First-time readers, the dialogue in this blog is set in the future (sometime after the year 2020). Each entry assumes there has been a 5th revolution in the US — the Revenge Revolution. More about Revenge Revolution and author, Entry #1. List and general description of entries to date. Annual assessment if Revolution plausible.
Note: most characters appear in a number of entries, with many entries building on previous conversations. Profile of characters. You’ll catch on quickly. Thanks for your time and interest…and comments.
Scene: Gelly, Jordan’s assistant, has been editing and updating a primer Jordan wrote about 2011. Section starts Entry #235. (Primer will be available as PDF in another few chapters. Then the primer download will be updated regularly.)
Gelly: “Jordan, you’ve done it again?”
Jordan: “Done what, again?”
Gelly: “Made me scratch my head. I just never thought about economic development as an incentive to pillage. I mean isn’t economic development supposed to create jobs and make everyone wealthier?”
Jordan: “That’s the political line. OK, some people do benefit.”
Gelly: “You mean the executives of the company that’s relocating. But I never though about the cost of these relocations to the people where the company left and even…”
Jordan: “…even to the taxpayers of the town where the company is relocating.”
Gelly: “If you add up all the costs, the only winners seem to be the company executives.”
Chapter 7: Eliminating the Incentive to Pillage. Some might view decisions to shutdown facilities and/or relocate manufacturing plants or distribution centers as capitalism at its best. Others view such decisions as capitalism at its worst – an incentive to pillage with no repercussions.
Senior executives and shareholders of a company can benefit financially from these actions. Senior managers at companies often have a major portion of compensation in stock – 75.0% of total compensation in stock is not unusual.
Stock price, and therefore executive wealth, is highly influenced by short-term earnings. If you do not believe so, look at the effect on the stock price if a company does not meet the quarterly earnings forecast.
While having compensation in stock rather than cash, especially with a claw-back provision (right to “recall” a portion of compensation at a later date) if long-term earnings do not pan out, is a major step forward, executives of the company still have a major incentive to take actions that may be contrary to the best interests of US society.
Many executives believe that by relocating operations, the company will lower its costs and in turn increase stock. The theory of this action – and I emphasize theory – is the wealth of those executives implementing job cuts will increase the company’s stock price. Screwed in this equation are those people whose jobs are eliminated and who helped build the company and create its value.
This perverse incentive to screw the very people who helped create the company’s value is either not understood or ignored by the public and politicians who make the tax laws. Management of these companies is giving away most of the store – in many cases transferring future wealth creation outside the US – and being rewarded for the transfer. It is as if the country where the new manufacturing plant is located offered current management a kickback – in effect robbing the US – and the US taxpayers are rewarding the management for accepting it.
The same perverse situation occurs when plants relocate elsewhere in the United States. State and local governments offer tax incentives to have plants relocate from one state to another.
Who pays for these relocations? Taxpayers at both locations. The people where the plant was previously located now have a lower tax base. The people where the plant is now located have higher spending to support the facility but without the benefit of taxes from the new company, which usually does not pay its fair share since it was recruited by waiving taxes.
If proper financial analysis were completed, my belief is it would be less costly to society and especially taxpayers, if the company revamped the existing facility rather than relocating to a new facility in another state. While some might view this perspective as socialism, the view is actually one that ensures America remains a vibrant country for generations.
Benefits of Using Existing Manufacturing Facilities The benefits of using existing manufacturing facilities rather than developing new or “greenfield” facilities are significant. Some benefits of existing over greenfield include:
- Infrastructure in place and ready. Many new facilities require roads, sewers, high–voltage electric lines, schools and other expensive infrastructure. Existing facilities may need some upgrades but the cost of upgrades will be less than: (i) building new and (ii) leaving the existing infrastructure in place to be repaired or sit idle and decay. Creating new infrastructure is double taxation on US citizens – once to build the existing infrastructure and again for the new infrastructure.
- Workers already trained. While some retraining may be needed, skills of existing workers can be utilized to develop and manufacture products of the same genre as currently produced. Why train someone in auto production in a different part of the US when a large segment of the population in another area is already trained?
- Lower cost to begin production. When all costs are considered – not just labor costs per hour – revamping and continuing to utilize the existing facilities and workforce are less costly to society than starting new. Even if a new building is required in the existing location, there are no additional costs for infrastructure or training.
- Faster turnaround from product concept to production. Skills acquired over many years cannot be taught in a short period, no matter how proficient the trainers. Even if the current employees are not trained in the latest technology, combining existing skills with those familiar with the latest technology will shorten the development time for new products.
- Avoiding costs for family relocation. Relocating workers and families includes both the direct cost of relocation and the indirect social cost. While some workers will view the relocation as an opportunity to move beyond the current environment, many of those who want the adventure have already moved. Forcing families to choose between retaining a job and relocation can have a major social cost. The more dominant the company in the area, the higher the social cost of closing the facility and relocating to another area.
An Occasional Exception to the Rule What if the existing infrastructure and local infrastructure is inadequate to support the company? In these circumstances, can the relocation be justified?
Yes, if a true case can be made. A few years ago two companies relocated North American HQ from Augusta, GA to Charlotte, NC. – Electrolux, Husqvarna. While Augusta, a town of about 200,000, had supported these firms and such other companies as EZ-Go and Club Car (both golf cart manufacturers), Electrolux and Husqvarna may have needed a larger community with a more diverse population, stronger academic institutions, international banks, international law firms and access to an international airport.
“Economic Development” Uneconomic. Do most relocations add jobs to the US market? No. Are there usually incentives to entice the companies to relocate? Yes.
Do these relocations create a net gain to US society? No. Owners of the business that’s relocating give taxpayers the finger twice. Taxpayers where the plant was located originally lose a tax base. Taxpayers in the new location pay additional the relocation incentives. Even for Electrolux and Husqvarna, there is likely a net loss to society rather than a net gain.
I realize this rationale may seem counter intuitive, especially to those involved with what is often labeled as “economic development.” However, I am waiting for someone to convince me with a rationale argument that these moves make economic sense.
Yes, the moves make sense for the companies. But the companies are part of a whole. Until we begin considering the impact of such moves on the system – all society – we will be double taxing ourselves with no net gain to the country’s wealth. Please show me why I am wrong. (BTW, please read Chapter 8 before forwarding your ideas. Thanks.)