The views expressed in Guest Opinions represent only those of the author and are in no way endorsed by Richmond BizSense or any BizSense staff member.
Late last month, with great fanfare, Gov. Bob McDonnell and the Virginia economic development establishment announced a big win. Northrop Grumman, a Fortune 100 defense contractor, decided to move its headquarters from California to Northern Virginia. But we shouldn’t be celebrating quite so much: It’s not that big a deal.
As a lifelong aviation buff, I am a big fan of Northrop Grumman. The firm is the descendant of a company that built famously rugged and pugnacious Navy fighters like the Wildcat, Hellcat, Bearcat, Tigercat and, most recently, the F-14 Tomcat (now retired from service, but destined to live on forever thanks to its starring role in the movie “Top Gun”).
Today they make many of the things that keep us safe and secure, from aircraft carriers to submarines to stealth bombers and the software that makes them work.
But is the move to Virginia as monumental as the headlines lead us to believe?
Three hundred highly paid executives will move from California to northern Virginia. Some empty space will be rented, homes will be bought and the ripple effect of the spending by these new Virginia citizens will certainly be welcome. We win! Go team!
But just as the announcement of the move started to fade as the news cycle moved on, I read this: “Northrop Grumman to lay off 330 people” at Fort Eustis.
So what just happened? Did we gain 300 jobs only to lose 330? Is this Northrop’s way of saying “thank you very much for the $14 million in tax breaks” that were, no doubt, a factor in their decision? Does this mean that 330 people, who yesterday were happily employed by the state’s newest Fortune 100 citizen, are now or soon to be on the street?
Answer: none of the above. This is a “teachable moment” on the danger of reading too much into sound bites and headlines about job losses and gains. And it seems to me that the entire process by which economic development agencies lured the headquarters to Virginia was political theater playing out in newspapers eager for headlines.
First, the move of Northrop Grumman from California to Virginia will not create any new jobs, save perhaps for some temporary additional work at moving companies. All the jobs that we gained represent jobs lost by Southern California. Of course, all things being equal, I’d rather have the jobs here in Virginia, but at the national level, this does not represent economic recovery. What it highlights is that the governors and economic development arms of all 50 states continuously engage in this ongoing competition to bring jobs to their own states. How do they do it? Taxes. More accurately, by eliminating taxes. Tax relief is the big gun in the arsenal of the economic developers when they go hunting for big game. Companies are moving all the time. Usually there is some basic economic reason behind the move, but when it comes down to a choice between state A and state B, that’s when the checkbooks come out.
This is all perfectly legal, of course, but it’s a little bit like the lottery, except that the odds are decidedly against the states. All those companies have to go somewhere, and in the absence of tax breaks or other concessions, they would choose their locations based on more fundamental economic factors. But the net effect of all of this “development” activity is that tax revenue of all of the states goes down. It’s just like the lottery, where winners are paid and get their pictures in the paper, but losers shrug their shoulders as they toss their worthless tickets in the trash outside the convenience store. And, like the lottery, this game is rigged – but in this case, the states are standing in line at the counter, scratching the tickets, and the winner gets to write the check! This lost (or, more accurately, foregone) revenue has to be made up somewhere, by cutting jobs, services or both, or by higher taxes on the citizens and companies already here. Or maybe a new Powerball game. There is no free lunch.
Second, Northrop-Grumman announced the possibility of losing 330 jobs, but not because it was ruthlessly cutting costs by tossing its workers under the bus. It made the announcement because Virginia law requires it to make such an announcement when a contract will soon expire and go out for bid if that event could trigger the loss of a significant number of jobs. So all they are saying is that if Northrop Grumman loses the contract, it will have to jettison 330 people. But the odds are high that the winner of the new contract will have places for those same people, or others, and there does not have to be any net loss of actual jobs. It should be a non-event either way as far as Virginians are concerned.
What neither story mentions is the net effect of the tax giveaway. If Northrop Grumman and other heavily recruited corporations paid the same taxes that our homegrown companies pay, Virginians – both corporate and individual – could enjoy lower tax rates or more services or both. This particular $14 million might be a drop in the bucket, but the cumulative effect of this corporate game of musical chairs adds up, and it is real. The effect is the jobs that aren’t created (or sustained) because of the money that the taxpayers did not have to spend or invest. These very real effects of taxes do not make headlines, but they are just as real, or more so, than anything you’ll read about in a press release.
So don’t read too much into the headlines or government announcements of job losses, jobs created or jobs saved. They are all just statistics, and as Mark Twain famously said, quoting Benjamin Disraeli: “There are three kinds of lies: lies, damned lies, and [job] statistics.”
