Nobody has been more critical than we have about our local addiction to tax freezes for economic development.
Nobody has been more frustrated about the $50 million in taxes that have been waived routinely for decades to businesses asking for tax freezes. Nobody has been more cynical about the interest by some employers in keeping Memphians in a low-wage, low-skill economy.
Nobody has been more passionate about the need to create workers who can compete in a knowledge economy. Nobody has been more dismissive about the argument that we have to waive taxes to make up for the poor state of our workforce, an argument we’ve made for 25 years while doing little to improve our workforce.
And yet, we believe that the government incentives paid for Electrolux and Mitsubishi to locate manufacturing operations here are justified. We also believe that the Greater Memphis Chamber of Commerce deserves serious credit for its work on these two projects, because it knew that our economy needed emergency resuscitation. In fact, it’s because our economy is gasping for air that we think that these incentives are merited.
Pay to Play
Our situation is akin to a cancer patient whose prospects for the future are dwindling when he learns about something that could potentially turn his condition around. In that position, it’s justifiable to spend whatever it takes. The Memphis economy is in a similar place. It is possible if not probably that we overpaid in our incentives, but we were at a point where we couldn’t very well dicker over the price if we wanted the benefits.
The Electrolux incentives total $179 million for 1,240 direct jobs paying about $31,000 a year. It is claimed that there will be twice as many jobs created indirectly for suppliers. The Mitsubishi incentives are $34 million for 281 jobs with average salaries of almost $50,000. (John Branston of The Flyer offered a helpful list of incentives and jobs created for automakers after Memphis Mayor A C Wharton compared these incentives to car manufacturing plants. To see it, click here.)
The only thing harder than finding business prospects are the negotiations to seal the deals. It’s nearly impossible for local economic development officials not to feel that they are negotiating against themselves. Because of it, there’s often little to do but err on the up side of incentives. Faced with an economy that was tanking, we think that the determination of Chamber officials to close the deal is understandable.
After all, in the past nine years, our economy has lost 34,700 jobs. And in a recent analysis of private sector jobs growth in the top 100 regions by the U.S. Bureau of Labor, there were 89 regions ahead of us. Put another way, we have lost 1.5 jobs a day for the past nine years. Meanwhile, we’ve lost $1.9 billion in income.
A Deep Hole
It is almost impossible to comprehend it, but jobs have been disappearing for a decade.
Taken together, there was serious reason for alarm at the Chamber of Commerce. There is a point at which a city’s economy gets much more difficult to pull out of a descent because the city has developed a negative narrative and an unfavorable reputation that can become deadly in the incestuous world of site location firms.
But it seems to us that there are reasons that made this a time when Memphis needed to go the extra mile to snare these companies.
First, the jobs are located in the core city where there is existing infrastructure that is already paid for.
Second, these are manufacturing jobs, which continue to be the gold standard for cities like ours without a deep knowledge economy. There’s little argument that they are much more preferable to our regular diet of warehouse and distribution jobs.
Importing Jobs, Exporting Products
Third, there is the potential for these plants to give us a stronger position in the increasingly important export economy. As President Obama said in his 2010 State of the Union address, the Administration’s goal is to double U.S. exports in the next five years to support and create U.S. jobs. In the past year, exports have outperformed the economy overall, but exports as a policy for our region has not been a widely pursued strategy for economic growth.
In a ranking of the top 100 U.S. metros, Memphis is #50 in annual exports, #65 in export share of GMP, and #46 in export jobs. Memphis produces $5.6 billion in exports; 9.3% of what is produced here is exported, and exports employ 44,515 people.
Recent export growth in Memphis has been about the national average, expanding at just under 10%. Average wages in Memphis’s largest export industry were $64,724, which is above the U.S. average. The Memphis metro has four export industry clusters – freight and port services, tourism, machinery manufacturing, chemical manufacturing, and paper manufacturing.
The percentage of Memphis exports sold to Brazil, India, or China is 8.4%, which ranks 84th among the nation’s 100 largest metros. The largest export markets for Memphis are Canada ($850 million); Mexico ($505 million); UK ($391 million); Japan ($358 million), and Germany ($254 million).
Clawback
For all of these reasons, it seems that the “hefty incentives,” in the words of The Commercial Appeal, were a risk worth taking in hopes of jump starting our economy and to do it with companies other than the low-wage, low-skill jobs that too often dominate our economic development efforts.
That’s not to say that we should go into these new relationships with rose-colored glasses. They are business deals and the reason that business so often bests government in negotiations is they are always operating with a clear-eyed business approach. Political realities necessarily complicate the deal-making on the public side, particularly in light of the boost that comes from announcements about new jobs and ribbon-cuttings for new plants.
We have three modest suggestions for Memphis and Shelby County Governments, which are putting up $44 million in incentives for Electrolux, but the same principles apply to economic development generally. First, taxpayers will be paying for the $40 million incentive (really about $70 million by the time the bonds are paid off) and they need to be assured that the plant will be here by the time the bonds are paid off in roughly 20 years. In addition, city and county granted a 15-year tax freeze of $38.7 million.
