Episode 48: The Great Debate with Greg LeRoy and Ron Kitchens: Predicting the Future of Economic Incentives
September 4, 2018 | By: Andy Levine
For this special episode, we brought together two leading thought leaders in the economic development space and put them on the phone together with “The Project” host Andy Levine in the middle. Greg LeRoy is the Executive Director/
Founder of Good Jobs First. And Ron Kitchens is the CEO of Southwest Michigan First. And they both have strong opinions on the use of economic incentives past, present and future.
Looking forward, we examined the question of “What role will incentives play in America’s future?” The format involved a three-minute opening statement from Ron and Greg. This was followed with twenty minutes of discussion where we found our two participants often in agreement. And then each speaker had time for a one minute summary. Special thanks to Greg and Ron for their preparation and intelligent thinking/predictions on the direction which economic incentives will take in the years ahead.
Andy Levine (Development Counsellors International): So today’s episode is a little bit different. In response to our earlier examining the mega deals episode with Brett Bayduss, we felt there was an opportunity to focus on the single issue of economic incentives a bit more deeply.
Patience Fairbrother (Development Counsellors International): So we brought together two leading thought leaders in the economic development space and put them on the phone together with Andy in the middle. Greg Leroy is the Executive Director and founder of Good Jobs First and Ron Kitchens is the CEO of Southwest Michigan First. And we looked at the question, what role will incentives play in America’s future.
Andy: Welcome to this special episode, Episode 48 of “The Project: Inside Corporate Location Decisions.” I’m Andy Levine of Development Counsellors International.
Patience: And I’m Patience Fairbrother, also with DCI and Andy’s co-host of “The Project.” So Andy, tell us about the great debate.
Andy: So it was really interesting. In many ways, I found that our two debaters were often in agreement with each other rather than on opposite ends of the spectrum and I really hadn’t anticipated that. But they offered some really intelligent thinking and predictions on the direction in which economic incentives are gonna take in the years ahead.
Patience: So enough of the preliminaries. Let’s get to our conversation with Greg Leroy and Ron Kitchens.
Andy: So welcome to Greg Leroy and Ron Kitchens for today’s great debate on the role of economic incentives in America’s future. Let me give you a quick little word of background about each of our guests today. Greg Leroy is the Executive Director and founder of Good Jobs First which he created 20 years ago, in 1998, Greg?
Greg Leroy (Good Jobs First): That’s right.
Andy: He is also the author of “The Great American Job Scam” and he’s probably one of the nation’s most vocal critics of economic development subsidies to corporations. Greg, welcome. Great to have you here today.
Greg: Thanks, Andy.
Andy: Ron Kitchens, Ron is one of the economic development profession’s top thought leaders. He’s the author of three books, including “Community Capitalism.” He’s served as CEO of Southwest Michigan First since 2005. Do I have that correct, Ron?
Ron Kitchens (Southwest Michigan First): That’s right, yeah.
Andy: Okay. And he also is the host of one my favorite podcasts, “The Always Forward Leadership Podcast” which I highly recommend to all the podcast lovers out there. Ron, great to have you here today.
Ron: Great to be here, Andy.
Andy: All right. So for today’s session, here’s the format that we’ve agreed upon. I’m gonna give each participant up to three minutes for an opening statement to share his views on the role of economic incentives in America’s future. We’ll then head into probably a discussion that will last something like 15 to 20 minutes long. I’ll ask some questions of each of the participants based on their comments and then I’ll give each of you up to one minute for a final statement. We did flip a coin at the start of this and Ron is gonna go first and then Greg will go second in terms of the opening statements. Ron, let me turn things over to you.
Ron: Hey, thanks, Andy and Greg, I’m looking forward to this because it is an important topic. You know, when I look at economic development, so I’ve been in this field for now just over 35 years and I’ve seen the country change and every kind of fad in economic development take place. But when we look back, you know, we know that the field of economic development, we’ve documented that it started in 190 BC and that was the Port of Rhodes and the Port of Delos fighting over trade and which city port was going to thrive. And that’s the first incentives that were given as one port cut their rates to drive traffic to that. You know, that’s all important because when we look at this idea that economic development’s job is to change the lives of people and the futures of communities, that’s hard to do that without…you know, looking at Gallup’s data that tells us there’s 7 billion people or so on the planet, there are 5 billion people over the age of 15. Of that, when surveyed, 3 billion people say the most important thing in their life, more important than food, more important than shelter, more important than education is a good job.
