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Wednesday, December 11, 2013

America's Most Wanted: Boeing

Boeing is America's Most Wanted Corporation in two senses. First, now that the Machinists' union in Washington state has refused the company's contract demands, it is shopping production (h/t Pacific Northwest Inlander) of the 777x aircraft nationwide and lots of states are making offers for it. Second, it is emblematic of everything the 1% is doing to destroy the middle class: despite being highly profitable, it pays virtually no taxes; it accepts billions of dollars in government subsidies; it is trying to eliminate pensions and cut salaries for its highly skilled workforce; and it is trying to move production away from its unionized workforce, something it has already accomplished in part.

The first part of the story is nauseating enough. With Boeing already threatening to leave its home in Washington state if it didn't get what it wanted from both the state and the union, Democratic governor Jay Inslee called a special session of the state legislature that took three days to approve subsidies for Boeing. The incentive package is the largest ever in U.S. history for a single company, according to Greg LeRoy of Good Jobs First, an astounding $8.7 billion over 16 years (2025-2040). By my own back-of-the-envelope calculations, this looks to be the largest-ever U.S. subsidy on a present value basis as well as in nominal terms.

By the way, this represents a huge jump from Boeing's current tax break package for the 787 Dreamliner, passed in 2003, which was $160 million a year for 20 years ($2.0 billion in present value, by my calculations). Under the new package, this would more than triple to $543 million annually.

Also of note, the World Trade Organization ruled that the 2003 subsidies are illegal under WTO rules, a finding that was upheld by the WTO's Appellate Body in April 2012. While the U.S. government has eliminated some of the illegal subsidies provided by NASA and the Defense Department, the state and local subsidies found to be in violation of the WTO's Agreement on Subsidies and Countervailing Measures have not been eliminated. As noted in the last source, the European Union was seeking permission from the WTO to apply $12 billion worth of sanctions on U.S. exports. The EU will certainly file a new complaint against whatever state and local subsidies Boeing ultimately receives for the 777x, and on the basis of the last case there is every reason to think the EU would again prevail.

But just days after the legislature approved the subsidy, the union rejected the proposed contract by a 2-1 margin. Though the company described it as a "contract extension," there were major changes involved, including replacing the defined benefit pension with a 401(k) (continuing an economy-wide trend contributing to the coming middle-class retirement crisis), increased health care costs for employees, a lower wage structure for new hires, and smaller raises than in the current contract, all in exchange for a one-time bonus of $10,000 for current workers.

After the contract offer rejection, Boeing announced that it would entertain offers from 15 states that might be interested, including Washington state. The proposals were due in less than a month, with the company imposing a December 10 deadline on prospective suitors. As Good Jobs First reported in its January 2013 publication, The Job-Creation Shell Game, we see a two-sided use of the corporate mobility conferred by a location decision to (as I like to describe it) extract economic rents (superprofits) from governments: Job blackmail directed at Washington state and the Machinists' union; combined with an offer to the other 14 states to engage in job piracy by subsidizing the firm's potential relocation. This is an exercise in raw corporate power.

And to what end? We have already seen the details on how Boeing wants to terminate true pensions, reduce other worker benefits, and create a two-tier employment structure. As Greg LeRoy highlights in a recent post, Citizens for Tax Justice has shown that over the decade 2003-2012, Boeing made $35 billion in pre-tax U.S. profits, yet paid negative tax to Washington state of $96 million and a whopping $1.8 billion in federal income tax refunds over that same period! To put the new deal in perspective, LeRoy points out that should it eventually be approved, the $543 million annual subsidy would be "more than twice what the state provides to the University of Washington." So not only are the labor provisions a direct assault on middle class living standards and retirement security, the opportunity cost of the deal will no doubt further imperil public education in Washington at all levels, undermining one of the very factors that gives the state a trained workforce that is attractive to employers in the first place.

Boeing has already shown its willingness to move work away from Washington state, when it built a  787 Dreamliner assembly line in South Carolina despite the billions in subsidies it received from Washington. However, the South Carolina site has been plagued with production problems, which some see as strengthening the bargaining position of the Machinists in Washington.

Personally, I tend to believe that the Machinists do have a strong negotiating position. It is hard to imagine other states coming up with some 20,000 highly skilled workers to take on the job. While I think it is possible that part of the production could be moved away from Washington state, for instance the wing assembly only, I think the company will have to leave most of the work in Washington. Moreover, Boeing only gets the $8.7 billion in tax breaks if it produces the entire project there. Missouri, by contrast, has only offered $1.7 billion in subsidies to attract the facility, which I consider to be unlikely to be successful because Boeing workers in St. Louis are also Machinist union members. But really, there is no way to tell for sure whether the company's desire to weaken the union will overwhelm what looks like a compelling case for staying in Washington.

