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Economic Research

Southern States Ply the Art of the Deal

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Photo by Brad Newton

Around the Southeast, states vie to attract firms that will create new jobs and boost area economies. But are some states paying too high a price to woo big business?

When he got word that a top executive of the German steelmaker ThyssenKrupp would be in Mobile in February, Alabama Gov. Bob Riley arranged his schedule to stop by and say, "Guten tag." Drop billions of dollars in a state, and the governor will drop in on you.

ThyssenKrupp is doing just that, having broken ground in November on a $3.7 billion steelmaking plant north of Mobile that is set to employ 2,700 of Riley's constituents when it opens in 2010. Alabama fought fiercely for the factory, providing $800 million in land, job training, tax breaks, and other financial incentives.

Mississippi, Alabama, Florida, and Georgia have all in the past couple of years awarded hundreds of millions of dollars in subsidies to automotive assemblers, steel mills, and other businesses. Important though the subsidies are, the highly competitive business of industry recruitment consists of more than financial sweeteners. In fact, Louisiana offered ThyssenKrupp a larger incentives package than Alabama did—reportedly more than $1 billion—but a variety of considerations swayed the decision.

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Some observers question the long-term wisdom of such large deals. Yet generous public incentives have come to be a widely accepted part of economic development. Even so, most experts say that while those packages are important in romancing companies, they are generally tiebreakers and not dealmakers.

Incentives "usually end up being a deal-closing fund," said Kenneth Stewart, commissioner of the Georgia Department of Economic Development. "Their intent is to attract [companies] to locate in one place over another when other factors are the same."

The first factor that must be in place is a suitable location with the right access and infrastructure, economic development experts say, along with a good labor pool, low business costs, and a decent quality of life.

In the case of ThyssenKrupp, had Alabama and Mobile-area officials not devised a workable plan and infrastructure allowing the company to haul steel slabs from Brazil through the Gulf of Mexico and eventually up the Tombigbee River, nothing else would have mattered, said Neal Wade, director of the Alabama Development Office, the state's main economic development agency. The Alabama Port Authority agreed to build a $115 million port near the plant site to unload the slabs. That project is not included in the $800 million in incentives because user fees from ThyssenKrupp should eventually pay for the port.

Politics, economics intertwine in recruitment
As critical as more quantifiable elements are, factors like a visit from the governor also play a role in successful economic development, Wade said. As "the state's chief economic developer," as Wade terms him, Riley has been instrumental in Alabama's winning several glitzy industrial prizes of late, including ThyssenKrupp, a Hyundai Motors plant in Montgomery, and a National Steel Car rail car plant in Muscle Shoals, Wade said.

Economic development has always been an economic and a political enterprise, say those who've studied it. James Cobb, the B. Phinizy Spalding Distinguished Professor of History at the University of Georgia, recalls an episode when he was working on his book, The Selling of the South—The Southern Crusade for Industrial Development. Cobb asked an Alabama economic development official in the 1970s whether his job was political.

"Oh no," the official replied. "My job is just to make [Gov.] George Wallace look good."

New jobs for more workers make governors look good, which is one reason states are willing to grant well-heeled corporations generous subsidies to bring employment, said Matthew Murray, professor of economics and associate director of the Center for Business and Economic Research at the University of Tennessee.

Scripps Research Institute Lab
Photo courtesy of Scripps Research Florida Institute
The Scripps Research Institute, a leading biomedical research organization, chose to locate a lab in Florida after the state committed more than $300 million and Palm Beach County added another $269 million.

"I think that there are economic rationales for pursuing these large and very visible facilities. But there are often political and visibility factors" as well, Murray said. He cited Mississippi, which awarded Nissan in 2003 and Toyota last year a combined $659 million in subsidies to win assembly plants, as an example of a state pursuing not only jobs but also favorable attention. Alabama made a similar image-polishing move with its $250 million package to lure Mercedes-Benz in 1993. Since then, the state's profile as a potential home to global manufacturers has indeed risen dramatically, Wade said.

The states "are really trying to show that they're a major player in the national and global economy," said Murray. "I think that's why we've seen the amounts that states and municipalities are willing to pay go up."

Chasing sustained prosperity
Huge industrial prizes such as steel mills and auto assembly plants tend to hog headlines and public subsidies. But some Southeastern states are directing dollars and energy toward other types of employers. A mantra among economic developers is "sustainable industry," meaning industry whose jobs are unlikely to disappear soon.

Wade and his counterparts, Dale Brill in Florida and Stewart in Georgia, all said sustainable development tops their agendas. The economic developers also stressed their desire to recruit and cultivate knowledge-based jobs, such as those offered by life sciences and technology firms. They also target particular industries. Alabama has clearly found success in automobile manufacturing and wants to expand its cadre of aircraft and aerospace firms. Georgia's favored niches include logistics services and life sciences.

ThyssenKrupp plant
Photo courtesy of ThyssenKrupp
After a heated bidding war among several states, ThyssenKrupp selected Alabama as the site of a $3.7 billion steelmaking plant. Under construction and expected to begin production in 2010, the Mobile plant—like the ThyssenKrupp plant in Germany shown above—will employ thousands.

