For Rural America to Win, Part 2

In my Dec. 11 blog entry – For Rural America to Win – I emphasized how rural communities must embrace digital technologies in order to compete and remain relevant in a fast-changing if not confusing world.

I expounded upon that theme last week in frozen rural Iowa, where I gave a speech at the annual meeting of the Clinton Regional Development Corporation.

More than 100 stakeholders attended the event, which was covered by the local newspaper and a television station. I gave my written remarks to the Clinton Herald, which published a story with the headline, “Barber Stresses Adapting to Change.”

It was an accurate nutshell of what I said, but, of course, I said a whole lot more.

Initial Impressions

I rewrote my speech after Mike Kirchhoff, president and CEO of the CRDC, gave me a tour of the region, which extends across the Mississippi River into Fulton, Ill.

My initial impressions, Clinton and the surrounding area, like most of rural America has taken its share of hits (the city’s population of about 26,000 is lower than it was in 1950 and has been on a decline for the past four decades) but unlike many rural communities, I saw some things that made me believe that it is poised for growth.

For starters, it would appear that the Clinton Community School District is embracing the idea of introducing digital technologies and critical thinking to its students in a big way.

Children, Teach Your Parents Well

In both the middle school and the high school, there are these “Innovation Rooms,” where students gather in teams around a circular tables with computers to essentially learn collaboration in solving problems.

(In my speech, I joked that the children in Clinton should teach their parents well about this.)

Twenty miles to the west, in DeWitt, Iowa, with a population of about 5,500, I learned that laptops are given to students free of charge from fourth to 12th grade, while PreK through third graders can check them out.

Truly this is greasing the skids, so that young people can be better prepared to enter a new digital machine age, more profound than the industrial revolution, and one that transcends virtually all industry groups and affects everyday life.

Blue-Chippers

I also saw that Clinton had some blue-chip manufacturing companies, including Archer Daniels Midland Company (ADM), one of the world’s largest agricultural processors and food ingredient providers; LyondellBasell, one of the world’s largest plastics, chemicals and refining companies; PCM RAIL.ONE AG, a German manufacturer of concrete sleepers and track systems for railroads, and Custom-Pak, one of the world’s largest industrial blow molded parts manufacturers.

When I see a concentration of world-class manufacturers in a particular community, that indicates to me a track record of successful manufacturing, which always peaks my interest. In short, they wouldn’t be operating there for long if they were not profitable.

And there is room for more as the 345-acre Lincolnway Industrial Rail & Air Park located adjacent to U.S. 30 and the Clinton Regional Airport has been designated a certified site, meaning the skids are greased for immediate development. Rail service to the park is provided by the Union Pacific Railroad.

I was also gratified to see that the CRDC had initiated a business retention and expansion program (BR&E should be a primary focus for most economic development groups in my opinion), and that it was part of a larger regional approach, being a member of the six-county, bi-state Quad Cities Chamber, with offices in Davenport, Iowa, and Moline, Illinois.

A Tough Row, Indeed

Seeing the creative use of digital technologies in the schools, the existing blue-chip manufacturers, the efforts at BR&E and regionalism, and the professionalism of Mike and his staff, I have to believe that the Clinton region is poised for winning a prospective company that is looking for a place to set up operations.

And if a STEM academy project that he is working on becomes a reality, Clinton will be transformed and made all the more competitive.

I only wish I could say that about every rural community that I visit. Some simply do not have the tools to compete, much less win. See my Sept. 18 blog, A Tough Row to Hoe.

But even for a community that has all (or most) of the pieces in place, it is harder for economic development organizations based in rural America to compete. Most projects, whether they are industrial or not, land in metropolitan areas, because that is where most of the people, the companies, and the jobs are. It that sense, it’s a numbers game.

Where There is Hope

Technically, rural communities are those outside of metropolitan areas, but in fact there are many communities within metropolitan areas that look and feel rural.

(I could easily take you to ranches, farms and agricultural equipment dealers within the huge Dallas-Fort Worth Metroplex where I live. In some of these places, you might guess that you were outside the boundaries of a metropolitan area.)

Back in 2009, President Obama made said “urban and rural communities are not independent, they are interdependent.” It was an adroit statement, which should give economic developers in rural communities hope.

