Local Government and Manufacturing Development

Paul Ericksen / March 19, 2018

Who do economic incentives really benefit?

In my second article I referred to the Federal Government’s involvement (or lack thereof) as foreign countries developed strategies to raise the competitiveness of their manufacturers.  Our government’s involvement was spotty and, for the most part, favored large Original Equipment Manufacturers (OEMs). For instance, NAFTA was a boon for OEMs looking to locate factories and/or source from suppliers located in either Canada or Mexico.  And of course, most recently, the new federal tax bill lowered the corporate tax rate significantly but didn’t address the tax paid of non-corporation businesses, at least to the same degree.

I think you can tell by my writing that I don’t think our Congressmen, Senators or Presidents have stepped up to the plate to support the bulk of where manufacturing paychecks are issued, i.e. from small and medium-sized manufacturers. These companies primarily operate within OEM supply chains. And maybe I’m a skeptic, but I don’t believe the OEM tax relief windfall will result in a meaningful increase in OEM sourcing with domestic suppliers.

Faux Manufacturing Economic Development Victories

This article is going to lay out how local (primarily state) governments have typically gotten involved in manufacturing economic development.  But first, I’ll pose a question:

"When was the last time you saw your Governor proclaiming an economic development victory?"

I’ll bet it was when they announced that a manufacturer had decided to open up a factory in your area. If so, I’m pretty sure they trumpeted the role the state played — under their auspices — in attracting this company and the number of jobs it will (possibly) produce.  I’m pretty sure, though, they didn’t trumpet the price paid to gain that manufacturer’s commitment, nor did they translate that number to a “cost per (projected) job.”

The reason I added the words “possibly” and “projected” is that the actual number of jobs added by such incentivized new employers seldom matches the levels cited in the initial announcements. Those details usually get visibility a couple of years later in a short column on page 3 of the Business Section in your Sunday newspaper.

Another point I want to make about state-level economic development incentives is that they are seldom offered to manufacturing firms already operating in a state.  The rest of this article will discuss these two scenarios and what it means to manufacturers and supply chain participants.

Trotting Out the Dog and Pony Show

Having worked in and around corporate America for over 40 years you can be sure I know a Dog and Pony Show when I see one.  Dog and Pony Shows are not the same as updates. Instead of providing “Just the facts, ma’am” (as Sergeant Joe Friday of Dragnet would have requested) they seem to be more of a commercial for extolling the accomplishments of one individual or another, i.e. a “Look what I did!” session.  To the point, most announcements made by politicians about bringing new manufacturers into their area fit the bill of being Dog and Pony Shows.

You may ask, “What’s the problem with a politician taking credit for bringing in new jobs?”  From my perspective there are three main issues.

Why State Politicians Shouldn't Take Credit for Manufacturing Gains

Bringing in a new factory does not require heavy lifting.  Really, it doesn’t seem like it’d be that hard to hand out financial incentives to attract a new employer, does it?  After all, all a politician is doing is competing with other states in a sort of reverse Dutch Auction.  By reverse I mean that each subsequent offer of incentives goes up, rather than down, and the state that offers the most usually wins.  I have no problem recognizing accomplishment when it is based on significant innovation and/or effort but that doesn’t seem to be the case in putting together a package of financial enticements to attract a new employer.

The enticements used are your money, not the politicians’.  As I said earlier, the politician seldom brings up the details of the cost of incentives needed to finance the packages they put together.  It is my observation that those same politicians proclaiming “victory” try to limit visibility of the incentive details from public view. Why?  Because they often appear to be outlandish. What started as more reasonable costs — in 1980, for example, the incentives to bring in jobs at Tennessee’s new Nissan plant added up to $11,000 each — kept going up as states became more competitive, and by 1993 the jobs at Alabama’s new Mercedes plant cost the state $168,000 each.

More recently (in 2017), Wisconsin had to actually change state law to offer Foxconn an average of $219,000 per job.  You may ask, “What’s the problem — that doesn’t seem not so bad.”  But what also needs to be considered is the wages those jobs will pay.  In the Foxconn case there are projections that the bulk of them will be production line positions with a projected hourly rate of $11.25.

And again, remember that the politicians trying to take all of the credit are playing with OPM — Other People’s (taxpayer’s) Money — in putting together the incentive packages for manufacturers. What does this mean to the individual taxpayer?  If you do the math, for every new job, a single family has to pay state taxes for 50 or more years.

Maybe not the best deal.

And what happens if the number of expected jobs never materializes?  I can assure you that the manufacturer won’t offer repay any of the incentives they were granted.

Leaving Established Manufacturers High and Dry

What about a state’s current manufacturers?  You know, the ones that have been around for a while paying taxes and already employing people?  If you’re involved with such a firm, I’d like to pose the following question to you:

“If the state were to give your company $100,000 in tax breaks for every new position you promised to add, do you think your firm could find ways to use that money to expand employment?”

I suspect your answer is “yes,” which leaves me wondering how you feel about your politicians being so willing to spend taxpayer money on attracting new factories but not as willing to spend money supporting manufacturers already in the state. While some states seem to be changing tactics, the dubious game of tax incentives still dominates the playing field.

How Manufacturers Can Stay Competitive in an Incentivized Economy

Why did I outline the above? Believe me, this article was not written to depress you.  But I don’t see the situation changing much any time soon. That leaves the question, “What are existing manufacturers to do to get a leg-up?”  The only true path I see for success going forward is for manufacturers — especially small and medium-sized manufacturers — to keep looking for ways to improve operations and competitiveness.  And what are needed are not so much the incremental improvements that most companies already look for on a daily basis. Rather, they are the step-function process improvements that will lead to more significant competitive advantage — including essential lean procurement efforts like supply chain optimization and minimizing waste.

The above is one reason I am supportive of truly innovative,  procurement-based startups such as MakeTime.  My recommendation is to look for such innovators focusing on lean procurement methods, and check out whether they can help your particular circumstances.

My next column will provide more background as to why “smokestack chasing” — what the incentive process outlined earlier in this article is usually called — makes even less sense as a stand-alone economic development strategy and then lay out a proposal for what states should be doing.

Learn more about Paul Ericksen and his over 40-years in the manufacturing industry here.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of MakeTime.