities where there is available workers – communities in Canada or around the world.

Every community from Edmundston to Shippigan to Sackville and St. Stephen in New Brunswick needs to think about its distinct economic role and pursue policies, infrastructure and other efforts to support that distinct role.  Are you a bedroom community that provides workers to larger urban centres?  Are you a regional services centre?  Do you have existing export-based industries that are losing their underlying reason to be in your community?  Have you relied on local entrepreneurs to drive economic growth?  If so, where is the next generation coming from?

Are there one or two key industries that drive your economy – agriculture, fishing, tourism, IT, education?  Will they continue to do so into the future or are they slipping away?

And if you are inclined to believe that becoming a retirement community is your distinct economic role, I urge you to reconsider.  Among Ontario’s 44 large, medium and small urban centres guess which one has the lowest median income.   Elliot Lake.

Lots of people are retiring and that number is set to grow significantly.  Communities that are great places to retire and offer services and support to people for the 20 and now even 30 or more years after retirement – will benefit.  But there are many reasons why that can’t be the primary economic role.

If your community is starting to look like Taintville, it’s time roll up your sleeves and get to work.

 

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How’s she goin’, boys? In the Miramichi, she’s goin’ pretty good these days

In this sense, of course, ‘she’ is gender neutral.  My father, sixth generation Miramichier, sidled up to my father-in-law one time (born and lives in Brazil and speaks a little English) and asked him “how’s she goin’?”.  My father-in-law asked me later who ‘she’ was and why was she going anywhere?

Anyway, no matter how you say it things are going pretty well in the Miramichi these days at least measured by the increase in the number of people working and average income levels.   According to Statistics Canada data – using CRA tax filer data – after steady decline in 2012 there was a big jump in the number of people declaring employment income and now there are over 1,800 more people working in 2015 than in 2011 (flat since 2012).    Don’t forget the number of employment income earners across the province has declined over the same period.
chi1

And these are not low paying jobs, the number of people in the ‘Chi reporting at least $50,000 increased by 1,850 between 2011 and 2015 – more than double the growth rate across the province.
chi

 

And, you might recall from the Census data, the Miramichi had the largest rise in average household income.

What’s going on in the ‘chi?

We will get much better data on this in November when the full Census data is finally released.

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McKenna 20 years later: Learning from his legacy

In recent weeks I have been working on a project that has led me to chat with a bunch of business and government folk that were prominent in 1980s/1990s New Brunswick.  In all cases the conversation eventually got around to Frank McKenna.  It always does.   Thirty years ago this month, Frank was elected as Premier and 20 years ago yesterday he stepped down as Premier – keeping a promise not to stay in power more than 10 years.

I have written a lot over the years about McKenna.  He reined in public spending.  He championed New Brunswick across Canada and beyond.  Who can forget the stories of taxi cab drivers in Toronto invoking his name or of him hustling CEOs on Team Canada trade missions much to the consternation of other Premiers.   In general, he spent a lot of time trying to convince New Brunswickers that we were just as good as any other Canadian.

In many ways his post-Premier career has been even more influential.  He hobnobs with Bill Clinton and other global leaders.  He is highly visible on many national issues.  His perch at the TD Bank has provided a platform to continue championing New Brunswick.

What is his legacy?  It’s hard to say.  The fact that Mckenna is a top 100 baby name in Canada for girls may or may not have anything to do with the guy called “the tiny, perfect Premier” back in the day.

There are certainly few people in New Brunswick who were adults in the 1980s and 1990s who don’t have a developed opinion about him one way or the other – I would say mostly a good opinion although I run into people who are still bitter about amalgamations, forced RCMP, etc. and even some who continue to believe he was too focused on attracting industry and not enough on helping poor, old NB small businesses.

My only beef with McKenna – stated at the time and many times since – was that he didn’t leave much infrastructure behind when he left.   McKennaism wasn’t embedded in government – not political or bureaucratic.  Bernard Lord actually ran on  a platform that repudiated McKenna’s economic development program talking about a “made in New Brunswick” solution instead (ironically, of course, Lord benefited from even more call centre jobs than McKenna as most firms attracted here in the mid-late 1990s only reached full expansion by the early 2000s).

This is the challenge with the cult of personality.  It can be a wonderful tool for change at a moment in time but can lead to an ongoing overhang – every Premier since McKenna has been compared to him – and not favourably.  One Premier told me he was dogged by McKenna’s shadow in office.  Fair enough.  U.S. Presidents get the same treatment.  All Republican Presidents get compared to the Gipper.

We should learn the lessons of Frank McKenna:  1) There is value in having a determined, charismatic leader during times when big changes are needed; 2) New Brunswickers can and should be #NBProud; 3) New Brunswickers can compete and win when it comes to attracting global firms; 4) true political success happens when change is embedded into the system – which did not happen with McKenna.

