Your Dell Job Unemployment Check is in the Mail; The Politics of Promoting Permanent Unemployment
In his comments on the Dell deal gone bad in North Carolina, Bob Orr, executive director of the N.C. Institute for Constitutional Law said, “But this shows the stark and painful folly of the incentives game that state and local governments are playing. No matter how much money you give these large international and national corporations who are headquartered out of state, if it’s financially more feasible for them to shut down the operation in North Carolina, they’ll do it and never look back."
Orr said the entire incentives system in North Carolina ought to be examined. He is partially correct.
It is not, however, only the incentives strategies that need a thorough public debate. The entire public policy on job creation in North Carolina needs an overhaul because the real economic danger being displayed in the Dell deal is that the current strategy is leading to permanent unemployment.
Over and above the $300 million obtained by Dell in the incentives deal are the tens of millions of wasted tax dollars spent on roads, sewers, the Dell industrial park and crazy job training programs at the local community colleges that trained workers for jobs at Dell that never existed in the past and that will never exist in the future.
State Sen. David Hoyle, the chief architect in putting the secret General Assembly and Dell deal together in 2004, was quoted on radio station WPTF defending the Dell deal gone bad. “We must continue this strategy,” he said, “or other states may out-compete us for jobs.”
The real danger is the set of business and financial interests, like Sen. Hoyle, who control the secret incentive decisions. Such interests are firmly wedded to principles of continuing the failed economic policies of the past. Sen. Hoyle, and the proponents of industrial recruitment in North Carolina, has the unchecked political power to block and subvert the implementation of a vastly superior job creation policy built upon local small business economic growth.
Their power to subvert new ideas on job creation in North Carolina, and many other southern states, is promoting a social class of permanently unemployed workers. Unless policies change, it is very unlikely that the 18 percent of unemployed workers in Hickory, North Carolina, for example, will ever work at a real job again.
Local Elected Representatives Cannot Answer The Most Basic Economic Question: Where Do Jobs Come From?
For the past five months, I have been prospecting mayors in southern metropolitan regions trying to generate interest in conducting an economic experiment for creating jobs. My target market for the demonstration project is 100,000 plus population regions with unemployment rates over 10 percent, and rising over a three-month period, beginning in March 2009.
Almost uniformly, the mayors do not understand how private sector small business job creation works. Most, if not all, have outsourced their elected duty for job creation from themselves to non-elected local chambers of commerce or regional economic partnerships, who promote the secret industrial incentive deals.
Recent evidence on the power of small business job creation presented by the Business Dynamics Division of the U. S. Census Bureau seems irrefutable. Jobs are created by small businesses, not by industrial recruitment. Yet, the mayors do not understand this fact of economic life about small business and continue to promote industrial recruitment as their main job creation strategy.
No matter how obvious the need for a new small business job creation strategy, urban mayors do not want to entertain new ideas about job creation. They are firmly locked into their comfortable relationship with industrial recruiters, whom they rely upon for vetting and screening new ideas.
One consistent factor among them was the complete absence of any sense of urgency about how serious the unemployment problems are in their economy.
Industrial Recruitment Destroys More Jobs Than It Creates
The much ballyhooed job creation prospects of Dell in 2004 was touted falsely at over 2,000 jobs. And, the much ballyhooed loss of 920 jobs in 2009 is also misleading. Neither statistic takes account of all the jobs destroyed in a local community when a Dell arrives, or when a Dell leaves.
Recent economic evidence from Michigan indicates a perverse effect of industrial recruitment. It tends to destroy more small business jobs in a community than it creates, leaving the economy more vulnerable to the wild swings in the global markets. The Wall Street Journal (WSJ) reported the economic evidence in their story, “The Michigan Example” (September 4, 2009).
As the WSJ noted, the study by the Midland- based Mackinac Center for Public Policy was “one of the largest experiments in smokestack chasing in American history.” They concluded that the “one thing it hasn’t done is create jobs.”
The Mackinac research found that for every 100 jobs that were promised with the use of government industrial recruitment incentives over a 14-year period of study, that only 29 jobs were actually created. However, the location of those 29 jobs destroyed other existing jobs in Michigan.
They cited economist Michael Hicks, a business school professor at Ball State University, who calculated the rate of return on the corporate tax credits. He found that for every $1 million in tax credits awarded, there were 95 manufacturing jobs lost in the counties where the companies were located. In North Carolina, the incredible job destruction machine of industrial recruitment has succeeded in destroying about 250,000 jobs a year since 2000.
The Business Dynamics Agency of the U. S. Census Bureau detailed North Carolina’s current rate of job destruction. In 2005, the 23,759 new small businesses in the state created over 217,000 jobs, while the 18,587 companies that went out of business or moved their operations out of state lost 463,792 jobs, creating a net loss of 259,253 jobs in the state.
