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Monday
Feb252013

Infrastructure for the sake of jobs?

We shouldn’t build infrastructure for the sake of creating jobs.

“Jobs and growth are the results of a productive system, not a proxy for one. Until we reconfigure our places, sustained prosperity will remain elusive.” – Chuck Marohn, If it creates jobs, then it must be good, right?

Jobs and economic growth are a result of having a productive system in place, not the other way around. We need to create real net wealth that benefits not only the local communities, but the region as a whole. Don’t get me wrong, jobs are great. But, building infrastructure with the primary purpose of creating jobs, with little consideration to context, is setting a bad precedence and setting up communities for unexpected liabilities.

This leads me to a new program in Minnesota called Transportation Economic Development (TED) that “is a competitive grant program available to communities for highway improvement and public infrastructure projects that create jobs and support economic development.” Projects can receive up to $7 million and must meet a few qualifications, but the primary concern is purpose #1: “Create and preserve jobs.” It aims to do this by providing funding to help jump start projects that lack local funds.

In theory, this sounds good: we’ll create infrastructure and it will support things like manufacturing, technology, research and development and bio-science. These are all industries that politicians salivate over. The problem is, by concentrating on creating jobs in the short-run, we’re ignoring whether what we’re building is actually a good project that will have a positive return on investment in the long-run.

I’ve taken the time to map all the 2011 TED projects. You can view all of 2011 and most of 2012 on Google Maps, but I wanted to highlight a few examples, most of which are classic “if you build it, they will come” projects.

City of Marshall – $575,000 in TED Funding [Map] [Facts]

marshall1

The city is installing turning lanes and a bypass lane on Highway 68 near the newly built Lake Road Industrial Park and officials are negotiating with businesses that may want to be located in the park. It’s estimated the $822,500 project will create about 100 jobs.

City of Mankato – $969,218 in TED Funding [Map] [Facts]

Mankato1

This project expands a local industrial park by roughly tripling its size. The interchange and roadway networks are being designed to accommodate a controversial Wal-Mart distribution center, for which the City has already kicked in $2 million in subsidies for a project that may not actually happen. Quick back-story, the distribution center has been in the works since 2005, but has yet to be built.

According to more recent news, the city anticipates the project will support 162 new jobs within 2 years and 405 new jobs within 5 years. Of course, since 2005, it was supposed to have already created about 500 jobs. By the way, I took photos (here and here) in Spring of 2011, and nearly 2 years later, it looks the same.

City of Perham – $3.5 million in TED Funding [Map] [Facts]

perham1

Perham is a small town in central Minnesota that is getting a new interchange that will support an estimated 240 jobs. TED will be providing $3.5 million of the $6.7 million project. This project might make sense if the town didn’t already have 3 interchanges leading to the same highway.

perham2

These are the types of investments you’ll get if you’re looking to create jobs without consideration for creating infrastructure that will have a long-term benefit to the community. These projects are essentially a continuation of the Growth Ponzi Scheme; infrastructure paid for via state transportation dollars as a way to induce new local growth at the periphery to help cover the cost of the existing infrastructure. Rushing these projects through with state infused dollars for the sake of short-term job growth seems so absolutely short-sighted.

From a local government’s perspective, what good is a job anyways? Most cities don’t have an income tax, nor do they collect sales taxes these jobs might be producing (beyond a few exceptions). Most local governments depend on property tax as the primary source of revenue. Meaning, this should create some incentive at the local level to maximize property taxes, not jobs.

Why isn’t this happening? Maybe it’s because we haven’t had to make it happen – whether that be because of new growth paying for old growth, local government aid funding or DOT transportation dollars. It’s as if we have a credit card bill we can’t pay off each month, but someone comes in at the last moment and pays it off.

Let’s take the Mankato example from above. The city builds and maintains the large industrial park, Wal-Mart moves in, pays property taxes and creates all of the estimated 500 jobs. It’s a distribution facility, so no point of sale isn’t happening locally. Meaning, Mankato’s State-approved local sales tax pot won’t benefit. Property taxes for similar large buildings are around $300,000 in property taxes per year and a full-time distribution employee makes approximately $15 to $18 per hour, or let’s say about $35,000 a year. Now, let’s assume all new employees purchase an average $160,000 house and pay the $2,000 in annual property taxes. Under this best-case scenario, Mankato will net $1.3 million in revenue.

$1.3 million sounds like a lot, but some of these 500 people will have children in public schools, right? That, and they’ll need public safety, too. Oh, and this is Minnesota, so we’ll need snow plows. Plus, let’s not forget that all of the over-sized infrastructure being built at the edge of town will certainly have to be maintained.

