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the small-mart revolutionHOW LOCAL BUSINESSES ARE BEATING THE GLOBAL COMPETITION
By Michael H. Shuman
Berrett-Koehler Publishers, Inc.Copyright © 2007 Michael H. Shuman
All right reserved.
Jack J. Shuman, my father, never had it easy, but compared to his parents, immigrants from Russia who had to cope with Czarist oppression, exhausting ocean voyages (two, in my grandmother's case), anti-Semitism, and the Great Depression, life was sweet. After World War II, he completed a master's degree in mechanical engineering and soon found a job working for Western Electric, the major parts and equipment supplier for the nation's telephone system. He worked his entire professional life for Ma Bell and even wound up retiring a few years earlier than planned after a court-ordered breakup of the telecom monopoly in 1984. The deal was simple: work hard and stick with the company, and we'll give you a decent middle-class salary for the rest of your life with periodic raises, decent health care, and a generous pension. The family settled in North Massapequa, New York, where the public schools were good, tract housing affordable, and mass transit to Manhattan fast and reliable.
Today, this lifestyle seems so alien that it might as well have existed in the Middle Ages. Almost no one expects to hold a job for a lifetime anymore. Companies hire and fire employees at will, and even top executives pack parachutes and expect to bail every few years. Workers, even those few still represented by a union, know that they are increasingly on their own and that they must be prepared to move nomad-like from job to job. For most Americans weekly take-home pay in wages, once inflation is factored out, has grown by remarkably little over the past generation. Employer health care plans are being pruned every year and increasingly charged directly to workers, and more than forty-six million Americans lack any health insurance whatsoever. Company pension plans have gotten smaller and less reliable, requiring Americans to save what they can through individual retirement accounts and other private vehicles. Taxes seem continually to go up as public services go down. Mass transit systems and public schools are a mess—where I live, in the District of Columbia, public schools rank dead last in the country, and even the best of the lot have their occasional playground shootings—pushing middle-class families to exhaust their savings on private schools.
The American Dream is fast shriveling up. My family's security is far shakier than my parents', and I fear what lies ahead for my children.
I suspect I am not alone. How about you? How secure do you feel? Are you satisfied with your job, your health care coverage, your family's well-being, your schools, your community? What does the future portend for your children?
One of the central paradoxes of contemporary American life is that despite so much wealth and progress, we have never been so insecure. Millions of middle-class Americans have taken advantage of low interest rates and borrowed their way to short-term stability, but we know that sooner or later this will come crashing down. The trigger could be a bursting real estate bubble, the collapse of the U.S. dollar, high inflation driven by skyrocketing energy prices, a dirty bomb set off by terrorists—or all of the above. Many of us are no further than one layoff, one major illness, or one national calamity away from plunging into a personal economic tailspin.
The causes underlying our insecurities are many and varied, but there is no question that a primary culprit is a set of forces we have come to call globalization. The United States emerged from World War II as the most powerful economy on the planet, its corporations the dominant players in every product line imaginable, from Lincoln Continentals to Sunbeam toasters, from Coca-Cola to Chase Manhattan Bank. One by one, however, other nations caught up: first the Western Europeans and the Japanese; then the "Asian Tigers" like South Korea, Malaysia, and Singapore; and now the population giants, China and India. Competition has forced American companies to become brutally attentive to the bottom line, and the luxuries of job security, health care, and pensions once enjoyed by our workers have been steadily whittled away, a process further hastened by those ideologically disposed toward dismantling organized labor and other public protections of worker rights. (The executives of many of these companies have never had it better, but that's another story.)
One important way U.S. companies have decided to become more globally competitive is by relocating offices, factories, and headquarters to countries where the costs of production are lower. Scarcely a month goes by when we don't read in the local papers that a firm employing hundreds, even thousands, of our neighbors is moving overseas. The departure of these old stalwarts of our community has been devastating, leaving craters in our local economies that once depended on them. The sage advice of economists and policy experts to communities has been to redouble our efforts to hold on to and lure back global business. Anxious to bring any new jobs to counter the loss of old ones, communities have enthusiastically welcomed chain stores, big-box malls, airports, tourist traps, and casinos, seemingly unconcerned that these new firms are coming with lower wages, part-time jobs, no health care, and flaky pensions.
