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JDI Roundtable on Manufacturing Competitiveness in New Brunswick

Policy must reflect ‘boom and bust’ cycles

Herb Emery

Do you ever worry we are too quick to judge our political leaders for the state of the economy? Since moving to New Brunswick in 2016 I have heard a lot of complaints about the sorry state of the New Brunswick economy since the 2008 financial crisis, the problem of “one and done” premiers since Bernard Lord and the problem of a lack of leadership.

But what would you think if I were to tell you that the economy in 2019 is exactly where we would have forecast it to be in 1996?

In the numbers we see two different stories. If the economy had continued to grow at the pace it had from 1997 to 2007, then in 2017 our GDP would have been $5 billion higher than it is today. However, if you forecast the growth of the economy based on the period up to 1997, then our GDP would be what we have today. 

Which forecast represents the normal state of our economy?

The “blame, then fire” the premiers narrative that explains our current perception of economic malaise is built off of a perspective that the decade before 2008, which saw a booming economy in New Brunswick, was normal. When the 2008 financial crisis kneecapped the economy, the province embarked on a 10-year Keynesian spending orgy to try to prime the economic pump back to life. It hasn’t worked and there may be a good reason it didn’t.

Meanwhile, the alternative story is that the New Brunswick economy, of the decade leading up to 2008, was far from normal and the robust rate of growth was never sustainable. By this view, the rapid growth up to 2008 resulted in an “over-shooting” of our sustainable levels of income and spending.

The no growth of the decade since has seen a return to our longer-term economic potential.

But the return to normal in this case is not an easy adjustment, in part because of the hangover from the boom and the ineffective and costly attempts to restart growth after 2008. Because the adjustment to normal was borne largely by labour market entrants, we hollowed out our young labour force with out-migration and we discouraged newcomers to the province to a degree that would not have occurred with slower but steady growth. 

Borrowing to sustain levels of public services through the decade after the bust, in the hope that the pre-2008 economy would return, has left us with a serious debt problem. These are long-lasting impacts of an unmanaged boom and bust.

The pre-2008 economy of New Brunswick was overheating, initially from high exports to the U.S., which was going through a credit-fuelled housing and economic boom. Mineral and energy commodities were in high demand on world markets. Exports expanded from 1990 to 1997 as the Canadian dollar depreciated against the U.S. currency, and grew at an accelerated pace to 2004 as the Canadian dollar fell to almost 60 cents U.S. As the exchange rate climbed back toward more usual levels, export values plateaued. Private-sector employment trends follow those for exports.

Reading about the New Brunswick economy in 2008, the challenges for pulp and paper and wood products after 2004 were highlighted as concerns, but the strong growth in GDP after 2004 was led by investment in large projects like the Canaport LNG terminal in Saint John and the refurbishment of the Point Lepreau nuclear plant. 

Yet, investment as an economic driver was out of steam by 2010.

New Brunswickers may have forgotten about the mining boom that was also underway with activity around Bathurst, Belledune, Sussex and the McCully gas field. Ominously, given the near-total loss of mining activity in the province, in 2008 the Department of Finance observed that “ways to improve and expand the viability of the mining industry are continually being investigated by the Province.”

So why does any of this matter? First, it is a reminder that an export-based economy will experience periods of economic boom and bust that we need address with our policies and decisions.

If we knew that the economic conditions of the pre-2008 decade were not going to last then, what could we have done differently? Overheating economies tend to lose control of the size and cost of the public sector by treating budget surpluses as permanently higher revenues. Overheating economies also tend to have over-investment in construction and in “mega-projects” relative to what is justified by more typical economic conditions. 

In other words, the failure of government in New Brunswick is not the inability to generate a return to the economic conditions of the pre-2008 decade. The failure was to manage the public sector’s growth during a transitory boom and to support export-oriented producers to mitigate the headwinds of an appreciating Canadian dollar. The government of New Brunswick has no ability to influence the exchange rate or world commodity prices, but it can influence labour costs, energy costs and other input costs with its policies and regulations. With this in mind, we should stop judging our premiers by whether or not they governed during periods of high growth; instead, we need to ask how they managed the affairs of the province given the condition of the economy.

If you aren’t sure how to decide if the economy is in good shape or bad shape, then simply look at the exchange rate. If it’s 80 cents U.S. or below, then you should expect the economy to grow. If it climbs toward par, then go easy on whoever is premier.

Herb Emery is a Brunswick News columnist and the Vaughan Chair in Regional Economics at the University of New Brunswick.

This article first appeared in Brunswick News publications – Feb. 7, 2019

The JDI Roundtable on Manufacturing Competitiveness in New Brunswick is an independent research program made possible through the generosity of J.D. Irving, Ltd. The funding supports arms-length research conducted at UNB.