We are using short-term job prospects to justify building infrastructure that we don’t need and has no real return on investment. Anytime that we make a long-term decision based primarily on short-term goals, it’s likely to have bad results. It’s like we’re tricking ourselves into thinking that we’re creating prosperity. The best example is TED Funding allocation to the City of St. Charles to build a new 20-acre industrial park. It’ll attract 45 new jobs, all of which appear to be existing Minnesota firms that are relocating. What’s good for St. Charles is some vacant office space an hour’s drive away.

Don’t get me wrong – jobs are great and communities need them. But they aren’t a be all, end all. Jobs and economic growth are the results of productive systems, not the other way around. Until we reconfigure our towns and change our growth patterns, our communities are likely to continue to be starved for jobs and growth. Building pieces of infrastructure with the primary purpose of creating jobs with little consideration to context is a recipe for disaster.

We need to create real net wealth with our infrastructure. Simple as that. Let’s start by taking inventory of our already successful places, incrementally improving them and going from there …

__

Two quick additions:

1) I think policies makers have a general misunderstanding of how business owners think. They don’t think of success in terms of jobs, but more so in terms of profit generated in an efficient manner. Upon being asked the question “how was last year?”, you’d never hear a business owner respond, “It was great! We had 10 employees and now we have 20.” Instead, you’re likely to get an answer about how profits were up and/or operation costs were down. Having lots of employees isn’t necessarily a good business practice nor is it in any way an indication of a healthy company.

2) Policies that promote and favor manufacturing and warehousing operations under the sole objective of job creation are misguided. There are better ways to create jobs. While American manufacturing is having a small renaissance, it’s being done with fewer employees and more high-tech machinery. The same goes for warehousing. Long gone are the days of one factory employing hundreds of people. Let’s stop pretending that we’re living in the past.

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Reader Comments (11)

I like your comments on how business owners think. We have a simular grant program in Florida to support development and job creation. There are two problems with these grants. First, all of the funding can only be utilized in a public right of way. This is a good opportunity to expand public infrastructure, however it is an expansion outside the urban centers. Secondly, these grants are managed by local government. The means that a checklist must be followed, so local government is encouraged to show job growth.

Most local stores and small businesses do not have growth through land development as part of their business model. I have found that most local business need assistance in cutting through red tape or in the interpretation of zoning codes. For less then $2000,000.000 the code, impact fees, and business licensing, could be revised to support infil and economic revitalization. Lets clean up the current mess before we spread out.

February 25, 2013 | Unregistered CommenterEdward Erfurt

Keep in mind that many of these programs whose main purpose is to create (temporary) jobs are relics of the old Keynesian ideal of full employment, though--not of businessmen's thinking. Of course, since we abandoned that ideal in the early '80s when we decided to follow supply-side and later neoclassical economics, one still does wonder how such a program can keep on existing...

February 25, 2013 | Unregistered CommenterSteve S.

This is a fantastic post, Nate. I just cringed when I saw Perham on that list. A fourth overpass! Wow! I did some work with them a few years back and discovered that they are spending something like 40%+ of their budget on debt service. The number continues to rise. They all seem to know that is not a viable strategy long term, but nobody has a socially/politically viable alternative.

I guess if the state will build you a fourth overpass, why bother to actually solve your problems. Another hit of transportation meth will tide you over for a while.

Did I hear correctly this morning on MPR that the new budget projection is for a $1.2 billion shortfall?

February 25, 2013 | Registered CommenterCharles Marohn

There's a lot to like about this post, Nate, painful as the realities you outline are. The section on Perham is especially ouchy.

I also like Edward's comment about cleaning up the current mess before spreading out--it reminds me of that Pattern Language element, "Site Repair". Is that why Strong Towns is now apparently situated in the rehabbed Northern Pacific Industrial Center?

February 25, 2013 | Unregistered CommenterSophia Katt

Sophia's post just sparked a thought - Isn't it frustrating that we can spend $6.7 million on a fourth highway interchange around what looks to be a really small town, but there is rarely any backing for weakening the influence of barriers/vacuums like rail lines through the center of our productive urban areas? This is (in my mind) one of the things that American cities are the most woefully inadequate at when compared to our counterparts abroad. Our urban highways are also good bad examples of this.

February 25, 2013 | Unregistered CommenterSkyler Yost

Re: Mankato. First, they assume that the Walmart distribution centre wouldn't have gotten built anyways on one of the many undeveloped/agricultural land plots near the many other interchanges in town, or on this one particular land plot which I assume would still have some sort of less direct access to the highway. This suggests they're not that interested in locating in Mankato, Second, they assume that the new road and interchange that will likely provide rather minor time savings for Walmart's trucks is going to cause them to locate in Mankato (even though they're not that interested in doing so)...

Since this interchange seems to serve no other purpose than promoting development, if this development doesn't happen, $3.4 million will have been spent on useless infrastructure?

