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Sunday, September 18, 2011

Wooing of Electrolux by Memphis Highlights Flaws of Economic Development Subsidies

The Commercial Appeal in Memphis has just published a great series on the subsidized relocation of Electrolux from a suburb of Montreal to Memphis. Electrolux is closing a 1,300-worker facility in L'Assomption, Quebec, and has pledged to create 1,240 jobs in Memphis, receiving a subsidy package worth at least $188.3 million for the $190 million plant there. Electrolux is getting almost $200 million to destroy 60 jobs in North America. Even if we only think about Memphis, we are looking at an "aid intensity" of 99% of the investment or $152,000 per job.

This is a bad deal on its face, even if Electrolux were not cutting 1,300 unionized jobs elsewhere. One way to see this is to understand that $152,000 per job is within the range that automobile assembly plants typically receive in incentives. It is unlikely that this oven plant has nearly the possibility of spurring co-location from suppliers that an auto plant does. Moreover, auto plants pay more, and they do not receive subsidies equal to 99% of the investment, but more like 33%. Plants is Mississippi, Alabama, Texas, and Georgia all fell in this range since 1999; only Tennessee paid more (46% of the investment, about $225,000 per job), for Volkswagen in Chattanooga. These numbers were calculated along with data I presented in my book, Investment Incentives and the Global Competition for Capital

It gets worse. As the paper relates, this subsidy package was negotiated in secret, and the full amount of the incentives were not disclosed to the public; even now, the newspaper has been unable to obtain all the details that likely will add to the cost.

In addition, the state agreed to a clause in the deal that prevents it from getting its money back if Electrolux fails to deliver on the 1,240 jobs or closes. More and more states are using such "clawback" provisions in incentive deals; even Tennessee has such a clause in its contract with Volkswagen. However, since that 2008 agreement, the state has not included clawbacks in deals with Hemlock Semiconductor and Wacker Chemie, according to the newspaper.

According to another story in the series, the workers in Quebec, who were represented by the International Association of Machinists union, earned the equivalent of $18.92 per hour, whereas the workers in Memphis will earn $14.65 per hour. So Electrolux was able to get rid of 60 workers, cut the wages of the jobs they kept by more than $4 per hour, get a more central distribution location, and a free factory courtesy of state and local governments in Tennessee. At a minimum.

To top it off, we have the requisite commissioned studies showing how well Memphis and Tennessee will do if the plant employs 1,240 people for 15 years. One of the reports did not even analyze the costs at all.

Let's review all the things wrong with this deal: Negotiated in secrecy, check. Bad cost-benefit analysis, check. Overpaid relative to what other states have paid for better projects, check. No money-back guarantee, check. Job piracy, check.

One booster of the deal complained that no one was writing about how great this deal could be if there were six or 17 suppliers in five years. But a worker losing his job in Quebec asked what Electrolux would do if Mexican officials offered a big incentive package along with a wage rate that is currently about $2.18 per hour.

What do you think? See the poll to the side.

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