Troubling Signs on the Economic Horizon

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Published in the Telegraph-Journal 3rd May 2013

We didn’t need to review the data to know that the New Brunswick economy has not fared well in recent years. The combined effects of the decline of traditional industries such as the forestry, weakened U.S. markets in the wake of the 2007-2009 financial crisis and cutbacks in government-sponsored construction have resulted in low or no growth across the province.

The output numbers tell part of the story. The province saw GDP fall by 0.6 per cent in 2012 after increasing only 0.2 per cent in 2011. According to Statistics Canada, goods-producing industries fell 3.6 per cent with declines in construction, mining and the energy sector, while manufacturing declined 1.6 per cent. Services output barely rose at 0.4 per cent in 2012 with marginal gains in finance, insurance and real estate services.

Unemployment has maintained a persistently high level and sits at more than 20 per cent in much of the province outside the three cities in the south. Despite the efforts by the Alward government to reduce its costs, the fiscal deficit continues to grow as does the net debt. The latter has climbed to more than $10 billion.

The U.S. is New Brunswick’s most important export trading partner. A particular concern continues to be the American economy which has effectively stalled since the financial crisis.

On the face of it, an American economic recovery seems to be well underway. The U.S. GDP expanded at 2.5 per cent on an annualized basis in the first quarter of 2013, following marginal growth for the previous three-month period. But even this apparently positive figure masks other more disturbing signs that an economy whose recovery has not matched the pace of past expansions could now be facing a deceleration in its own modest growth rate.

In fact, adjusted for those changes due to temporary fluctuations in inventories maintained by corporations, the U.S. economy’s annualized growth rate shows a steady deceleration over the past three quarters, falling from 2.4 per cent to 1.9 per cent to 1.5 per cent. Other economic measures, from retail sales to the index of leading economic indicators, exhibit symptoms of fragility or even outright declines. The alarm has been sounded by numerous investors who are now concerned that the U.S. has entered yet another spring slowdown.

It is possible that the U.S. economy is merely in transition. But this time may be different. First, after adjustment for inflation, wage compensation hasn’t increased since 2010 and in the absence of higher incomes, consumers have been reluctant to increase their purchasing to pre-recession levels, even with record-low interest rates.

The weakened EU economies have made it much more difficult for the U.S. to increase growth by boosting exports. Today export sales are barely growing, and sales to Europe’s hardest-hit economies have actually declined.

In the interim, Washington’s dysfunctional politics has resulted in numerous unproductive policy moves, instead of the reforms that are sorely needed. And while the U.S. federal deficit has been significantly reduced, the sudden contraction in growth will serve to slow the economy even further, reducing growth in America’s economic output this year by as much as 1.5 per cent. That loss in economic activity will equate to 1.5 million fewer jobs.

In spite of the weaknesses in global economies, the New Brunswick government has admitted its spending cuts and the lack of major infrastructure projects on the horizon will impede economic growth in the province.

“Reduced levels of public sector capital spending along with the absence of any new major projects in the private sector will limit the contribution of capital investment to economic growth. As well, fiscal consolidation at all levels of government will serve to weaken overall economic growth.” Mr. Higgs said.

In the circumstances, it is critical for the government to revisit its commitment to what has become a counterproductive push for austerity. The New Brunswick economy shows little capacity for sustainable growth in the short term. It is necessary now to ensure that the capacity of the economy to recover in the medium term is not jeopardized.

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Filed under Austerity, Fiscal Policy, Job creation, New Brunswick, U.S.Economy, Unemployment

Why the Public Does Not Believe That Corporations Are Accountable

westonAddressing members of the media on Thursday, Galen G. Weston, executive chairman of Loblaw, told reporters that, “I’m very troubled. I’m troubled by the deafening silence from other apparel retailers on this.” Mr. Weston was referring to the tragedy at a Bangladesh textile factory last week in which factory collapsed, killing almost 400 workers.

Mr. Weston said Loblaw has always ensured that factories in its supply chain adhered to rigorous standards in areas including local labour laws and work conditions. Mr. Weston said he was “troubled” by practices that saw it fit to send workers back into the factory after it was declared dangerous.

“Nothing in those reports suggested a problem, but the scope of the audits does not cover structural integrity,” Weston said.

But it is exceedingly difficult to believe that Loblaw executives would have been unaware of the risks associated with shoddy building practices in Bangladesh. Site selection methodologies have become very sophisticated and comprehensive over the last 10 years, covering everything from the cost and availability of labour to elements associated with real estate. The number of fire escapes and other safety factors would have been integral considerations in any evaluation. Site selection may not have been the responsibility of Loblaw employees themselves, but specialists contracted to perform evaluations would have provided a detailed breakdown of risk factors. Since this has been standard procedure for some time, it is disingenuous in the extreme that Mr. Galen would project that this was all new to him and his executive team.