The project lists relieving congestion on Victory Dr as part of its purpose. Does Victory Dr have any real congestion? That seems hard to believe, there are 2 lane regional roads here that serve a lot more destinations that have hardly no congestion.

As for Perham, when it says the new interchange will support 240 new jobs, are those all jobs that wouldn't have located in Perham anyways or just jobs in new businesses they expect to see on the road served by the interchange? There's a big difference, since if the new interchange doesn't prove significantly improved access to Perham (it doesn't seem to), any jobs that will locate next to the new interchange would have probably located elsewhere in Perham, like along the old highway, in which case the project wouldn't actually be creating any new jobs. You could even argue that it's destroying jobs since it's taking savings that could have been used for tax cuts or other services (depending on your political ideology) that would have actually created new jobs.

So even if you don't consider the maintenance costs that comes with maintaining this infrastructure, I'm not convinced these projects are as good as advertised.

February 25, 2013 | Unregistered CommenterNicolas Derome

It's an all too common issue. People forget that freeways are always revenue negative. They are not a place of commerce, they assist to facilitate commerce. I think a good analogy, is a commercial vehicle scenario:

No business, ever, would purchase a commercial vehicle with a blank check. Let alone, in the hopes that he/she will eventually have the revenue to support this commercial vehicle. This is especially the case, if the commercial vehicle purchased was grossly overpriced, or required unusually high maintenance. This is because a commercial vehicle is always an expense. Often a required expense, to facilitate commerce. A business owner, to remain successful, would seek to use the most reliable, efficient, and inexpensive vehicle, to accomplish the task, and ideally, already have the revenue plans in place to cover the expense.

Build the minimum road infrastructure to properly support the commercial activity, make it reliable, and long lasting. Make it only when the current infrastructure is no longer sufficient to support the commercial activity.

February 26, 2013 | Unregistered CommenterDennis

Great post. Let me pose an alternative scenario, though: what if the bulk of local revenue DID come from income taxes? Does that change things? That is the case here in Ohio, where "job-creating" projects like these are being sold by politicians all the time.

Right now, in fact, a small (but rapidly growing) community in Central Ohio is toying with the idea of building a $50 million, 5-mile roadway extension that will pass through an existing industrial park. The goal of the project is to "open up 1,600 acres of land for development and create 2,500 jobs with the expansion of the industrial park." Surprise: neither the city nor the county want to foot enough of the bill to get it done, so they're hoping for state support. Here's hoping they don't get it.

February 26, 2013 | Unregistered CommenterScott Ulrich

Scott -- It might change it slightly, but at the end of the day, the LT incentive (in a rational market) should be to maximize income while minimizing expenses. The strategy you describe would likely do that in the short term, but is very unlikely to do so over the long term.

February 27, 2013 | Registered CommenterCharles Marohn

Well, actually it is not really a "fantastic" post, because it just tears down a state program aimed at "creating" jobs, but does not tell us anything about how jobs could, or "should", be created. I found myself waiting for the punch line, so to speak. Perhaps this plays into some thread of this site, in which I am not steeped, being new to the site? Anyone care to fill me in on what such things as "clean up the current mess" means in terms of what we actually DO to create that "productive system"? Thanks.

March 2, 2013 | Unregistered CommenterDavid Venhuizen

David,

I am definitely too steeped in the Strong Towns message, because my initial reaction to your comment was "Of course it didn't offer a 'solution', it was a post about the problems and 'job creation' is an output of a productive system, not a task to be accomplished!" Reading your whole comment, however, made me realize that you have a great point - the initial message is powerful and catchy, but there are times when not enough is done to make sure a new reader would follow the entire argument, particularly the implied 'best practice'. A large part of the Strong Towns message is about allowing productive places to flourish through making sure productive uses aren't outlawed or unproductive uses aren't subsidized, because the most productive development patterns are those of traditional settlements - those that were built pre-WWII. In our modern time period, these are both outlawed and competing with subsidized forms of living (car-based suburban development, namely), and our traditional developments are frequently being torn down and replaced with suburbanized forms of living (city apartments that are surrounded by parking lots, for example). The end result is that the more 'natural' forms of living (the ones that are more financially productive, along with a host of other benefits) have to be advocates for a return to rules and regulations that encourage their development over other (decidedly more modern and therefore less tried and true) forms of living.

I know I haven't exactly answered your question(s), but I hope this helps shed some light on the Strong Towns way of thinking. For more info, check out Jane Jacobs' Cities and the Wealth of Nations, Nassim Taleb's Antifragile, and/or some of the old posts on this site (the From the Mayor's Office ones are great).

March 3, 2013 | Unregistered CommenterSkyler Yost
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