Charlie Arlinghaus

January 21, 2014

As originally published in the New Hampshire Union Leader

Politicians often seem like they are from another planet but today I think a few people in Concord could learn a lot from Saturn. Politicians on both sides of the political spectrum are easily tempted to come up with pretend solutions that aren’t focused on the real problem but serve their own political purposes. The more complex a problem is, the greater the political temptation can be.

It is no secret that the greatest challenge facing New Hampshire’s future is economic development. A once proud and thriving state now languishes in the doldrums of economic stagnation. Oddly, politicians familiar with the problem nonetheless can’t see how it might affect other issues they fret over.

Politicians wonder why young people don’t stay here yet have trouble figuring out that the lack of jobs might have anything to do with it. It shouldn’t be that hard to figure that the very mobile younger adults of today might be more likely to locate where they can find work.

Similarly, the statewide angst over declining in-migration ought to be less of a mystery. There is no chicken-or-the-egg riddle here. People don’t move here and then figure out how to create jobs, quite the reverse. When we had one of the fastest growing economies in the country a lot of people moved here. When we declined into employment mediocrity people stopped moving here. Correlation is not the same thing as causation but this isn’t a mystery of human nature.

At this point, virtually everyone agrees that jobs are our first priority. The disagreement is about how to get there.

We can learn a lot from Saturn – not the planet with the icy rings but the General Motors project started in the 1980s and closed by the federal government in the bankruptcy/bailout recently.

GM went on a nationwide search in the mid-1980s for a location for a new plant for the just created Saturn division. It ruled out Detroit from the start although finalists included some old line auto hotbeds like Kalamazoo. New York offered huge subsidies to lure them but ultimately wasn’t close.

Ultimately a location near Nashville beat out Kalamazoo and Lexington. Prof. Timothy Bartik did a number of academic studies on the subject. His findings are interesting and worth more detail than I can get into here. But they support the conclusion that economic competition is not ruled by any one item.

To be sure, the three finalists had the three lowest tax costs of any location under consideration. But taxes as component of the cost per car were not the only consideration affecting the economic competitiveness of a particular location. The eventual winner had the lowest variable costs overall and the second lowest tax cost.

The costs of energy, housing, and general cost of living that determine wages made a big difference in Nashville’s favor. In addition the responsiveness and low key competence of Tennessee’s government made a big difference. The study also found that if New York – offering incentives greater than a billion dollars — had eliminated all taxes whatsoever they would still not have attracted Saturn.

The suggestion is, not surprisingly, that tax differentials matter but they aren’t the only thing that matter. States are and should be attracted to tax reductions to improve their economic climate because of their immediacy. Many measures, like location and access to railheads, can’t be changed. Other cost-of-living and cost of labor measures change slowly over time. Electric rates, for example, are quite uncompetitive but can’t be lowered in one fell swoop. Home and rental prices which drive cost of living and therefore labor costs can be changed but only slowly.

On the other hand non-competitive taxes can be changed right away. A tax cut, however, is not like a spigot turning on. Rather, it is a strong signal of business sensitivity and one immediate change to our climate. In that sense it affects both the competitiveness spreadsheet and also is a marketing message.

Similarly, the silliest thing we can do immediately is to raise taxes. One nonsensical proposal going nowhere this year would create a capital gains tax and send a signal to investors willing to risk capital that we would prefer they not do so here. Rather than seeking investment, we want to make it more difficult for you to invest in our state. I’m not sure that “please don’t invest in us” is an effective economic development slogan.

Over the next decade New Hampshire has to do short term and long term things to move us up the list in any economic development spreadsheet. It’s not one thing. It’s everything.

1 reply
  1. Doug Hall
    Doug Hall says:

    Nice essay, Charlie. I hate it when in discussion of any one policy issue someone claims that that one single thing is what increases or constrains economic growth.

    I have always been a proponent of “economic growth without population growth.” That would be better than economic growth that requires an influx of people to sustain it (which is what we relied on 1960-2000).

    But we don’t use the right measures to think about this. In your essay, you state “At this point, virtually everyone agrees that jobs are our first priority.” I disagree to the extent that it depends on the type of jobs. If we lose 1 good-paying manufacturing job but add 2 low-paying part-time hospitality industry jobs, our net measure is an increase in jobs. But I would definitely not consider that a plus for the overall economy or condition of the state.

    I think we should use a different measure: Each added job that pays above the current median wage in the area should be counted as a + (plus) while each added job that pays below the median wage should be counted as a – (minus). The net of the pluses and the minuses is a better indicator of whether we are helping the economic condition of our families than simply the count of added employment.

    Reply

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