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The Job Flight Controversy...(continued)

By Jock O'Connell

www.jockoconnell.com

For example, there is no doubt that recent decisions by Northrop, Lockheed and McDonald-Douglas -- companies which form the core of California's aerospace industry -- to build new facilities in Southeastern states, primarily Georgia, have been influenced by political imperatives. At a time of declining Pentagon budgets, these firms, along with other major defense contractors, are seeking to improve their ties with key members of Congress, especially those like Senate Armed Services Committee chairman Sam Nunn (D-Georgia), who exercise considerable power over military appropriations. Unfortunately for California, no member of the state's huge congressional delegation has similar influence over how the Defense Department spends taxpayers' money.

Unlike the aerospace giants, most California companies with moving or out-of- state expansion plans are not looking to relocate a continent away. As the California Business Roundtable survey suggests, most of the manufacturers who are pondering a move are casting their eyes toward the Southwestern states and toward Mexico. In recent years, recruiters from neighboring states have gone to exceptional lengths to entice California manufacturers to relocate. They have had mixed results. While they have picked off some genuine winners, they have also carted away some industrial carrion -- firms that might have gone Chapter 11 had it not been for the new tax credits and subsidies they received for moving. However, alarmed that these poachers have been enjoying too much success at our expense, California's business leaders and public officials have been casting about for the means to keep California firms in California. Hence, the abundant concern today over job flight.

States like Nevada, Arizona and Utah have been exceedingly vigorous in their efforts to lure California companies with promises of cheap land, lower costs and more compliant public officials. Pueblo, Colorado, for example, is reportedly offering California manufacturers fully developed industrial sites at the token price of $1 per acre. But there are practical as well as political limits on what can or should be done to retain companies which are being lured to other states by offers of extensive subsidies and tax credits. Although California was the first Western state to establish Enterprise Zones (which provide tax credits and other benefits to companies locating in economically distressed areas), it seems unlikely that this state's voters would favor policies that in effect subsidize business activities. Nor would such policies be necessarily well-advised. According to economist Erica Groshen of the Federal Reserve Bank of Cleveland, altogether too many of the companies drawn by such opportunities turn out to be what she calls "foot-loose industries," companies which quickly move on once they have soaked up all the available tax credits and other inducements.

(California economic development officials might want to gather information about the fates of those companies which have gone out-of-state. It would be interesting to learn if the savings they had anticipated vanish once the welcome wagon has pulled away, once local labor costs have been bid up by other newly arriving firms, and once the full impact of industrial growth on public services and public opinion have become apparent to local officials. There is evidence that a growing number of states and municipalities which once bid heavily and perhaps too indiscriminately for new employers have been reconsidering their strategies and leaning more toward policies to control growth. Florida officials, reeling from the effects of that state's rapid population growth and economic expansion, are now routinely imposing such novel requirements as environmental impact studies before permitting new development.)

As for the competitive charms of Mexico, it is a wonder that even more California manufacturers are not actively considering moving at least part of their operations south of the border, especially now that free trade talks are underway. More than anything else, the likelihood that Mexico will siphon off a substantial number of manufacturing jobs from California illustrates the predicament in which California's public officials now find themselves. Since there is no question of matching the low wage rates and much laxer regulatory climate that are the principal attractions of manufacturing in Mexico, some loss of business to Mexico must be conceded. It may seem paradoxical, therefore, that many of the business groups and political leaders who profess to be most alarmed about job flight from California are also among this state's leading proponents of a free trade pact with Mexico. To some critics, the business community's support of a North American Free Trade Agreement suggests how disingenuous the business community's concern about job flight really is. Their concern is with the welfare of corporations, not workers.

What they are clearly gambling on is that the expanded business opportunities expected to result from a free trade agreement will generate more than enough new jobs in California to outweigh probable losses. Presumably, these gains in employment will occur in those industries which embody California's comparative advantages in the highly competitive world of international trade. This stance is consistent with California's economic track record. Historically, the state's economy has compensated for the loss of lower paying manufacturing jobs in rapidly maturing industries by creating even more jobs in new, growth industries. That being the case, it is worth inquiring what (if anything) is being done to ensure that California industry will continue to have important comparative advantages five, ten or twenty years down the road.

