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Foxconn in Wisconsin -- A Truly Bad Deal

 Last year, I wrote a blog about a young man from Alabama who went to work in a new plant built by the Golden Dragon Copper Tubing Company, a Chinese firm that had located in Alabama in response to tax incentives provided by the state, beating out a number of other states offering tax incentives that didn't measure up to Alabama's offer.  Golden Dragon had decided to build the plant in the U.S. to avoid import taxes it would have had to pay if it shipped its product from China. The tax incentives added up to a princely $200 million.  The young man had recently gotten a machinist certification and thought he would be making about $19 an hour, the going wage for machinists.  Golden Dragon gave him $11.  Even after a raise to $11.75, he couldn't pay for his mortgage, baby food, insurance or light bills.  The reality, he discovered, was that, in a state flooded with low-skill workers who were looking for work, Golden Dragon would not pay more than it had to pay, and he was not going to do much better than that. 

The political benefit to the politicians who proudly announced that Golden Dragon was coming to Alabama was immediate and powerful.  Only a very small part of the $200 million in tax concessions they had granted would come out of the current state and local budgets.  They would be paid for by future generations.  The benefit to the workers turned out to be negligible.  But that had no bearing on the politics.

This story, however, was very small potatoes compared to the story of Foxconn coming to Wisconsin.  The moral, though, is exactly the same.

Here are the facts. In July, Governor Scott Walker and President Trump took the stage in the White House to announce that Hon Tai Precision Industry Co., a Taiwanese firm better known as Foxconn, was going to invest $10 billion to build a new manufacturing plant in Wisconsin that would start with 3,000 workers and eventually employ 13,000.  Average wages in the plant would be about $53,000 per year.  This, of course, was just what candidate Trump had promised Rust Belt workers he would do in his campaign and Governor Walker had made jobs the cornerstone of his reelection campaign, too.  A $10 billion investment by a foreign global firm like Foxconn was a spectacular way to deliver on those commitments.  Not only would this be an iconic example of returning manufacturing jobs to a manufacturing state from overseas, but Foxconn, as the leading maker of products of the top brands in personal computing, cellphones, printers and related equipment, could hardly be characterized as the manufacturing past.  It sure looked like the manufacturing future.

Foxconn has not said in so many words why it decided to locate a manufacturing plant in the U.S., but observers point to two probable factors.  One is that President Trump has threatened to raise import duties dramatically; Foxconn could avoid those duties if it manufactures in this country.  Second, the plant it plans to build will be manufacturing glass panels of the kind used in TV's, laptops and smart phones; glass is very heavy and Foxconn could save a lot of money in shipping costs if it manufactures in the U.S.  

Either or both of these factors by themselves could produce strong financial incentives to locate in the United States.  But that was not enough for Foxconn.  Just like Golden Dragon, Foxconn hired an American firm to run a competition among American states to see which state would offer the largest tax concessions to get this new plant. 

It was money well spent.  Wisconsin came up with $3 billion in tax breaks.  Foxconn has insisted that there is a deal only if the Wisconsin legislature passes a bill with the tax break in it by the end of September.

Three billion dollars is a lot of money.  It would be one of the largest deals of this kind any state has ever made to attract a company.  Up until now, the typical amount that the state has come up with to attract a company has amounted to about $2,457 per worker.  This deal would come in at slightly above $19,000. 

But that is only one way to do the calculation.  The state talks about creating 50,000 jobs, including suppliers and small businesses that spring up to support the people who work at the factory.  Bloomberg estimates 5,000 to 10,000 jobs.  Foxconn talks about the possibility of eventually empoying 13,000 people.  The Wonkblog column in the Washington Post did the math for 13,000 jobs.  The tax subsidy would amount to $200 million to $250 million for up to 15 years. This works out to roughly $230,700 per worker for 13,000 workers.

On July 28, Michael Hicks, the George and Francis Ball Distinguished Professor of Economics at Ball State University, published a piece on the Marketplace site in which he says that if the plant employs the 3,000 workers it has promised, it will receive a subsidy from the state that will exceed the projected pay for those employees by more than $10,000 each.  As Hicks points out, under these conditions, Foxconn will be operating in the state with no risk whatsoever. In his words, "This isn't simply a bad deal. It is an over-the-top bad deal for Wisconsin."

How can it possibly be worth a tax break of $230,000 per worker to create these jobs?  Golden Dragon looks like a great deal—for the state—by comparison. 

The argument the state makes is that this is a heaven-sent way to put Rust Belt frontline factory workers back to work.  But that turns out not to be true for at least two reasons.  One is that the unemployment rate is already well below five percent.  The second reason is more important.  Making glass panels for electronic gizmos is tricky.  It turns out that it is work that has to be automated, because, when it is done by hand, imperfections in the finished product are much more likely than if the glass is produced by a robot.  Neither Foxconn nor the state will talk about what kind of jobs will be available at the new plant.  But if you look at actual plants that make this type of product, what you see is that the actual manufacturing work is not done by humans; it is done by robots.

