Alberta needs a reality check on calls for diversification, says economist Trevor Tombe

Originally published onJan. 14, 2016.

"Watch your thoughts, for they become wordswatch your words, for they become actions."

This wisdom has a long history, and is very relevant for Albertans today.

We are facing difficult economic and political challenges. The perception we have about our economy its present and future matters. It shapes our language, and thus our policy actions.

• Calgary economic forecast calls for heavy 'humility' in 2016
• OPINION|Coun. Ward Sutherland on diversifying Calgary's economy
• Calgary offices teem with 'palpable paranoia' on Termination Tuesdays and all week

Planning the future properly

Think our economy is imploding? Then drastic actions appear necessary.

Think too many of our economic eggs are in theoilsandsbasket?Then calls to "diversify" sound sensible.

• How one Alberta oil and gas town is trying to fix its oil dependency

Betting the price of oil will soon rise? Then delaying much neededtax and spending reforms seems reasonable.

If we want to plan our future properly, we need to step back and look at the data. We need to figure out what's really a problem, what solutions we wantand the long-term implications all before we act.

The alternative is contentious debates, lousy public policyand lower prosperity.

Whether Alberta is nowa 'have not' province

Many feel the economy is nosediving and believe Alberta is now ade facto "have not" province. Things certainly aren't good especially for people who've lost their jobs or businesses.

By the end of 2015, there were almost 60,000 more unemployed Albertans than there were a year earlier. Employment is down in mining and oil and gas sectors in particular by roughly 25,000. The government's budget is also in rough shape, with $18 billion in deficits projected to 2019. This makes people planning their financial futures nervous, both businesses and families alike.

But it's not all doom.

The average worker in Alberta makes roughly $200 more per week than those in the rest of Canada- Trevor Tombe

Our unemployment rate at seven per centis no more than the national average of 7.1per cent. Of course, for an Alberta acclimatized to an above-average economy, this is a big change.

But the share of our population that is employed is higher than average 68 per cent in Alberta versus 61 per centnationally. More Albertans choose to work, and that's a good thing.

We also still earn more. The average worker in Alberta makes roughly $200 more per week than those in the rest of Canada.

Claims that earnings are on the decline also fail to note that while they are down by one measure, they are up by another.Comparing late 2015 with the same period in 2014, Statistics Canada's Survey of Employment, Payroll, and Hoursshows Albertans' average weekly earnings are falling.

But another source, the Labour Force Survey, shows an increase over the same period. This may seem odd, but it happens. Different data measure different things in different ways. Statistics abound, and we must view them with caution. One thing is clearthe sky, while cloudy, is not falling.

The diversification debate heats up

There's a danger in overreacting to faulty perceptions.

Many feel that too many of our economic eggs are in the oilsands basket. Enter calls for "diversification" the current buzzword.

But what do we mean by diversification anyway? How do we measure this?We can start by examining which industries employ Albertans.

Fewerthan seven per centof our workforce is in mining, oil and gas. For perspective, this is smaller than the eightper centshare of employment in Ontario's finance, insuranceand real estate sector.

• Construction, not oil, is king in Alberta's economy

Looking at employment shares in a systematic way reveals a surprising conclusionAlberta has one of the most diverse economies in the country.The situation in Calgary is equally surprising.

It has the second most diverse workforce in the country behind Regina.

And the city with the least diverse employment? The National Capital Region ofOttawa-Gatineau. Not surprising given the dominance of government employment.

But wait!

What about all those Alberta workers who don't work directly in oil and gasbut support the sector nonetheless? The accountants, consultants, engineers, truckers and so on, who support the oil and gas sector?

These "indirect jobs" are frequently pointed to as evidence of the resource sector's outsized influence on Alberta's economy,and the need for action.

Statistics Canada estimates that for every job in the oil and gas sector in Alberta, there are two indirect jobs attached to it.

So, if 150,000 workers are directly employed in oil and gas, then another 300,000 are indirectly employed by that sector.

Does that mean 21 per cent of Alberta workers are involved somehow in oil and gas? Not quite. There's a problem with these indirect job numbersevery sector has them.

If we take the estimates at face value, and add up all direct and indirect jobs in Alberta, we wind up with over 3.3 million workers that's about 1.1 million workers more than actually exist! Indirect jobs are being counted twice.

