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Smokestack Chasing, Bankruptcies and Other Manufacturing Hypocrisies

Aug. 26, 2015
When it comes to governmental industrial economic policy, too many politicians subscribe to “no win” theories.

I’ve been writing for IndustryWeek since April 2014. During that time I’ve posted 32 articles totaling almost 43,000 words. In each I’ve made a point of trying to focus on facts and realities, keeping emotion out of my arguments. The reason I’m making this point is that in this and the next couple of articles I’ll be discussing a subject from a point-of-view that may seem a bit biased to some. I’ve got tendencies just like everyone else. I guess I’m letting you know if you continue reading you are in for a bit of a rant. I hope you enjoy it!

The issue of government involvement in business is highly controversial. Why? Because it draws economic theory into the discussion—topics like capitalism, socialism, etc.—which tend to lead to political positioning. As I laid out in “ Finding the Middle Ground in Supplier Negotiations,” politics—at least in recent history—is highly polarized in this country with politicians having seemingly little appetite for compromise. In other words, they don’t look for middle ground in much of anything, resulting in issues becoming emotional fairly quickly. Consequently, rarely does anything substantial ever get accomplished regarding governmental industrial economic policy and because of this, U.S.-based manufacturers compete at a disadvantage globally. So, where does the extreme economic theory positioning come from?

First let me say that I believe in free market economics. You’d probably find most business people have a free market philosophy. On the fringe of this philosophy, however, are those free market advocates who cannot see the need for government involvement in business ever, period, end-of-story. From my perspective, the main source of economic policy polarization comes from these people, whom I refer to as uber free-marketeers. Bottom line, uber free marketeers are never willing to consider any form of middle ground relative to governmental involvement in business. Their mantra is that government shouldn’t be involved in picking the winners or the losers. This uber-block do a pretty good job in coining slogans but the basis for their arguments is founded strictly on theory, not business realities.

What have I seen that has led me to feel this way? Remember, I’ve worked in supply management since the late 1980s and this experience has given me a unique perspective on the realities of global competition, i.e., getting purchase orders. In other words, I’ve seen first-hand what the impact or absence of governmental support for U.S. manufacturers has led to. I’ll describe what I’ve seen using three examples that I hope convince you that a proactive governmental industrial economic policy is a critical element to a successful manufacturing economy.

Chasing Smokestacks

I forewarned you that there might be a bit of emotion in this article so we might as well start on a topic that really gets me going. I’m talking about politicians who are willing to throw almost unlimited financial incentives to companies and corporations in an effort to get them to relocate existing—or open new—factories to their states. In other words, they have a strategy of bringing jobs to their states through what is often referred to as chasing smokestacks. And many of these same politicians—mostly governors, including a few that are currently running for President—are at the front of the line when decrying government involvement in business, i.e., picking the winners and losers. My personal opinion is these politicians are also at the forefront of hypocrisy. Why? Surely they must understand that in chasing smokestacks they are, in fact, picking winners and losers on several levels. You may ask, “How so?” Let me elaborate.

I understand the political realities of adding jobs. And one strategy for bringing in new jobs has always been attracting companies to open up factories locally. In the old days the focus of this strategy included selling companies on things important to an employee’s welfare, such as a healthy standard of living, a good educational system, quality of life, etc. Today the focus seems to be almost exclusively on offering companies financial incentives, with the result being that almost unbelievable levels of tax deferrals, grants, infrastructure commitments, etc., are needed for states to successfully attract new “brick and mortar” businesses. Sometimes—and not infrequently—the states commit hundreds of thousands of dollars for each anticipated job. When this happens, the winners are evident—the companies getting the incentives, the people getting jobs at the new factories and the politicians who get credit for creating them. So, who are the losers, then?

