This week we learned that state and local governments had given over $1 billion to ThyssenKrupp. I still wonder how much locally owned businesses and local communities could have used that $1 billion dollars. Nevertheless. a new report, as discussed in the New York Times, calls into question the sole operating philosophy of economic development in Alabama.

“We hope that states will fix their rules to make sure that their programs are creating lots of jobs, and good jobs, with wages tied to the economy and with health care, so companies aren’t getting paid to pull wages down,” said Greg LeRoy, the executive director of Good Jobs First, who added that such deals should be watched even more closely in a downturn. “There’s a real tension between economic development spending and the maintenance of vital services.”

States rarely have accurate measures of how many jobs such programs create, but they are discovering that many such programs fail to live up to their billing. Pennsylvania found in a 2009 legislative report that many business in its Keystone Opportunity Zone program “are not creating jobs or generating capital investment.” A recent study that New Jersey commissioned of its Urban Enterprise Zone program found that the $2.17 billion it spent over six years had produced “limited economic impact.” New York changed its old Empire Zone program, which was supposed to give tax breaks to companies to create jobs in poor areas, after auditors found that some businesses had received tax breaks but lost jobs, while others were being rewarded for hiring in wealthier areas.

“Over time, the programs get deregulated in ways that make them windfalls instead of incentives,” Mr. LeRoy said.

The new report singled out some states for praise. Nevada and North Carolina’s programs were applauded for having strong wage standards, requirements that employers provide health coverage and pay part of the premium, and requirements that subsidized facilities stay open for a set period of time.

The report from Good Jobs can be found here. Here are some more findings of the report.

Money for Something rates the performance standards and job quality requirements of 238 key subsidy programs from the 50 states and the District of Columbia. Each is rated on a scale of 0-100.  Findings:

  • Only 135 programs have a performance standard relating to job creation, job retention or training of a certain number of workers.
  • Fewer than half (98) of the 238 programs impose a wage requirement, and only 53 of those are tied to labor market rates.
  • Only 11 of the wage requirements raise pay levels by mandating rates somewhat above existing market averages. Wage requirements vary from just above the federal minimum to more than $40/hour in limited cases.
  • Only 51 programs require that a subsidized employer make available healthcare coverage, and only 31 require an employer contribution to premiums.
  • The states with the best average scores among their programs: Nevada (82), North Carolina (79) and Vermont (77). The worst: the District of Columbia (4), Alaska (5) and Wyoming (10).

And if we are not going to invest in locally-owned businesses , continue being bullied around, and pay the extortion of the out-of-state corporations, let’s at least demand transparency and accountability.

Governor Bentley proudly announced that Alabama will give  over $70 million dollars to an out-of-state corporation to come to Alabama.

As part of the deal, the state will give the Illinois-based company as much as $40 million in cash payments over a period of time as the company hits employment benchmarks. The document says Navistar can collect $10 million for site work at the one-mile-long facility. . .

Local governments in the northwest Alabama area have also committed almost $20 million in cash incentives for the project, according to the document.

So we will continue to travel the same path to economic instability, brittleness and dependence.  Evidence continue to show the dangers of the Governor’s strategy but also show another path toward resilience and security: empowering locally owned businesses. For instance, listen to the history of Buffalo,

By 1986 three-quarters of Buffalo’s regional economy was controlled by absentee-owned firms. This economic shift from local to non-local ownership of commerce generated record profits in the earlier part of the century, but precipitated long-term social and economic losses in the latter because multinational businesses simply were not as dedicated to the area.  For instance, one study revealed that between 1965 and 1980, companies headquartered outside of the Buffalo-Niagara region were twice as likely to close as locally-based ones. When these local firms closed, and the influential families that ran them left town, they also abandoned their philanthropic responsibilities to the area. Independent business leaders were also engaged in local political and economic issues but when multinational representatives replaced them, the local political and economic discourse no longer revolved around Buffalo’s best interest. Economically, the city lost its import-substituting businesses.  Socially, it lost its community pillars.

