Connecticut: Winning By Losing

Just four years ago, the Houston Astros of Major League Baseball was the worst team in the sport. But last week, the ‘Stros won the World Series. How did the organization progress from worst to first in merely four years?

By its own admission, the team won by losing. 2013 was the final year of a three year period when the organization leveraged its abysmal situation to clean house and reinvent itself. That clearance process set the stage for its subsequent success.

The State of Connecticut may be facing a similar opportunity today. Since 2016, two of the fifty largest business corporations in the nation moved their corporate headquarters out of state, with GE shifting to Boston and Aetna to New York City. And Alexion Pharmaceuticals, a firm that had received state funds to establish a New Haven headquarters, announced that it would follow Aetna to Boston.

Nevertheless, based on recent news about these corporations, Connecticut may not have been badly damaged by their departures after all. GE is now reacting to severe financial problems by implementing an immense operational retrenchment. Aetna is negotiating a potential merger into CVS, a much larger corporate entity. And Alexion is reported to have arranged its relocation to divert investor attention from a myriad of legal problems.

Meanwhile, earlier this year, Governor Malloy had been locked in battle with the Republicans and with his fellow Democrats in the Legislature over the state budget. Connecticut had been the only state in the nation to proceed into October without a fiscal blueprint.

But just last week, Republican and Democratic legislators finally resolved the situation by shutting out the Governor and working together to craft a budget. In other words, they simply placed the Governor’s proposals to the side, worked with each other, and passed legislation with a super-majority vote that was impervious to a gubernatorial veto.

So how far has Connecticut progressed this year? Not nearly as far as the Houston Astros have progressed since 2013, of course. No one in the Nutmeg State is declaring victory over its challenges just yet.

Nevertheless, just a few months ago, three ostensibly successful business corporations were preparing to depart the state, and the Governor was locked in a budget stalemate with the State legislators. And today? It appears that Connecticut’s economy may win by “losing” a trio of unstable employers, and its Legislature may likewise win by “losing” a stalemating gubernatorial negotiator.

So how long may the residents of Connecticut need to wait until they can truly celebrate? They may wish to take heart and recall that the Houston Astros merely needed four years to progress from cellar-dwelling losers to championship winners.

So perhaps, for Nutmeggers, 2021 may be a glorious year.

Grocer Convergence

Why do all new automobiles have rounded jelly-bean style edges? Even the mighty Toyota couldn’t make a success out of its boxy Scion models.

And why do all new mobile telephones feature finger-flip screens and electronic keyboards? Although BlackBerry continues to try marketing a traditional keyboard on its KEYone device, it has only managed to snare a tiny fraction of the market.

Once upon a time, automobiles, telephones, and many other products and services featured creative and unique designs. So why are we now seeing design convergence in so many different sectors of the economy?

Indeed, even supermarkets are not immune to this trend. A few weeks ago, for instance, Kroger launched a new web portal called We Are Local to develop its roster of local niche suppliers. The service is expected to help the traditional chain compete more effectively against Whole Foods.

But at the same time, the Wall Street Journal reported that Whole Foods’ new owner Amazon is busy eliminating local suppliers at all supermarket locations! The move is expected to help the relatively young grocery organization lower its cost structure to a level that is comparable to more established competitors like Kroger.

In other words, Kroger is becoming more of a niche product retailer that is evolving towards the Whole Foods model, while Whole Foods is becoming more of a standardized retailer that is evolving towards the Kroger model. But is either business strategy a wise one?

In the short term, the answer to this question is likely “yes.” After all, Kroger’s product selection could benefit from some local flavor. And Whole Foods’ selection is a bit expensive.

But in the long term, the commoditization of an industry tends to lead to its inevitable consolidation. After all, when all competitors sell identical products and services, it isn’t very difficult for the largest firms to acquire the smaller ones.

At the moment, there are more than 64,000 supermarket and grocery store organizations in the United States. It’s a delightfully large and diverse industry, operating within a sizable and healthy competitive market.

But what will happen if its market leaders continue on their path to convergence? As fans of classic Scions and BlackBerries have learned, consumers may find themselves bidding farewell to creative designs.

Ford: From Mexico to China

Ever since Donald Trump declared his intention to seek the Presidency of the United States, he has heavily criticized American firms that manufacture products in Mexico. One of those firms, for instance, has been the Ford Motor Company.

His criticism began in earnest more than a year ago, when Ford announced its intention to shift production of the subcompact Focus automobile from Wayne, Michigan to a new plant in San Luis Potosi, Mexico. But shortly after the Presidential election, Ford announced that it would reinvest in the Wayne production facility.

That produced celebrations in the American workforce, but astute observers noted that Ford didn’t actually announce that Focus automobile production would revert to Wayne. Instead, the firm declared that it would produce the subcompact at Hermosillio, a different location in Mexico, and would shift other vehicle production to Wayne.

And last week, less than six months later, Ford changed its plans again. Now it plans to shift the production of the Focus to China.

China? Whoa! The United States economy would undoubtedly be much better off with production of the Focus in Mexico, and not in China. After all, a Mexican final assembly factory would be sufficiently near the United States to purchase components from American suppliers.

And Mexican consumers, working in Mexican factories, are usually far more likely than Chinese consumers to purchase products that are manufactured in the United States. They’re also far more likely to use the online services of firms that are based in the U.S., considering that internet titans like Facebook and Google are banned from the Chinese mainland.