The problem is there’s only 1.2 billion jobs on the planet so it leaves a shortfall of 1.8 billion. Now, how does that position us as America? Well, we are one of the two, three, or four best job creators in the world, depending on how you measure that but we also know there’s a competition to not only grow jobs to meet the needs of our people but it’s also a competition to keep the jobs we have. And so, as economic development and community leaders, we have a moral responsibility to focus on growing jobs through asset management. And when we look at that, it isn’t about incentives to companies. It’s about inducements to get what we need to take care of our people and those are jobs. And so we have to manage for the land use, human development use, and financial management use and so incentives are one of those tools but they are simply a tool to achieve an outcome and that outcome…well, I think our founding fathers said it best. Our outcome is happiness. We’re the only country that was ever based on the principle that we wanted people to be happy and we know the number one thing that makes people happy and content is a good job.
Andy: Ron, thank you for a opening statement. I didn’t realize you were going to go back to 190 BC to make your comments but…
Ron: Yeah well, you know.
Andy: And you weren’t around for that deal, right?
Ron: I didn’t participate in that deal but I broke it down and studied the economic impact.
Andy: Okay. Okay. Very good. Greg, let me do the same and open the floor to you.
Greg: Thanks, Andy, and great to be with you, Ron. So to be a little more parochial and specific, but those were great frames that Ron gave us, the question is how do we use incentives as part of the broader palette of tools that public policy gives us in terms of infrastructure, land use, planning, zoning, all the other tools that public officials bring to the table to create jobs, to retain jobs, to improve jobs. That’s the great question here. And our perspective at Good Jobs First is that incentives have kind of taken on a life of their own that has really detached them, in many cases, from the bigger mission that Ron and I largely agree on here, that is too many incentives have become windfalls. Too many incentives don’t meet the definition of what we would call the true definition of an incentive.
Our working definition of incentive is very simple. It’s something that should happen and that isn’t happening and won’t happen until public dollars reduce private risk. So, for example, bringing grocery stores to a food desert, the private market’s not doing that, hence the food desert. Using public dollars to help make it so that people don’t have to take a long bus ride to buy dinner or get a prescription or buy a pair of shoes for their kids, we think that’s a totally appropriate use of incentives. Citizens returning from incarceration to get better job skills so they’re less likely to commit a crime again and more likely to be less dependant on government safety net programs, again, the private market’s not gonna do that but it’s an absolutely appropriate role we think for government investments in incentives for improving skills, especially given our increasingly tight labor markets today.
So, for us, the issue is how do we keep incentive programs, the eligibility bright lines structured so that we’re really addressing market imperfections and not creating windfalls and not picking winners and losers, frankly. I mean, I think the best example we have currently of government falling into this trap of paying companies to do what they would do otherwise anyway is the Amazon warehouse storyline, right, where Amazon’s business plan has morphed in the last several years so that they now wanna deliver rapidly and that has caused them to change from a business model that had them with very few warehouses structured in a way to avoid the collection of sales tax to now having hundreds of warehouses close to all their major markets with lots of Prime household members and yet they’re getting paid with incentives to do that even though their business plan causes them to do it. Between their warehouses and their data centers, we’ve tabulated about $1.6 billion in incentives to Amazon.
That’s before whatever they get for their new second headquarters project, their HQ2 project. So, for us, the question is playing a smart poker game from the public sector side of the table by truly using incentives meeting that definition of something good that should happen isn’t happening, won’t happen until public dollars reduce private risk.
Andy: All right. Greg, thank you for a great opening statement as well. I think, gentlemen, two very thoughtful and really, really excellent opening statements. Greg, I wanna go back to your definition and I just wanna make sure I heard this correctly because I think it was very good. Incentives, something that should happen but won’t happen without public dollars investing in it. That’s your definition of what incentives should be, did I get that right?
Greg: Uh huh.
Andy: Okay. Okay. So, how do you determine, you know, sort of what qualifies as a valuable or worthy incentive in that regard versus what doesn’t? It’s so hard to predict what…you know, you can’t look into your crystal ball and sort of see into the future. What’s your definition of how to predict a bad incentive, I guess?