Insecurity, we are told, is a necessary price for prosperity. New York Times columnist Thomas Friedman insists that globalization is "making it possible for ... corporations to reach farther, faster, cheaper, and deeper around the world" and is fostering "a flowering of both wealth and technological innovation the likes of which the world has never before seen." Similarly, local economic developers, who see their mission as orchestrating private and public decisions to maximize local business activity, have looked at the reality of globalization and concluded that there is no alternative (TINA). Change is painful, but the new mission of a community, as they see it, is to take full advantage of the cornucopia of global opportunities while minimizing the regrettable side effects. And that's why we must embrace TINA.
The Iron Lady
I have plenty critical to say about TINA, but let me try, at least in this one section, to play the devil's advocate and state its case as dispassionately as possible. It goes something like this: In the new go-go global economy, every community must run faster to become more competitive. The best way to do this, according to the early economist David Ricardo in his theory of comparative advantage, is to find a handful of industries in which to specialize, and to market world-class products. Exports from our best industries, like prescription drugs from New Jersey or country music from Tennessee, bring new earnings that we can then spend on supplies, parts, and technology for related industries. Clusters of similar firms then coalesce, and their constituent businesses spur one another to innovate, become more productive, and strengthen a community's global niche.
As competition from every nook and cranny of the planet intensifies, the most successful enterprises, the eight-hundred-pound gorillas anchoring and driving these clusters, will be the most globally minded, ambitious, and nimble, and the scale of these firms—the Microsofts, the Mercks, the Bank of Americas—is necessarily large. They may not need to have an office in every country or a million employees, but they do require a critical mass of finance, technology, and talent that no small business can possibly muster. If you live in a community lucky enough to have such a firm already, the priority is to retain it. The vast majority of communities, however, must lure them to anchor new clusters. And if your community can't snare a firm's global headquarters, then it should at least go for a major branch office, a factory, a warehouse, a service center, or, heck, even a sales outlet will do.
Economic developers sometimes distinguish between businesses of primary and secondary importance. They consider manufacturing primary because historically it has provided more jobs that are higher paying and longer lasting. The other sectors of the economy—like food, energy, education, and various business and household services—are seen as secondary since they seem to grow around the primary sectors.
A good example of this logic is South Carolina's decision, more than a decade ago, to pony up $130 million to attract a two-thousand-employee automobile plant owned by BMW. Some years after this deal was consummated, BMW hired the Moore School of Business at the University of South Carolina to perform an "independent" evaluation of the deal. "Undeniably," the researchers concluded, "the BMW location decision represented a major achievement in South Carolina's promotion of economic development." By their calculations the plant has led to the creation of 16,600 jobs in the state and $4.1 billion in additional annual output.
Since economic developers frequently cite this deal to show how beneficial TINA subsidies can be, we will examine the study in a little more detail shortly. For now, let's just observe the logic of TINA thinking. The Moore School explains how the deal flowed from the rigorous application of the principles of mainstream economic development: "Economic theory clearly states that regional growth and development depends on developing an export base." Why exports? Because "manufacturing operations bring new money flowing into the state from outside.... The money is not recycled from one sector of the state's economy to another—it is almost all an economic gain for the state's citizens—providing money that can be used to purchase goods and services from other regions and countries."
A decade ago economic developers saw "incentives" like those South Carolina offered as their most important tools for expanding export businesses. These took many forms, including grants, low-interest loans, loan guarantees, industrial development bonds, tax breaks, zoning preferences, training programs, new streets and sewers, you name it. But economic development has increasingly focused on creating a favorable "business climate." "Regulatory reform" seeks to reduce burdensome red tape, which means weakening public standards related to health, labor, environmental protection, and product safety. "Infrastructure" initiatives put in place roads, utilities, airports, telecommunications, and high-speed Internet facilities that can serve export-focused firms. "Workforce development" seeks to mobilize education and employment systems to provide higher-quality employees for these companies. And a diverse assortment of land-use tools like industrial parks, enterprise and empowerment zones, downtown development districts, and historic preservation create magnets for enterprises and consumers alike.