Indeed, if you look at Foxconn's operations in China, the picture is clear.  Foxconn has ordered literally millions of industrial robots to replace its line workers in China.  When asked why, they tell their shareholders that the robots are cheaper, more reliable, don't need vacations, don't demand raises and do not go on strike.  Industrial workers' salaries in China in the coastal provinces are one-tenth to one-quarter of those of American industrial workers.  It stands to reason that Foxconn is not interested in employing former steel workers and autoworkers in its new plant in large numbers.  These are the very people they are getting rid of in China.  And it is a good bet that those they do hire will be replaced by robots within five years.

So most of the workers that will be needed are not former steel and auto workers, but engineers, programmers and other highly educated and trained workers.  Workers with these skills are in very short supply in the Rust Belt states.  Why is that?  Because the Rust Belt states in general and Wisconsin in particular have been starving their universities of funds and their schools are not producing enough high school graduates with the skills in mathematics and science to get into engineering schools.

One of the most remarkable things I discovered when doing the background research for this blog is that Governor Scott's people, when they got wind of the Foxconn opportunity from the White House, went to visit with top officials at the University of Wisconsin and other top Wisconsin universities to see what they might do to gin up more engineers and others with the skills that Foxconn might need.  These are the very institutions they have been putting on a starvation diet.

So where does this leave us?  The Wisconsin legislature is being asked to blow a $3 billion hole in their budget to attract to Wisconsin a firm that is a world record-setter at replacing low-and middle-skill workers with robots.  This giant hole in the budget would be justified on the basis of providing jobs to former steel and auto workers, but the jobs that will be available are not the jobs that former auto and steel workers can do. No one, as far as I know, has put any real money on the table for turning these former industrial workers into graduate engineers.  And no one, as far as I know, has talked about Foxconn offering engineers in other states the kinds of salaries that would entice them to move to Wisconsin.  So where, exactly are they supposed to come from and where is the argument that this plant will turn around employment in Wisconsin?   Not only can I find no evidence that this plant will make a dent in the employment of unemployed steel and auto workers, but I see the state putting an enormous sum at work to attract a firm that has acquired a world-wide reputation for walking away from similar commitments and for treating its workers with contempt.

As you can tell, spending $3 billion to attract Foxconn to Wisconsin makes no sense at all to me if the object is to provide a shot at a better future for Wisconsin's young people and dislocated workers.  Even if putting that much money on the table resulted in better jobs for a substantial number of the former steel and auto workers employed at Foxconn, there is no way that Wisconsin could do this for another firm and another one after that.  No state has tens of billions of dollars to invest this way.  This may be a good strategy for boosting political careers, but it is not a strategy for statewide economic development.

But I want you to focus on one piece of this picture.  We are looking at a state that has been starving its educational institutions for funds, pleading poverty.  Now, somehow, it has come up with $3 billion to invest in its future.  Lets assume for the moment that it is really interested in investing in its future AND that it has $3 billion to invest in creating an economy that would make all its people prosperous.  What would be the best way to invest that kind of money to reach that goal?

If you want an answer, you have only to look at Massachusetts on the one hand and Singapore on the other. In Singapore you will find a case study in economic development led by skill development.  At each stage of its meteoric economic climb from poverty in the 1960s to its current status as one of the world's leading economies today, Singapore led with education and training, building the education and skills of all its people as the prelude to the next step in its economic development.  Education and training was not seen as a cost but as an investment.  Each time it ratcheted up its economic goals it first built the workforce it would need for the next leap and then sold its skills to the world's leading firms.  Those firms were not looking for cheap unskilled or semiskilled labor.  They were looking for highly educated and highly skilled workers and they were willing to pay the going price for such people.  Singapore's success rests on a foundation built on one of the world's finest elementary and secondary education systems, one of the world's finest career and technical education systems and one of the world's best higher education systems.

The Massachusetts story hardly needs repeating here.  Already home to many of the world's best higher education institutions and more than its share of the nation's best elementary and secondary schools, Massachusetts leaped ahead of all the other states when it passed the now-famous Massachusetts Education Reform Act, implementing most of the strategies used by the countries with the world's best education systems, including Singapore.  Massachusetts to this day has one of the strongest economies in the world.

If you want to imagine what Wisconsin could do with $3 billion, you have only to look at Singapore and Massachusetts.  Neither imagined that they could run successful economies by showering firms like Foxconn with tax breaks.  Not only is that not an investment, it robs the state of the funds it needs to make a real investment in its future.  If Wisconsin wants to invest in its future, it could start by investing in its people. 

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