Greg: Sure. So I think if you look, for example, at the history as we have over time with incentive programs like tax increment financing districts or enterprise zones, which are originally structured facially in a way that would appear to meet my definition, that is they’re originally structured to revitalize depressed areas that have been attracting insufficient levels of private investment. The trouble is that over time, many states have deregulated the eligibility rules for those programs in ways that make it very easy for them to become automatic, to become gimmes, to be gamed, so to speak, in ways that really pervert or undermine the original intent of the program.
So, you know, because the way economic development has evolved where no government is privy to the board meeting minutes, to the consultant’s reports, and no company signs a document saying under the penalties of perjury, I verify the but for clause, we think that the only way you can reasonably safeguard this spending to meet our definition is to keep the eligibility rules of the programs very tight so that you know you’re meeting market imperfections. There are ways to clearly define a food desert. There are clearly ways to define a citizen returning from incarceration. There are clear ways to meet small business lending gaps.
Andy: So, what I’m hearing from you, Greg, is you’re not necessarily against economic incentives but you just think a community has to be very smart about it.
Greg: That’s right.
Andy: Is the public sector able to be a smart poker player in this game with companies?
Ron: Yes and no. One, I don’t believe the poker analogy’s accurate.
Andy: Oh, well take us there then as well.
Ron: So, there’s so much data available now. So an incentive is really an inducement to behaviors so the easy analysis is when I started my career, I started out in owning retail stores. And so I knew that if I had a new store, you know, and I wanted customers from somebody else’s store to come into mine, I had to have good quality products, I had to deliver it in a timely, high-quality manner, but if I wanted their customers, I had to have a better pricing model. That’s really what incentives are, it’s a better pricing model. And so by developing pricing strategies and you can figure out what your neighbor is. The data’s there. So this idea that their ignorance we don’t have access to, you know, the site consultant’s report but for a big deal, we hire site consultants to do the exact same analysis that a company has done. So there’s no disadvantage there.
There may be laziness in decision making. We have tools like economic impact analysis that give us the ability to analyze the positive, you know, the new revenue coming in, the new jobs, but also the impact it has on public services that are required and additional cost to schools. So the ability to not have information and to treat it like it’s a gambling metaphor I don’t think’s accurate. You know, we go into something, we are very knowledgeable about what we’re doing. We understand it and we understand that the value has to be to the local area and that’s the difference that economic developers and communities are interested in job creation and capacity building in their own areas, not on a national/international scale. So if you’re competing locally, you have to incentivize locally.
Andy: I wanna take you in a little different direction, you know, for both of you, what has, I think, caused this to get on the national radar is Amazon HQ2, which we’ll come back to in a little bit. But this question really deals with neither of you used the term corporate welfare in your introductions. Ron, I didn’t expect you to. Greg, I sort of thought you might. Is that an accurate description of what we’re seeing in some of the deals, Greg, and is that a fair description of, you think, what is going on in some of the deals that have come through recently?
Greg: Well, certainly we use the words windfalls or, you know, giveaways. The phrase corporate welfare has a complicated history. It was coined apparently by Ralph Nader in the late ’60s but messaging experts have long warned everybody that it’s a confusing phrase because you’re mushing a potentially negative adjective, corporate, with a positive noun, welfare, that is if you believe that we should have a social safety net program to help families when they’re down on their luck. So although it’s had a resurgence in use, especially from the right in the last several years, we use it very selectively.
Andy: Okay. Ron, any points on that phrase and has that been a fair or unfair characterization?
Ron: Yeah, I think it’s one of those things, Greg’s right, that’s been used by the far right, kind of the Tea Party Movement. It really has no meaning. It’s one of those bludgeoning things that people throw out there, you know, because they don’t wanna say your mama. But it just doesn’t mean anything and so yeah, it’s a kind of a ridiculous thing to say.
Andy: Ron, I’ll put this one to you. So the national unemployment rate is hovering around 4% right now. If that trend continues and we sort of remain at close to full employment, will that make incentives less valuable in the final decision of most corporate location decisions? I’m just wondering if as labor access and labor availability becomes more important in driving decisions, will we see less in the form of incentives playing a somewhat smaller role do you think?
