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BBA Economic Digest: Feet to the Fire

Holding Their Feet to the Fire

You seldom hear about state and local governments enforcing clawback clauses that are common in incentive agreements with companies. The bottom line is that a deal is a deal is a deal.

And I have no problem with that. That's why they call them agreements. All parties need to uphold what they said they were going to do. Having said that, if a company said it would create 200 jobs over an agreed upon period of time but created say 190 jobs, would I go after them? No I would not. It's the blatant offenders who don't come close to doing what they said they would do that need the attention. After all, this is the taxpayer's money we're talking about. Tennessee's FastTrack program issues taxpayer-funded grants to support company relocations and expansions with the goal of creating new jobs in Tennessee. Firms commit to specific new job positions, but Tennessee has granted them some leeway. The department formerly gave companies credit if they met 80% of the new jobs target but later revised that to 90%.

Ohio officials are using a potential record-setting $60 million tax incentive clawback as leverage in development negotiations with General Motors. The attempt to recover tax incentives already disbursed—the largest such clawback ever pursued by a state—would be retribution for GM balking on a 2009 deal to create 200 jobs and retain 3,700 jobs at the Lordstown Chevy Cruze plant that shuttered last year.

The Ohio Tax Credit Authority pulled a vote on the clawback from its agenda at the eleventh hour two weeks ago so that the state could strike a deal about GM making further investments in Ohio.

Kevin Gullette, CEcD, said he experienced a situation in which the company exceeded investment threshold, but came up short on head count.

"We were able to work with them (without attorneys!!!) to create a weighted system whereby they ended up with 90 percent of the agreed upon incentive instead of scrapping the whole deal," said Gullette, director of business development at University of Arizona, Tech Parks.

An Existential Crisis

It's common knowledge that businesses of all kinds are devising ways to protect themselves from future shocks by making their supply chains more resilient. Seven months into the COVID crisis, the greatest long-term risk to supply chains is not the virus, but trade protectionism. It was resurgent even before the pandemic, and now threatens to choke off the lifeblood we need to speed us toward recovery. Against a backdrop of deteriorating relations between the U.S. and China, there is a growing chorus of countries seeking to re-shore, nationalize or find alternative sources for key products such as 5G wireless equipment, semiconductors, steel, electrical power gear, mobile cranes, rare earth minerals and other goods. “In the current alternate universe we’re living in, global trade is collapsing and the WTO and the liberal order itself are in a true existential crisis,” Bloomberg noted in June. As economies around the world emerge from the pandemic, trade flows will find a new equilibrium. But normalization will hardly mean a return to normal. The new wave of protectionism could very well significantly increase the cost of goods at a time when much of the world is experiencing historic levels of joblessness and business failures.

Friedman's Legacy

He was no mere economist. Milton Friedman was a celebrity. PBS gave him a 10-part series. His theories on the primacy of shareholders and the priority of profits still hold sway over large parts of the corporate world.

The New York Times Magazine published an essay by Friedman 50 years ago entitled “The Social Responsibility of Business Is to Increase Its Profits.”

Friedman, who was on the faculty of the University of Chicago and who died in 2006 at 94, argued that corporate executives should stop worrying about paying high wages, protecting the environment and other do-gooderism. Rather, they could best help society by maximizing the value of their companies.

In the years since, many American companies have prospered, with soaring profits and stock prices — but there have also been big downsides. The incomes and wealth of most American workers have grown slowly. Some other measures of well-being, like life expectancy, have also stagnated.

For the essay’s 50th anniversary, The Times invited executives, economists and others — both defenders and critics of Friedman — to reflect on the essay. Here are some excerpts.

"Friedman is owed respect for his analysis, but this highlights the ways in which investors and society have evolved over 50 years. Employees care about how companies function. Many of them are also a company’s shareholders, and they are calling on leadership to take action on societal issues." -- ALEX GORSKY, chief executive of Johnson & Johnson

"The shareholder-primacy view of the corporation — which gives little voice to the workers, customers and communities that are impacted by corporate decisions — has been the modus operandi of United States capitalism. Why did this view become so dominant? One rationale was a practical one. Rather than being asked to balance multiple, often conflicting, interests among stakeholders, the manager is given a simple objective function. More important, though, was the naïve belief, dominant in the Chicago school at the time, that what is good for shareholders is good for society — a belief that rested on the assumption of perfectly functioning markets. Unfortunately, such perfect markets exist only in economics textbooks." -- MARIANNE BERTRAND, professor of economics at the University of Chicago Booth School of Business

"I’ll never forget reading Friedman’s essay when I was in business school in the 1980s. It influenced — I’d say brainwashed — a generation of C.E.O.s who believed that the only business of business is business. The headline said it all. Our sole responsibility to society? Make money. The communities beyond the corporate campus? Not our problem." -- MARC BENIOFF, chief executive of Salesforce