The first group of losers is the current residents of that state who have to pay for those incentives through their personal taxes. For simplicity’s sake let’s use the example of a state which has offered incentives amounting to $200,000 per job and that the average taxpayer in that state pays $5,000 a year in state income tax. It’s real easy to see that it takes 40 years—the length of an average career—of an existing taxpayer paying taxes to create a single job. Sure, over time (usually a LONG time) attracting new companies may raise the state’s economic situation but not anytime soon, especially when companies are getting 10, 20 or even 50 (yes, 50!) years of tax deferrals. I suspect established residents would rather see their tax dollars go towards more immediate impacts, like better roads, schools, etc. One point that no-one can logically argue about is that the size of these incentives have gotten out-of-hand.

Another loser group is the current manufacturers already located in the state, especially if that company has to compete in any way against the companies being attracted. Imagine having employed people and paid taxes within a state for decades only to then find that your governor has just offered a set of financial incentives to a competitor in the hopes of getting them to relocate to that state. This actually happens… a lot. Just the idea that politicians would be willing to provide incentives to companies that contributed nothing to a state’s economy while at the same time not offering similar benefits to a company that has over years been “paying the bills” is the ultimate slap-in-the-face of the incumbent manufacturers. If that’s not picking winners and losers I don’t know what is. What’s a current manufacturer to do—move out of the state and then move back in to get access to the “cookie jar?”

Finally, another loser tier is citizens of the United States. Unless the companies being attracted are from overseas, smokestack chasing between states is a zero-sum game. This means that overall the national economic impact of the new factory is a “push.” And most smokestacks being chased are NOT foreign. When one state wins, another loses. In fact, when the new factory involves relocation rather than start-up, NO new jobs are created, nationally. In fact, then, due to the lucrative incentives used to attract them, the new factory contributes less than the historical average to the ongoing fiscal viability of the country.

Smokestack chasing is akin to using tax dollars in trying to attract/retain sports teams, isn’t it? Not a real popular thing with most tax payers these days. Why should attracting manufacturers be viewed any differently?

Why do politicians do this? The publicity of new jobs is always a positive press release and attracting new companies is always easier than doing the actual “heavy lifting” necessary to create new jobs. In fact, most politicians aren’t interested in “heavy lifting” since it takes time to the point that those that initiate it might not get credit for its eventual impact. On the surface, smokestack chasing seems like a quick-hit, job-creating “silver bullet.” But as I’ve discussed, it is anything but. Politicians that talk about not wanting government involved in creating winners and losers and then chase smokestacks are first-class hypocrites.

The 2008/2009 Automotive Industry Bailout

Continuing on in this same vein of hypocrisy you need look no further than the recent automotive industry bailout. We had many politicians advocating that one of our largest industrial employers—the automotive industry—should go through bankruptcy rather than providing a government loan to support a restructuring. Why? Because giving them a loan would position these companies to be winners when—according to uber free-marketeers—they should be allowed to lose. Whoa! Easy to say, but what would have been the consequences of allowing those bankruptcies?

The losers would have been more—much more—than the employees and stockholders of the automotive manufacturers. For every OEM job there are another 12 to 15 supplier jobs directly dependent on business with automotive industry business. Make no mistake about it. Allowing the automotive manufacturers to go bankrupt would have led to thousands of bankruptcies of small- and medium-sized supplier firms.

I’ve seen projections of what the impact of an automotive industry bankruptcy would have led to and it is not pretty. The number of lost jobs would likely have caused not only a national but also a global depression (not recession) given what was going on in the world’s banking system at the time. In the end, two of the three domestic automotive manufacturers took advantage of the government loans, which kept them solvent and out of bankruptcy. So who would have been the winners and losers in this instance if the government assistance was not made available?

I have trouble seeing any winners unless you consider those who would be able to say holding to their uber principle of non-governmental industrial intervention was a win. Pretty much everyone else would have been a loser. If you don’t believe me read a history of the 1929 depression and try to pick out winners (there were none) because that’s what would have happened. It wouldn’t have taken just a couple of years to rebound—it would have taken decades.

