On January 31, Electrolux announced (h/t Alan Freeman, ipolitics.ca) that it would be closing its new (2012) factory in Memphis, Tennessee, by the end of 2020. This facility, you may recall, was a subsidized relocation from L’Assomption, Quebec (a Montreal suburb) that had an aid intensity of at least 99%! Yes, Tennessee state and local governments gave Electrolux a free factory ($188.3 million at present value in subsidies) while allowing it to get rid of its union, cut 60 jobs, and save over $4 per hour in wages on the jobs they kept.
As if all that weren’t bad enough, the state of Tennessee agreed not to put clawback provisions into the contract with Electrolux, although the state was already requiring such clauses in contracts with major companies like Volkswagen in Chattanooga. That piece of economic development malpractice has now come back to bite the governments involved where it hurts. Not only does the contract specifically prevent the state from getting its money back, state and local governments guaranteed loans connected with the project, the payments for which will last until 2036. According to the Commercial Appeal’s article, state government is on the hook for $48.5 million in loans, while Memphis and Shelby County governments must pay off a further $28.0 million.
While Electrolux committed to employing 1,240 people in order to receive the subsidies, its peak employment appears to have been the 1,100 who were employed in 2017. Now, just two years later, the company employs only 530 in Memphis, a figure that has been stable for about a year, supplemented only by overtime and temporary workers, both of which have now disappeared.
The fate of the Memphis facility is to be consolidated into another Electrolux plant in Springfield, Tennessee, in a transformation that will add no jobs in Springfield because of increased automation. According to a story in the Canadian Press (paywalled behind the Nexis database), Electrolux plans to invest $250 million to centralize all its U.S. cooking production at the Springfield facility.
A final twist in the Memphis story is that in 2016 Electrolux workers formed a local union of the International Brotherhood of Electrical Workers. Union business manager Paul Shaffer says he was “assured” by the company that the closure was not related to the decision to unionize. Color me skeptical, but thanks to our old friend information asymmetry, we’ll probably never know. But the timeline is: 2016, unionization; 2017, 1,100 workers; 2018, 530 workers; 2019, closure announcement. Yes, I’m still skeptical.
I’ve been telling people for years that we need to explicitly include corporate rent-seeking into models of site-location decisions. Both Investment Incentives: Growing Use, Uncertain Benefits, Uneven Controls (2007: download here from the first link) and Investment Incentives and the Global Competition for Capital (Palgrave, 2011) make this case strongly. How else can we interpret Electrolux’s behavior, squeezing every last dollar out of desperate governments near the height of the Great Recession, and demanding no clawbacks, except as a manifestation of rent-seeking? It’s time to revise site-location theory to reflect this.
And in my standard EU comparison, let me point out that an aid intensity (=subsidy/investment) of 99% is not allowable anywhere in the European Union, where the maximum aid intensity allowable is only 50%, and that only in the poorest regions of the Union, such as Bulgaria (and that only on the first €50 million of investment; with a maximum of only 25% on the next €50 million of investment, and a maximum of 17% on any investment increment over €100 million). People were saying it was a bad deal when it was announced in 2011, as pointed out in these pages and in the great series the Commercial Appeal produced at that time. We were right, far more than we wished.
Cross-posted at Middle Class Economist.
General Electric has announced it is severely scaling back its move to Boston but has promised to return 87 million.
So a lot of Electrolux employees lost their jobs.
My question would be how many of the imbecilic administrators of this deal will lose their jobs?
EM:
Government or Private?
Speaking of Quebec, they had (years ago) finance the building of a General Motor paint shop near Montreal. The paint shop operated for 5 years…then GM shut the thing down — the Quebec government was left holding the bag, about $200 million in debts
On the bright side, NYC decided that the deal with Amazon was simply not worth it! So there’s a bit of hope.
NLF:
Welcome to Angry Bear. First time comments always go to moderation to weed out spammers, advertising, and other undesired Internet objects.
NLF, I was thinking the same thing: What about Amazon?
Of course, the news is spinning the Amazon thing as those bad liberals with little about how little such deals work out.
I believe Bernie Sanders and some others have propose legislation that would tie federal money received to the amount of state money given out on these deals. That is, if the state can afford to subsidize such wealthy corps, then they obviously do not need the feds help.
It a good reason why social nationalism is so important. Capital markets are central finance and idiots like Bezos are central planners. Creating a generation after generation of perverts who only care about themselves and self-gratification. Amazon if the 2008 financial crisis had allowed to finish, would be dead today. It only exists because of the bailout of high finance. Instead of the club for growth, we should call it the club for debt. Go into debt, get a nice high, crash.
Liquidating capital markets and destroying institutions like the World Bank,IMF and WTO is so important. Without them, capital owners will be toast. Countries can actually control their resources again without fear of being stripped.
That Amazon walked away from the deal to move into already crowded and expensive Long Island City (Queens) has both the governor and mayor hopping mad at those who questioned this deal. They are now saying there should have been more rational discussion. Of course the deal making was sort of done in secret so that call is a bit hollow.
Run,
Public in all of these cases. Private if the companies committed fraud.