Unfortunately Buffalo’s leaders have done little to recognize the importance of, let alone revive, the local sector.  The best example of the city’s allegiance to top-down development is Canal Side, a massive waterfront redevelopment plan, which was to be anchored by mega-retailer, Bass Pro.  The city and county took the greater part of a decade to plan this single project and earmarked $14 million for it.

But while elected leaders set aside millions for this waterfront strip mall, they gave nearly nothing to entire blocks of existing local retailers. Too often the community bears the burden of any substantive Main Street development.  One example is Grant Street, a two-mile long, distressed retail strip populated by dozens of local shops (including grocery, hardware and home supply stores).  For decades these shop owners have tightened their belts to continue serving their neighborhood and yet, between 2006 and 2009 received an appalling $21,000 in business grants from the city. Ironically, after nine years of negotiations, Bass Pro (having no real ties to the city) declined Buffalo’s multi-million dollar offer effectively stunting the area’s greatest silver-bullet development.

Doesn’t this sound like Alabama. Imagine what Alabama locally-owned businesses and communities could do with the $70 million being handed to Navistar, the latest “silver-bullet” development. What paltry sum has been invested in locally-owned businesses and historic town squares across Alabama?

Buffalo businesses and citizens though are trying to pursue an alternative path.

Residents and proprietors have embraced Buffalo First’s localism initiative for a host of reasons, the most compelling of which has been economic.  According to research firm Civic Economics, when a person patronizes local independent businesses, over three times more of their money is re-spent in the local community than had they made their purchase at a national chain.  This is critical to a struggling metro like Buffalo because it helps to root the few dollars generated by the city, in the city.  Localism makes sense because it makes cents.

Sometimes the local economic multiplier effect is far greater when businesses commit to maximize local procurement.  For example, Buffalo’s largest community-owned natural foods store, the Lexington Cooperative Market, has pledged to source locally whenever possible.  Because of this, it boasts that roughly 51 cents of each dollar spent there is re-spent in the local economy.  This happens when the Co-op uses the money that shoppers spend to pay local producers, suppliers, farmers, service providers, and the Co-op’s 70 employees.

Even though supporting local businesses provides greater economic velocity and multipliers, the best reason is:

In addition to boosting economic multipliers, businesses like the Co-op perform another key function that national businesses cannot—they create community wealth.  Larger employers may boast that they create “jobs” (even if they are low-wage) but local businesses create wealth because someone who lives in the area owns it.  Income is measured by one’s hourly wage or salary but wealth is measured by one’s assets, valuable items a person owns (such as a home, business, art or equipment) that can be converted to cash and can be passed on from one generation to the next or from one neighbor to the next.  While income helps to pay the bills, assets give people the power to put down roots, to create and to grow.  Every local proprietor in Buffalo has this advantage.

Thomas Jefferson wrote to James Madison: “the small landholders are the most precious part of a state.” He might say today, the small, locally-owner business owners are the most precious part of the state. It is this wealth-creation which breeds political and economic independence. Paerhaps

Local economic resilience and local job security should form the basis of Alabama’s economic future. Further evidence proves it works and shows a starting place;  a new, comprehensive 16-county assessment of the Northeast Ohio regional food system has been released. (“Comprehensive” is an understatement.) According to the author of the report:

The study concludes that if residents and businesses of Northeast Ohio spent 25 percent of their food dollars on local farms and businesses, 27,500 new jobs could be created while increasing economic output by $4.2 billion and generating $126 million in local and state taxes.

According to the assessment, 73 percent of every food dollar goes mostly to trucking, distributing, refrigerating, packaging and preserving food for long-distance shipment. Potential jobs that can result in localization include farming and livestock, food processing, distribution, educational services, health care, as well as additional jobs induced by increased local spending.