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Filed under Corporate Ethics, Labor force management, Risk Management, Social contract

We Need an Education And Training Revolution

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In an important way, the purported skills shortage reflects complacency, as well as the short-sighted economics of Canada’s corporate sector. In sectors as disparate as manufacturing, oil and gas, financial services, information technology and tourism, Canadian companies eschewed investments in innovation and productivity improvements while gradually allowing total compensation to decline against their American counterparts. Today, many Canadian firms struggle to be globally competitive. The affordability of labour is the cornerstone of this dynamic.

Published in the Telegraph-Journal 30th April 2013

The scandal around the use of temporary foreign workers by some firms in Canada has re-opened the discussion about what’s causing a shortage of workers in industries across the country. And it has raised questions about whether there is a skills mismatch or even if there is the kind of shortage that cannot be addressed by conventional means.

Speaking to the Commons finance committee for the last time before his departure for London in June, Bank of Canada governor Mark Carney said that there are shortages of some skilled trades but pointed out that Canada has one of the most flexible labour markets in terms of mobility among advanced countries.

The problem of unemployment is most acute in places with rigid labour markets. Countries with limited mobility of labour, high taxes on hiring, too-strict rules about firing and high minimum wages have some of the highest unemployment in the world. In some countries, cartelized industries, powerful trade unions and complex regulatory regimes on work and compensation conspire to keep unemployment high. But one would need to very heavily massage the data to view Canada as one of these countries.

“There are some signs of skills miss-matches (but) we do believe employers play an important role to ensure life-long skills development is a part of the nature of business in Canada,” Carney told the finance committee. He argued against increased reliance on the controversial temporary foreign workers program. He stated that the program was more suitable for temporary shortages of high-skilled workers than service jobs and other lower-wage categories that critics claim are now being filled by foreign imports.

He argued that if there is a shortage of workers to fill unskilled, low-paying jobs, it is important to allow the market and wages to adjust over a reasonable timeframe rather than try to solve the problem by bringing in foreign workers. The solution to that problem, said Carney, is for employers not only to “make sure Canadians are paid higher wages, but also that the firms improve their productivity.”

This solution is particularly challenging for firms in Atlantic Canada which have long relied on paying workers lower wages and benefits compared with their counterparts in the rest of Canada. Over time, this wage differential has become integrated into the operating cost structure of many companies who leveraged that differential to avoid improvements in productivity or investments in innovation.

Deregulating labour markets even further may be required to successfully address worker shortages and ease unemployment. But it will not be enough on its own. There are examples of where more innovative approaches have paid dividends. Countries which have better skills matching and unemployment records tend to be more activist, helping to find jobs for those who are struggling. Germany pays a proportion of the wages of long-term unemployed workers for the first two years. It has the second-lowest level of youth unemployment in the developed world. The Scandinavian countries provide young people with individualized plans to integrate them into employment or training programs. These approaches can be usefully tailored and adopted by Canadian jurisdictions.

The broader solution lies in starting in the right place. Technology is helping democratize education and training but only among the literate. The root of the competitiveness challenges that plagues Atlantic Canada is the persistently low levels of literacy across the region. What is needed is an education and training revolution that is appropriate to the scope and scale of the problem beginning with a thoroughgoing multi-generational commitment to eradicating illiteracy. What is needed is a dramatic expansion of the study of science and technology and closing the gap between education and the needs of the workplace. And what is needed is a generous investment — by government and industry — to upgrade vocational and technical education and to substantially expand apprenticeships. The clear implication of such an approach is that it is necessary for firms and educational institutions to forge closer relationships with each other. This would require a change of attitude that is long overdue.

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What’s an SLA?

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Claiming that they were scammed by Indian multinational outsourcing firms and “dazzled” by their sales pitches, some executives of Canadian companies deny accountability for poor job performance, work delays and outright project errors. Apparently, these executives prefer being characterized as incompetent managers, unaware of basic contractual countermeasures such as service level agreements (SLAs), rather than admit they made decisions to outsource work to offshore locations. This line of reasoning also extends the definition of “plausible deniability” to include practices that are intrinsic to executive decision-making. The changes introduced by the federal government will do nothing to change the fundamental problem associated with the purported skills gap.

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The Economy Isn’t Working As Planned

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A substantial amount of public support for fiscal consolidation is predicated on the assumption that profligate government spending has been responsible for fiscal deficits and debt. But New Brunswick is a clear example of how revenue shortfalls, as the result of lowered taxes, have conspired with too-low spending to create a fiscal imbalance. Policies aimed at reducing government deficits and debt accumulation have increased unemployment at the same time that they have been fiscally counterproductive.

