Posted on March 1, 2008

An Open Letter to Jack Roberts & Bob Warren
Dear Jack and Bob,
Thanks for your Guest Viewpoint piece in the Register-Guard on 9 October 2007, in which you argued that, contrary to popular belief, "the bulk of [our] time, effort and, yes, money devoted to economic development is spent helping local business grow and expand here...." If true, this is wonderful news indeed—but only, alas, if it’s really true. To remove any doubt, let me offer a recommendation I hope you’ll support: Let’s ask the state to audit your programs and confirm your numbers.

To refresh your memory, in a Commentary in the Register-Guard, a week before yours, I wrote: "According to its annual budget figures, Oregon’s Department of Economic and Community Development spends less than one percent of its total budget helping small, local businesses expand." That figure came from a recent analysis by the Legislative Fiscal Office, showing that the Department has a budget of $405 million and only two line-item programs dedicated exclusively and unambiguously for promoting local business: Small Business Development Centers ($2.3 million) and Targeted Service Providers ($1.4 million).

You responded that this was "a total falsehood," and argued that 85% of the loans made by the Oregon Business Development Fund go to small businesses. But, alas, that would only increase the Department’s budget allocation to local business from 1 to 2.5 percent.

You also wrote that 70% of the Department’s active accounts are focused on "Oregon retention and expansion projects, while just 30 percent are new recruitments." I hope you will forgive my skepticism about this assertion. Here’s a nagging problem. "Retention and expansion projects" can still mean mostly nonlocally owned businesses (albeit ones sited in Oregon), which means your "local effort" may not be local at all.

Part of the skepticism, Jack, is frankly your record as director of the Lane Metro Partnership. As you know, the Register-Guard in 2003 analyzed millions of dollars of tax abatements you had handed out in recent years, and found 95% went to six nonlocal companies. You’re a recruitment guy. When you and I debated at the University of Oregon that year, I asked if you ever analyzed how the time and energy of your economic-development efforts were split between local and nonlocal business. You replied that you not only didn’t know but you didn’t think it mattered. Even today, on your web site, you say that the mission of Lane Metro is "the recruitment of new industry to the area for the purpose of local job creation."

Bob, while I love what many people in your department are doing, the overall allocation of your resources remains a big question. The slogan on your web site - "Come a Week, Stay Forever." – doesn’t exactly speak to existing Oregon entrepreneurs. Moreover, anyone reading your 2005 Annual Report, the most recent one published, must struggle to find any mention, let alone prioritization, of locally owned business. If there are local businesses benefiting from the hundreds of millions each year you’re spending on nanotech, biotech, export promotion, film projects, port improvement, water projects, and so forth, I fear it’s by accident, not by design.

I’m also worried that in your article you both continue to defend outside recruitment strategies. "[I]f a successful company is looking for a new place to invest its money and hire workers," you write, "why shouldn’t Oregon try to compete for its share of this economic growth?"

Well, here’s why: Because every hour and dollar spent on recruitment is an hour and a dollar unavailable to developing truly local business. And the verdict is in: Local businesses generate substantially greater economic growth than nonlocal businesses.

Jack, it’s especially stunning that you’ve learned so little from your experience in Lane County. Again, going back to the Register-Guard report in 2003, those high wage jobs you tried to attract turned out to be astonishingly expensive and unreliable. Most of the six nonlocal companies to which you gave roughly $6 million under-delivered the jobs they promised, and several took the benefits for a couple of years and the moved to another gullible, subsidizing jurisdiction in the world. The cost of a net new job from those efforts was $67,220 of public money. The other five percent went to a dozens of local businesses, and the cost of a new net job from them was $2,100.

Nurturing home-grown businesses, in other words, was more than thirty times more effective at create new jobs than attracting outside corporations. Had you spent the same $6 million on local business, you might have created 28,000 more jobs. Or had you created just the same number of jobs in local business that the six big companies provided, you might have returned $5.9 million to Lane County taxpayers.

This shouldn’t be a surprise. A growing body of evidence suggests that locally owned businesses generally contribute more to the “economic multiplier” than nonlocal business – often two to four times more income, wealth, jobs, and tax payments – because the former spend more money locally. A community made up of locally owned businesses is better equipped to promote smart growth, draw tourists, attract talented young people, and seed a self-reinforcing entrepreneurial culture. Compared to economies rooted in a small number of absentee owned enterprises, local-business economies tend to have greater social stability, lower levels of welfare, and more political participation.

The nonlocal focus of Oregon’s economic development expenditures locally over the past two decades has ensured disappointing results. In 1980, before the state’s developers started courting global companies, 11.5 percent of Oregonians lived in poverty and the state was ranked in the middle of U.S. states for most poverty in the nation. By 2005, more than 14 percent were in poverty, plunging the state down to 16th place in the race to the bottom. I’m not sure this is a record either of you really want to brag about.

That the two of you still think that 30% of state resources going to recruitment is a mark of success underscores how the importance of your going to the top of Mt. Hood and rethinking your priorities. The right number for recruitment, a growing number of experts believe, is roughly zero.

But I don’t want leave the impression that I expect am I unwilling to celebrate even modest shifts in your priorities in the right direction. So let’s join together to find out if how much of a shift really has taken place. Let’s ask the state auditor to analyze, say, the last decade of economic-development work in the state, for your agencies and for others as well. And let’s get the following simple questions answered:

• In each program, how much money has been allocated to locally owned business in Oregon, and how much to businesses not locally owned?
• What has been the long-term job-creation efficacy of each category in each program?

The principles of good government demand that Oregon focus scarce public funds and staff on what really works. So... can I count on your support?

Sincerely, Michael H. Shuman