I mentioned in last week’s blog that the cost of labor, indeed the cost of living, is typically lower in rural America than in metropolitan areas, providing companies a potential cost savings.

The local regulatory and tax climates in rural places are often more amenable, less restrictive, for companies than within metropolitan areas, a broad-brush statement to be sure.

Fixing the Digital Divide

Again, repeating myself from last week, the challenge for rural America is in providing a pipeline of talent in a new digital machine age, and, what I failed to mention, the proper infrastructure to support those digital technologies.

Truly there is a digital divide. Rural areas have significantly slower internet access, with 39 percent lacking access to broadband of 25/4 megabits per second, compared to only 4 percent for urban areas. This impedes not only students in underserved rural areas but businesses that operate are there as well.

When we think of infrastructure, we think of roads, bridges, water lines, our electrical grid, all very important, but broadband is now, in the words of U.S. Sen. Shelley Moore Capito, R-W.Va., “a pillar of our 21st century infrastructure.”

Sen. Capito, along with U.S. Sen. Kristen Gillibrand, D-N.Y., introduced the Broadband Connections for Rural Opportunities Program Act in September. The bill would authorize federal grants for up to 50 percent of a broadband project’s cost, increasing to 75 percent for rural areas.

Half Measures

What gets my goat, and we all need a good goat, is the lack of real commitment to workforce training. I continue to see only half-measures in rural communities and urban communities alike, with little or no collaboration between community colleges and local employers, particularly with manufacturers.

Certainly these are different tribes speaking different languages but that is no excuse. Both are guilty of either not reaching out to one other or not listening to one another. Of course, there are great success stories exemplifying collaboration and unison of thought, but I do not see that as the norm in most places, particularly in rural America.

I have been in too many rural communities where the absence of any meaningful vocational training programs would essentially result in them being scratched off our list during a corporate site selection project.

As one exasperated plant manager once told me, “I mean, come on, how many cosmetologists does this small town really need?”

New Approaches Needed

Earlier this month, and I mentioned this in my talk in Clinton, IBM Chief Executive Officer Ginni Rometty said her company plans to hire about 25,000 people in the U.S. and invest $1 billion over the next four years.

That is all very good, but it was her comments in an op-ed piece in USA Today that really caught my eye. Rometty said many technology jobs don’t require an advanced degree and she encouraged government investment in vocational education and training.

“We are hiring because the nature of work is evolving,” Rometty wrote. That’s also why many of the jobs are hard to fill, she said. “What matters most is that these employees – with jobs such as cloud computing technicians and services delivery specialists – have relevant skills, often obtained through vocational training.”

There are large numbers of unfilled tech-related jobs in this country, because of a shortage of workers with the requisite skills.

“As industries from manufacturing to agriculture are reshaped by data science and cloud computing, jobs are being created that demand new skills – which in turn requires new approaches to education, training and recruiting,” she wrote.

All places, rural and urban alike, should take her words to heart.

In the meantime … Peace on Earth, Good Will Toward All.

I’ll see you down the road. (Next year.)

Dean Barber is the president/CEO of Barber Business Advisors, LLC, a location advisory and economic development consulting firm based in Dallas. He can be reached at dbarber@barberadvisors.com or at 972-890-3733. Mr. Barber is available as a keynote speaker.

For Rural America to Win

As a “place profiler” for corporate and economic development interests, my work will sometimes take me into rural America.

Most rural counties offer employment in a variety of industries, but experience has taught me that they can differ quite a bit in their industry mix.

No logging industry on the open plains of the Texas Panhandle. No expansive cattle ranches in up and down West Virginia.

I’ve also come to realize, and my logic is admittedly somewhat inverted, that most jobs follow people. That in essence means that metropolitan areas will have a certain advantage by virtue that more people live within their confines. It’s where most of the companies are. It’s where most of the jobs are.

Conversely, rural America – those counties that are not in metropolitan areas – will have a tough row to hoe largely because of numbers and geography.

Consider that the population in rural America (non-metropolitan counties) stands at about 46 million —14 percent of U.S. residents spread across 72 percent of the nation’s land area. Now a picture might be forming.

Certain Competitive Advantages

Despite limiting factors, I actually believe there are certain competitive advantages that rural communities can offer to potential companies that would consider investing in them.