 

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If we want to be globally competitive, we have to take that term seriously

The City of Saint John recently released a study they had completed looking at the property tax system that makes some interesting recommendations most notable for a significant rise in taxation of heavy industry, the assessment of equipment and machinery as part of the overall property tax assessment and an increase in municipal control over rate setting.   If we are going to have these debates we need to do so armed with good data.

My big theme these days is that New Brunswick is far more exposed to the global economy than ever before.  It competes with other jurisdictions with the export of our products and services, on the attraction of talent (everything from home care workers through to Phds), for federal government and private sector funding, for business investment, and for general influence over policies that can have profound impact on us.

In this environment it becomes incredibly important for us to know who our competition is and what set of policies and efforts are required to ensure we are competitive?

I am particularly concerned with smaller urban centres across Canada.  There is a growing body of data that suggests that many of them are at high risk over the next 10-20 years of slow and even negative growth.  Across Canada, the largest urban centres are growing employment at a rate 2.7 times faster than urban centres with between 50,000 and 99,999 in their employed workforce and 14 times faster than the smallest urban centres (with under 50,000 workers).
Employment growth between 2010-2015 by size of employed workforce
All urban centres across Canada (CMA/CA)largeurbs
Source: Statistics Canada CANSIM Table 111-0007.

First, this is a fairly small timeframe – 2010-2015 – doesn’t mean we can project out for the next 20.  But it is a long enough time to allow us to speculate.  If you look at the data closer you see that many mid-sized urban centres in the orbit of the largest urban centres (such as Guelph, Waterloo, Drummondville, etc.) are doing quite well as are those that have a core, high value geography-specific industry (such as Estevan, Okotoks and Camrose) but urban centres that don’t fall into these two categories are struggling a lot more.

Why?  There are few possibilities.  First, historically these smaller urban centres relied almost exclusively on natural population growth and intraprovincial migration – very little immigration – to grow (BTW this is more of an eastern Canada phenomenon).   Now those two sources of population growth are drying up and they have to compete with the largest urban centres to attract immigrants – a much harder proposition.  The tightening labour markets are leading to the loss of industries that don’t “have to be there” for lack of a technical term.  Eventually it could lead to much greater decline.

Secondly, these communities are facing even more competition as discussed above.   I could list off for you more than a dozen firms in New Brunswick that have expanded manufacturing and other operations outside the province in just the past few years because in their calculus it made more sense to expand out there than back home.  I get that and government shouldn’t try to brow beat firms into bad business decisions.

But, we need investment here.  According to KPMG’s annual report on competitiveness around the world, New Brunswick firms already pay high property taxes (see example below).  Now, there are lots of debating points here: 1) property taxes are not a huge part of overall operating costs; 2) this particular metal fab firm may not be ‘heavy’ industry as defined in the new report; 3) If Saint John had the flexibility of U.S. jurisdictions it could selectively reduce taxes for ‘strategic’ industries, etc. etc. etc.  So, I understand the debate.

Let’s just make sure that when governments make decisions – they have the best data to back up those decisions – and that data should be focused on our competitiveness as a jurisdiction.  And not just for business.  We’re going to need to attract 150,000 people to our shores over the next 15 years (Campbell forecast) – they will want to come and stay in communities that are ‘competitive’ – taxes, quality of life, quality of schools, green spaces, etc.

Annual property tax bill from a 100-person metal fabrication facility*proptaxsj

 

Source: KPMG 2016 Competitive Alternatives.  Based on a 100,000 square foot facility on a six-acre site.   Shown in U.S. dollars.

 

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Chasing Amazon? May I suggest you consider Facebook instead?

The competition to attract Amazon H2 and its 50,000 jobs is reaching a fevered pitch.  Some experts have suggested the total value of the incentive deal will reach $5 billion ($100k per job) or more.  Amazon has even stated that it expects a massive incentive deal.  Some jurisdictions will undoubtedly waive all corporate taxes – income, sales, property, etc. and also offer some kind of personal income tax rebate (i.e. a grant to the firm based on how much personal income tax is expected to be generated).

As I have said before this amounts to lottery-mania.  All the Governor ‘war rooms’ established and all the gimmicks (remember the town that renamed itself Google on a temporary basis to attract that firm?) will end up being a fun distraction (and a costly one).

May I suggest, as an alternative, that you consider attracting Facebook instead.

Facebook has already announced it will be hiring several thousand new staff to monitor content and one expert suggested this would only be a drop in the bucket – he indicated 10,000 or more may end up being needed around the world to ensure all that fake news you click on or like is put into context or deleted outright (did Bill Murray actually benefit from New Brunswick’s legendary kindness?).

New Brunswick has a cybersecurity cluster.  It has a long history with back office and customer interaction centres.   It is rapidly boosting its immigration to ensure a future pipeline of workers.  It is almost a certainty that a 1,000 person Facebook cybersecurity/content centre would thrive here.  As a cherry on top the NBCC and CCNB would be thrilled to churn through hundreds of graduates from a customized content moderation/security training program.

After all, like the lottery, winning $100 million would be nice but the free tickets, $10 and $100 prizes are in large part what keeps us coming back for more.