Ron: No, I think what you’ll see is a restructuring of inducements. You will see more dollars, as Greg mentioned, driven toward getting participation rates up, whether that’s a re-entry or whether that’s training and development of those who’ve gotten lost in the systems, whether it’s social safety nets, so we’re providing daycare for the single mom who can return back to the workforce, but you’re gonna see communities realign their inducements to be much more around human factors because that’s where the shortfall is. And it isn’t just the low unemployment today. It’s the Baby Boomer phenomenon so not only do we have low unemployment but we, depending on what area you’re in, you’re gonna be looking at a 20% gap in the number of people in the workforce today versus 10 or 15 years from now because of the different sizes of generations.
So it’s going to dramatically change that. You’ll see incentives built around automation. You’ll begin to see incentives given to retain companies, knowing that they’re going to lose jobs but using those dollars for automation. So it’s gonna dramatically change how we calculate that and it’s gonna take a lot more sanity, if you will, and a lot more data-strategic looks at incentives than simply if you move and create x jobs, you get this amount of tax abatement.
Andy: I wanna take us in a different direction. Greg, I’ll put this one to you but hopefully both of you will comment on it. So the big elephant in the room right now is Amazon HQ2. Greg, in your opening comments, you talked a little about Amazon and its warehousing program. So the company opted to make this search a very public site selection process. Greg, you’ve written about this a lot I know. Give me your thoughts on what was the motivation behind that and also, are we gonna see more companies following in Amazon’s footsteps?
Greg: So yes, the public auction for Amazon HQ2 was launched last September 21. To my knowledge. it’s about the sixth time in U.S. history, right? Boeing did it three times, once for its headquarters, two for product lines. Elon Musk and Tesla did it few years ago for the Gigafactory that ended up near Reno and Saturn, General Motors did it way back in the mid-’80s. These are rare events and when I spoke at the International Economic Development Council meeting in January, that was a big question on a lot of people’s minds was is this gonna become the new norm and to which I said, “I don’t think so.” I think that public auctions are rare.
I think they’re driven by companies that are very good at earned media. I think Tesla and Amazon are brilliant at earned media and Amazon’s obviously an insanely popular top-rated consumer popularity company. And it’s interesting because of all the blowback that Amazon got over the apparent ploy to up the ante, to get more tax breaks by staging the auction the way it did, in the period between September and January, when they made the first cut to the 20 finalist cities in late January of this year, they basically tried to kind of change course. They tried to go back to the old school of now we’re gonna have everything covered by non-disclosure agreements. Now we don’t want any coverage of our site visits. Now we don’t want any leaks. They really kind of tried to put the toothpaste back in the tube and I don’t think they can. I think it’s still gonna be a very contested area. There’s litigation in several cities over the Open Records Act of whether or not the even the opening bids are public documents, especially in Pennsylvania for the Philadelphia and Pittsburgh bids. So I don’t think it’s the new norm and I think Amazon’s got some regrets about what happened.
Andy: But you think their initial motivation was to…you termed it an auction.
Greg: Absolutely, and I think even the mayor of San Antonio said that publicly in his letter bowing out, saying we think we’re being played and we’ve got better things to do with our money. They used the word incentives 21 times in the original RFP but if you’re seriously gonna hire 50,000 brainiacs, you’ve got a very limited list of markets where you can realistically expect to do that. This is a transaction driven by executive talent pools and nothing else and that means, you know, Frisco, Texas never had a prayer and Virginia Beach never had a prayer and yet the company encouraged them to apply. What else can we surmise from what happened?
Andy: Ron, what’s your perspective on this, the Amazon HQ2 process?
Ron: Yeah, I think I mostly agree with Greg on it. You know, it’s an anomaly. It’s not going to change site searches other than it will cause angst in corporate America once all the incentives…and you’re already seeing it. Well, if this state or this community offered Amazon that, then we must qualify for this percentage of that offer. And so it has created a lot of cloudiness out there. It’s, you know, from a perspective of, you know, a fire drill, there were a lot of cities and places that put together proposals that should’ve said no.
