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Big State Incentives Seen As Bad Business
What Was Vilsack Thinking to Offer $50,000 Per Job to Keep Maytag Open in Newton?
Des Moines Register
May 12, 2006
[Note: This material is copyright by the Des Moines Register, and is reproduced here as a matter of "fair use" for non-commercial, educational purposes only. Any other use may require the prior approval of the Des Moines Register.]
This week we saw a bad example of government trying to do to much.
Fortunately, it failed.
I, for one, am thankful that Whirlpool executives had the sense to turn down Iowa Gov. Tom Vilsack when he tried to shove a ton of money their way in hopes of keeping the Maytag plant in Newton open.
Whirlpool, because it's a business run by executives who are apparently a whole lot smarter than the group that ran Maytag into the ground, said no thank you.
The governor's package was reportedly nearing the $100 million mark, including up to $75 million to build a new factory, which would be leased at an unknown cost to Whirlpool, and $20 million to retrain workers, along with tax and energy incentives.
A hundred million dollars to save fewer than 2,000 jobs.
That's roughly $50,000 per job, which is about what the average pay is at Maytag.
What was he thinking?
David Swenson has a cynical answer to that question, but it makes sense. The Iowa State University economist said Vilsack got beat up so bad politically over the closing of a Blue Bird bus manufacturing plant in his hometown of Mount Pleasant several years ago that he may have decided to make a huge offer to Whirlpool in Newton, knowing that the company would turn him down.
If that's what the governor was thinking, he was right.
Whirlpool turned him down flat, presumably for the reason that the offer didn't make business sense.
According to analysts, Maytag's manufacturing operations in Newton are outdated and have been for several years. The Iowa company simply did not keep up with the times.
I don't blame state government for wanting to save the Maytag jobs. It's a natural thing to do. Someone is hurting, you want to help.
But please, use some common sense.
There are plenty of studies that show that typical government incentives are a relatively minor consideration for most businesses when they decide where to locate operations.
Of course, Vilsack's offer to build a new plant was hardly a typical incentive.
Still, the studies say that the factors that executives typically give the most weight to in deciding where to do business are things like the availability and cost of labor, utilities and transportation. Those are the expenses that business pay over and over again. In the long run, they are important factors in determining whether the business makes a profit or not.
It's a pretty shortsighted executive who puts government incentives ahead of the cost of doing business.
I'm not opposed to using government incentives, because there are times when they can legitimately tip the scales.
But they should be used sparingly and for the right reasons.
State government kicked in $20 million as part of a total package of $70 million worth of incentives to get Wells Fargo Mortgage to expand its operations in West Des Moines a few years ago. Those incentives included training costs, road construction and tax breaks.
Twenty million in tax incentives is a lot, but it's way less than $100 million.
And, notes Swenson, there was a key difference between the Wells Fargo and Maytag situations.
Wells Fargo is in financial services, a growing industry. Just look at all the insurance and banking jobs that have come to Iowa in the past decade.
It makes sense to attract a significant new piece of Wells Fargo's operations to central Iowa, he said, because once that new business unit is here, it becomes expensive to pick it up and move it somewhere else.
You'll never get a 100 percent guarantee, but common sense tells you that you are better off bringing in a growing business than trying to keep alive a manufacturing-based industry, like appliance-making, that has been bleeding jobs to overseas competitors for several years.
The bottom line, Swenson says, is that state incentives can't change market forces.
South Dakota tried to do that with by subsidizing a railroad in the 1980s, he said, but the effort didn't have much long-term effect.
"If the state of Iowa builds a manufacturing plant in Newton, how does that factor into the long term well-being of the state of Iowa?" Swenson asked.
"Somewhere along the way we crossed a line when we made that offer," he said of last week's bid to keep the Maytag plant open.
And even if it was done, as he suggests, purely for political reasons, we still need to think about the precedent that such an offer sets.
In my book, making the kind of offer that Gov. Vilsack did to Whirlpool is terrible economics, even if some people do think it's good politics.