The key, for those rural communities that want to grow (and the desire has to be there), is to identify and aggressively promote, leverage, and market those competitive advantages.

I am not the first nor will I be the last to suggest that economic development is a contact sport. The most successful economic developers that I have ever been around are part evangelists and part football coaches for their respective communities.

If you watch a 60 Minutes profile of Joe Max Higgins, I think you might get my drift. For Joe Max and any number of economic developers that I have worked with, this isn’t just their job, it’s their calling.

For practitioners in rural America, the calling can be especially daunting. More so than their urban counterparts, economic developers in rural areas have to work harder to come up with meaningful answers, supported by data, as to why their place would make for a better place for corporate investment.

One possible reason could be labor costs. Per capita income of people living in non-metro counties has been about 80 percent of metro dwellers since the early 1990s. Compared with their urban counterparts, rural workers have lower median earnings in nearly every age group.

This can pose an opportunity for some companies in some places. A manufacturer operating in a rural setting may be able to pay line workers $18 an hour, whereas they would have to pay $23 an hour in a more competitive urban environment.

I have helped certain manufacturers locate in small towns in rural settings as they wanted to be the big fish in the small pond. Armed with data that I had provided to them and visiting these communities, they soon realized they could draw a sufficient number of qualified job applicants without having to pay a premium in wages, but still higher than most wage earners in that particular town.

In urban settings, that strategy would not work nearly so well, largely because of the many existing employers competing for talent. They would be one of many fish.

Bite the Bullet

But for rural communities, appealing on the basis of lower labor costs alone is not enough. They have to show that they have the talent quotient to fill the bill for prospective companies. And therein lies their biggest challenge.

It is not good, it is not helpful that students in rural communities are far less likely than their peers in cities and suburbs to gain exposure to rigorous computer science training. These skills have emerged as a fast track to high-paying jobs.

A 2016 study from Gallup and Google found that computer science is less of a priority in rural schools than in urban and suburban areas.

If rural communities truly want to be in the hunt for better paying jobs, particularly in manufacturing, they are going to have to bite the bullet and emphasize computer science beginning in the earliest grades.

I’m afraid there is no getting around it for rural America. It has to be done, K-12. Not doing so puts rural communities (and the youth living there) at a further competitive disadvantage.

The Old and the Young

We also know, because the U.S. Census Bureau tells us so, that the rural America is older than urban America. (The median age of people living in rural areas is 43 years, compared with 36 years for urban areas.)

Generally, an older working-age population points to lower overall labor force participation, as workers begin to drop out of the labor force past age 50. And the latest Census Bureau data confirms that men and women living in rural areas have lower labor force participation than their urban counterparts. (59.2 percent compared with 64.2 percent.)

What doubly hurts is that many millennials will leave rural America for metro areas in search of better job opportunities. This pattern of migration is nothing new and probably has been going on for a very long time.

The Bold Ones

While it may be difficult if not unrealistic to stem the overall tide of outmigration by millennials, I have witnessed how some economic developers in rural America will take extraordinary steps to improve life in their communities.

In addition to pushing for computer science in local schools, they will advocate for the teaching of principles of entrepreneurship and more vocational training. They will push for the creation of makerspaces, and they will talk to existing industry about forming internships and apprenticeship programs. They will explore alternative financing to small business ventures with their local community banks.

They will be consumed with quality of life, about local healthcare, education, recreation and life away from the workplace, and they will look to form partnerships and find allies along the way, all on a shoestring budget.

Winning economic developers in rural America will be ardent students of state and federal loan and grant programs that can make a difference.

New Market Tax Credits come to mind here, an often ignored federal program that makes it possible for businesses operating in distressed areas to get more flexible loans with better rates and terms than what the market could offer.

Not to take anything away from economic developers in metropolitan areas, but their rural brethren will have to work harder to know more, because the stakes are so much higher. Wins and losses take on a different meaning when your resources are limited.

All economic developers everywhere know that if they are to be effective and spark change, they will likely offend somebody along the way. It just happens.

Coming Home

In my travels, I have seen in rural communities a phenomenon that I liken to repatriation. It is when the sons and daughters who had left to make their bones in their respective fields, typically in urban markets, want to come back home.