Published in the Telegraph-Journal 26th April 2013

Today’s economy wasn’t part of David Alward’s plan. Before taking office in 2010, his campaign pledge was that he would “lower small business taxes, freeze power rates, increase the budgets for tree-planting and woodworkers, and put more decision-making power into the hands of local economic development agencies” to restore the province’s economic health.

Three years later, the health of the economy has scarcely improved. The most stark evidence of this failure is on the fiscal side. Standard & Poor’s Rating Services downgraded New Brunswick’s credit from its A-plus grade to AA-minus over fears of its high tax-supported debt and the long-term demographic trends facing the province. In 2009-2010, New Brunswick had the second largest deficit in Canada as a proportion of GDP and it has been growing steadily. The interest on the net debt reached $643 million in 2010-2011, even with record-low interest rates. The rating agency says the Alward government is on the right track to turn the situation around. But it is clear that fiscal consolidation has become mired in the reality of near-zero GDP growth.

New Brunswickers are acutely aware that things aren’t working as planned. Since 2010, unemployment has risen to over 10 per cent, real wages have fallen and despite record-low interest rates, businesses are not investing. The federal government has made changes to Employment Insurance prompting Premier Alward to call for a moratorium on the new provisions until more study is done on their impact. The response of a record number of New Brunswickers to the moribund economy has been to join those who already have sought more favourable employment conditions in Alberta, Saskatchewan and Ontario.

New Brunswick joins those jurisdictions in which the practices of fiscal consolidation have only worsened an already bad set of economic conditions. Even austerity hawks have begun to reconsider whether the cure is more onerous than the disease. The International Monetary Fund said this month that “it may be time to consider adjustments to the original fiscal plans.” The IMF may have been referring to Great Britain, but the observation is equally relevant to New Brunswick.

The question is what kind of adjustments would work in New Brunswick at this stage. Mr. Alward and Minister of Finance Blaine Higgs blame the fiscal situation on years of profligate government spending. Mr. Higgs has on numerous occasions said that the government plans to stick to the economic course it has set which focuses on reducing government expenditures to kick-start growth.

A growing chorus of economists and policy makers argue that there are some things the government could do to spur growth without risking a large increase in the budget deficit. The simplest would be an injection of investment in infrastructure such as roads, bridges and schools. The logic is that such projects create jobs and generate business investment. They could get off the ground almost immediately, yet would not add significantly to the deficit because they are financed by long-term borrowing. There are a significant number of infrastructure projects across the province that would meet an urgent need, from the building of water treatment facilities to hospital improvement to school repair. Each of these projects eventually will need to be undertaken anyway but with record-low interest rates, these projects today represent a real bargain.

The challenge even to this relatively modest undertaking is that infrastructure development requires government funding. Government however, has borrowed beyond its ability to pay, at least according to the bond ratings agencies that are watching this province closely. This offers the politically partisan opportunity to criticize Mr. Alward and his party but New Brunswick has supported heavy government spending for far longer than Mr. Alward has been premier. New Brunswickers today enjoy the legacy of substantial government spending in health care, education, roads and pensions. But this has occurred at the same time that taxes were reduced to levels that ultimately have proven to be unable to sustain this spending.

Mr. Higgs is right that unbridled spending has been the primary cause for the province’s financial mess. But increasingly, being right may not be enough.

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Where’s the Recovery?

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A key reason that the economic recovery has been unable to gain momentum is that our policies have been doing precisely what basic macroeconomics says we shouldn’t do. By cutting government spending in the middle of an anemic economy, we’ve been engaging in a self-destructive process calculated to increase long-term unemployment. Austerity policies are counterproductive not only from the perspective of growth and employment but even in strictly fiscal terms.

Published in the Telegraph-Journal 23rd April 2013

Just when it seemed that the U.S. economy was finally on the right track, it has again lost momentum. And in the process, America’s wobbly economic performance has shaken confidence in the prospect that the world’s economies could rise above the anemic performance that has characterized them for more than four years.

The year started well enough in the United States. In the face of a sizable tax increase on January 1st, employment, retail sales and housing all improved substantially in January and February. GDP grew at an estimated annualized 3 per cent in the first quarter while stock markets reached new highs.

The bottom fell out in March. Employment growth, reaching an average of 208,000 in January and February, slowed abruptly to register only 88,000 in March. Retail sales declined as did new construction starts on single-family homes. The dip in housing activity is especially problematic since fundamental determinants, such as low mortgage rates and lean inventories, and an increase in the household formation, had been pointing to continued gains.

Predictably, the economic slump in the U.S. has had its impact in Canada. The Canadian economy lost more than 54,500 jobs in March 2013, according to Statistics Canada. That figure pushed Canada’s jobless rate higher to 7.2 per cent and represents the worst month for Canadian employment since February 2009. In addition to January and February job statistics, the latest numbers show that the Canadian economy has lost more than 26,000 jobs in 2013.

