Today’s Company Town

For over half a century, the economic health of the Puget Sound region surrounding Seattle has been intertwined with the Boeing company. Boeing made Seattle the “Jet City” in the ‘60s. But Seattle now spends most of its time trying to stop Boeing from jetting out of town.

Boeing is in the midst of a nationwide search for a new plant location, forcing Washington to compete with other states to maintain a relationship it once took for granted. Whether or not the new factory ends up in the Puget Sound region, the company has already begun cutting ties to the area. Although the area’s economy has diversified recently, the prospect of Boeing’s impending departure gives local leaders the jitters. Just how far can, or should, the Puget Sound region go to stop Boeing from leaving? 

Center of a Boom & Bust Economy

Boeing was founded in the Seattle area in the early 1900s and has maintained a strong presence ever since. Currently, the aerospace giant employs about 60,000 people in Washington state, most of whom live and work in the Puget Sound region. The aerospace industry has a large impact on Washington’s economy. As a whole, it employs about 200,000 people directly and indirectly-about 7.5 percent of the state’s workforce.

Throughout the mid-20th century, Boeing exerted its influence on regional politics to force compromises on taxes, regulation, and other policy decisions. In return, the Seattle area could rely on the company to provide a consistent stream of living-wage jobs and tax revenue. Plus, Seattle could count on Boeing to take an active role in civic and cultural affairs, providing money and leadership for schools, libraries, museums, and education. In many other cities throughout the country, other large employers played the same role-the Big Three auto manufacturers in Detroit, Bethlehem Steel in Baltimore, and McDonnell Douglas in Los Angeles, to name a few.

Back then, cities that relied so heavily on a major employer could better afford to ignore the trade-off looming in the background: the company’s failure could have dire consequences for the city. But now the rules have totally changed. Companies that manufacture goods in the United States are increasingly at a disadvantage as they seek new ways to increase dividends. Frequently, this means downsizing the workforce, taking jobs overseas or to other states where labor is cheaper, outsourcing more jobs to subcontractors, and relying more on temporary help than permanent hires. In a 21st century corporate environment, civic ties are just that-apron strings that keep companies from fulfilling their obligation to shareholders.

There are few success stories under this business paradigm-although shareholders may benefit from continued profits, layoffs (or the threat thereof) leave employee morale low, regional economies falter, and product quality is often compromised. Michael Moore’s documentary Roger and Me, about General Motors layoffs in Flint, Michigan, illustrated the crushing impact of the American auto industry transformation on Rust Belt cities in a most spectacular fashion-lines for food handouts that flash back to the Depression, huge areas of abandoned buildings, and disastrous (yet darkly hilarious) economic development schemes. In another example, the Kodak corporation, headquartered in Rochester, New York, began downsizing in the 1980s and by 1995 had eliminated around 20,000 workers. Rochester has been left with a stagnant economy, declining average wages, and high vacancy rates downtown-despite upward economic trends nationwide throughout the 1990s.

In the Puget Sound region, Boeing’s monolithic presence exacerbates the speculation and wild swings of fortune that have plagued the region since its early days. In 1969, the Boeing workforce was at its all-time peak of 105,000 employees when the airline industry crashed. Over 60 percent of workers were laid off practically overnight, and the Seattle area plunged into a massive recession that lasted until the 1980s. A now-infamous billboard showed up on the outskirts of town reading, “Will the last person leaving Seattle please turn out the lights.”

The scars from that recession are still palpable. Every round of Boeing layoffs and every new production order send shock waves through the region, making front-page headlines and eliciting either heartburn or rejoicing among local officials. Although the newer presence of Microsoft, Amazon, Starbucks, and other large employers diversified the regional economy, the state’s current recession seems to have given Boeing more clout than ever.