I know of bankers, lawyers, doctors, teachers, and corporate executives, who have returned to their hometown to start a business and/or raise a family. It can be done, especially after professional experience has been gained.

Rural economic developers welcome these returning professionals, as they know those coming home will offer much to their communities in terms of talent and will be natural allies to economic development.

Trump’s Big Promise

The history has yet to be written on the 2016 presidential election. But President-elect Trump’s promise to bring back millions of manufacturing jobs certainly resonated with working-class people, particularly in rural America.

Manufacturing is all the more important in rural America, accounting for nearly 15 percent of earnings compared to just over 9 percent in urban areas.

These mostly white and rural people have felt abandoned, even disrespected by the federal government. Sensing this, Trump said he would renegotiate or scrap NAFTA, reject the Trans-Pacific Partnership, and slap China with tariffs.

Based on what I saw in Mexico this past Spring, I can no longer think of myself as a free-trader. But here’s the problem: Total inflation-adjusted output of the U.S. manufacturing sector is now at its highest, with employment near it lowest.

Even with some manufacturers reshoring operations, it is highly unlikely that millions of factory jobs will be created because of the more prevalent use of robots, which will only grow as costs continue to fall.

In short, the automated, hyper-efficient shop floors of advance manufacturing will make Trump’s pledge a hard one to fulfill in both rural and urban America. I hope I am wrong.

The wild card in all of this is corporate taxes rates. If they are more than halved as the Trump & Co. may push for (See last week’s blog “The Big Business Story to Come”), all bets are off.

I’ll see you down the road.

Dean Barber is the president/CEO of Barber Business Advisors, LLC, a location advisory and economic development consulting firm based in Dallas. He can be reached at dbarber@barberadvisors.com or at 972-890-3733. Mr. Barber is available as a keynote speaker.

The Big Business Story to Come

A few months ago, I was sitting with a group of musician friends when incredibly the subject of corporate taxes came up. I am not sure how or why, but it did.

Most of those gathered at the Appalachian String Band Festival in West Virginia, were of the far left persuasion, and one, a very nice guy and talented fiddle player, got it into his head that big bad corporations in this country should pay more taxes.

I mentioned, rather demurely, that the United States already has one of the highest corporate tax rates in the world, to which another fiddle player, whom I consider a friend, answered with “BS.” (Except he didn’t use the abbreviated version.)

I let it go. Why argue over something extraneous as tax rates, when we were there to play music.

Life is too short. I’m not going to let politics, much less facts, become a demarcation line or a prerequisite for friendship. I am quite comfortable “hanging” with people who do not share my views, no matter how deluded they might be.

Carrier News Dominated

Last week, much of the news was dominated by President-elect Donald Trump brokering a deal with Carrier to keep a portion of its workforce in Indianapolis rather than a total plant shutdown with work shipped to Monterrey, Mexico.

Curiously, many pundits decried the move as something precedent setting and bad, when it was neither.

The truth is this thing happens not all too infrequently, albeit it is usually governors and high-ranking state economic developers who are making the telephone calls, dangling tax abatements as an incentive to keep companies from moving operations out of their state.

Taxes Matter

Indeed, much of the basis for industrial recruiting by economic developers in states vying for industrial investment is rooted in tax incentives.

In short, taxes matter and in tandem with a regulatory environment, infrastructure and sometimes labor costs form the basis for what many companies see as the business climate of a place.

(Sometimes companies, particularly tech companies, will ignore a not-so-good overall business climate in favor of a plentiful talent pool, witness biotech and Silicon Valley in California. Another blog for another time.)

Something Else

While Carrier said tax incentives were important in keeping operations in Indianapolis, I don’t buy it. The $700,000 a year in tax abatements for 10 years from Indiana is a smidgen in comparison to the $65 million a year Carrier would have saved in labor and other costs by shifting production to Mexico.

No, something else was at work here. Two things come to mind. One, Carrier ‘s parent company, United Technologies, is a major defense contractor that wants to stay in the good graces of an incoming administration, which will likely increase defense spending.

Two, and granted this is mushier, Trump has vowed to work with the business community to reduce corporate taxes and regulations.