Alabama should find some great encouragement on the jobs-front considering the state of our lingering high unemployment. Detailing these potential 27,500 new jobs:

We group them broadly into three categories: retail, restaurants, and consumer service; farming and animal growing; and food processing. By far, the largest number of new jobs, roughly 10,000, come from farming and animal growing. About 5,000 come from retail, restaurants, and consumer service. And about 4,000 come from food processing. The remaining 8,500 jobs come from the indirect and induced impacts in other sectors, summarized in Chart 16.

To put these numbers in perspective, recall (see Chart 3) that unemployment in the region right now is over 214,000. Unemployment throughout Ohio is now above 10% and in some of the counties in the region it’s over 12.5%. The 25% shift therefore has the potential to put one out of eight currently unemployed workers in the region back to work.

The report also assesses the positive effects of the 25% shift on energy independence, public health, quality of life and decreased pollution.

You would think that policy-makers would respond when report after report confirms this positive dramatic impact of re-localizing our food supply. This study for Ohio further confirms the documentation shown already from other nationwide studies and state-specific examples from Georgia, Michigan, and Minnesota.

The report even includes some very creative policies for implementing the 25% switch. For instance,

1. Modify the competitive bidding law to allow agencies and local officials to include the “multiplier effects” of local-dollars spent locally.

No one wishes to undermine the basic principle of good government that contracts should go to the lowest-cost bidder. A better approach might be for the state to obtain
representations from every bidder about how much of the bid will be spent in-state. A quick multiplier analysis can be done to determine how much additional tax revenue the state will collect. Bidders that spend more in-state will generate more tax revenue than bidders that spend out of state. By adjusting the bid by the anticipated tax revenue, the state can better calculate which bidder is truly delivering the best price. Moreover, because non-local vendors can perform equally well under this approach, the measure is not discriminatory and therefore legally sound.

2. Redirect economic development dollars and incentives to locally-owned business instead  recruiting out-of-state industries.

A soon-to-be-published study by one of the authors of this report will show that the three largest economic development programs in the state are spending most of their funds on attracting or retaining non-local businesses, which turns out to be the least effective strategy for stimulating the economy and creating jobs. Such funds should focus instead on local food business. Better still,
focus on providing seed capital for food meta-businesses throughout the state.

The report literally contains over 50 other specific recommendations which could easily be modified to meet Alabama’s needs and implemented without a single tax increase. We actually could expect more that 27,500 jobs because the region in Ohio of the study has about 700,000 less people.

For the sake of job-creation, economic recovery, community resilience, energy independence, let’s move our economic development policies into the 21st century.

Each time you purchase a loaf of bread at your grocery-store or that your child consumes at school (or tomato or strawberry or steak or peach for that matter), let it be a reminder:

Every loaf of bread unnecessarily imported means the leakage of bread dollars outside the local economy and the loss of local bread business that could contribute to regional prosperity.

We know politicians love ribbon-cuttings; the bigger the better.  Politicians crave the major industry announcements and the big plant opening. And politicians love “recruiting” out-of-state multi-national corporations. What they do not acknowledge is that these corporations play states against each other like a fiddle, extracting better and better deals and the expense of the winning bidder.

If our economic policies are well demonstrated on big screen. Consider Back to the Future. The multinational corporations are played by Biff, while the people of Alabama are portrayed by George McFly.

We act George McFly in economic development. We beg and plead for out-of-state corporations to come and plunder our state’s resources: both natural, fiscal, and human. We auction off our state and finances in fierce competition with other states. We “incentivize” these corporation in the name of job creation with property tax abatements, corporate income tax credits, sales tax exemptions and rebates, free land, infrastructure development etc. All the while, we promise to provide them a “pro-business” environment, which means limited liability,  legal immunity in court, and limited regulation for their activities when they mess up. To stay with the movie analogy: when they wreck our car, we are expected to pay for the damage.  We consistently fight to be the victim of exploitation.

Should we be dependent of these out-of-state corporate interest for our economic prosperity. It should be free to work, just like it should be “free to pee.”

Our politicians here are the older brother, the little sister is the people of Alabama, and the bully is the transnational corporations. Our leadership should fight for our rights, not actually give our “twinkees” away to the bully. We should not need to give away our limited financial resources, environmental health, nor economic independence to help these corporations pad their profit margins.