Those struggling to keep Boeing in the region must not only fight the macroeconomic trends of globalization and outsourcing of labor markets, but also the short-term downturn in the airline industry. In the wake of September 11, the war in Iraq, and SARS, airlines have cancelled production orders. Airbus, the French airplane manufacturing company, has won other recent orders out from under Boeing’s nose. The resulting Boeing layoffs-about 35,000 since 2001-combine with a national recession to make Washington state’s unemployment rates among the nation’s highest.

Bidding on the 7E7: When Too Much May be Not Enough

In the spring of 2003, Boeing announced that Washington state would have to compete with other states to land a factory for the manufacture of the 7E7, the company’s next commercial airplane. The factory will give rise to an expected 800 to 1,200 Boeing jobs and up to 17,000 spin-off jobs. The Puget Sound region, home to Boeing’s commercial airline division, was stunned by the announcement. Boeing had never before undergone a full-scale search for a plant location.

Although some states grumbled that Boeing was just using them to squeeze Washington state for more concessions, the Washington state legislature took the announcement seriously-as did 21 other states, at last count. In the same legislative session that cut pay increases for teachers and state workers and slashed social services to balance a $2.65 billion budget shortfall, politicians offered Boeing the fattest incentive in Washington’s history-$3.2 billion over a twenty-year plant lifespan. The subsidies will amount to roughly $160,000 per worker per year for jobs that pay $65,000 a year. Michigan offered a $300 million package of incentives and programs. In Texas, seventeen cities submitted proposals hoping to win the assembly plant. Even California, undaunted by colossal budget deficits, put together $250 million in incentives.

The scenario is not unusual. Incentives are part and parcel of economic development departments nationwide, and in recent years, state incentives to win or retain corporations have grown considerably. One estimate puts the national cost of incentives at over $60 billion yearly, leading one to wonder whether the bidding war is worth it. In a nationally syndicated opinion article, Neil Peirce used Washington state as an example of the questionable logic in spending valuable tax dollars to attract employers when infrastructure and services are falling apart due to lack of funding. “Think what that money could mean in creating regions with improved transit and roads, livable city centers and neighborhoods, superior schools and universities, trained workers and fiber optic broadband-the very assets critical to competition in the new global economy,” Peirce wrote.

Most other economic development experts agree. “It’s a complete waste of taxpayer money,” Susan Christopherson, a professor of economic geography at Cornell University, states bluntly. According to Christopherson, incentives do little but erode a state’s tax base and actually factor very little in a company’s calculation of profits. A summary of Boeing’s locational criteria for the new 7E7 plant lists 26 categories, just one of which encompasses tax concerns. Compared with criteria like proximity to a port capable of round-the-clock operations, and a climate with good flying weather year-round, taxes seem to be one of Boeing’s more flexible-and less costly-requirements. Boeing also benefits from intangibles in the Puget Sound region-ties to the higher education system and a skilled workforce, the quality of life in the region, and ties to local subcontractors-to a degree that they may not know or care to admit.

Moreover, with the current state of the airline industry, Boeing should hold much less bargaining power than it did fifteen, or even ten years ago. After all, what prize awaits the winning bidder? The jobs arising from the new plant can hardly be seen as stable. Boeing executives haven’t even decided to produce the plane, and even if they do, building the 7E7 is contingent on getting orders from airlines. This past summer’s layoffs due to canceled orders emphasize that there are no guarantees. In Georgia, the state offered an incentive package worth $320 million ($97,000 per worker) to secure a BMW plant in Savannah. Despite Georgia’s winning bid, DaimlerChrysler hasn’t broken ground because of the recession-and is debating whether to break ground at all.

All of this uncertainty begs the question: if huge incentives are such a losing proposition, why compete?

Despite the fact that Boeing can’t offer what it once did, the Puget Sound region is in no position to play hardball, either. It shares the predicament of many other regions in the U.S.: if they don’t pony up the cash, the Boeings of the world will pack up and move overseas. In a global marketplace, traditional economic theories, which assume low locational flexibility, high capital costs, and little geographic disparity in labor costs and taxes, do not always hold. Cheaper labor costs, fewer regulations, and lower taxes can make the move overseas worthwhile, even considering the cost of building new facilities. Boeing already outsources many of its major parts assemblies to factories in Japan and elsewhere. The 7E7 plant, wherever it ends up, will only handle final assembly of the component parts, which is why it will generate around 1,000 new jobs as compared to 5,000 or 7,000 for previous Boeing models.

