Tom Snyder: When jobs outnumber people, how should we spur economic development?

Last week I reported on a recent study
conducted by the NC Secretary of State’s office, in partnership with Dr.
Caroline Glackin, an economic development researcher at UNC Pembroke. The study
analyzed the job creation engine that young businesses represent in North
Carolina. I also discussed comments made by Tom Barkin, the President and CEO
of the Federal Reserve Bank of Richmond, which is responsible for economic
support to the region of the US which includes North Carolina. I’ll summarize a
couple key points below, but you may want to read that piece as a preface to this week’s
article where I’ll take a deep dive into the economics of economic development,
and suggest that North Carolina make policy steering adjustments, based on
recent data.

As of May 2023, there were approximately
888,000 registered and active businesses in North Carolina. More than half of
them, 460,000 formed between July 1, 2015 and June 30, 2022. If you assume new
businesses formed at the same rate from July 2022 – May 2023 (which is
conservative, new business formations have been on the rise the last 3 years),
then approximately 526,000 new businesses have been launched in NC in the last
9.5 years. That represents 59% of all businesses in the state.

Significantly, young businesses create nearly
all net new jobs. Established businesses, like hair salons, gas stations and
restaurants that have been around for many years tend to sustain the same number of jobs, not create new job growth. It is
new businesses that dominate the creation of new job growth in a region.

What
does this mean for economic development?

For many decades, economic development at a
city, county and state level has consisted of “hunting for jobs.”  By this, I mean that economic development
offices primarily focus on attracting companies to move to, or open a new
office or facility in, the jurisdiction of the economic development office. The
idea was founded on the premise that there
are more people in an area than there are jobs for those people. Therefore,
if a major effort could be conducted that brought a chunk of new jobs all at
once, that would be beneficial to balancing the scales between residents and
jobs.

At a tactical level, attracting jobs usually
consists of spending millions of dollars on site development projects and tax
incentives, plus often a token spend (by comparison) on workforce development.
Workforce development is one of the carrots that regions offer, under the
assumption that companies won’t relocate to a place where the workforce is not
skilled for whatever that company does. I won’t spend time on this topic today
except to say that I have not seen strong evidence that workforce development is
particularly meaningful on a company-by-company basis. My view is that most
programs are woefully underfunded, and the target companies themselves are
detached from the process, failing to provide a significant number of
meaningful internships and apprenticeship opportunities for practical skill
development. If I hear enough feedback, I can dig deeper into this topic
another day.

Where I want to focus today is on the two
largest tools in the toolbox for traditional economic development, namely site
development and tax incentives.

Site development prepares available land for
factories, distribution centers, data centers and other large facilities by
putting in place utilities, communications and transportation infrastructure.
These costs quickly scale into the millions of dollars.  Depending on the site location, geography,
zoning and population density, typical costs of site development may look like:

●    
Land acquisition – $3,000 –
$30,000 per acre

●    
Grading – $10,000 – $100,000 per
acre

●    
Roads, Utilities, Stormwater
Management – $50,000 – $500,000 per acre

●    
Environmental Remediation –
$100,000 – $1-5M or more

●    
Permitting – $5,000 – $50,000

Tax incentives are most commonly negotiated as
an exemption from future taxes, based on the number of jobs an employer will
create.  In North Carolina, the Job
Development Investment Grant (JDIG) is administered by the Department of
Commerce. This is a performance-based tax incentive program. This means that
incentives are given to the companies based upon actual job creation and
capital investment that occurs, typically over 5-12 years. There tend to be
minimum thresholds on number of jobs, wage level and amount of capital
invested.

The JDIG program has been under significant
scrutiny in recent years. Earlier this year, during my annual State of the
Region Address, I reported on how frequently large, established companies fail
to hold up their end of the bargain in these negotiated deals. The examples in
the non-exhaustive list below represent $432.1M in tax breaks that failed to
deliver in the recent past (source: Carolina Journal reporting on the NC Dept
of Commerce Economic Incentive Committee):

●    
Bandwidth – failed to meet $113M
payroll goal (Raleigh)

●    
Allstate – missed hiring goal by
850 jobs (Charlotte)

●    
Centene – pulled out of $1B
expansion and 6,000 job commitment (Charlotte)

●    
Advance Auto – failed to create
700 new jobs promised to create $1B benefit to NC (Raleigh)

●    
Microsoft – pulled out of two
multi-million dollar expansion promises (Charlotte, Morrisville)

●    
Sonic Automotive – failed to
create “hundreds of jobs” (exact number not reported)

●    
Conduent – did not achieve 200 job
expansion (Durham)

●    
S&D Coffee – promised 200 jobs
but actually reduced headcount by 150 (Concord)

I do not know the total sum that the state
spends annually in economic development site work and tax incentive programs,
but it is easily north of $100M.

This form of economic development has not
always underperformed. Originally, focused on manufacturing, it was well suited
to meet the needs of the heyday of growth in the 1940’s through 1960’s.
Manufacturing was the core industry for many cities across the country. By the
1970’s we saw slowing of growth and by the 1980’s massive job losses in that
industry began to occur, largely due to globalization. Many communities failed
to adjust their economic development strategy in this period and fell victim to
what we now know as the rust belt.