Leaving aside the question of whether some corporate departures might be desirable (as in the case of the more unrepentant industrial polluters), it is not immediately clear -- at least from an economic perspective -- why public officials should be so agitated to discover that there are firms leaving the state. The fact is there has always been a significant ebb and flow of companies into and out of California. Too often, however, bad news obscures good news. The current hand-wringing about job flight, for example, obscures the fact that 912 new or expanded plants -- all of which involved either the creation of at least 50 new jobs, $1 million in new investment or the addition of no less than 20,000 square feet of new floor space -- were opened in California between 1988 and 1990, according to Conway Data, a Georgia company which monitors business activity nationally,.

Why, then, are public policymakers not at least equally interested in learning why so many companies are evidently eager to set up shop in a business climate which the California Chamber of Commerce claims is so unappealing? Should not finding ways of abetting such fresh enterprise enjoy at least equal priority in fashioning policies for enhancing California's business climate?

So long as the focus remains on preventing job flight or plant closures, the danger exists that public policies will be fashioned with an eye more to the demands of the whiners than to the needs of the winners --those companies which continue to flock to California despite what the Business Roundtable says. The likely result is that rather less emphasis will be placed on devising policies to advance California's cause in the competition for fresh enterprise -- for new business start-ups and for businesses moving into the West from other parts of the country or other regions of the globe.

This state's economy is undergoing fundamental changes. Many major corporations are restructuring, streamlining their operations, and permanently reducing their workforces. Several of the industries upon which the state has depended for economic expansion are exhibiting the signs of age and weakness. Aerospace faces continued shake-outs as the defense budget continues to shrink. The computer industry is maturing rapidly. Even agriculture faces the ravages of pestilence, drought, the suburbanization of the Central Valley and the increased competition that a free trade accord with Mexico will assuredly bring. Meanwhile, other industries are emerging to provide new economic impetus. During this period of transition, policy makers hear both the demands of California's economic past and the yearnings of the state's economic future. Yet, according to James R. King, president of Applied Development Economics, "We don't have an adequate enough grasp of the structural changes California's economy is undergoing in order to make intelligent policy choices for tomorrow."

Despite their embrace of laissez-faire economics and abiding distrust of industrial planning, most of California's business leaders have not been entirely confident in leaving the state's economic affairs to the unseen hand of Adam Smith. More often than not, the mainstream business community has seen a need for a responsible role to be played by the visible hand of government. During the late 1980s, a broad consensus was crystallizing among business organizations, labor unions, educational groups, state and local officials and others concerned with the long-run economic development needs of California. As demonstrated perhaps most vividly by the business community's active role in supporting a major gasoline tax increase to fund vital transportation projects, business leaders recognized the indispensable nature of strategic investments in the state's economic future. Groups such as the Bay Area Economic Council were active in bringing business and government leaders together to discuss long-term objectives. Similarly, representatives of some of this state's largest corporations set out three years ago to rescue California from the clutches of short- term thinking. What they produced was a thoughtful and far-reaching set of policy recommendation in a report entitled "Vision: California 2010," published by the California Economic Development Corporation.

Of late, however, all this seems to have changed dramatically. The business community's support for such investments has all but evaporated. No doubt the anxieties created by the recession and drop in defense spending have caused business executives to attend to more pressing concerns back at the office or on the shop floor. No doubt, too, business organizations have seen a unique opportunity in this economic downturn to press the Legislature for regulatory reform and tax relief for businesses. But something more has happened as well. In the struggle for defining The Business Agenda for California, the voices of moderation within the state's business community have evidently been outflanked by the proponents of what could be most succinctly termed Orange County conservativism.

By comparison to the Vision 2010 report, the business community's current political agenda seems to have largely rejected any real responsibility for the state's economic future. Instead, it is an agenda preoccupied with narrowly-focused, short- term objectives. An October 21 press release from the California Chamber of Commerce claimed that "an overwhelming majority of California employers believe lower taxes and reform of the workers' compensation program would enable California to retain jobs and boost the state's domestic and international competitiveness." Nowhere is there any hint as to how a state government already facing $8 billion in further revenue shortfalls can cut taxes and still meet its constitutional mandate to balance the budget.

