You Gotta Have Somethin’: In Defense of Incentives

There are certain hot-button issues — God, politics, and possibly football – that are so dear to some people that they are incapable of changing their minds once they have formed an opinion.

We are all guilty of this to some degree. We espouse the notion of being objective, unbiased, logical and sensible, but research shows that we consistently fall short.

Confirmation bias causes us to pay closer attention to evidence and arguments that support our own firmly held conclusions and to discount contradictory evidence. We are resolute and the facts be damned.

Once we decide, we don’t like to re-decide. That’s too much work. It’s because of our neurological laziness that we sometimes fall prey to beliefs, impressions, and reports that are just plain wrong.

One of those beliefs, which many economic developers know all too well, is that all financial incentives provided to companies to expand in a given place amounts to “corporate welfare.” Try changing someone’s mind on that one.

Three Mega Projects

This argument goes back for decades, and periodically pops up, usually because of headlines. There are three mega projects in the news right now, and all center around incentives to some degree.

I am referring to FoxConn, which has announced that it will build a plant in Wisconsin, Toyota-Mazda, which publicly announced it will build plant somewhere, and Amazon, which also publicly announced that it will locate a second headquarters somewhere.

The size and scope of these projects, coming literally back to back, have economic developers, a group that is always watched, scrutinized, and second guessed, in a tizzy.

Get Things Right

Wisconsin’s efforts to bring a $10 billion Foxconn Technology Group plant to the state may have hit a snag. The board of the Wisconsin Economic Development Corp. delayed a vote to give final approval to a contract that would provide the Taiwanese firm with $3 billion in economic incentives.

Final action on the contract will not happen before the board’s next scheduled meeting on Nov. 8 at the earliest. Apparently, board members are wanting more safeguards in place.

“We’re going to take whatever time is required to get things right,” WEDC Chief Executive Officer Mark Hogan told the Milwaukee Journal Sentinel. 

The contract being considered would pay up to $2.85 billion in cash to the company over 15 years to offset 17% of its qualifying payroll costs as well as 15% of the capital costs of constructing an up to $10 billion factory that could employ as many as 13,000 people.

Unconventional and Big

The Amazon project has captured the imagination of the nation, partly because the Request for Proposal (RFP) was unconventionally published in a very public manner and the sheer size of it. This project defines big on so many different levels.

If you are reading this on Oct. 19, today is the deadline for the responses from cities that choose to compete. At stake is what Amazon is calling “HQ2,” a second headquarters that will create 50,000 direct jobs averaging $100,000 and approximately the same number of indirect jobs. The capital investment for 8 million square feet of office is estimated to be about $5 billion.

Amazon currently employs about 40,000 people in Seattle, where since 2010 it has paid nearly $26 billion in wages and spent $3.7 billion on buildings and infrastructure. The company estimates it has had an indirect economic impact of $38 billion on Seattle.

Pay to Play

Based on the numbers, I believe the city that wins HQ2 will be offering an incentive package in the billions. The Baltimore Sun has reported that Maryland’s incentive package reaches that mark. And in In New Jersey, outgoing Gov. Chris Christie (R) and bipartisan leadership of the state Legislature have pledged a $5 billion package.

It should be noted that New Jersey ranked 50th and Maryland ranked 43rd in the newly published 2018 State Tax Business Climate Index by the non-partisan Tax Foundation.

That is not to say that Amazon will go to the highest bidder. I don’t think it necessarily will. Tech talent and the culture of the place will go a long way in determining what city will become the next company town. But incentives will play a role, because they have to. It is now the nature of the game. It is what is expected.

The smallest of the three mega-projects is that of Toyota-Mazda. Together the Japanese companies will invest about $1.6 billion in the new plant. By all accounts, that is still a very large project, which is why the automakers are pressing for an incentive package of at least $1 billion, according to a recent Bloomberg report.

About 4,000 direct jobs will be created. Figure another 12,000 to 15,000 indirect jobs will be created.

Will they get it? Probably so based on history. Should they get it? Well, that depends on who you ask.

A Commonplace Tool

It is not just the national headline projects in which economic development incentives are employed. Just do a Google search and you will see that in Bexar County, where San Antonio is the county seat, local economic developers are pushing for a 10-year property tax abatement, worth nearly $3 million, for a credit union that will create about 50 new jobs.

Just last week, officials in San Antonio and Bexar County opted not to bid on the Amazon project, saying the city wouldn’t have been “competitive” on incentives.