In many communities, the core principle was
not abandoned, but rather adapted to other industries. Site development and
incentives for advanced manufacturing did not create as many total jobs, but
were still major economic projects. Knowledge workers needed large corporate
campuses and labs and facilities to work from. Even today, data centers – which
create very few jobs – are incentivized with these same tools.  A small to medium data center creates roughly
50 direct jobs. Primarily these are security guards, maintenance staff and a
handful of IT support and electricians.

I’ll share an example. Google built a data
center in Lenoir, NC. The project started in 2007 and expanded in 2018. It has
been reported that the project was eligible for $26.5M in property tax
incentives from Caldwell County and NC. It additionally qualified for JDIG
incentives estimated at $10-20M and likely received site development support in
the range of another $10-25M.  The site
has created roughly 150 direct jobs, and many indirect and temporary jobs like
construction on the project. 

For purposes of estimating the return on the
economic development incentives, let’s assume that this project was awarded the
midpoint of each of the ranges above.  In
this case, the data center project cost taxpayers $59M ($26.5M property taxes
that were not collected + $15M in employee taxes not collected, plus $17.5M in
taxpayer money spent to develop the site). Considering the 150 direct jobs
created, that is a cost of $393,333 in taxpayer spending per new job created. 

To qualify for JDIG incentives, the jobs
created must pay a wage that is at least 110% of the average wage in the county
the jobs are created.  Currently, the
average wage in Lenoir (Dept of Commerce, 2023 data) is $40,000-$42,000 per
year.  Therefore the data center jobs
created must be at least $44,000-$46,200. Likely most of the data center jobs
are near that average, with a few of the IT positions paying higher.  Let’s assume that across the 150 jobs, the
typical wage is $50,000 per year.

I won’t get too far into the weeds here, but a
worker in North Carolina making $50,000 per year and taking a standard
deduction pays approximately $1,770 in state taxes annually (not including
common deductions like mortgage interest or child tax credits).  At this pace, it would take each worker 222
years to pay back the original investment that the state made to attract their
job to NC.

Of course this is an oversimplification. The
data center project created a halo of other jobs in the region, and workers pay
sales taxes and conduct beneficial commerce with other businesses as their
salaries circulate money through a local economy.  But even with these secondary benefits, it is
extremely difficult to reconcile the benefits of “big game hunting” style
economic development.

Why does this kind of economic development
still dominate in most places across the US? 
I think there are two reasons.

First, and probably most significantly, big
projects create big headlines. Elected officials love ribbon cuttings, grand
openings and the shock-and-awe news cycle that accompanies these types of
projects. These are newsworthy wins that are easy to campaign on. It is no
wonder that the same big companies that receive huge incentive packages are
often one and the same as the companies spending millions of dollars on
lobbying and campaign contributions. These projects provide mutual benefit to
both parties, while your average taxpayer ultimately covers the cost.

As a side note to this first point,
journalists fall prey to this big story trap. Of course it is newsworthy to
cover big corporate development wins. It should be every bit as meaningful to
cover a startup that hired employee #3. 
After all, that’s 50% corporate growth, a huge win! But editors don’t
prioritize small businesses that most people have never heard of as big news,
and the fact a story like this is happening every single day somewhere in your
community makes it impossible to deploy enough reporters to cover the activity.

The other reason this style of economic
development continues to persist is more subtle.

The answer hearkens back to the original
premise. Are there more workers than jobs?

In most larger cities, there is so much
opportunity that they are seeing massive immigration. Raleigh is a prime
example. At a recent event hosted by the city, they announced that Raleigh is
seeing 70 new people move here every single day.  Does that sound like a place where there are
more workers than jobs?  Quite the
opposite. Employers are desperate for talent. Now, more than ever, people are
taking control of their own destiny through entrepreneurship.

There have been two keys that have steered people to consider entrepreneurship
– and to start new businesses – at record rates. Technology advancement and the
wake-up call of the pandemic. I do not believe this is a temporary glitch or
bubble.  The shift towards
entrepreneurship is a cultural shift that is accelerating. 

4G and 5G networks, precise global positioning
technology, secure mobile payments and cloud services have combined to enable
new forms of work to be highly effective. 
Gig Economy style jobs have become prevalent in many verticals including
transportation, retail, healthcare, logistics and distribution. These jobs
allow people to set their own schedules and work only as much as they want to.

At the same time, these technologies have
reached a maturity that enables a massive segment of jobs to be worked
remotely. Remote work has eased the pressure of commuting and for some has
reduced the pressures of childcare and other factors that may have kept people
out of the workforce. Beyond working remotely for a traditional employer,
remote work capability has also created a spike in freelancing, as people put
their skills in the market for themselves.

The pandemic was a tipping point, providing a
wake-up call that energized many people to experiment with this new paradigm.
In 2021, we saw the Great Resignation where millions of people (more than 4M per
month in late 2021 and early 2022) quit their jobs out of frustration, burnout
and realization that there is a better way to live than to be at the whims of a
sub-optimal employer. As people reevaluated their career paths, more and more
frequently they decided to work for themselves or take a chance on starting
their own business.