Furthermore, as Neil Peirce pointed out in his article, other countries do not always operate based on the noninterventionist ideology of capitalism: “[In other countries, the] rules of the game [are] different from Americans’ free market theories. Suggest a joint venture with a Taiwan company in a designated area there and the government may co-invest with you… Consider a plant in a Shanghai industrial park and the government there might even build it for you.” It’s a conundrum worthy of its own acronym. Former British Prime Minister Margaret Thatcher coined “TINA"-There Is No Alternative-to describe the phenomenon that motivates the incentives game. 

Think Locally, Act Locally

Many economists believe that there is an alternative to the questionable logic of overspending to attract companies. Christopherson points out that Boeing and most large companies benefit from intangibles that do not typically factor into a location decision but may ultimately become evident were they to leave town. Companies rarely think about things like local institutions that train the regional workforce and serve as research and development centers, nor do they consider their dependence on local subcontractors. Replicating these programs and relationships in another place takes time and money. Christopherson recommends that local officials make these connections clear to the company, thereby fostering a more realistic starting point for negotiations. Additionally, Christopherson suggests that a public comparison of some of the true relocation costs could change public perceptions and go a long way towards keeping companies in town.

A growing number of economists also advocate basing an economy on locally owned businesses rather than trying to attract transnational corporations. Lawyer and economist Michael Shuman is one of those who believe that, instead of sweating Boeing’s departure, the region should do away with those regulations and policies that largely benefit big companies. “The standard menu of economic development strategies-courting large manufacturers and exporting as much as possible-is a loser,” he says in an interview. Instead, regional leaders should focus on developing locally owned, import-substituting economies. Although possibly unpleasant, slowly weaning the Puget Sound region from its dependence on Boeing could benefit the region in the long run.

Locally owned business, by definition, serves local needs. Company owners and shareholders live where they do business and have more of an interest in civic affairs, culture, and quality of life. Regional leaders can then make real trade-offs between costs of regulation and benefits to the public at large-without being held hostage by the prospect of economic doom and political suicide. And since local businesses do not employ the vast numbers that large companies do, their failure-although not without impact-will not have the dire consequences of a large pullout. Most importantly, as Shuman wrote in a recent Seattle Times op-ed piece, “locally owned businesses are the best producers of income, jobs, tax receipts and charitable donations for a community over several generations. All these transactions reinforce one another and pump up the local economic multiplier.” A recent economic analysis in Austin, Texas, found that every $100 spent at a Borders bookstore generated $13 of economic impact. The comparable multiplier impact of $100 spent at a local bookstore was $45-more than triple the benefit.

Shuman advocates two steps to stimulate the development of local businesses. First, he says, “state and local governments should get rid of all business subsidies. Ninety-eight percent of subsidies benefit big companies instead of small ones.” Sometimes subsidies are buried in regulatory policy-from zoning to tax incentives to banking. “Tear any policy apart and you will find a Boeing bias,” Shuman says. Second, legislators should put in place measures specifically designed to encourage local entrepreneurs and small business development-things like training, additional loan capital, planning to identify small business opportunities, and the development of links between government, consumers, and local businesses.

To curb the practice of businesses pitting states against one another, a number of advocates have suggested looking at the European Union as a model. The E.U. defines what is and is not acceptable practice to lure companies, requires disclosure of any proposed incentives, and must approve any large subsidy agreements. Typically incentives are only approved in rare cases (in areas that are at a significant economic disadvantage, for instance). Disclosure requirements alone could make states, politicians, and the public more aware of the extent of the competition between states, and of the trade-offs between incentives and other state services. Although the federal government is unlikely to adopt such a policy, multi-state agreements are a workable, if distant, possibility.

