Kelo, Pfizer and Economic Development


Four years ago the United States Supreme Court ruled in favor of the City of New London, Connecticut, in a controversial case brought by Susette Kelo and some of her neighbors over the extent of the power of eminent domain. By ruling that New London had the right to condemn Ms. Kelo's property in the name of economic development, the Court set off a predictable reaction amongst lawmakers who were incensed at the notion that the government had the power to take private property for such a cause. What the political knee-jerk overshadowed was a rational discussion of just how ridiculous the New London approach was from an economic standpoint.

There is a reason that discussion did not take place. New London, population roughly 26,000, was doing what almost all towns do to one degree or another: they were chasing the big payoff. They were putting all their chips on the table - including the social capital of their community - in search of one big-time jobs and tax base jackpot. In this case, New London was wooing Pfizer, a pharmaceutical company. Not only were they willing to condemn property, level neighborhoods and install infrastructure, but the deal included millions of dollars of tax subsidies. Sans the heavy-handed condemnation, this is the stuff that towns do all the time. From the NY Times:

Economic development officials in Connecticut used that [Pfizer development] plan — and a package of financial incentives — to lure Pfizer to build a headquarters for its research division on 26 acres nearby. With an agreement that it would pay just one-fifth of its property taxes for the first 10 years, Pfizer spent $294 million on a 750,000-square-foot complex that opened in 2001.

We can look in retrospect at the folly of this adventure as Pfizer has now announced that they are pulling out of New London. As a cost-cutting measure, they are moving the jobs to the nearby city of Groton, Connecticut. 

“Basically, our economy lost a thousand jobs, but we still have a building,” [councilor] Mr. [Robert] Pero said. 

Optimism or delusion?

The problem here is not that Pfizer moved out. The problem is that New London embarked on a speculative strategy of growth-inducement that was destined to fail. Putting so much of their efforts, focus and capital into this one gigantic undertaking, they ultimately attempted to lure a facility that was not well matched for the community. How do we know that? Well, if New London was the perfect fit for Pfzer, then why was all the subsidy, condemnation and massive infrastructure improvements necessary to make the deal work? And why have they moved out now?

"Professionals" involved in traditional economic development would call that last statement naive. "Come on, Chuck," they would say. "This is what you do to land the deal. You can't really expect us to walk away from all those jobs?"

"What jobs," is my response.

That is not a cheap shot made after-the-fact. Go around the country and look at places where towns give huge incentives and build massive amounts of infrastructure to dislocate businesses. The new locations typically are geographically less advantageous, but short-term are financially lucrative. How many of these ventures are sustained for a generation or more?

And the problem doesn't only arise when these schemes fail. For every city that lands the big fish, there are countless others that spend their energies, hopes and capital trying to do the same, yet come up empty. I don't have any firm numbers to analyze the degree of failure from this approach, although each day seems to bring more and more examples. Ponder all of the towns you know and see if you can put them into one of these categories:

  1. Those that have spent the money on infrastructure, given the subsidy to new businesses and had it result in decades of prosperity (sustained growth, lower taxes, increased opportunities) for their community.
  2. Those that have spent the money on infrastructure, given the subsidy to new businesses and had it result in some near-term growth, but long-term experienced stagnation or decline.
  3. Those that have spent the money on infrastructure, given the subsidy to new businesses and gotten nothing for it.
  4. Those that have spent their time looking for a chance to spend the money on infrastructure and give the subsidy but have not had that opportunity present itself.

My experience tells me that almost all towns would fall into one of the last two categories. There are a countless number of communities that have built infrastructure to induce growth and gotten little or no return on that investment. There are even more that are paralyzed economically waiting for the chance to play this game.

If all we know how to do in terms of economic development is build more infrastructure and give more tax subsidy, yet we clearly see that this has failed to lower taxes, grow jobs and provide prosperity to most towns, what do we do?

I'll try and answer that question, and more, in my posting this Wednesday.

 

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