Florida, Brill said, aims to build an "innovation economy" powered by biomedical research, alternative energy, aerospace, homeland security, and brainpower that might emerge from any sector. Former Gov. Jeb Bush began a push to wean the Sunshine State from its historic dependence on tourism and construction. Since taking office in January 2007, Gov. Charlie Crist is continuing that mission, said Brill, director of the Office of Tourism, Trade, and Economic Development in the governor's office.

To be sure, tourism remains critical in Florida's economy. It accounts for 18 percent of the state's sales tax revenue, and it's one of the reasons residents there pay no state income tax, Brill said. At the same time, Florida appears to be making headway in attracting life science businesses.

Florida and Palm Beach County announced in December that each will contribute more than $90 million to help the Munich-based Max Planck Society build its first U.S. biotech lab near Palm Beach. The Planck Society operates 80 institutes that study evolutionary and cell biology, neuroscience, and genetics. Its lab at Florida Atlantic University, which is donating land for the project, is scheduled to open this year and will employ about 150 scientists, according to the Planck Society.

The state's $95 million incentive package for the Planck Society comes from the Florida Innovation Incentive Fund, which is designed to attract biotech companies and research institutions. In coming to Florida, Planck followed the famed Scripps Research Institute, which bills itself as the world's largest, private nonprofit biomedical research organization. Scripps opened a lab in 2004 that employs more than 160 people, including about 130 faculty and scientific staff. In 2003 the state of Florida agreed to award Scripps $310 million for equipment and salaries, and Palm Beach committed $269 million more for land and buildings.

After Scripps moved in, the Torrey Pines Institute for Molecular Studies announced plans to build a research center in Port St. Lucie, and the Burnham Institute for Medical Research plans to open a facility in Orlando.

"I would argue that areas we're going to focus on are going to make incentives over time less and less important," Brill said. "Where we're headed, at least, is that the modern game is going to be built on workforce and infrastructure."

Economic development's deep roots
The modern era of economic development programs can generally be traced to the Great Depression and its immediate aftermath, when Southern states, desperate to improve their employment prospects, offered relocation incentives to Northern manufacturers, said Connie Lester, a historian at the University of Central Florida. After all, President Franklin D. Roosevelt in 1938 famously declared the region America's "economic problem number one."

Even before the Depression, the Southeast's economy lagged behind the nation's. "In this situation the slavish adherence to an agricultural economy built on a few staples—cotton, corn, and tobacco—was a prime factor," Atlanta Fed economist C.H. Donovan wrote in a 1946 report on the spread of industrial development corporations in the region.

Indeed, a desire to reduce reliance on agriculture instigated what is generally considered the first state-level program to offer manufacturers financial incentives such as tax breaks and free land. Launched in 1936, the state of Mississippi's Balancing Agriculture With Industry (BAWI) Plan generally drew mixed reviews, said Lester, who is writing a book about the economy of 20th century Mississippi.

BAWI brought employment to a downtrodden state, but the jobs were mostly unskilled, low-paying factory jobs filled by farm women and teenagers, Lester said. BAWI did little, she said, to improve the lives of most Mississippians, and—like much of the Southeast—the state today remains behind others in many economic and quality-of-life measurements.

BAWI had its successes, however. For example, Ingalls Shipbuilding Corp. was established in Pascagoula under the program, and it remains a major employer.

Scattered economic development campaigns predated BAWI. A group of private citizens in Mobile, Ala., in the 1920s bought land and sold it cheaply to the state in hopes of bringing International Paper Co. to town. In 1928 the state leased the property to International Paper "at a nominal rental," for 99 years, with tax exemptions for 20 years, according to a 1945 Atlanta Fed report. The International Paper plant was an economic cornerstone in the city until it closed in 2000, 27 years before the lease expired.

Several forces spurred a proliferation of Southeastern industrial development programs after World War II. For one, jobs were needed for returning servicemen. Second, wartime industry had been widespread in the region but wound down with peace. Something needed to take its place, according to the Atlanta Fed report on industrial development corporations. Finally, mechanization was displacing growing numbers of agricultural workers, who found themselves needing other employment.

The general idea behind the early economic development programs was to go to great lengths to import low-wage, low-skill jobs. Then, once the region's economy stabilized, officials would end the practice of granting subsidies and other enticements, Cobb said. Overall, though, those programs were never phased out, he added, and have become more elaborate.

Business recruitment changes with the times
Just as an economy is ever-changing, the strategy of attracting industry has evolved. Before the 1980s, Southeastern states generally marketed cheap land, lax regulation and docile, nonunion labor, Cobb and Murray said. With that approach, luring industry was mostly a matter of squiring visiting executives to golf courses, ball games, and restaurants. It's now a more sophisticated, numbers-based business, Wade said.