In Hoover, Alabama, the city council approved tax rebates of up to $4 million for a Whole Foods Market Plaza shopping center. And in Hodge, Louisiana, the WestRock paper mill, which employs 450 workers with an annual payroll of $28 million, will get a performance-based tax rebate of $1.5 million a year for five years in exchange for a $200 million expansion that will keep the plant competitive.

My point is that incentives are a commonplace tool in economic development, and are not just awarded to the FoxConns, Amazons and the Toyotas of the world.

Textbook Tax-Break Auction

But that doesn’t make it easier for the critics to accept. They contend that companies are going to locate and expand with or without incentives. From their standpoint, granting incentives is an irresponsible and wasteful act that costs taxpayers.

Greg LeRoy, executive director of Good Jobs First, an organization that promotes corporate and government accountability in economic development, has called the Amazon project a “textbook tax-break auction.”

“Taxpayers should watch their wallets as the trophy deal of the decade attracts politicians to a hyper-sophisticated tax-break auction. We fear that many states and localities will offer to grossly overspend to attract Amazon, even though the business basics–especially a metro area’s executive talent pool–will surely control the company’s decision.

“Public auctions for economic development deals, like those staged in the past by Boeing and Tesla, are the rare exception: nearly all are staged in secret. Based on what we know about Amazon, we expect this one to be a textbook show,” he wrote.

A Bad Deal Costs a Good Man

To say there is not a kernel of truth to the critics’ arguments would be a fallacy. To say that mistakes have not been made in awarding incentives would be wrong.

I recently spent time with an economic developer whom I greatly respect and who lost his job because a deal went bad. Several million taxpayer dollars were lost, which naturally caught the attention of the news media.

But that same economic developer could rightfully point to a long track record of good deals that he brokered in which hundreds of millions of dollars, perhaps billions, were invested in his state and thousands of jobs were created.

Did he err? Yes, he would say that he absolutely did. But should he have had to fall on his sword because of one bad deal after a long string of successes? I don’t think so. But that’s what happened.

I could tell that it pained him to talk about it. And yet, he needed to. I’m glad I heard his story, because it put things in context. Incentives can be costly in more ways than one.

Greasing the Skids

But I am philosophically not opposed to incentives, so long as they are judiciously applied with the proper due diligence. Part of that is because I have represented companies in a consulting capacity that have sought incentives during a site selection project.

I always advise companies that incentives should never be the driver of the project, rather that solid business reasons should prevail. But the fact remains that there are substantial costs and risks to a new capital investment and job creation for a company in a new place.

“Greasing the skids” to lessen those upfront costs and risks only make sense to communities that choose to engage in business attraction and compete in the arena for corporate investment. But with this comes great responsibility.

Economic developers and local officials must know what the impact or return on investment will be to the local economy in terms of jobs created, (both direct and indirect) annual payroll, taxes paid, and the general economic ripple effects. Only then, when armed with the numbers, should they be offering public dollars as an inducement.

By the same token, companies should know the numbers and only accept incentives if they are certain they can do what they say they will do in terms of capital investment and job creation.

I Was There

Back in 1994, when I was the business editor of The Birmingham News, I heard complaints that Alabama had “bought” the Mercedes-Benz project, a $325 million assembly plant, with a $250 million incentive package.

I didn’t take those comments too much to heart, because I had seen the numbers showing that the incentives would pay for themselves in a matter of four or five years.

The plant in Tuscaloosa went through a number of expansions. I cannot tell you how many. I can tell you that the plant, now in its 20th year of production, was in the midst of a $1.3 billion expansion, when Mercedes announced last month that it would spend an additional $1 billion to manufacture electric SUVs and create an additional 600 jobs.

The economic impact of the latest expansion is to the state is estimated to be $307.9 million annually, according to the University of Alabama Center for Business and Economic Research. That includes contributing $109.2 million to the state’s GDP and $62.4 million in earnings to Alabama households from direct and indirect jobs.

Once this latest expansion is complete, Mercedes will have invested $6.8 billion in the state, a far cry from the initial investment of $325 million. Looking back, that $250 million incentive package was well spent.

Would Alabama have gotten Mercedes, or later Honda in Lincoln, or later still Hyundai in Montgomery, or Toyota in Huntsville without offering financial incentives? No way, and that’s because other states, offering their own incentive packages, were competing hard for those projects.

When I think of economic development incentives, for some strange reason Billy Preston’s 1974 hit record “Nothing from Nothing” pops into my mind.

Nothin’ from nothin’ leaves nothin’, You gotta have somethin’ if you want to be with me.

Billy understood.

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. BBA helps companies and communities. (Send us your RFPs.) Mr. Barber is available as a keynotes speaker and can be reached at dbarber@barberadvisors.com or at 972-890-3733.