With a back-of-the-envelope adjustment we can examine how important each industry is for jobs, direct and indirect alike.

It turns out about 15 per centof Alberta's employment is oil and gas. Another 11 per centis construction.

Now let's compare to Ontario. About 14 per centthere are involved in manufacturing, and about 10 per centare involved in finance, insuranceand real estate.

Which is more diversified? It's a toss-up

Of course, this isn't the last word and there are other things we could have looked at.

How about income?

Roughly onequarter of Alberta's income wages, salaries, profits, and so oncomes from the mining, oil and gas sector.Our income is therefore much less diversified than our employment.

Do any of these numbers suggest corrective government action is required? It depends on what we think "normal" should be.

Throwing around the word diversification is not a solution. And making diversification the goal, without saying what it means, leads to lousy public policy.

Subsidies or loans to "value added" businesses and sectors, for example, can often do more harm than good.

We must always askWhat are we aiming at?

Employment diversity? If so, why? Income diversity? If so, whyand whose?

Perhaps we're really concerned about volatility in employment. OK. Of all workers or just lower-income ones?And is Employment Insurance not sufficient?

The list of questions goes on and on. The answers will not come easily, but the questions must be asked.

When a government minister, public commentator, newspaper columnist, or anyone else lazily uses the words "diversification,""value added,"or other buzzwords without specifically saying what they mean, alarms bells should ring.

The budget gamble

More challenging for Alberta than the overall structure of its economy is the fiscal health of the government's budget. For this, perceptions of the future matter a lot.

If we think oil prices will soon rebound, then there is less need to discuss tax and spending reforms that will improve our government's budget situation today.

• Sinking oil prices: Winners and losers
• ANALYSIS | Seeking a political scapegoat for plunging oil: Don Pittis
• 4 oil forecasters point which way prices will go

Both the PC budget plan in March 2015 and the NDP budget in October 2015 had rosy oil price forecasts. The NDP budget, for example, forecasts oil prices averaging $57 US a barrel in 2016 and $67 in 2017. The government is not alone.

Among private sector forecasters surveyed by the governmentthe range in estimates for this year is between $54 and $75 US a barrelnext year, the range is $57 to $79. Last time I looked, prices were barely over $30. Wishful thinking doesn't make for good planning.

The market also expects these low prices to continue. Futures prices,essentially deals today for deliveries later,suggest an average oil price of $36 in 2016 and $42 in 2017.

The market's expectation for oil is therefore much lower, for much longer, than either the government or many private forecasters suppose. That's a problem.

As each dollar in oil prices is worth about $170 million to the Alberta government's fiscal bottom line, what we think will happen to oil prices in the future is critically important.

If prices remain low, the government's projected future deficits will grow by billions. If that happens, tough decisions will need to be made.

Alberta needs a sales tax.- Trevor Tombe

Either taxes will have to go up perhaps through a Harmonized Sales Taxor spending will have to go down. The hope that oil prices will rise prevents these tough decisions today. And it's not getting any easier.

So what are we to do?

Anecdotes are not data

We should focus on policies that work well in any economic climate. Reacting to one headline after another is not ideal.

For economists, some fruit hangs very low.

Alberta needs a sales tax, so we can lower worse forms of taxation we already have such as income taxes, both corporate and personal. We need to save more of our royalty revenue, so government revenue is not tied so tightly to volatile commodity prices.

To the extent that we're concerned about job losses in oil and gas, then there's an employment insurance program already in place. If this is insufficient somehow, then we should talk about that.

Infrastructure and market access (i.e., pipelines) are as important now as ever, and the government's new climate policies and carbon tax (good policy in its own right) may go some way towards boosting support outside of Alberta.

It's tough to say what ought to be done

After all, every policy has winners and losers, and political tensions in Alberta are high. But policy should be evidence-based and communicated in clear, plain language.

Families regularly make difficult decisions about how to spend their hard-earned income.

Imagine how difficult these decisions would become if different family members had different impressions about the state of the family's finances or were using vague language to describe their situation?

The same is true of public policy debates. We should react to data instead of anecdotes, avoid buzzwords and jargon, and be fairer and less political in our policy debates. We can do better, andwe must.

Calgary at a Crossroads is CBC Calgary's special focus on life in our city during the downturn. A look at Calgary's culture, identity and what it means to be Calgarian. Read more stories from the series at Calgary at a Crossroads.