I do not suggest we stop all industrial recruitment, but our economic development dollars and policies should most certainly be more favored toward our locally-owned business and local economies. While not good for politicians and their photo-ops, locally owned business development actually makes better economic sense.

As shown by a new University of Pennsylvania study,

Many communities try to bring in outside firms and large factories, but the lesson is that while there may be short-term employment gains with recruiting larger businesses, they don’t trigger long-term economic growth like start-ups do.”

Stephan Goetz, professor of agricultural and regional economics at Penn State, and his researchers, who report their findings in the current issue of Economic Development Quarterly, studied data on the economic growth in 2,953 U.S. counties, including both rural and urban counties.

Goetz said a better strategy to promote economic growth may be encouraging local businesses rather than recruiting large outside firms.

We can’t look outside of the community for our economic salvation.” Goetz said. “The best strategy is to help people start new businesses and firms locally and help them grow and be successful.”

The research also revealed:

Small, locally owned businesses and start-ups tend to generate higher incomes for people in a community than big, non-local firms, which actually can depress local economies. . . Smaller, locally owned businesses, it turns out, provide higher, long-term economic growth.

Let us stop kowtowing to transnational corporations and look to ourselves for “economic salvation.” We can take the rein of our economic destiny and actually achieve higher, long-term economic growth.

Let us stand up for our local communities and local economies (our “Loraines”) for once. Better long-term economic stability and resilience can only be achieved by taking these locally-owned businesses by the arm.

The better strategy: develop dense networks of locally-owned businesses which substantially meet locally needs, locally. The clusters of economic independence would develop such economic potency that out-of-state corporations would want to locate nearby to join the networks, (and without the artificial “incentives” but by sheer force of the economic synergy and free market competition.)

Politicians brag about economic development programs; these plans invariably include “incentive” dollars that state and local governments provide to companies in the name of job creation, usually: property tax abatements, corporate income tax credits, sales tax exemptions and rebates, etc.

What kind of transparency exists for these tax give-aways? What kind of accountability is demanded in return?

According to a new comparative study on transparency of state level corporate welfare,

An increasing number of states are disclosing the names of companies that receive economic
development subsidies, but there is wide variation in the quality of such reporting. A few states
have created exemplary online disclosure systems, while many release recipient information only in obscure reports tucked away in remote corners of official websites. About a dozen states still keep taxpayers in the dark on the use of job subsidies, even though they cost taxpayers nationwide tens of billions of dollars each year in direct outlays and lost tax revenue.

Alabama is included in that dozen. How did Alabama score: a D-, 37th according to the report. That ranking actually makes us look better than the truth. While the average score for states with some disclosures was 59; our score was a miserable 10 out of 100. We barely missed the group of 12 states with absolutely no transparency or accountability.

Alabama has been involved in several high-profile development projects. For instance, Alabama offered a subsidy package that the ultimate cost of the subsidies could exceed more than $1 billion to Thyssen-Krupp.

At least 10 Wal-Mart locations have received subsidies worth about $49.8 million in Alabama.

Curently, the details of all the packages from across the state are hidden or are not readily accessible. The details of every package should be fully and completely available to the public. After all, how do we know if these projects are worth it.

This study not only addresses the disclosure of actual subsidies and tax breaks, but it also addresses performance assessment of the corporate promises. Accountability is as important as transparency.

Effective subsidy disclosure also requires the release of data on outcomes, especially job creation/retention as well as wage rates and benefit levels in those jobs. Information on the location of subsidized facilities is also valuable.

Why is this important? As suggested here,

At a bare minimum, we ought to ensure that every economic development deal our government makes includes a strong clawback provision . . .

If we are looking to increase the efficiency of the state’s economic development agencies, then we need to be collecting the performance management data that will allow us to make informed decisions and ensure that our economic development dollars [are] being spent as efficiently as possible,” the bill states. “Quite simply, you can’t manage what you can’t measure.”