The Real Story

More interesting to me than the news on Carrier — which puts faces to a story (The New York Post quoted the Facebook post of an employee named Paul Roell: “Thank you, Donald Trump, for saving my job.”) — is that Trump’s proposed nominee for U.S. Treasury secretary, Steve Mnunchin, said last week that the administration was targeting a reduction in the corporate tax rate from 35 percent to 15 percent.

That is a real big story, overlooked by many. If that were to happen, it would be “yuge,” and redefine the business climate in this country.

This may come as a shock, but back in 2012, President Obama actually proposed lowering the nation’s corporate tax rate to 28 percent. At the same time, he wanted to boost overall revenue from corporate taxation by banning numerous deductions and loopholes that save companies tens of billions of dollars a year on their tax bills.

2012 was an election year and a Republican congress wasn’t about to play ball. (Mitt Romney, by the way, had proposed lowering the rate to 25 percent.)

Not BS at All

Despite what my fiddle-playing friends might believe, the United States, with a combined top marginal tax rate of 38.9 percent (consisting of the federal tax rate of 35 percent plus the average tax rate among the states), has the third highest corporate income tax rate in the world. It is exceeded only by the United Arab Emirates and Puerto Rico, according to the nonpartisan Tax Foundation.

The U.S. has the highest corporate income tax rate among the 35 industrialized nations of the Organization for Economic Co-operation and Development (OECD).

“The U.S. tax rate is 16.4 percentage points higher than the worldwide average of 22.5 percent and a little more than 9 percentage points higher than the worldwide GDP-weighted average of 29.5 percent. Over the past ten years, the average worldwide tax rate has been declining, pushing the United States farther from the norm,” according to a Tax Foundation report in August.

You don’t have to be a Washington insider or an accountant to know that the federal tax code is very complicated. Because of the abundance of loopholes and deductions, most corporations don’t pay 35 percent, but an effective tax rate closer to 29 percent. The weighted average tax rate for the S&P 500 overall was 26.7 percent in the second quarter of this year, according to Howard Silverblatt of S&P Dow Jones Indices.

Still, our effective rates are significantly higher than the worldwide average corporate tax rate, which has declined since 2003 from 30 percent to 22.5 percent.

Also, keep in mind that companies do not need to pay U.S. taxes on the profits earned by overseas operations until the earnings are brought back to the U.S., which means many keep trillions in profits parked offshore.

I have to believe that a lower corporate tax rate would bring much of that money home and sharply reduce companies’ incentives to take a foreign address, a practice called inversions.

A Challenging Environment

Now if you were to ask me if I believed that some companies pay their executives really obscene amounts of money and that wealth disparity in this country is a real and growing problem, I would say absolutely true.

Do I believe that special interests have been successful in carving out loopholes and deductions making a tax system far too complicated and unfair. Yes, I do. But those are separate issues.

The issue of this blog, which directly impacts job creation, is that we have a very challenging environment for business investment in the U.S. in large part due to our disproportionately high corporate tax rate in comparison to the rest of the world.

Many Unknowns

There remains a lot of unknowns to what may or may not happen. So if the effective rate goes to 15 or 20 percent, will this be done in conjunction with the closing of loopholes?  No one yet knows. We still don’t have a lot of meat on the bone, but the impact to corporate profits and investment in this country could be significant.

So this is the big story that I am watching. I’m not so much concerned with whether Trump is making phone calls to CEOs in an attempt stop individual plants from closing and moving offshore. It’s not necessarily a bad thing, I just think it is small potatoes when compared to what happens with corporate taxes and the overall business climate of this country.

Staunch the Bleeding?

The latest jobs numbers from Bureau of Labor Statistics show that jobs in the manufacturing sector fell for the third straight month, declining by 9,000—losing 62,000 workers year-to-date.

We’ve been bleeding manufacturing jobs, going from 20 million jobs back in 2000 to 12.3 million today. Will Trump, the economic nationalist, find a way to effectively staunch the bleeding through tax and regulatory reform?

I don’t know. How about that, a business consultant who says he doesn’t know. I am watching and waiting just like you.

I’ll see you down the road.

Dean Barber is the president/CEO of Barber Business Advisors, LLC, a location advisory and economic development consulting firm based in Dallas. He can be reached at dbarber@barberadvisors.com or at 972-890-3733. Mr. Barber is available as a keynote speaker.