The views expressed in Guest Opinions represent only those of the author and are in no way endorsed by Richmond BizSense or any BizSense staff member.
Late last month, with great fanfare, Gov. Bob McDonnell and the Virginia economic development establishment announced a big win. Northrop Grumman, a Fortune 100 defense contractor, decided to move its headquarters from California to Northern Virginia. But we shouldn’t be celebrating quite so much: It’s not that big a deal.
As a lifelong aviation buff, I am a big fan of Northrop Grumman. The firm is the descendant of a company that built famously rugged and pugnacious Navy fighters like the Wildcat, Hellcat, Bearcat, Tigercat and, most recently, the F-14 Tomcat (now retired from service, but destined to live on forever thanks to its starring role in the movie “Top Gun”).
Today they make many of the things that keep us safe and secure, from aircraft carriers to submarines to stealth bombers and the software that makes them work.
But is the move to Virginia as monumental as the headlines lead us to believe?
Three hundred highly paid executives will move from California to northern Virginia. Some empty space will be rented, homes will be bought and the ripple effect of the spending by these new Virginia citizens will certainly be welcome. We win! Go team!
But just as the announcement of the move started to fade as the news cycle moved on, I read this: “Northrop Grumman to lay off 330 people” at Fort Eustis.
So what just happened? Did we gain 300 jobs only to lose 330? Is this Northrop’s way of saying “thank you very much for the $14 million in tax breaks” that were, no doubt, a factor in their decision? Does this mean that 330 people, who yesterday were happily employed by the state’s newest Fortune 100 citizen, are now or soon to be on the street?
Answer: none of the above. This is a “teachable moment” on the danger of reading too much into sound bites and headlines about job losses and gains. And it seems to me that the entire process by which economic development agencies lured the headquarters to Virginia was political theater playing out in newspapers eager for headlines.
First, the move of Northrop Grumman from California to Virginia will not create any new jobs, save perhaps for some temporary additional work at moving companies. All the jobs that we gained represent jobs lost by Southern California. Of course, all things being equal, I’d rather have the jobs here in Virginia, but at the national level, this does not represent economic recovery. What it highlights is that the governors and economic development arms of all 50 states continuously engage in this ongoing competition to bring jobs to their own states. How do they do it? Taxes. More accurately, by eliminating taxes. Tax relief is the big gun in the arsenal of the economic developers when they go hunting for big game. Companies are moving all the time. Usually there is some basic economic reason behind the move, but when it comes down to a choice between state A and state B, that’s when the checkbooks come out.
This is all perfectly legal, of course, but it’s a little bit like the lottery, except that the odds are decidedly against the states. All those companies have to go somewhere, and in the absence of tax breaks or other concessions, they would choose their locations based on more fundamental economic factors. But the net effect of all of this “development” activity is that tax revenue of all of the states goes down. It’s just like the lottery, where winners are paid and get their pictures in the paper, but losers shrug their shoulders as they toss their worthless tickets in the trash outside the convenience store. And, like the lottery, this game is rigged – but in this case, the states are standing in line at the counter, scratching the tickets, and the winner gets to write the check! This lost (or, more accurately, foregone) revenue has to be made up somewhere, by cutting jobs, services or both, or by higher taxes on the citizens and companies already here. Or maybe a new Powerball game. There is no free lunch.
Second, Northrop-Grumman announced the possibility of losing 330 jobs, but not because it was ruthlessly cutting costs by tossing its workers under the bus. It made the announcement because Virginia law requires it to make such an announcement when a contract will soon expire and go out for bid if that event could trigger the loss of a significant number of jobs. So all they are saying is that if Northrop Grumman loses the contract, it will have to jettison 330 people. But the odds are high that the winner of the new contract will have places for those same people, or others, and there does not have to be any net loss of actual jobs. It should be a non-event either way as far as Virginians are concerned.
What neither story mentions is the net effect of the tax giveaway. If Northrop Grumman and other heavily recruited corporations paid the same taxes that our homegrown companies pay, Virginians – both corporate and individual – could enjoy lower tax rates or more services or both. This particular $14 million might be a drop in the bucket, but the cumulative effect of this corporate game of musical chairs adds up, and it is real. The effect is the jobs that aren’t created (or sustained) because of the money that the taxpayers did not have to spend or invest. These very real effects of taxes do not make headlines, but they are just as real, or more so, than anything you’ll read about in a press release.
So don’t read too much into the headlines or government announcements of job losses, jobs created or jobs saved. They are all just statistics, and as Mark Twain famously said, quoting Benjamin Disraeli: “There are three kinds of lies: lies, damned lies, and [job] statistics.”