Already, the Canadian province of Quebec is trying to get back several million dollars in incentives provided in the form of a loan to Electrolux in 2009. In other words, Electrolux has shown that it has no hesitancy in eliminating 1,300 jobs and moving lock, stock, and barrel to another city, and for that reason, local government should sign an agreement that its tenure here will at least be for the length of the bond payments.
The agreement with the Grizzlies would be a good model. For $250 million in incentives to move here – in the form of improvements to The Pyramid and construction of a new arena – HOOPS, owner of the team, agreed to pay the defeasance of the remaining bonds if it leaves Memphis before the bonds are paid off.
Setting the Right Targets
Second, it’s time for State of Tennessee to expand its toolkit of business incentives. The lack of strong state incentives is the reason that local taxpayers are so often stuck with the bill for new companies. That’s why there are no better elected officials than our mayors to convene a meeting of the major metro mayors to discuss a push in the Legislature for additional state incentives.
Mayor Wharton is getting some heat on talk radio, both white and black, about the incentives, and it’s worth remembering that great cities do many things at the same time. They can recruit new business while investing in neighborhoods, improving arts and culture, and most of all, investing in the quality of life projects (our favorite: Memphis Art Park) that are pivotal to jobs growth in the first place.
It’s also encouraging that Mayor Wharton and Shelby County Mayor Mark Luttrell are getting serious about creating entrepreneurs, particularly minority entrepreneurs. As we’ve said often, our community should set the goals of being a national leader in African-American business and a hub of African-American talent.
We should abandon any reticence in stating it emphatically as our chief economic development objectives. The total business receipts by minority businesses here are about 2% although we are the first majority African-American metro with more than one million people in the history of the United States. In other words, minority business represents one of our greatest economic opportunities, putting more money in everyone’s cash registers.
An Unfair Share
But we digress.
Third, it’s time for business incentives to be paid totally by Shelby County. This Noah’s Ark approach to economic incentives and investments in community amenities is yet another time when Memphians pay a disproportionate share of our region’s costs. Take Electrolux: Memphians will pay 100% of the city’s $22 million incentive and about 70% of the county’s $22 million incentive. As a result, taxpayers outside Memphis will pay an inequitably small share of the cost of these incentives.
We needed something right now to stop the bleeding and the negative trends of the Memphis economy. We still need a long-term strategy to break our overreliance on tax freezes (and their accompanying glowing economic impact statements). There’s no question that these kinds of large subsidies and incentives are not sustainable as a long-range strategy.
Nonetheless, none of this should diminish the fine job done by Greater Memphis Chamber on these two prospects, whose timing should propel a growing positive attitude and self-confidence that gains momentum as we move farther away from the last years of the Herenton era .
Essentially, we are buying time. This particular employment of the PILOT program and various tax incentives is much more appropriate than the abuse of the same incentives to aid every distributor in their quest to establish a warehouse with a handful of low paying jobs. To ensure the “investment” yields a higher return we must leverage this gained time to accelerate workforce training, education reform and launch in earnest programs that will aid in small business start ups. I would be interested in seeing collaboration between a group like Southwest CC with Mitsubishi and Electrolux that will ensure they have the quality employees which will allow their venture to be successful while providing the opportunity for local residents to gain valuable skills. Nissan basically required a similar partnership in Mississippi (with MSU if I am not mistaken) as part of their facility build out in Canton. There is no reason similar efforts cannot be made locally.
Good thoughts Urbanut.
A number of nonprofits that have job training programs could also greatly benefit from a collaboration. Advance Memphis, Hope Works Inc. and Bridges USA are ones that immediately come to mind but I am sure there are many other nonprofits that could stand to benefit as well.
Amen. At least for once we’re not incentivizing companies with salaries that give employees opportunities for welfare. One other thing – we can always seem to find money in the midst of a budget crisis if teh mayor wants it. We need that kind of attention and sense of urgency to neighborhoods and quality of life investments as well.
Since we are in the investment biz as a city, the city should step up to the education of the workforce somehow.
There needs to be another training included in their training, a training to dump the attitude worker here sometimes get.
Mitsubishi has more work than what they are bringing now, they could bring more work in more areas of their business, and there are other companies just like them that could also be brought here.
— We keep trying to focus on Bioscience, which is a good focus, but, there’s no need to be myopic about it, there will ALWAYS be a need for engineering degrees. The people who make the designs for the equipment that makes the stuff that makes cars and stuff like that.
It looks like funding art AND math teachers and such isn’t such a bad idea after all.
— We need people from our public and private schools that will be able to become engineers. That won’t happen with unequal distribution of resources to the point we have traditionally had here.
Thank goodness that we have better leadership, now we have to have better system design and better mechanism design.
Memphis is the perfect place to make such a thing a reality.
Agreed Brian,
If and when these business ventures result in success for both the local community as well as the parent companies there is no reason they would not invest further in the area. Per the engineering degrees, engineers are necessary for many aspects of design and production. Providing a primary education focused toward “holistic engineering” where students can then specialize in particular fields at the collegiate level would definitely strengthen the quality of our local workforce.
Perhaps the school vote is at least a starting point in addressing the way in which we currently choose to distribute our limited local resources.