So why did some politicians balk at providing the assistance? Because of their uber-principle which, from my perspective, is mostly political. There was a misperception that the jobs being saved by the government loan—remember, the assistance was going to be paid back—would primarily be union jobs, and unions are an anathema to uber free marketeers. These uber politicians went so far as to blame the unions for the automotive companies being in the predicament they were in—as if it had nothing to do with the failure of the banking system—because of “high wages and benefits.”

Just a note: When successful German and Japanese automotive manufacturers look to locate factories in “low cost” countries, one of the places they always look at is the United States. Why? One reason is that U.S. union automotive wages are lower than those in Germany and Japan. The same bankruptcy projections I referenced earlier show that over 90% of job losses from an automotive industry bankruptcy would have been non-union. Regardless, it’s pretty clear now that besides the failure of our banking system, the primary driver of the decline of these companies was poor management over many, many years. And remember—the loans to the automotive OEMs were paid back!

Successful Foreign Government Economic Development

Most uber free marketeers don’t seem to understand how governments have been involved in the emergence of strong foreign manufacturing economies. Anyone who thinks that China became a force in manufacturing solely on the back of low wages just isn’t informed. And it just isn’t that China decided to sacrifice its environment for manufacturing growth, either, although this was a factor. For instance, there was a reason that prior to the Beijing Olympics the Chinese government shut down factories (and most traffic) prior to the competition in areas near where the events were to be held. It was to ensure the air quality would adequately support the athletes.

The Chinese government has been closely involved in the emergence of their manufacturing economy. And why wouldn’t they be since a considerable percentage of Chinese manufacturing firms have some percentage of governmental ownership. In fact—and this is not widely understood—the Chinese military actually has ownership in many companies, and not just defense related. Just think: The next time you purchase something “Made in China” at your local discount or warehouse store you may be helping pay for that new aircraft carrier they are planning! So in China at least, the government has a strong interest in establishing conditions that will ensure the success of some of their manufacturers. I don’t think I even need to discuss how China has manipulated the value of their currency in support of their manufacturing sector.

Our government has done a really poor job in sticking up for manufacturing globally, especially for our small- and medium-sized manufactures. Let’s face it. As long as we don’t have a strong governmental economic policy and involvement, we will not have the “level playing field” that the uber free marketeers profess to support. Do we really want a 50-employee wiring harness manufacturer in a rural upper Midwest community to be competing—on their own—against foreign firms that receive all sorts of support and incentives from their government? You’d think so if you listened to our uber politicians.

And it isn’t just China. Korea had been a shining example of how government collaboration with manufacturing can enhance its competitiveness. The Koreans have taken a different path than China, not involving in ownership. Instead, they work directly with industries to facilitate their investment in emerging technologies even before there is really a market for their output.

For instance, coming out of the automotive bailout I discussed earlier, one of the involved OEMs introduced a car that had a joint-gas/electric propulsion ability. This automobile required a special type of battery technology. Due to the extreme amount of investment required—billions of dollars—to develop and tool up this technology there was only a single global source for the required batteries—a Korean conglomerate. Why Korea? Several years before their governmental/industrial partnership identified the potential for such a market and the government financed industry investment in it. The end result was that since introduction of that U.S assembled vehicle, the Korean provider of that battery technology has sold billions of dollars of product such that the initial government investment to develop it has already been paid off.

So who are the winners and losers when foreign governments get involved in support of their manufacturing section but the U.S. doesn’t? Easy. The foreign manufacturers win and U.S. manufacturers (and citizens) lose.

I could go on and on. For instance, the current debate about whether to maintain sponsorship of the U.S. Import/Export Bank. Really? We have uber free marketer politicians saying having such an institution picks winners and losers. In this case I’ll agree with them. Having an Import/Export Bank allows for domestic winners and foreign losers. Doing away with that bank will create thousands of foreign jobs a year and result in the same magnitude of lost U.S. jobs.

The point here is that as long as we have politicians that can’t find a way to the “middle ground” on governmental economic policy (or about any subject, for that matter), our country ends up being an economic loser.

You may wonder how this subject is related to Next Generation Supply Management. My next article will discuss one potential supply chain-based governmental economic policy.

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