Much of the chamber's agenda is echoed by the California Manufacturers Association and the California Business Roundtable. In a survey issued in November, the Business Roundtable reported that, in addition to opposing stricter environmental regulations, a majority of the state's business executives were against legislation prohibiting workplace discrimination based on sexual orientation; requirements that all employers provide health coverage for their workers; and a publicly-funded health care system for all. They also favored policies to streamline the permit process and restructure state public education. Boiled down to its essence, this is an agenda that is resolutely anti-government. As for the resistance to taxes, it is based less on Yuppie greed than on a sincere desire to paralyze government by denying it the sustenance of revenue. (In all likelihood, this demand has been raised primarily as a means of inoculating business against future tax increases or the adoption of a split-role.)

Although business groups have sought to advance their agenda in recent weeks by dramatizing the rate of job flight, not everyone is convinced that a genuine crisis exists. Many labor union leaders, consumer advocates, environmentalists and civil rights activists suspect that businesses associations are exaggerating the state's present economic woes in the hope of stampeding the Legislature into sweeping regulatory reforms and tax relief. To some extent, business people only have themselves to blame for such skepticism. For much like a middle-aged hypochondriac, the state's business community has long been a notorious source of wheezes, groans and noxious gasses about high taxes, an allegedly hostile state government and an unfavorable business climate, even during the best of times.

Nor does it help the cause of business groups to base their claims on surveys of such dubious character as the one commissioned by the California Business Roundtable. According to a November 22 article in the San Jose Mercury News, survey questionnaires were actually mailed out some 7,000 companies. Fewer than 1,500 were returned. Of those, over 1,100 of the respondents said they had no plans to go anywhere. Eric Miller, an expert on survey research and the editor of the Long Island-based Research Alert, told Gary Webb of the Mercury New's Sacramento bureau that the survey was a "classic piece of advocacy research...the statistical equivalent of a 900-number call-in poll." As a result, the survey's findings were skewed in a highly negative direction. As if that were not enough, Webb's article notes that even Mark Baldassare, the Southern California pollster who conducted the survey, objects to how the results have been twisted by business lobbyists eager to dramatize the extent of job flight. For example, companies which reported they were merely considering an out-of-state move are now being represented by the Business Roundtable as all but packed up and gone.)

The current demands for a less rigorous regulatory climate and lower taxes run directly contrary to the interests of some of the Democratic Party's most vocal and well- organized constituencies: the aforementioned labor unions, environmentalists, consumer advocates and civil rights activists. But it is not just the existence of institutional opposition that leads most Democrats to reject the notion that California's regulatory and tax policies have necessarily hamstrung the state's economy. For the most part, Democratic politicians continue to embrace a set of economic policies and bromides born of the New Deal. It is, however, an approach -- featuring substantial investment in education and public works -- which now places them squarely at odds with an erstwhile ally but now a business lobby which now holds that lower taxes and not more government spending is the appropriate prescription.

In the past, California's economy has been able to retain and even attract industry because of its considerable assets, most notably a skilled workforce, a superb system of public education and an efficient transportation network. But in recent years, the value of many of these assets has been eroded by complacency. Now, not unlike the nation as a whole, California has emerged from the longest sustained period of peacetime economic growth only to find that it cannot pay its bills, let alone restore those assets which have deteriorated.

Regrettably, what is apt to be an almost theological dispute over the largely manufactured issue of job flight will probably divert attention toward narrowly-focused objectives and equally myopic answers. Yet, those concerned that excessive regulations may be killing the goose that has been laying the golden eggs may want to contemplate how that same goose may be just as easily starved if this state continues to forego strategic investments in its future.

There is nothing inevitable about an ideological or political gridlock between right and left, between government and business. But whether a business community unnerved by recession, dismayed by rhetoric about the state's business climate and overall economic prospects, and cowed by ideological zealots will take the lead is an open question. So, too, is whether a demoralized post-Proposition 140 Legislature will undertake any major new initiatives or whether a beleaguered governor will provide the necessary leadership at a time when much of his own party seems decidedly ambivalent about the virtues of anyone in government exercising strong leadership in the area of economic and business affairs.

In the meantime, though, prominent business leaders in this state continue to send a message around the world -- one which the Eastern press will be only happy to amplify -- that businesses and investors should stay away from California. It really is an odd state of affairs.

COPYRIGHT (C) 1992 BY J.A. O'CONNELL


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