Fundamentally, we have flipped to a society
that has far more jobs than people. No longer are people defining themselves
through the lens of 40 hours per week. Entrepreneurs often work more than 40
hours, but on things they are passionate about. And many work less, setting
their own limits, based on numerous quality of life considerations.

In places like Raleigh, it is easy to
recognize the new paradigm where there are more people than jobs. In more rural
areas, it can be more difficult to see this. For a place to authentically have
more jobs requires broadband. Rural communities that have invested in fiber and
that have strong cellular networks, like Wilson, NC, are thriving. But places
that lack high speed networks are stuck in the past. There is a digital rust
belt, if you will, of communities that are unable to connect their residents to
the thousands of job opportunities available in the remote work and gig
economy.

Places without broadband may still have more
people than jobs. But here’s the thing. Those places won’t attract companies to
open a new office or factory. Because those employers require broadband as
well. Even the old economic development paradigm is bound to fail.

What should economic development offices
consider in a world with more jobs than people?

The priority shifts to labor. Where economic
incentives previously were steered towards industry, communities now must focus
on their residents. Immigration is vital for growth. Tulsa, Oklahoma was an
early mover in this space. In 2018, Tulsa launched a program called Tulsa
Remote, offering $10,000 to anyone who moved to the city to work from Tulsa, no
matter where their actual job was housed. Local residents pay income and sales
taxes, and Tulsa was happy to import worker salaries from companies elsewhere.

There is still a need for business focused
economic development, but increasingly it should focus on young companies, not
established ones. Remember, it is young businesses that create the new jobs.
The State of Virginia has put taxpayer dollars into a startup investment fund
and is co-investing with traditional VC’s. Early stage capital, provided
through grants or seed investments can make or break the success of a new
venture.

Recall from last week – if North Carolina were
able to help just 5% more early stage ventures to make it past year 4, to
become sustainable businesses, it would create 25,500 new jobs, driving nearly
$1B in new wages and another positive $500M+ in halo effect commerce.

What would it take to drive that 5%
improvement?  Let’s get back to the
numbers.

There are 526,000 businesses in North Carolina
created in the last 9.5 years.  Let’s
assume a third of them, or 175,000 are 3 or younger.  Five percent of that total would be 8,750
businesses, each employing 2.66 employees (not including the owner).  As I discussed last week, If those businesses reached
sustainability, they would create an additional 7.6 jobs each – a massive
windfall for the state.

What might a state incentive program look like
for these small businesses?  Let’s look
at the data center project from above. $59M in incentives to create 150 new
jobs.  $59M could instead look like a
$6,700 grant to each of the 8,750 young companies.  Would that amount of additional working
capital make a difference to a small organization? It is a no-brainer to think
that it would create enough impact to result in far more jobs than 150 created
at the Lenoir data center run by a $1.6 trillion dollar company.

I’m not sure that a free handout to every new
business makes sense. But I absolutely think that a significant budget
allocation to be deployed to new businesses should be core to future economic
development strategy for North Carolina. I would make this a combination of
competitive grants, revolving loan programs and some form of grant/investment
matching program.

I believe we should focus both on attracting
labor and supporting entrepreneurial ventures. The playbook should include
funding for:

●    
Increase the current SBIR/STTR
matching program administered by the NC Department of Commerce (the One Small
Business Fund).

●    
Add funding for startup micro
grants and larger grants, administered based on a competitive application
process and by an independent nonprofit organization or private foundation like
NC IDEA.

●    
Create new funding for childcare
and elder care as an attraction tool for talent and to free entrepreneurs to
spend more of their time and money on achieving sustainability for their
businesses.

●    
Invest significantly into
affordable housing. The most successful regions are the ones that have strong
workforces and the lack of affordable housing is a huge impediment to a healthy
and diverse economy.

●    
Create an equity investment fund,
administered by an independent nonprofit to invest in local companies,
providing a path to direct financial return on taxpayer dollars back to the
state.

●    
Invest heavily in nonprofit
Entrepreneurial Support Organizations that provide support and resources to
entrepreneurs and startups. [Full disclosure – I operate RIoT, a NC-based
nonprofit ESO].

●    
Create new loan programs and
bolster existing ones to help small businesses invest in capital equipment and
early stage direct costs.

●    
Eliminate the restriction on local
government to establish broadband infrastructure and provide broadband services
to their own residents.

●    
Require economic development
support services to be funded by private industry as a component of bids to
deploy new private broadband services, to help impacted communities to take
advantage of the broadband to create new jobs once the infrastructure is in
place. Note that there is significant federal funding for these broadband
projects that broadband providers are applying to claim. In my opinion, those
projects should not be awarded without aligning entrepreneurship programs,
funded independently by private industry as a requirement for award.

Note that not everything on the list above is
new. Affordable housing, for example, has been a major topic of discussion in
recent local elections. But I suggest a slightly different framing. Call these “economic development” priorities. 
Housing should not only be a concern of the housing authority. Economic
developers should be thinking about all of the above topics as part of their
new playbook – are more impactful than simple site development and JDIG style
tax incentives.