The loss of the 920 jobs at Dell, using the historical ratios of job destruction in North Carolina, will likely lead to the loss of about 3,000 other jobs that will be destroyed in the Winston-Salem region, an economic fact not generally disclosed by Sen. Hoyle when he defends the continuation of his backwards policy.
Industrial Recruitment Destroys Small Firms in the Local Economy
As a result of trade agreements, most small manufacturing firms lost their large industrial customers – who moved operations overseas – primarily to China and India. Many small firms in America went out of business because of trade policies. When they went out of business, economic networks and supply chains in each metro region that used to infuse economic growth were destroyed.
Economists from the University of Illinois, working for the Chicago Federal Reserve Bank on the causes of economic stagnation in the Midwest, have called this loss of small firms “hollowing out.” In their research, one primary cause of job loss and economic weakness in the Chicago regional economy is related to a huge “hollowing out” of small firms, following the implementation of the new global trade policies.
Over the last decade, as a direct result of global trade policies, the share of U.S. Research and Development Corporation (R&D) sites declined from 59 to 52 percent within America, while it increased from 8 to 18 percent in China and India.
The industrial recruitment strategy aims at the location of the lowest wage, least R&D intensive parts of the global industrial supply chains (call centers), which contributes nothing to the local technology innovation process, and furthers the hollowing out of small manufacturing companies.
In other words, the industrial recruitment strategy in North Carolina works hand-in-glove with existing global trade policies that have destroyed the economic strength of small firms in regions like Hickory. North Carolina Secretary of Commerce Keith Crisco has called for an even greater reliance on the global industrial recruitment strategy, which is directly the cause of the Dell deal gone bad.
The Job Creation Deficit and Keynesian Permanent Unemployment
The U.S. labor market now has six unemployed people for every job opening, and the job deficit is growing. The political class in state and local governments is responding with more politics as usual, and using the old idea of industrial recruitment, combined with tax incentives, to lure large global corporations with jobs to their community.
In the most recent report to the President on the state of the American small business community, the Small Business Association Office of Advocacy (SBA) notes that, “Small businesses have been the primary job generator in the U.S. economy, creating 60 percent to 80 percent of the net new jobs annually from 1994 to 2004. In the most recent year with data (2004), small firms accounted for all the net new jobs, and firms with fewer than 500 employees had a net gain of 1.86 million new jobs.”
However, the small business job creation pipeline takes a long time to begin spewing out jobs. The SBA found that, “For 90 percent of these beginning or ‘nascent’ entrepreneurs, it takes more than five years after the process has begun for an outcome to be determined. By that time, about one-third have implemented a new firm, one-third have disengaged from the process, and one-third are continuing in “fuzzy front end” of new product development.”
The longer the failed policies stay in place, the worse the job creation problem will become, and massive government spending, generally called Keynesian stimulus spending, is not going to help.
“The Keynesians Were Wrong Again,” wrote Peter Ferrara, in his Sept. 11, 2009 op-ed piece in The Wall Street Journal. “Keynesianism—named after the British economist John Maynard Keynes,” notes Ferrara, “is the theory that you fight an economic downturn by pumping money into the economy to "encourage demand" and "create jobs."
His main argument is that jobs come from private sector investments, not by growing the government bigger.
“U.S. economic recovery and a permanent reduction in unemployment will only come from private, job-creating investment. Nothing in the Obama economic recovery program, or in the Bush 2008 program, helps with that,” he writes.
The reason Keynesian spending does not work in the global market is that the domestic economy no longer has the internal linkages that formerly diffused the spending into hundreds of small manufacturing companies, which created the jobs.
Wanted: A Full and Honest Debate on the Failed Economic Policy of Industrial Recruitment
How do citizens in North Carolina hold the political and business leaders who did the Dell deal accountable for what they did to the citizens?
Allowing the local chambers of commerce and government agencies to continue to block and politically subvert the implementation of economically rational new small business job creation strategies increases the prospects of permanent unemployment.
As Bob Orr said, the citizens in North Carolina deserve a full, honest debate over the state’s failed economic strategies.
An entirely new small business infrastructure must be created in each community to stimulate new business ideas and investments. This new strategy starts with idea generation on what new businesses or new products may work well, given the history of the regional economy.
An entirely new set of job creation tools must be placed directly in the hands of unemployed workers and small business owners to increase the rate of investment in both existing small firms and startups.
And, the longer the politicians like Sen. Hoyle can delay its implementation, and avoid the debate, the harder it will be for North Carolina workers to avoid the fate of permanent unemployment – which is the real economic danger of the Dell deal gone bad.
This article was written by guest commentator, Thomas E. Vass of Regional Innovation Systems, Inc.