I mean, you had places that were too small, that didn’t have the assets and that was driven by ego of elected officials and places that said well Amazon must not know what they’re talking about because clearly, we’d be perfect. And so, that a lot comes because I blame economic developers and elected officials. You have to know who you are and, you know, don’t participate in a search where you have no chance of being successful. There are too many opportunities out there you can be successful at. So, you know, Amazon will be interesting to see what will happen but I think it will come down to the final three communities that would’ve come down to the final three communities before any of the process.
Andy: Ron, let me throw this question at you. So when I joined in the economic development profession back in 19…and the phrase that I always heard and I’m sure you always heard as well was well, economics incentives aren’t that important to a final decision. They’re just the cherry on top of the ice cream sundae. Is that an accurate phrase today or have incentives, in your mind, become more important to location decisions?
Ron: Yeah, when I think that and I’ve heard that a thousand times too. I don’t think it was ever true because if it was true, then it shouldn’t have been done. But it’s like saying that people buy a house because they get a tax deduction for the mortgage insurance. Does that go into some people’s calculation? Absolutely it does. It’s an incentive that the federal government has created to encourage people to buy homes. That’s all it is. You know, incentives for corporations, if they’re not mitigating a cost or a strategic disadvantage that a location has, then it shouldn’t be offered. And so the whole idea of an incentive is to make things equal or give you an advantage not as a gift, not as a lagniappe, a little something extra at the end.
Andy: So, Greg, I think we have time maybe for one more question here. I just wanna take you…you know, your organization, over the past 20 years, has really focused on what I believe is a belief that economic development incentives have sort of gone wild and should be reigned in somewhat. As you look ahead to the next 20 years, and I don’t know if you’ll still be running Good Jobs First at that point, but looking ahead to the next 20 years, what is the dream scenario for you? What would you like to see happen in this area on a federal level, let’s say?
Greg: So I think that…and at the federal level you asked, we mourn the fact that there’s never been meaningful federal leadership on this issue, on the war among the states. The second war among the states was a phrase coined 42 years ago by “Business Week Magazine.” There was a Supreme Court case called DaimlerChrysler v. Cuno that came to naught in 2005 and 2006. We’ve never had a president before who actually endorsed the war among the states until President Trump did that during his transition period at the Carrier plant speech he gave in late 2016. And then he actively participated in fostering the Foxconn competition with Foxconn Chairman Terry Gou last winter and spring, the deal that’s playing out now in Wisconsin.
We’re in uncharted territory right now in terms of Uncle Sam’s actively abating and making things worse. We’ve always said that Uncle Sam could help fix this problem by sort of building on the whole legal driver’s age, legal drinking age precedent, that is the Supreme Court upheld the precedent back in the ’80s, that it was okay for the states to raise the legal drinking age to 21 as a highway safety measure and the feds did that by withholding 10% of highway trust fund monies to states that didn’t yet raise the drinking age to 21. We think equivalent now, you could attach some good accountability strings to ubiquitous forms of economic development money coming from Uncle Sam, take HUD Block Grants as a good example, and say until a state agrees to very full disclosure of the costs and benefits of every deal, until a state agrees to sign a no active piracy clause that it won’t actively raid jobs from other states, we’re gonna hold back 10% of the HUD Block Grant monies to that state and its jurisdictions. I think there’s a lot of unspent procedural or administrative power that Uncle Sam could exercise if he so chose.
Andy: I just wanna ask you one other question. You know, from some of your readings and some of your comments today, it seems like a lot of your concern deals with openness, transparency, and sort of secrecy that you see in certain elements of the process right now. Am I reading you correctly in that, Greg?
Greg: Yeah, absolutely. If you look back at the long reform movements having to do with mortgage redlining, with the Home Mortgage Disclosure Act preceding the Community Reinvestment Act or environmental reforms built on data coming from the Toxic Release Inventory of the EPA, disclosure is always the fundamental first reform necessary no matter where you’re coming from, no matter what beef you may have with the way incentives are playing out.
Andy: Ron, any comments there on issues of secrecy versus transparency? Does the site selection process sorta have to be done, you know, behind a wall to a certain extent from the company’s perspective?