We do know, however, that Boeing is displaying everything that is wrong with corporate America today. As I wrote recently, there needs to be a federal law against states providing subsidies to move existing jobs out of another state. Banning job piracy would also weaken companies' ability to engage in job blackmail by reducing the economic viability of actually relocating to another state. With Boeing's auction sure to set a new standard in the annals of job blackmail, the sooner we can get action on relocation subsidies, the better.

Cross-posted at Angry Bear.


  1. It helps to state Boeing's interest explicitly.

    Boeing's entire business model is based on snatching up gains from suppliers, workers, the State, and anyone else who has a stake. Boeing's profitability comes at the expense of every stakeholder in the picture. This is the Wal-Mart business model applied to high-end manufacturing.

    Building airplanes and pleasing customers is good, too, but extracting gains from stakeholders is fully within the control of company executives, and something they regard as their personal contribution to success.

    When a new airplane program comes along, Boeing has extraordinary bargaining power, and they apply it shamelessly. At least the Machinists had the opportunity and the courage to say no!

    On the other hand, the point of public policy should be to raise living standards. Why would I support a public policy that lowers living standards?

    Two things will change the bidding dynamic. First, we need a different strategy for states - perhaps setting up fixed investment funds, and making employers bid against each other for limited public resources. Second, it would really help if Federal transportation funding (let's say) were reduced by 50 cents on the dollar when states bid against each other for a project.

  2. You seem to be making contradictory arguments. The first argument is that providing such subsidies is bad for the States that do it, then you're arguing that the States should not be allowed to engage in such "job piracy" by offering such subsidies.

    If the current subsidies to Boeing are bad for Washington, then Washington should tell Boeing "good riddance" and laugh at the fool States that bid against each other to see which can put the largest bullet through its foot.

    As for the WTO, if such subsidies are damaging to the host countries or States, then why would other countries petition the WTO to punish countries for self-damaging behaviour? Should those other countries not just say, "Thank you for selling us such nice aeroplanes below cost!" and laugh at us?

    1. Not contradictory. The overall structure of allowing investment attraction subsidies is expensive for governments, leads to inefficient capital allocation, and shifts income from average taxpayers to the wealthy. For any individual state, however, there are strong, rational incentives to offer the incentives because of the jobs and tax revenue the investments bring. It is a classic Prisoners' Dilemma, as I argue in great detail in my book, *Competing for Capital: Europe and North America in a Global Era*, Georgetown University Press, 2000.

      This is not to say that in an individual case, a state might be led to pay more than 100% of the benefits, due to the dynamics of unregulated bidding in a situation of incomplete and asymmetric information.

      This is not all your analysis misses. Washington and South Carolina are not separate countries. Moving jobs from one to another does not reduce *U.S.* unemployment; it simply reduces state governments' tax revenue. Moreover, since large airliners are a duopoly, Boeing doesn't have to use its subsidies to sell below cost. You did notice that its 10-year profit is far in excess of its subsidies and tax refunds, didn't you?

      Moreover, your view on the value of not worrying about foreign subsidies is naive: there is value in having jobs for people and having people with skills. If you let another country export its unemployment to you and de-skill your workers, there is both an immediate and long-term price to pay. You should take a look at the literature on strategic trade theory, in which Boeing and Airbus make up Exhibit A.

    2. Unions also lead to inefficient capital allocation, and shift income from non-union to union workers.

  3. I'm curious as to a comparison of machinist pay growth vs executive pay growth over the past 2 decades.

    1 if it's necessary to trim future machinist pay growth and benefits shouldn't it be true for executives as well? where are those plans on the table?

    2 the issued stock and stock options directly injure share holders by diluting the earnings per share. issuing shares to executives who sell them and then having the company buy common shares back from the market only serves to line executive pockets without helping the other share holders. just don't issue the shares and grow the business or issue bigger dividends.

    1. 1. No. If the machinists do not have other opportunities, they will take a pay cut. Similarly, if the executives do not have other opportunities, they will take a pay cut. If the machinists don't like it, then they can try to be executives.

      2. If the shareholders don't like it, they can sell.

  4. How can a "political economist" maintain credibility? Neo-liberalism?

    1. Don't see why neoliberalism would be necessary. Adam Smith was a political economist but no neoliberal.