Northrop Grumman’s move to Virginia and the downstream impact it creates on Virginia is far more important than 330 jobs that will be assumed by another firm at Ft. Eustis. Having Fortune 100 firms like Northrop Grumman and SAIC relocate headquarters to Virginia is a very positive move depsite the temporary tax furlough. How anyone can write about this being a ruze with little impact is beyond me. I am pretty confident that the high paying headquarter jobs will create much more tax revenue at an individual level than the Ft. Eustis jobs. You even said it yourself, the Ft.… Read more »
You are spot on about the job “losses” pertaining to the contract being renewed or not. You made some mention of the 300 employees coming to VA and some minor contribution to the local economy. BUT… you have vastly underestimated the value of of Fotune 100 company’s spending. The concession was only $14 million. A company like that brings more money than that to VA every day and disperses it into the local economy. This isn’t just about payroll tax. It’s more about their guests, visitors and business services than their employees. They will wine and dine visiting big wigs,… Read more »
Jim – If my use of the Twain quote implied that there is some subterfuge going on – that was not my intent. My point is that headlines about hundreds of jobs gained, jobs lost and jobs saved, whether it’s from state government or federal action are not the whole story because a) there is a hidden cost that we all bear and b) it’s often a zero sum game. We win some and we lose some. When we win a big one like NG, it’s good news for us (and bad news for CA), but when we don’t win,… Read more »
David Goodwin, What do you mean we’re not “stroking a check on a borrowed bank account like the Federal gov’t”?! Did you not read that our General Assembly and our Governor decided to borrow a combined $1.1 Billion for FY2011?? We borrowed $600 Million from VRS to fix our budget gap–That borrowed amount will have an interest rate of 7% for 13 years. Virginia also just took out $500 Million in bonds for road projects. The road bonds were something Kaine wanted to do, but even he knew we had no way to make the bond payments. I’m in no… Read more »
Dave -I’ll say it again – I am glad the executives will come to Virginia and spend their money here. I hope they will stay. And we already have tens of thousands of Northrop Grumman employees all over the state spending their wages. Further – my beef is not with NG, Virginia EDP or Gov. McDonnell. My point is simply that Government (not ours nor any other) doesn’t “Create jobs” when it moves people around with tax incentives. So if we are going to use tax policy to attract business – why not eliminate all taxes on all businesses –… Read more »
Tom: You failed to take into account that the 300 or so tranferees to Virginia are highly paid and will be paying Virginia income tax for years to come, as well as spending dollars every day in the Commonwealth.
The payback will certainly take some years but in the end Virginia will have a net gain.
Tom,
Very well said, I liked your analysis. Brian is correct, these “executive transplant” will purchase homes, goods and services which will benefit our economic machine on a daily basis. And their prescence in VA generates progressive attention on the Commonwealth as a good place to live while doing business.
Brian – No – I did not fail to to take that into account. Clearly, more jobs in Virginia means more revenue, and that might easily exceed 14MM over time. What I am saying is the net gain from this type of “job creation” activity must also take into account the losses we suffer when we lose one of these beauty contests. To that point – check out today’s article on the shutdown of the furniture plant in Martinsville. Here we are in the good old US of A fighting over which state gets the privilege of paying the most… Read more »
It is well established that more jobs are created by small businesses than large businesses. Yet we race after the big businesses thinking that they will be our salvation. It is not only the cost of the incentives. Frequently there are changes in laws to offer more protection to business and fewer for our citizens – a literal race to the bottom. What is the end result? Where are the two chip plants that were to make Richmond a silicon valley of the East? Motorola was never built and the other is now shut down. If Virginia wants to create… Read more »
In my view, the big issue is incentives… they have exploded in use to the point where it is difficult to see if or who really benefits beside the direct receipient. Yes sometimes the incentives do help. However, I believe in most cases a deal is made, which may or not benefit the community, but the community will surely pay for it in lost revenues, and inequitable tax liability. Some time back, in an effort to draw business to their rural communites, a number of new industrial shell buildings were constructed…in advance of a viable prospect. At one time almost… Read more »
I’d like to respond to Tom’s point that it is vital we dig behind headlines with data and make sure we gain an accurate insight. What would be helpful in a discussion of this type is a Sources and Uses of Funds analysis. Are our Economic Development organizations required to perform this type of analysis? Is it a matter of public record? Does it take into account the true economic ripples (some of which are mentioned in the article and replies)? We allow ourselves to be made victims if we take headlines and “facts” at face value. Tom, thank you… Read more »