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The Midwesterner: How not to build an economy

By Richard C. Longworth

You can bet on it.

Any time a Midwestern company announces it wants to (1) move, (2) stay, (3) grow, (4) shrink, (5) hire, (6) fire, (7) come or (8) go, you just know that some government or governments will throw money at it to persuade it to do what it was going to do anyway.

As I've written before, Midwestern states are doing this more and more in a desperate attempt to hold on to investment and jobs. Cities do it, too, none more vigorously than Chicago, which has just done it again, giving $3.1 million to a steel company which may or may not need the money.

The beneficiary, apart from the company, seems to be a Chicago neighborhood that doesn't need jobs. One loser is a neighborhood, also in Chicago, that really needs jobs. Another loser is another Midwestern city, Cleveland, that also needs jobs.

Does any of this make sense? Only to politicians, like Chicago's new mayor, Rahm Emanuel, who will get his picture taken when the company in question opens its new headquarters, just down the street from City Hall.

The company is JMC Steel Group, a big maker of tubular steel products. JMC is headquartered in Beachwood, part of the Cleveland metro district, and has manufacturing and other facilities around the Midwest. One of locations, called Atlas Tube, is in South Deering, which is a blighted neighborhood on the south side of Chicago, still suffering from the collapse of Chicago's steel industry there 30 years ago.

JMC says it wants to move its headquarters to Chicago's Loop from Cleveland. The state of Illinois already bribed it in January with $2 million in corporate income tax credits over 10 years, if it would open this headquarters in Chicago. Now Chicago's Community Development Commission, traditionally a rubber stamp for whatever the mayor wants to do, has approved an additional $1.12 million in tax increment financing (TIF) funds to help JMC pay for new furniture and other refurbishing of its Chicago digs. The company says this refurbishing will cost it $4.7 million, and it needs help. Read more from the Chicago Tribune.

JMC has promised to invest $10.2 million in Illinois over 10 years. Maybe it will, maybe it won't: we'll come back to this later.

Naturally, JMC and the city are trumpeting the job gains involved, so let's take a look at them.

JMC says the new headquarters will employ about 100 people within four years. About 50 of those people will be relocated from Ohio. The other 50 would move up to the Loop from South Deering.

JMC also has agreed to keep 286 of its Chicago-area workers on the payroll. Would the company have fired all these workers if the state and city hadn't ponied up? We'll never know.

The two bribes — $2 million from Illinois, $1.12 from Chicago — add up to $3.1 million. The governments are trumpeting those 100 jobs, but this is a phony, since 50 of these people were in Chicago anyway, and now will just be commuting in a different direction. So the net gain to Chicago is 50 jobs imported from Ohio, or $62,000 per job.

That's a lot of money for one job, about twice as much as the $33,000 per job that the state just paid Motorola Mobility Holdings Inc. to stay in suburban Libertyville. (This was two months before Motorola Mobility was bought for $12.5 billion by Google.)

OK, that's a plus of 50 jobs for Illinois. But let's think about that. Not one job is added to the overall economy. The national unemployment rate is 9.1 per cent; in Ohio it's 9 percent, in Illinois 9.5 percent. This JMC deal won't move that needle one bit. The people who work for JMC now will still work for JMC. Ohio loses 50 jobs and Illinois gains 50 jobs, but the unemployed in the two states, who presumably need some government help, will be totally unaffected.

Are Illinois taxpayers keeping JMC in business? Not that you'd notice. According to Crain's Cleveland Business magazine, a JMC executive and his family bought a majority stake in the company earlier this year. The new owner, Barry Zekelman, was quoted as saying he plans to grow the company through acquisitions, which is another way of saying that he plans to employ workers who already have a job, not add any new jobs to the economy.

All this happened on the day that the Census Bureau announced that the nation's poverty rate has reached 15.1 percent, the highest in 17 years. Also, we got the news that fully one-fourth of all Chicago homes are underwater, which means they're worth less than their mortgages.

In other words, there would seem to be better targets for government spending than a Cleveland company that plans to buy other companies but can't afford to buy its own furniture.

TIF, that tax increment financing, is a controversial tool in its own right. Its purpose is to invest money in a project, on the assumption that the project will increase the value of a neighborhood and hence increase property taxes there. The investment comes up front, with the increased property taxes (the tax increment) to be collected later.

Theoretically, TIFs are supposed to be used mostly in less-developed or under-developed neighborhoods. During the Richard Daley administration, TIFs were used overwhelmingly to fund projects in the Loop and other upscale neighborhoods; Emanuel apparently is continuing this tradition.

But the city and state can argue that JMC has promised to invest $10.2 million in Illinois. JMC's record here isn't very good. Eight years ago, the city promised JMC's Wheatland Tube subsidiary a total of $1.9 million in TIF financing, after Wheatland promised to redevelop its South Side facility and keep 236 workers there on the job. In the end, Wheatland kept only about 160 of those workers, and the city, which had already paid $590,000, stopped further payments. Under the new deal, JMC will be able to keep this money, raising its total take from the state and the city to some $3.7 million. The city's TIF deal with JMC won't become official under the City Council approves it, as it is expected to do.

All this should provoke thinking on how to spend the taxpayers' money.

Not only is the US in a recession, it is in a transition to a new, post-industrial economy, in which the future belongs to the city, state and nation that invests most wisely in education, infrastructure and the innovative encouragement of new companies and new entrepreneurs.

Steel companies like JMC are important to the Midwestern economy, but they're not exactly the wave of the future. They still turn out steel products but, using automation, do this with an ever-shrinking work force.

The $3.7 million that Illinois and Chicago are giving JMC would have paid for a lot of teachers, an extended school day, miles and miles of fiber-optic cable, or venture capital for new start-up firms.

Instead, the state and the city have chosen to use the money to steal a handful of jobs from another state, impoverishing them both.

This post was originally published at The Midwesterner.

16 September 2011