Friday, March 05, 2010

Corporate Welfare is Better Than Corporate Bailouts?

I've commented before on Thomas Friedman's fetishism toward China. Alas, we live in a short-sighted democracy while they live in a far-sighted dictatorship. You know the drill. Back in 2005, Friedman includes Ireland on his short list of countries we needed to be concerned about. Wow, only five years ago he saw Ireland as a challenger to the U.S. as a destination for "premier U.S. companies, such as Intel and Apple, [when] building their newest factories, and even research facilities". Today, Friedman's argument remains the same - it's just that he's quietly dropped Ireland from his list of challengers to U.S. supremacy.
We are the United States of Deferred Maintenance. China is the People’s Republic of Deferred Gratification. They save, invest and build. We spend, borrow and patch.

And this contrast is playing out in the worst way — just slowly enough so the crisis never seems acute enough to take urgent action. But, eventually, infrastructure, education and innovation policies matter. Businesses prefer to invest with the Jetsons more than the Flintstones, which brings me to the subject of this column.
Let's see... The Flintstones... Six original seasons, numerous spin-offs, TV movies and specials, a few live action movies, and Fred and his gang are still sufficiently famous to sell cereal. The Jetsons, a space-age repackaging of the Flintstones. Only 24 original episodes followed by an unsuccessful attempt at a revival in the mid-80's and a much smaller set of movies and specials. Sure, it was a bon mot, but the joke would work better if The Flintsones weren't, in actuality, the better investment.

One of the things you have to consider when discussing a totalitarian state is that the government has a vested interest in making itself look better. As commenter CWD is apt to note, it turns out that back during the Cold War the USSR wasn't very honest about its productivity and capacity. Yet today, people like Friedman would have us take China at its word. A nation that continues to grind down dissent, censor, and stifle the spread of information should be taken at its word, right? And it says that it is building great infrastructure that will carry it into the future? Let's not worry that we're being sold a bridge in Shanghai. Concrete reinforced with... is that styrofoam? And garbage?

China is literally insisting, "The bridge is safe". But perhaps it's a better metaphor for the choices companies are making than "The Flintstones vs. The Jetsons". How much trust do you have in that bridge? How much faith do you have that it's an isolated mistake? Like putting DEG in toothpaste, melamine in pet food, or using lead paint in children's toys. "Danger, Will Robinson." Maybe Friedman has confused The Jetsons with Lost in Space.

I won't deny the significant element of truth behind Friedman's concern. The United States has not been good about investing in its infrastructure and preparing for its future. China has been building and expanding an educational system that it believes will help it advance in the future, while the U.S. K-12 system focuses largely on the lowest common denominator and its colleges are financially squeezed. But even as he glides around Shanghai in a hired car, the driver of which is no doubt instructed "Don't let the American see the bridge made out of garbage", Friedman misses the fact that China has a lot of problems of its own. It is willing to effectively throw away a generation of workers to man the sweatshops that churn out cheap goods for foreign companies and, while it does cherry pick students it believes will excel academically or athletically for specialized education and training, it's not so clear that you get the same benefit from a scientist whose career was chosen for him by the state as you do with a scientist who was personally drawn to the subject, even if he gets A's on all of his exams. There actually are benefits to living in a free society.

Friedman also misses the point when he parrots the complaint of Intel's CEO,
A new semiconductor factory at world scale built from scratch is about $4.5 billion — in the United States. If I build that factory in almost any other country in the world, where they have significant incentive programs, I could save $1 billion,” because of all the tax breaks these governments throw in.
When the promise of a new plant is on the line, U.S. states scramble to give tax breaks and incentives to companies like Intel, arguably well past the point of fiscal sanity. It's understandable why the CEO of a corporation wants to not only continue to enjoy that "competitive" environment, but also to demand a $billion or so in additional incentives, but be real. State and local governments don't have the money, and if they did they would be guilty of the "spend, borrow and patch" approach Friedman just criticized.
Not surprisingly, the last factory Intel built from scratch was in China. “That comes online in October,” he said. “And it wasn’t because the labor costs are lower. Yeah, the construction costs were a little bit lower, but the cost of operating when you look at it after tax was substantially lower and you have local market access.”
So an up-front subsidy, virtually no tax on the operating plant... is there anything else on the CEO wish list?
With the generous research and development tax credits and lower corporate taxes they receive, Intel’s chief competitors in South Korea basically have “zero cost of money,” said Otellini.
Free money.... Why isn't this plan sounding like it's sustainable. (How's Ireland doing these days, again?) Seriously... when it was union states versus "right to work" states, we were told that the solution was to undermine the unions. Then it was "right to work" states versus Mexico. Now it's Mexico versus India and China. "Titans of industry" like Intel's Otellini will inevitably chase the lowest cost plants and labor. Sometimes, when a profitable, multi-billion dollar company comes to you and says, "To stay competitive in the future you must give us $1 billion up front for building our plant, freedom from business and property taxes once our plant is built, interest-free loans to pay for construction and operation, and don't even get me started on environmental regulations," the proper response is, "Enjoy building your new plant in China."

Even after hearing Intel's, "I want a free lunch - and I want to eat your lunch as well" position statement on its future construction plans, Friedman remains credulous, quoting Otellini, "'Something has to pay for' everything government is doing today". The key point being, that "somebody" is not going to be Intel or Otellini. Friedman writes,
We had to do the bailouts, the buy-ups and the jobs bills to stop the bleeding. But now we need to focus on the policies that spawn new firms and keep our best at the top.
Perhaps the $billion or two that Otellini would demand to build a U.S. plant could be better invested in infrastructure improvements, education and encouraging start-ups. Because, you know what? There's always going to be somebody who's willing to offer Intel a better deal for its new plant, and it doesn't actually serve us or help us build a sustainable future to participate in that type of race to the bottom.


  1. Since one of the things that makes it cheaper to manufacture in China is the lack of intrusive laws (like protections for intellectual property) . . . I wonder how Intel will feel when half the workers leave to start the "Intel-like" chip factory across the street . . .


  2. Historically, of course, the danger wasn't so much that the plant next door would steal your technology - it was that there would be an "unofficial" night shift in your own factory, producing "counterfeit" goods using your own machines. I expect that's less likely to happen when you own the plant.

    I expect Intel will spend a lot of money on security, and has good protocols at all of its plants to protect its IP.