"The Friedman doctrine precipitated a new era of short-termism, hostile takeovers, junk-bond financing and the erosion of protections for employees and the environment to increase corporate profits and maximize value for shareholders. This version of capitalism was ascendant in the 1980s and continued until the 2008 financial crisis, when the perils of short-termism were vividly illustrated and the long-term economic and societal harms of shareholder primacy were becoming increasingly urgent. Since then, the Friedman doctrine has been widely eroded, as a growing consensus of business leaders, investors, policymakers and leading members of the academic community have embraced stakeholder capitalism as the key to sustainable, broad-based, long-term American prosperity. " -- MARTIN LIPTON, senior partner at Wachtell, Lipton, Rosen & Katz

'Friedman’s timeless essay resonates today as corporate America embraces “stakeholder capitalism,” a popular concept that is inconsistent with the law. Stakeholder capitalism distorts the incentive that prompts investors to risk their capital: the promise of a profit on their investment. So, I share Friedman’s concern that a movement toward prioritizing ill-defined “stakeholders” might allow some executives to pursue personal agendas — or simply camouflage their own incompetence (until it is starkly revealed by poor shareholder returns)." -- DANIEL S. LOEB, chief executive of Third Point

"Friedman’s logical suppositions build carefully atop one another, but at their base lies a sloppily unsupported claim: that what business owners generally want is to make as much money as possible. If this were true, the rest might well follow. But it is empirically false. Sole proprietors and closely held firms often operate in ways considerate of their workers, communities and customers that are far from profit-maximizing." -- OREN CASS, executive director of American Compass.

Digital Upskilling

While many people believe artificial intelligence will eliminate jobs as companies increasingly adopt machine learning. Certainly that will happen.

But it is more likely that companies will need fewer full-time employees for certain tasks, resulting in more part-time jobs or temporary work. “In an economy where benefits are tied to full-time employment, any increase in job churn would create instabilities and insecurities in people’s ability to maintain their income and their health and retirement benefits,” said Darrell West with Brookings and reported by Fortune. To date, the U.S. does not have a national strategy in place to deal with laid off or under-employed workers who are unable to find new jobs because of their lack of technical training. But one is desparately needed. It has been my long-time belief that it all hinges on digital skills, which hinge on two basic elements.

First, we need to improve broadband internet access for better access to online job training and education services as well as to help them work remotely. Second, we need for schools to focus more on areas like computer science and math, critical to workers succeeding in a digital world. This should begin in elementary school.

Community colleges can and should play in huge role providing workers with vocational skills and they should be tuition free, as in free. (Really, not such a radical thought.)

In short, as a country we need to up our game to ensure lifeling upskilling to everyone who wants to work. Do that, and no people and no communities are left behind. 

While the future is hard to predict, I think it is safe to say that digital technologies are the future. Digitalization will touch all of our lives and subsequently will change many if not most of our jobs. 

The future of work will see a shift in demand away from office support positions, machine operators, and other low-skill professions - and towards vocations such as computer engineers and information communication technology specialists.

Purpose-Driven Economic Development

One would think, by definition, that economic development organizations are purpose driven. They exist as part of a bigger cause, leaving no room for complacency or excuses.

The best practitioners are those who when confronted with a problem go above, under and around the problem to find a solution.  They are never complacent. They never rest on past sucesses.

This devotion to a process of continuous improvement pays off once you hit an inflection point (similar to what venture capitalists call product-market fit), after which point lesser exertions will yield higher returns.

Many give up before reaching this point, because let's face it, economic development is hard. It's a roller coaster ride that is not for the feint of heart.

But purpose-driven economic developers, those who truly believe in servant leadership and providing economic opportunities to all, they are the ones who persevere.

When I am around such individuals, it gives me faith in both the profession of economic development and the goodness of people.

Bottom line: Economic development is about impacting lives for the better. The best practioners are those who identify problems in their communities and solve them.

Of course, my purpose, as an economic development consultant, is to help them make that happen.

A Unified Team Clear in Its Mission "A house divided against itself cannot stand." So said Abraham Lincoln in 1858 as a candidate from the state of Illinois for the U.S. Senate. (He would lose to Stephen Douglass.) Lincoln was speaking to disunion as a result of slavery, that the government cannot endure permanently half slave and half free. As a consultant to economic development organizations, I have come across more than a few houses divided, certainly not over an issue as weighty as human rights, but one that does inhibit growth in communities. Whenever I see more than one economic development organization within a community vying for primacy, I invariable see a house divided where disunion and confusion reigns. There is much to be said about the value of inclusion and diversity of thought. You want diverse ideas and opinions to determine best courses of action. But in the end, it is best for purposes of economic development to have a single unified team clear in its mission and goals. When organizations see each other as the competition, that serves no one. If I were representing a corporate client with a site search looking at such a community, which economic development group would I contact? Group A or Group B? I could always send a request for information to both and let them sort it out. But then again, I shouldn't have to.