While the primary drivers of a TINA economy are big, globally oriented businesses, smaller businesses are important as partners in a cluster or as secondary suppliers of goods and services purchased by workers employed in that cluster. That's why TINA loves LOIS, locally owned and import-substituting businesses. Every chamber of commerce praises small businesses, mindful that they create the vast majority of new jobs in the community (and also loyally contribute most of the chamber dues). Every economic developer waxes eloquent that small businesses serve as the backbone of the local economy. Every politician rushes for a photo op with the most successful local entrepreneurs. The International Economic Development Council (IEDC), in its primer on economic development, begins: "Even though working with existing businesses and assisting their growth never makes headlines, local firms already have a local commitment and are a far more reliable method of job growth than the headline-grabbing attraction efforts."
"Through economic development activities," the IEDC handbook continues, "existing businesses are nurtured and expanded, new businesses are attracted to an area, and new enterprises are created." Like children in a healthy family, all businesses are to be loved equally because "each of these activities leads to job creation, an increase to the tax base, and improvement of the overall quality of life within a community—all adding to the wealth of the community."
TINA advocates cheer for all business: big and small, new and old, local and nonlocal, clean and dirty, free market or prison, anything that produces jobs. But to understand the real contours of the economic development politics of TINA advocates, we must look not at what they say but at what they do.
For more than fifty years the Maytag factory in Galesburg, Illinois, manufactured refrigerators. No longer. In 2004 the company gave pink slips to its last sixteen hundred employees and moved operations to Mexico. When the first rumblings about the departure were heard, economic developers in Galesburg desperately mobilized $8.6 million from local sales taxes and state grants to retrofit the plant. They abated property taxes for ten years that otherwise would have gone to public schools. Maytag did stick around a bit longer, but ultimately the lure of cheap labor south of the border was too great. The granddaddy of the incentives package, Jeff Klinck, now admits: "Maytag's leaving town has devastated our community."
Fifteen hundred miles to the southeast, economic developers in Putnam County, Florida, gave $4.5 million in cash and tax breaks to Sykes Enterprises to build a call center. Sykes came, thanked the community for the gift, operated for five years, then moved its center overseas. Timothy Keyser, a local lawyer, says, "It's universal blackmail out there, with corporations all playing the same game."
Economic developers in Indiana paid $320 million in taxpayer money to United Airlines to build a state-of-the-art aircraft maintenance center at the Indianapolis International Airport. The company had promised to employ five thousand well-paid mechanics and invest $500 million of its own capital, but in the end the center never employed more than twenty-five hundred. In 2003, having not made good on even half of its promised investment, United shut down the center and outsourced the work to cheaper private contractors down South.
According to an article in the St. Petersburg Times, economic developers in Florida pumped $49 million of tax breaks and gifts into a microchip plant originally run by AT&T after it threatened to move to Spain. Today, employment is about a third of what it was in the year 2000, and much of the equipment in the plant has already been shipped overseas. All of Florida's economic development programs between 2004 and 2005 cost the state government $900 million. That same article astutely observed: "The nearly empty factory could be a symbol for the flaws that beset what government and business leaders call 'economic development.'"
According to Good Jobs First, a small think tank dedicated to identifying and eliminating corporate pork, Wal-Mart also has received more than $1 billion in state and local government support over the last ten years in 244 separate deals. Nearly a dozen communities paid from $19 to 46 million each to attract one of the world's wealthiest companies to set up a distribution center.
There are literally hundreds of these stories from every part of the United States and they all are practically identical. Convinced that TINA firms will make or break a region, economic developers insist on lavishing them with taxpayer money to persuade them to come or to stay. Alan Peters, an urban planning professor at the University of Iowa who has studied these deals, says, "It seems like almost every state is giving away grandmother, grandfather, the family jewels, you name it, everything."
And for what? The company rarely fulfills its pledges entirely, and sometimes not at all, and sooner or later it moves elsewhere. Some state and local officials have learned by now that these deals are likely to be losers, but economic developers ominously warn—there is no alternative. Peters and his colleague, Peter Fisher, estimate that public payments to TINA, nearly all made in back rooms with no public scrutiny, now cost the American taxpayer an estimated $50 billion per year. And that's just state and local money.
Excerpted from the small-mart revolution by Michael H. Shuman Copyright © 2007 by Michael H. Shuman. Excerpted by permission of Berrett-Koehler Publishers, Inc.. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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