. . . Uniform reporting requirements would require all applicants to economic development programs to meet certain data-reporting requirements, including existing as well as proposed job numbers, benefit levels and salaries.

Several states are models for greater transparency and openness. For instance, we could follow the example of other states which scored well.

    • Illinois programs requires reports of both projected and actual jobs and wage rates. The reporting actually appears on the Illinois Corporate Accountability website, also stand out for dis-aggregating the wage data by occupational category and for requiring recipients to report annually on whether they are meeting job goals, and if not to explain why.
    • Illinois, Kentucky, Missouri, Ohio, Pennsylvania and Wisconsin all have their reports available on the internet.

The report authors suggest the essential elements of a sound economic development disclosure program:

      • For every company receiving subsidies, the public has the right to know how much it is receiving (both projected amounts and actual) from each program.
      • The public should be told the exact location of the subsidized facility, including street address and ZIP code.
      • The public needs to know how many jobs the recipient company proposed to create or retain and how many it actually did.
      • There also needs to be information about the quality of those jobs. That means the projected wage rates of the positions and the actual pay levels achieved.
      • In addition to broad average wage rates, which can be skewed by a few very highly paid employees, recipients should divide individual wage rates into ranges. Occupational breakdowns are also helpful.
      • Agencies that oversee subsidy programs should report on whether recipients have met job creation and other targets. They should also report what the state agency has done (or not done) when recipients have failed to meet their projections.
      • Agencies should make use of up-to-date web technology to create databases that allow users to search disclosure information from all of its programs in a single place.

How far could we move toward strengthening our locally-owned businesses if we spent our local money locally. Or more narrowly, what if just our anchor institutions within our communities mostly bought local? How many farms would spring up if school cafeterias bought their produce from local grocers and farms? Or consider if our hospitals, jails, and colleges were added to the scenario. An article which appeared in the Michigan Citizen answers discusses these questions:

Far too much of our recent history has been shaped by efforts to recapture the giant industrial production of a century ago. These efforts dominate our public policies in spite of the fact that statistics demonstrate that small, community-based businesses drive economic and creative development.

Small businesses generated 64 percent of the net new jobs over the last 15 years, creating more than half of our GNP. The majority of these businesses are locally based, employing a range of skilled workers, including about 40 percent of all high tech workers in the country, and they produce 13 times the patents per employee of large firms.

Several anchor institutions have voluntarily committed to increasing local purchasing there in Detroit:

Fostering small cooperative businesses means redirecting our spending in ways that encourage local production. That is why we should all welcome the recent efforts by the Detroit Medical Center, Henry Ford Hospital and Wayne State University to increase their local purchasing. These are key anchor institutions in Detroit that could have a tremendous economic impact on the local business community. Currently the combined spending of these institutions is about $1.6 billion annually. Less than 10 percent of that is spent in Detroit.

The City of San Francisco has taken it one step further by enacting policies for all municipal agencies and municipally-owned anchor institutions:

The city of San Francisco has taken even more direct measures. In an effort to stimulate local employment, San Francisco passed a local hire ordinance that requires all county-funded projects worth $400,000 or more built within 70 miles of the county borders hire at least 20 percent of their people from the city by the end of this year. Over the next seven years, the goal will be to hire 50 percent of all workers from within the city limits.

The author encourages their municipal leadership to set minimum purchasing requirements:

There is no reason why our mayor and city council cannot begin to establish policies that direct local spending by all of our anchor institutions. A modest goal of increasing local spending by these institutions to 15 percent would more than double what they are currently spending, stimulating further activity.

Think of the economic impact if our anchor institutions: the Clay County Hospital, Southern Union University, and all public schools in Clay County for instance purchased just 15% of their food and needs from within 30 mile radius? As noted elsewhere before:

Each school, prison, and public hospital should purchase a percentage of its food from local farms and ranches. We could rapidly revitalize local, family farming if a percentage of every school lunch was grown within its county’s borders. Consider the impact on small farming operations if each prison purchased all its food from nearby.