Fall From the American Dream

This last one was different. Only now are we realizing the full extent of the damage. I’m not referring a hurricane, but rather the Great Recession, considered the largest downturn since the Great Depression.

Throughout our history, we have weathered recessions, 34 since 1854.  But this last one cut us to the quick, and to some degree it is still with us, despite the fact that job openings have risen to a record high and that wages are finally rising.

Still, there are indicators that not all is well. The labor participation rate — the proportion of people employed or looking for work in the U.S. — fell to 62.7 percent in September, near a 40-year low. Drug overdoses are now the leading cause of death among Americans under 50. And men have become less appealing to women as marriage partners.

Some economists believe all these are telling factors that are very much tied to this last downturn and the loss of millions of manufacturing jobs.

It’s Not Over

On Sept. 20, 2010, The Economist proclaimed, “It’s Over,” referring to the Great Recession that technically ended in June 2009. But is it really?

Using tax records to trace more than a million workers through the recession and its aftermath, Danny Yagan, an economist at the University of California, Berkeley, found that thousands of workers who lost their jobs ultimately stopped looking.

“The signals say the recession is over, but employment’s not back to normal,” Mr. Yagan told The New York Times “Recession effects aren’t supposed to last this long.”

Certainly, some parts of the country have yet to fully recover.  This holds true especially in rural America where the shutdown of a single major employer can have devastating effects. I have seen it firsthand as a consultant to communities and companies.

Distressed and Disconnected

Indeed, there is a “disconnect between national trends and local realities,” according the Economic Innovation Group, which recently published what it calls The 2017 Distressed Communities Index.

“Distressed communities are disconnected communities,” the report states, “to which the fates of their 52 million inhabitants are diverging from the rest of the country. These are places increasingly alienated from the benefits of the modern economy.”

And it is in these distressed, alienated places where many manufacturing jobs have evaporated. Since 1980, a full third of all manufacturing jobs — five million since 2000 — have been lost, due in part to automation and U.S. trade policies.

In a 2017 paper with the ominous title, “When Work Disappears: Manufacturing Decline and the Falling Marriage-Market Value of Men”, University of Zurich economist David Dorn found that employability and marriageability are deeply intertwined.

Deaths of Despair

A drop from 72 percent of U.S. adults being wed in 1960 to half that in 2014 is due in part to economic forces that are making men less appealing partners to women.

Dorn found that when towns and counties lose manufacturing jobs, fertility and marriage rates among young adults go down, while unmarried births and the share of children living in single-parent homes go up.

As manufacturing jobs are lost, there are also increases to mortality in men aged 18 to 39, Dorn says, with more deaths from liver disease, indicative of alcohol abuse; more deaths from diabetes, related to obesity; and lung cancer, related to smoking, and drug overdoses.

These “deaths of despair” have decimated one demographic group in particular: the white working class, and have taken over a million American lives in the past decade.

A Worsening Crisis

Princeton economists Anne Case and Angus Deaton contend that a gradual “collapse of the white, high-school-educated working class after its heyday in the early 1970s,” has resulted in death rates that have been rising dramatically since 1999 among middle-aged, less educated white Americans, reversing decades of longer life expectancy.

Opioids killed about 33,000 Americans in 2015. Overdose deaths in 2016 will likely exceed 59,000, the largest annual jump ever recorded in the U.S., according to preliminary data compiled by The New York Times. The evidence suggests the crisis is only worsening in 2017.

Last year, Princeton economist Alan Krueger made headlines with a study showing that nearly half of prime age men (or men ages 25 to 54) who are not in the labor force take pain medication on a daily basis. Two-thirds of those men, about 2 million, take prescription pain medication on a daily basis

In a new paper published last month by the Brookings Institution,  Krueger dives deeper and finds that opioid use could account for a 20 percent decline in men’s labor force participation from 1999 to 2015 and a 25 percent of the observed decline in women’s labor force participation.

Of the 35 member countries that make up the Organization for Economic Co-operation and Development, only Italy had a lower labor force participation rate of prime age men than the U.S. in 2016.

Loss of Hope and Identity

Many researchers believe the opioid crisis is due in large part to a loss of hope and identity among white blue-collar workers. The problem is especially acute in small town and rural America, where the unemployment rate remains high and a disproportionate number of residents are on Medicare or Medicaid, according to the Centers for Disease Control and Prevention.

Carol Graham, a senior fellow at the Brookings Institution and a professor at the School of Public Policy at the University of Maryland, says blue-collar whites have had more difficulty in adapting to the loss of manufacturing jobs.