To some degree, the decline of U.S. manufacturing left Southeastern states with little choice but to change. Through the 1970s and '80s, the traditional sales pitch gradually became obsolete as fewer domestic manufacturing jobs stayed stateside after companies seeking low labor costs began looking to developing countries, not the Southeastern United States.

As Keivan Deravi, an economist at Auburn University at Montgomery, puts it, states such as Alabama could no longer draw manufacturers by simply pleading poverty. "In a sense, I think that by default we learned that we need foreign direct investment [FDI], and in order to get the FDI to come in we started offering very extensive incentives," said Deravi, who has worked with Alabama officials on incentive packages.

Good deals for everyone?
Whether the extensive incentives—not just in Alabama but in all states—benefit the public in the long run is a matter of debate. Murray, of the University of Tennessee, figures that "if you ask 10 economists, you'd get 15 different answers." As Murray—one of those economists—said, "It is extraordinarily difficult to demonstrate, with these incentives of $100,000 to $200,000 a job, that those manufacturing plants pay back to state and local governments what was given to them."

He said when a large industrial concern—such as a ThyssenKrupp in Alabama or Kia Motors in Georgia—is exempt from corporate income or property taxes for a couple of decades, someone else, or other businesses, must make up the difference. Cobb, the historian and author, is also skeptical that generous public subsidies for industry ultimately pay off. In addition to forgoing local and state tax revenue, these incentive packages also risk turning communities into one-industry towns because job training programs are generally geared toward a single company or industry, Cobb noted. Also, he said, for all the recent success in luring manufacturers, many Southeastern states remain near the bottom of many quality-of-life measures such as infant mortality and educational attainment.

Wade and other economic developers harbor no such doubts. Alabama's image among national and international business decision makers has improved dramatically, he said. In the early 1990s, a survey by a private sector economic development group Wade headed found that corporate chieftains viewed Alabama as "backwoods, redneck, and football crazy." Few at that time would consider bringing a plant or office to the state, Wade said.

Now, he said, Alabama is on the list of any firm looking to put a major facility in the Southeast. Wade said numerous large projects were eyeing the state in early 2008. In late February, the U.S. Air Force named European Aeronautic Defense and Space Company North America (EADS) and Northrop Grumman Corp. to build a fleet of aerial refueling tankers, a decision that is expected to bring an aircraft assembly plant to Mobile. EADS, the parent company of Airbus, has also announced plans to shift production of a commercial air freighter to the proposed Mobile factory. Together, the facilities are expected to employ between 1,300 and 1,800 people, according to published reports. The deal committed the Air Force, for now, to buying only four test versions of the tanker, worth about a total of $1.5 billion. EADS executives were quoted in press reports saying talks for the full 179-plane order would start in subsequent weeks.

Wade's department also points out that the average salary or wage paid for jobs in the state has risen 76 percent, to $35,448, from 1990 to 2006. That remains 15.6 percent below the national average; it was 14 percent lower in 1990. At the end of 2007, the state's 4 percent unemployment rate was a full point lower than the national rate. Wade asserts that Alabama's economy is better situated to weather a downturn than the broader U.S. economy.

Since Mercedes-Benz's arrival in 1993, Alabama has attracted two other automotive assembly plants and has become known as a regional manufacturing center.

Sweeteners not to everyone's taste
Government subsidies for economic development were hotly debated upon their introduction. The Atlanta Fed's 1944 report on BAWI, for instance, quotes unnamed bankers and businesspeople calling the practice "outright socialism" and contending that "a good, strong enterprise needs no subsidy."

In 1994 then Alabama Gov. Jim Folsom lost a reelection bid after he spearheaded the state's package for Mercedes, which amounted to $169,000 for every job when the plant opened. Rival states also criticized Alabama for sparking a bidding war for industry. But major expansion by Mercedes and the arrival of other auto plants have blunted the criticism, Deravi said.

Though public subsidies for private corporations are not universally embraced, the practice appears to be widely accepted in the Southeast today, judging by the actions of public officials and voters.

In June 2007, Alabama voters approved a measure more than doubling, from $350 million to $750 million, the amount of money the state can borrow to finance industry recruitment subsidies. The state legislature had already unanimously approved the increase. Lawmakers were swayed, Wade said, by a map showing that projects the incentives could help attract were scattered in legislative districts throughout the state.

In another show of support, Mobile County, Ala., residents in October 2007 voted 74 percent to 26 percent to dedicate up to $156.9 million of county roadbuilding money to incentives to ThyssenKrupp.

Mississippi's state legislature approved incentive packages for Nissan and Toyota in 2003 and 2007, respectively. In Georgia, the General Assembly in 2004 granted the state Department of Economic Development broad new powers, including the ability to buy land for industrial prospects and a multimillion-dollar pool of bond money to pay for it.

In some fundamental ways, industry recruitment remains the same game it has always been, just on a bigger stage with bigger dollars. States try to lure jobs, using whatever means work best—financial incentives, superior workers, advantageous location, or any combination of those and more factors. Techniques and conditions may change, but the jobs race among states in the Southeast remains hard-fought.

This article was written by staff writer Charles Davidson.