 

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We need more investment: A lament for Energy East (?)

 

One of the reasons why the New Brunswick economy has been so draggy in recent years has been the lack of big scale capital expenditures.  For the better part of 30 years, starting with the Confederation Bridge, at any given time New Brunswick could count on having several of these large scale projects going on at any given time.  We had pipeline construction, new energy infrastructure, Lepreau refurbishment, a $2.4 billion new potash mine, a new LNG import terminal, wind energy investment, etc.  In the past few years, however we have had very little of that big scale investment.

If you back out public sector capital spending (which is down but has remained quite high), public sector investment in non-residential tangible assets averaged well over $3.2 billion/year. Now it is down to below $2.2 billion/year.  That may not seem like much to some folks but if you suck out $1 billion/year in CAPEX it hurts the economy now and dampens it for the future.

The following table shows this CAPEX trends but expressed as a share of national capital expenditures.  For most of the past decade, capital spending in the private sector in New Brunswick averaged more than $18 out of every $1,000 spent across Canada.  That is now down by 41% to only $10.67 per $1000 spent across Canada.  Public sector spending is still roughly at par with the rest of the country as a share of GDP (NB is roughly 2.1% or so of national GDP or similar to $20.47 for those of you who can’t follow my confusing math).  Private sector CAPEX, by contrast, is half what it should be.

capex

 

And this matters for more than one reason.  First you lose the economic impact of the investment itself (construction) but second most of these large projects generate an ongoing stream of economic activity as the asset is amortized over time.

This is what I tell mayors in New Brunswick.  There are two kinds of building permits.  The first kind is reacting to what is going on in the economy (think residential) and the second kind is driving new economic growth (think a new manufacturing facility).  You can build all the new houses you want but it won’t lead to the creation of a new manufacturing facility but if you build a new manufacturing facility it will create the demand for new housing.

So, if New Brunswick had the same level of annual capital expenditures since 2010 as we saw the previous decade  There would be nearly $8 billion more deployed right now across the NB economy.  That economic boost would have been significant.

As we look to the future we need to encourage more investment.  The loss of Energy East is just another example of a project that would have provided some of that needed new CAPEX.

 

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A possible tax reform solution: Tighten the rules around equivalency

From the start the federal government has couched the issue of tax reform around fairness.  Why should two people earning the same income and doing the same work pay different levels of tax just because one uses a corporation to receive and distribute income?

If this is really the issue, then the solution should be to tighten the CRA rules around equivalency.  If you have two lawyers earning the same income, doing the same work for the same ‘client’ then maybe they should pay the same taxes.  The problem is that if you have one lawyer that earns $150k working for a government agency and another earning $150k working for herself – with no guaranteed income and facing costs not faced by the employee – there is no way they can be considered equivalent.

As for the active vs. passive income argument – small business owners should be given fairly wide latitude to store up income to be spent in the future.  And the sprinkling thing?  There are already rules around this.  Tighten them up a bit respecting that spouses do play an important role in most small businesses.

At the end of the day I believe there is a solution here that would make things more fair without taking away the risk premium that we need to encourage entrepreneurship.

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The Amazon headquarters sweepstakes: It’s fun to play!

Why would someone buy lottery tickets every week, week in, week out for years – even decades?  They know intuitively the chance of them winning the big one is infinitesimal but they get out there every week.  In fact, the larger the jackpot -and hence the more unlikely the chance of winning – the more people who play.

If you ask them they will say: It’s fun to play.

The little thrill every week from seeing if your string of numbers matches the winner is worth the investment.

The same process is playing out with the Amazon HQ that has been dangled around.  Never mind that some suspect that Amazon actually has already selected its  city and is trolling around to get a better incentives deal.  Even if it was an actual competition (which it probably is) the chances that your community will win the big one is infinitesimal.

Google the story.  You will find City Councillors and mayors from Biloxi to Halifax to Vancouver all eager to serve up a bid.  Many, like Vancouver, are hiring whizzy firms like Deloitte to craft the value proposition.  Paying tens of thousands of dollars for a chance at billions?  Why not?

It’s fun to play.

For a few weeks, economic development is front and centre.  Local newspapers are covering the story of the Halifax bid (actually the Canadian Press).  Detroit thinks Amazon will restore its former glory.  Windsor, Ontario wants in – talking a joint pitch with Detroit.  The mayor of Chicago wrote an op-ed stating why it should be in the Windy City.  Even Moncton should bid – jointly – a virtual HQ – everyone wins!

Cynics might say this is all just a waste of time and resources.  Over a two month period likely millions of dollars – maybe tens of millions – will be spent – time and effort on bids.  Why not focus your resources where you have a better chance of success?

I am not as cynical.  Having been involved in dozens of big ‘pitches’ over the years (including writing a proposal to attract a Mercedes manufacturing plant in the early 1990s), I believe they have the side effect of helping communities hone their value proposition for investment and uncover gaps that are holding back growth.  This intelligence – gleaned while buying the lottery tickets – helps down the line.

 

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