A recent study from the University of Minnesota corroborates this policy direction (ht to my mom).  According to the study:  Filling school lunch trays with fresh, locally grown foods that are easy to incorporate into school menus can contribute as much as $430,000 annually to a regional economy, according to new research from University of Minnesota Extension.

The study focused on five rural counties with only 20,840 students and examined the potential economic impact of farm-to-school programs. According to the author, “a $400,000 annual impact could support two to three full-time farms.”

$400,000 could go a long way in east, central Alabama too. Combine this $400,000 with the monetary velocity of money spent locally, the impact multiplies to $1.6 million.

State Senator Bill Holzclaw

On June 20, I commented about  a gathering of faith-based groups that had gathered in Huntsville to discuss the frightful implications for them of the Alabama Anti-immigration Bill. As part of that post, I critiqued the apology of the bill’s sole defender,  State Senator Bill Holzclaw, who had attended the meeting. Surprisingly, that post elicited a response from the Senator. I then provided my own response to his blog post on June 22.

However, on June 22, the same day as my response to him, I also suggested Alabama follow the lead of Oregon which had recently passed a bill to strengthen their local economies by supporting locally-owned businesses.   Oregon HB 3000 allowed state agencies and local governments to give preference to goods made in Oregon and services perfomed by local businesses, even if it entails paying up to 10 percent more than the cost of out-of-state suppliers. (Alabama only allows a three percent local preference rule currently.) I cited a State Senator from Oregon:

“This bill will help Oregon businesses by encouraging the development and growth of our local supply chains, which will help create local jobs and revitalize our state’s economy.

In addition to reading my response to his blog post, the Senator must have kept reading other parts of Keating’s Desk and liked what he saw; for today this appeared in the Huntsville Times:

State Sen. Bill Holtzclaw told local business leaders Thursday that the state needs to spend more money with Alabama businesses.

As chair of the Legislative Oversight committee, Holtzclaw, R-Madison, said he discovered that half of the $88.4 million the state spent on personal service contracts – architects, legal services, consulting and the like – was paid to out-of-state companies.

I am concerned about the number of dollars not being kept in the state,” Holtzclaw told the monthly gathering of the Madison Chamber of Commerce Thursday at the Holiday Inn West.

Though only 59 of 332 personal service contracts went to out of state companies, the cash value of the out-of-state contracts was $44 million.

“Half is flowing out of the state,” he said. “We can do the work (in Alabama). We’ve just got to figure out how to connect you (local business owners) with the state.

These numbers are impressive, especially considering the number of architects, lawyers, and consulting firms in Alabama. These types of contracts are not limited to out-of-state, single source providers; firms in Alabama can do these projects. (I would also point out that most of these types contracts are not subject to competitive bid laws.)

Remember: that extra $44 million could go a long way in Alabama. Combine this $44 million with the greater monetary velocity of money spent locally, the economic impact quadruples to $176 million.  Remember: for every $100 dollars spent locally,  about $68 stays in the area while only $43 of that same $100 stays in the local economy if spent on a out-of-state firm.

Closing these leaks in these service industries is a great first step, we cannot limit the review to mere services, though. Our contract review especially should include goods and products as well. What Oregon State Senator Clem stated of Oregon is true of Alabama.

Oregon government purchases a lot of goods and services. We should be buying Oregon products first. We think as many of these products as possible should be purchased from small businesses within our state, particularly when the price of those products is very similar. This bill allows Oregon companies to take advantage of the state’s purchasing power to grow their businesses and create more Oregon jobs.

As I reiterated on the June 22 post,

A balanced approach should be adopted which encourages the development of home-grown, import-substituting local manufacturers. We must identify the leaks of investment out of our local economies and enact policies which catalyze the local production of many items we now import.

Sen. Holzclaw, I hope you can convince your colleagues to support your position here. It is good policy: good for a resilient economy and great for job creation.

Hey, Democrats, it is also good politics.  Relocalizing the economy should be a primary plank of our platform.

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