“Discrimination gave blue-collar whites better access to those lifestyles than other groups. Today, minorities are gradually catching up and, perhaps due to their constant challenges in the past, they seem to be better at multitasking in the labor force. They are much more likely to take new low-skilled service jobs in sectors such as health, for example, than are whites, particularly white males,” she wrote.

“While there are challenges for many low-skilled workers in changing economic times, and minorities still face significant disadvantages, among blue-collar whites, due to trends in the economy, the labor and marriage markets, and in health, the fall from the American dream has been a longer and harder one, at least in relative terms.”

Causal or Symptomatic

Federal Reserve Chair Janet Yellen told a Senate Banking Committee hearing in July that rampant opioid abuse in the U.S. is related to the decline in labor force participation among prime-age workers.

“I don’t know if it’s causal or symptomatic of long-running economic maladies that have affected these communities and particularly affected workers who have seen their job opportunities decline,” Yellen said in response to questioning from Sen. Joe Donnelly, D-Ind., on the issue.

The U.S. is “the only advanced nation that I know of where in these communities we’re actually, especially among less-educated men, seeing an increase in death rates partly reflecting opioid use,” she added.

When he was chairman of the Federal Reserve, Ben Bernanke, warned during the recession and the recovery that workers who stayed unemployed too long might drift too far away from the labor market to ever return. That seems to be the case.

Scars Left

Stephen Gold is president and CEO of the Manufacturers Alliance for Productivity and Innovation (MAPI) has said that “maintaining our competitive advantage in global manufacturing starts with people.”

He tells of research showing that of a projected 3.5 million manufacturing jobs expected to be available in the U.S. between 2015-2025, and that 2 million of them could go unfilled.

I think it has become increasingly clear that a significant portion of our American workforce is, in fact, “damaged goods,” and some workers who have been unemployed too long are probably forever lost.

The Great Recession has left its scars and is still being felt in so many places, particularly in rural and small town America. Having treatment centers and vocational training made available in distressed and disconnected communities can only help. I only wish I had better answers than that.

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. BBA helps companies and communities. (Send us your RFPs.) Mr. Barber is available as a keynotes speaker and can be reached at dbarber@barberadvisors.com or at 972-890-3733.

Amazon HQ2: An Avalanche of Glass, Steel, People and Money

A plenitude of cities are vying to become the chosen one for Amazon’s future “HQ2,” a second, equal-footing headquarters that will employ 50,000 people at an initial investment cost of $5 billion.

Most people have little understanding about Amazon, much less its plans for HQ2. (“Amazon wins games by changing the way the games are played then being the only ones who understand the new rules,” wrote a former Amazon employee.) I include myself among the ignorant, which didn’t stop me from writing Even a Blind Hog: Handicapping Amazon HQ2. After all, I am a consultant.

But this much I do know – the city that is chosen will be reshaped and transformed for decades to come.

I actually regret writing my Blind Hog blog, not because I demonstrated that I was pretty much clueless like everyone else, (I did say from the outset that I was probably wrong.), but because of the responses that it generated.

Mind you, some were very good in that there was reasoning behind the thoughts. Others were bad because, well, you’ll see.

We Need It and Sis Boom Bah

The bad ones fell into two categories. The first was the “we need this,” almost a “we deserve this” response. It goes something like: “Hey, Amazon, if you have an ounce of humanity, you will choose us, because, well, we’re kinda hurting here, and we really need you. So please do the right thing and choose us.”

I actually came across this type of response back in August, when I wrote two blogs about where a $1.6 billion Toyota-Mazda assembly plant project. By this rationale, companies should abandon siting billions of dollars of capital for business reasons (talent, supply chain, cost of doing business, etc.), and look to places that are economically challenged.

Of course, it is not about what any community needs. Rather, it’s all about what the company wants or needs, which in the case of Amazon is considerable. Those needs are spelled out in their request for proposal (RFP), which does provide us with certain clues as to where the company might go.

Then there is the “cheerleader” response. It’s something like: “Hey, Amazon, we’re open for business, and we’re the best, because, well, we are. Choose us and you won’t be sorry. Rah, Rah, Rah, Sis Boom Bah!”

The cheerleaders may cite some supporting factoids (often they do not), but their responses exemplify little if any critical thinking on why their city would be a good fit for Amazon.

The truth is you can find flaws in every place, and that no city meets all of Amazon’s needs absolutely. And that is what makes this project so interesting, along with its transformative nature.

Best Be Careful

Since Amazon publicly published its RFP last month, there has been no shortage of people speculating on where it might go. And that is all they are doing, speculating. Count me among the guilty. I had to laugh when I read one big commercial real estate company’s ranking of top cities for the Amazon project, misspelling Pittsburgh in the process.

