Maintaining our hidden economic engine

Op-ed column in the Penticton Herald: 27 June, 2006

Quick: what is the largest industry in Penticton? Tourism? Agriculture? Healthcare? According to the “Community Profile” on the city’s economic development website, the largest industry in Penticton (measured by wages paid to residents in 2000) is “retail trade” (16%), followed by health and social services (14%), and manufacturing (10%). No other industry accounts for more than 10% of the wages earned in the city.

Clearly, there is something wrong with this data. Only a small percentage of each dollar we spend in retail trade at Wal-Mart or any other store remains in the local economy as wages. The balance is sent to places in the supply chain where value is added, such as coastal China via Bentonville, Arkansas. Apparently, there is some economic “dark matter” that holds the economy of Penticton together while we ship our money elsewhere.

A closer look at the data reveals a hidden economic engine. Our region is unique in that total employment in all industries accounts for just over half of our $1.3B annual income. The other half comes from “non-employment” sources, the largest of which is pensions paid to retirees—a whopping 23% of total regional income. In other words, the largest “industry” by far in this region is the Canada Pension Plan. But there is more to it. An additional 10% of the money that flows into Penticton comes from “investments”, which ostensibly includes private retirement income. And, if we attribute a disproportionately large part of the “health and social services” industry to retirees, we conclude that retirees, who currently make up roughly 25% of the population, are responsible for nearly 40% of the money flowing into the local economy. And this excludes any savings that retirees might bring with them and spend on, say, housing.

There is both good and bad news associated with this conclusion. The good news is that Penticton is in a position to experience enviable economic growth for the next 25-30 years due to the large cohort of baby boomers who are just now entering their retirement years. According to forecasts in a report by Urban Futures (available from the RDOS web site), in-migration will double the number of Pentictonites in the 65-74 year-old segment by 2031. The recipe for economic success seems pretty simple given this opportunity: protect what we have now (clean lakes, green hillsides, a relaxed rural/agricultural environment, the best climate a Canadian retiree can get without buying private health insurance), permit construction of high-density high-end residences on the valley floor, and provide world-class infrastructure for our citizens. The bad news is that by underestimating the economic importance of retirees, we might squander our natural advantages. A small, but representative example is provided by city’s reluctance to underwrite the cost of chipping orchard and vineyard waste. If the health and comfort of retirees are adversely affected by high levels of smoke in the valley, then should we not do everything we can to minimize smoke, including providing the agricultural industry with an alternative to burning waste?

Unfortunately, providing world-class infrastructure for the influx of retiring baby boomers will require more than chipper trucks. Both provincial and regional governments will have to make massive investments to support our booming population of seniors. The unique problem facing Penticton is that the tax base for locally-funded infrastructure—things like public transit and recreation facilities—will be small relative to the number of retirees. Ruthless prioritization of finite tax dollars is critical if we hope to avoid being a high tax/low amenities destination. But prioritization requires that we acknowledge the emergence of new economic drivers in this community and reevaluate our willingness to expend scarce resources chasing revenue from increasingly marginal sources such as tourism and conventions. I know it is blasphemy to say such things, but the data is pretty clear on the matter.

Consider, for example, the proposed events center. A shiny new venue makes sense if it attracts retirees looking for something to do in the winter. But many of the arguments made in favor of the current proposal emphasize the economic benefits of spending $30M-$50M in order to attract more conventions. I am a bit skeptical about this given that the entire accommodation and food industry in Penticton accounts for only 5% of our total income. How big can the upside be? The risk is that the magnitude of the event center as it is currently conceived precludes spending on other facilities to attract retirees, such as a new performing arts center, a museum/library upgrade and so on. Indeed, the risk is that the events center precludes all other spending, period. So much for the chipper truck.

The bottom line is that our future is grey. By failing to acknowledge this and prioritize our tax revenues accordingly, we jeopardize the dominant source of future economic growth for our region. Setting priorities and making trade-offs is hard; but I believe it is worthwhile to have the debate before we spend all the money.