Ron: I both agree with Greg so I believe any deal that’s announced that uses public dollars, whether they’re current dollars or future earnings, should be transparent and not just the income side but the expense side as well. You know, with the technologies we have today, we happen to use a firm out of Texas called Impact DataSource that does the analysis for us so we know the cost-benefit on every deal and that should be a public document that governmental units disclose on every deal. People have the right to know plus it sets standards for the quality of the deal you do. And it becomes very easy to judge and professionalize economic development.
I think the sales process, the process prior to announcement does have to be confidential because no of us want to negotiate our salaries, our home mortgages, any financial transaction that’s complicated, in the light of the public. But once that transaction’s completed, it is public and should be. And so those who fight for it to stay in the dark do a disservice to economic development, they do a disservice to community growth, and they do a disservice to those who want to advocate for it but don’t have enough information to do that.
Andy: Okay. I think that is a good note maybe to go into our final summaries. I will just say this. This became less of a great debate. It’s almost a great love-in, I think. I find you guys are in agreement more than disagreement.
Ron: Men of goodwill will always find a way to come together in support of each other.
Andy: Very good. Greg, I think we’ll have you go first since Ron went first in the opening statement and give us just sort of your summary in this area.
Greg: Great. Well, as a guy who’s also been wailing on this issue for decades, since the late ’70s, it’s heartening to hear Ron’s perspective because I’ve seen an evolution in the thinking of the profession over time as I’ve been speaking to and training public officials about incentives from hostility to the idea of transparency to now, many of practitioners embracing it. And I think on the right side of history on economic development are those practitioners who understand that they do need to be more transparent, that there has to be more participation, that we can’t undermine public goods like public education in the name of economic development without shooting ourselves in the foot, especially given the silver tsunami and the need to replace so many skilled Baby Boomers. So frankly, the Amazon HQ2 thing has become a giant, kind of, therapeutic, teachable moment in which this spotlight has been put on what has historically been a very secretive process and we think that’s very positive for the future of the profession.
Andy: All right. Ron, we’ll leave it with you for the final word here.
Ron: So, you know, I’ll end how I started that the greatest force for change is a job and if we begin with the human perspective that we want to enable people to get jobs that are both a value to them as a person but provide enough for their families to live the American dream. If that’s our ultimate goal, then we, as economic developers, as community leaders, have to operate as activist investors. And as an activist investor, we don’t just buy a share of the stock and hope it does well. We’re constantly working to make sure the company is doing well so that they can do good.
So we have to constantly be tweaking and saying, you know, a decade ago, it was land costs that needed to be induced. Well today, it clearly is the reinvention of the American workforce. And I would say, you know, the also retraining and developing of an international strategy towards bringing more workers to America but those are the things that we have to work on because we have to remember, the greatest force for change is a job and that’s about people.
Andy: I think that’s a great note to leave it on. I wanna thank both of you. So Greg Leroy of Good Jobs First, Ron Kitchens of Southwest Michigan First, thank you so much for being a part of today’s episode.
Greg: Thanks so much, Andy. Great talking to you, Ron.
Ron: Yeah, you too. Look forward to talking to you both soon.
Andy: So that is a wrap on this special episode, Episode 48 of “The Project: Inside Corporate Location Decisions.”
Patience: A very special thank you to Greg Leroy and Ron Kitchens for taking the time to do this podcast. The full transcript of the discussion is on our website at www.aboutdci.com.
Andy: Now, before we go, we do want to remind you again that DCI and Jorgenson Consulting are sponsoring the fourth biannual 40 under 40 competition to select the economic development profession’s rising stars.
Patience: If you will still be under the age of 40 on January 1st, 2019, you’re eligible for consideration. Just go to econdev40under40.com, fill out a short application form, and submit it by October 12th.
Andy: And if you’re over the age of 40, then we’d encourage you to nominate a younger colleague for the award. Simply go to econdev40under40 and fill out a nomination form.
Patience: Your application must be submitted by October 12th and winners will be announced at the IEDC Leadership Summit in January 2019.
Andy: “The Project” is sponsored by DCI. We are the leader in marketing places and have served over 450 cities, states, regions, and countries. You can learn more about us at aboutdci.com.
Patience: We are hard at work on new episodes of “The Project” so keep tuning in and every other Monday, we’ll have a new episode of the podcast for you. We hope you will keep listening. There are many more projects to come.