Putting Politics Before Policy

As good as they sound, why are these approaches not taken seriously as an alternative to the scattershot big-spending approach to economic development? Despite the high stakes, regional discussion has been somewhat myopic on the Boeing issue, refusing to seriously entertain all but two outcomes: the compromised status quo or billboard farewells on the deserted city’s outskirts. Although alternative economic development strategies make plenty of sense (and are not a secret by any means), political ends determine the means used to bring jobs to town.

For years, local politicians were rather cool, even cavalier about their relationship with Boeing. The response to Boeing’s 1991 decision to build the 777 in the Seattle region was a $47 million impact fee. Although the state’s Growth Management Act mandated such a fee, the company grumbled about it for years, hinting that it might expand elsewhere. Local leaders, however, refused to offer any of the incentives provisioned by other states. A spokesman from the Washington State Department of Trade & Economic Development was quoted in the Seattle Times as saying, “We are hoping and wishing that Boeing will make a decision to stay here. It is a superlative manufacturing company, but we can’t expect all of its decisions to be in our favor.”

Then in March of 2001, in the midst of the dot-com crash, Boeing announced it was moving its corporate headquarters out of Seattle. Although the move was primarily symbolic, hardly impacting the local economy, CEO Phil Condit took it as an opportunity to comment pointedly about the burdensome cost of doing business in the state. A great deal of hand-wringing and finger-pointing among Washington leaders followed, and in the spring of 2003, the state legislature finally began to bend over backwards on Boeing’s behalf. In addition to the incentive package, the legislature overhauled the unemployment tax and workers’ compensation laws-two thorns in Boeing’s side for years. The legislature also passed a 5 cent/gallon gas tax this past spring-after trying for three years-which they hope will bring some relief to the transportation mess in the Seattle area. Businesses, including Boeing, campaigned vigorously for the gas tax increase.

Early this summer, as the competition for the 7E7 plant was announced, cardboard signs usually reserved for political campaigns started to spring up on lawns and highway medians: “Land the 7E7 and Build Washington.” Distributed by the local machinists union, the signs were part of a larger campaign to raise awareness of Boeing’s importance to the regional economy-and also sent politicians the message that they ignore Boeing at their own peril. “Often, politicians feel trapped in a prisoner’s dilemma,” says Greg LeRoy of Good Jobs First in Washington D.C. Not wanting to be known as The Governor That Lost Boeing, politicians feel pressure to win or retain trophy projects. “And when the economy is stagnant,” LeRoy adds, “there is more pressure on elected officials to appear aggressive on jobs.”

The incentive package was an easy sell-only one state senator and ten representatives voted against the Governor’s proposal. No one else wanted to be the one that drove Boeing out of town. The fact that local officials will take the fall if Boeing leaves during their term leads them to make decisions that could compromise the region’s long-term economic health.

Ultimately, the Puget Sound region will likely have to wean itself off of Boeing, whether it wants to or not. Even if the company stays in town, the region’s influence over it, for better or for worse, will continue to diminish. Since predicting when the ties will sunder-and who will be in office at the time-is a crapshoot, politicians need to exhibit real leadership to ensure the area’s long-term economic health. Raising the stakes and passing the dice to the next in line is not really a solution. Nationwide, our leaders must better manage the difficult balance between long-term regional needs and the needs of large employers. Doing so requires more than passing regulations and bribing companies with incentives. It means actively investing in the infrastructure, environmental protection, education, and social services that keep the quality of life high. And it means investing in local business development and potentially forging agreements with other states and countries to limit the size and nature of incentives.

As this issue was going to press, Boeing announced that it will build its next plant in Everett, just outside of Seattle, after all. Press accounts included the note that Boeing will be taking advantage of the $3.2 billion in tax breaks over the next twenty years that, as mentioned above, the Washington legislature approved last year.