Explanations for the American decline ranged from the possibility that government statisticians failed to adjust the economic data for seasonal effects to the impact of different hiring patterns between large and small firms. Neither of these explanations is persuasive and in any event fail to take into account why economists have been so wrong in their job forecasts over the last 18 months.

The likelihood that the sputtering American economy is the consequence of a single or even a concatenation of misfortunes is extremely low. We are better off to blame global incidents such as those in Cyprus or North Korea or the instability of oil prices, though none of these credibly explain the scope and scale of America‘s weakness.

The more likely culprit is austerity. Stalemates in Congress have resulted in the expiry of a payroll-tax cut and the imposition of higher income taxes on the wealthy which will cost American taxpayers $150 billion in higher taxes in 2013. A similar lack of Congressional resolve resulted in the “sequester” which on March 1st brought across-the-board federal spending cuts worth $85 billion in the current fiscal year. Economists who have been critical of austerity, such as Paul Krugman, have remarked that the American economy may now be less resilient in the face of austerity than it was when austerity measures were first imposed.

Despite the stalling economy, the stock market has, in the main, shrugged off the bad news. This further reinforces the claim that the performance of stock markets bear no relationship to the actual economic experience of most Americans. Moreover, there is emerging evidence that large companies are faring much better than small firms. A substantial number of these large firms operate offshore where the benefits of their growth and profitability do not contribute to the health of the American economy directly. That large firms expend far more lobbying dollars on Congress than their small company counterparts will come as no surprise to critics of Beltway politics.

It is clear that the U.S. economy has not shrugged off the effects of austerity. Instead, it still limps along with growth hovering around 2 per cent. At some point, the evidence that austerity has not achieved its stated objectives will become too difficult to brush aside. For millions of unemployed, this moment cannot come soon enough.

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Start-ups Are the Key to Our Future

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Published in the Telegraph-Journal 19th April 2013

In a province where traditional industries have been in decline, substantial reliance has been placed on new business formation to support New Brunswick‘s economic growth. But entrepreneurship has always been a risky proposition. Whether launching a tech start-up, a small business, or an initiative within a large corporation, the odds are overwhelmingly against the entrepreneur. Harvard Business School researchers have recently estimated that more than 75 per cent of all start-ups fail.

For decades, business founders had been taught that success involves writing a business plan, pitching it to investors, assembling a team, introducing a product and selling it as aggressively as possible. This is the conventional approach and prevailing wisdom of business schools, government economic development agencies, financial institutions and investors.

But recently an new methodology has called into question the logic of business planning and discarded much of what we thought we knew about the process of starting a company. Called the “lean start-up“, this new methodology favours “experimentation over elaborate planning, customer feedback over intuition, and iterative design over traditional “big design up front” development“.

One of the forces behind this new methodology is Steve Blank, a consulting associate professor at Stanford University, National Science Foundation principal investigator at the University of California at Berkeley and Columbia University and extremely successful founder of numerous high-tech start-ups.

Blank holds that business plans are one of the fundamental reasons why failure rates among start-ups are so high. The traditional business plan typically includes a five-year forecast for income, profits and cash flow. The assumption behind writing a business plan is that it is possible to figure out most of the unknowns of a business in advance, before funding is raised and the idea is actually executed.

According to Blank, “no one besides venture capitalists and the late Soviet Union requires five-year plans to forecast complete unknowns. These plans are generally fiction, and dreaming them up is almost always a waste of time.”

Conventional business plans contribute to the likelihood that entrepreneurs who can convince investors to fund them then begin to build the product in isolation from their markets, with little if any customer input. Too often, after months or even years of development, entrepreneurs learn the hard way that customers neither need nor want most of the product’s features. And in today’s fast-moving markets, even good ideas can be made obsolete very quickly.

Blank concedes that business success is predicated on too many factors for one methodology to virtually guarantee that any single start-up will be a winner. But on the basis of hundreds of start-ups, in university programs that teach lean principles, the more important claim can be made that using lean methods across a portfolio of start-ups will result in significantly fewer failures than using traditional methods. In the last five years alone, more than three dozen universities have begun to incorporate the lean start-up methodology in their program portfolios, with immediate and documented success.

A lower start-up failure rate would have profound economic consequences in New Brunswick. The province’s economy increasingly is being buffeted by the forces of globalization and disruption. Its traditional industries are rapidly losing jobs, many of which will never return. To ensure economic viability in the long term, the province must rely on successful entrepreneurship. The growth of jobs across the province will need to come from new ventures, and all New Brunswickers have a vested interest in fostering an environment that helps them succeed, grow and hire more workers. The rapid expansion of start-ups is critical to supporting the transformation to an innovation economy. Universities, government, financial institutions and investors each have a key role to play.

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Filed under Business strategy, Education, Innovation strategy, Job creation, New Brunswick, Universities