But Pittsburgh Mayor William Peduto did get it so very right when he said, “This is a transformational opportunity unlike any that we’ve ever seen.”

In my last blog, I quoted a remark frequently made by my grandfather, “Even a blind hog will find an acorn on occasion.” Mayor Peduto’s statement reminded me of another: “Best be careful what you wish for, because you may just get it.”

Whichever city “gets it,” it will get what The Seattle Times calls “an avalanche of glass, steel, people and money.” Like Seattle, the HQ2 city will become a company town. And while the benefits will exude to many, HQ2 may make life actually tougher for some. More on that in a moment.

Hit Me With Your Best Shot

I am purposely not reading the newspaper stories of Philadelphia’s bid, or that of Boston, Dallas, Indianapolis, or Denver, or any other of the umpteen cities vying for HQ2. At this point, it would serve little purpose.

Despite their shortcomings (all places have them), some cities have a real shot at winning HQ2, while others are crafting proposals only because they are succumbing to political pressure to do so. The thinking by local politicos is that they would look bad if they did not throw their hats in the ring.

Economic developers and elected officials can then say, “well, we gave it our best shot.” And then go back to business as usual.

One economic developer told me said he hopes he will not be pressured into crafting a proposal to the Amazon RFP. “It would cost me $50,000 to do this, and I don’t want to waste the time and money,” he said.

Trust me, he would be wasting time and money.

Update: My friend will be working on his city’s Amazon proposal for the next 17 days. (Deadline is Oct. 19.) I told him that I was very sorry.

In my Blind Hog blog, I picked Atlanta, although in hindsight Charlotte and Raleigh-Durham might be better choices. But it matters not what I say or anyone else says in speculation.

What ultimately matters is Amazon’s choice. Then over time, we can watch a city that will be forever changed. We only have to look to Seattle as a petri dish for what is to come.

A Juggernaut Dominance

Amazon has spent about $4 billion acquiring about 8.5 million square feet of downtown office space in Seattle, although some estimate the footprint closer to 10 million. The company expects to grow to 12 million square feet in the next five years.

According to an analysis conducted for The Seattle Times, Amazon occupies 20 percent of all prime office space in the city, more than twice as large as any other company in any other big U.S. city. (In most big cities, the top employer occupies less than 5 percent of local office space.)

About 70 percent of new downtown office space added in 2016 was exclusively for Amazon, which has turned formerly forlorn parts of the city, into vibrant live-work-and-play neighborhoods, according to The Times.

Amazon now occupies more office space than the next 40 biggest employers in Seattle combined. It has more local job openings than all of the other region’s major employers combined.

Rider Levett Bucknall, a firm that tracks construction cranes worldwide, said Seattle led the U.S. with 58 cranes at work. Los Angeles, which has six times Seattle’s area, ranked second with 36 cranes.

In short, expect the Amazon juggernaut dominance to happen in the city chosen for HQ2.

An Unaffordable Future?

In the process, the resulting tech boom (50,000 direct jobs averaging $100,000 and 53,000 indirect jobs) will not only alter the chosen city’s cultural fabric but will also increase the cost of living.

In a 2014 op-ed, Jeff Reifman wrote in GeekWire that an Amazon-fueled future is “will be more male, even more white, wealthier and less diverse, unaffordable to those with lower incomes including the firestarters of culture, artists.”

The influx of high-income earners, along with the lawyers and venture capitalists who will support them, will be a harbinger for growth and rising prices. Seattle’s record growth has made it the nation’s hottest homebuying market, with prices rising faster here than anywhere else in the country.

The median price of a single-family home or condo in Seattle was $522,000 in August, according to real estate company Redfin, a 67 percent spike from April 2010, when Amazon opened its headquarters.

Nested’s 2017 Rental Affordability Index ranked Seattle fifth in a nationwide survey of cities and ninth worldwide, with a cost per square foot of $3.07. Monthly rent for a single person, according to the survey, averages $1,288.76.

In a 2015 study, Redin found that for every 1 percent increase in the number of technology workers between 2014 and 2015, there was roughly a 0.5 percent increase in home prices.

Home prices have jumped 64 percent in Austin since 2009, Redfin’s data show. In Boston, prices are up 71 percent. And in San Francisco, the median price of a home is $1.25 million, a 123 percent increase since 2009.

Am I predicting future affordability problems in the HQ2 city that is chosen? I guess I am at that.

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. BBA helps companies and communities. (Send us your RFPs.) Mr. Barber is available as a keynotes speaker and can be reached at dbarber@barberadvisors.com or at 972-890-3733.