And what was President Trump’s response to Ford’s latest decision? Although he greeted Ford’s earlier decision by tweeting “Thank you to Ford for scrapping a new plant in Mexico …,” he hasn’t yet replied to the announcement of the shift to China.

Of course, it’s entirely possible that he might still comment on it. And it’s also quite possible that Ford will change its plans yet again.

But for the moment, it appears that Mexico’s loss is not the United States’ gain. It’s China’s gain, and thus the United States’ loss as well.

An Unintended Consequence

Throughout his Presidential campaign, candidate Donald Trump referred to the North American Free Trade Agreement (NAFTA) as “the worst trade deal ever” for the United States. He vowed to eliminate his nation’s trade deficit with its neighbor to the south.

Last week, though, the U.S. Commerce Department announced that the trade deficit between Mexico and the world’s largest economy had soared to its largest imbalance in almost a decade. And some economists believe that the worsening imbalance may be attributable, at least in part, to the verbal statements of one man:

President Trump himself.

How is this possible? Well, the President’s aggressive posture is believed to have generated fears of a trade war between the two NAFTA countries. Such a war would significantly reduce Mexico’s attractiveness as a place to do business within the global economy.

And the global financial markets sell any currency whenever they expect future events to reduce the allure of operating in its country. Trump’s tough talk, unsurprisingly, has helped drive down the value of the Mexican peso against the American dollar since he began running for office.

Nevertheless, when a nation’s currency declines in value, it becomes a less expensive location in which to manufacture products. That’s why a place like Bangladesh, which only ranks 106th among 138 countries in overall global competitiveness, continues to produce billions of dollars of ready-made garments annually for numerous global retailers.

Thus, when the President of the United States criticizes Mexico and drives down the value of its peso, he helps that nation become more cost competitive to firms around the world.

It’s an unintended consequence that illustrates the complex and intertwined nature of our global economy. As President Trump attempts to rebuild his nation’s manufacturing base, he’ll need to avoid driving down the value of his competitors’ currencies in order to achieve his goal.

The Fallacy Of Labels

And now it’s Secretary Clinton’s turn to be tagged with a label by Donald Trump! After applying sobriquets to Low Energy Jeb Bush, Little Marco Rubio, and Lying Ted Cruz, The Donald is now alternating between Incompetent Hillary and Crooked Hillary.

By doing so, the leading Republican Presidential candidate is drawing attention to the validity of such labels. Are they ever truly accurate? Or are they simply misrepresentations of the beliefs and positions of our political leaders?

While pondering these questions, it may be helpful to consider the American President who may have accomplished more than any other to usher in the modern era of limited government. He presided over the deregulation of the airline industry, the abolishment of usury and other interest rate regulations, and the phase-out of price controls over domestic oil supplies in the United States.

Indeed, he may well have been the most free market oriented leader of the five American presidents who held office during the 1960s and 1970s. Was he Republican President Gerald Ford? Or Richard Nixon?

Believe it or not, this Presidential promoter of capitalism was Jimmy Carter. He signed the Airline Deregulation Act of 1978 into law. He also signed the Depository Institutions Deregulation and Monetary Control Act of 1980. And he signed the National Energy Act of 1978, followed by the Energy Security Act of 1980.

These laws, considered in tandem, collectively implemented the massive deregulation of the American transportation, financial services, and energy industries. That’s why a conservative libertarian web site and a liberal progressive web site agree that the left wing label that is often affixed to President Carter requires “rethinking.”

Ironically, the two Republicans who served in the Oval Office immediately prior to Carter may have been the most economically liberal Presidents in modern times. How so? Gerald Ford, for instance, ultimately decided to participate in the fiscal bail-out of New York City after he initially rejected the Big Apple’s plea for federal aid. And Richard Nixon temporarily ordered “a freeze on all prices and wages throughout the United States” in order to tame inflation.

Apparently, like the liberal label on President Carter, the conservative labels on Presidents Ford and Nixon are extremely misleading monikers. Ironically, many contemporary pundits have declared that Donald Trump’s self-characterization as a conservative is actually fallacious as well.

So what should we do with these political labels? Perhaps we should simply pay no attention to them. Instead, perhaps we should strive to understand each politician’s policies and positions before we draw conclusions about their philosophical leanings.

Super Bowl’s Biggest Loser

At first glance, the Seattle Seahawks would appear to be the biggest loser of yesterday’s Super Bowl, wouldn’t they? After all, the Seahawks lost the game in the final minute by inexplicably attempting a risky one yard touchdown pass instead of simply running the ball straight over the goal line.

According to the mayor of Glendale, Arizona, though, the biggest loser wasn’t the Seahawks franchise. Instead, it was the city of Glendale itself, for bearing the fiscal burden of hosting the game.

Although the game was billed as the Phoenix Super Bowl, with most of the pre-game festivities split between Phoenix and Scottsdale, the football stadium itself is located in the suburb of Glendale. Last week, Glendale Mayor Jerry Weiers said that “I totally believe we will lose money” on the game.

You may be dubious about Weiers’ assertion that Glendale’s public safety costs of hosting the game will exceed its financial and economic benefits. It is noteworthy, though, that the Glendale mayor isn’t the first city executive to voice this complaint.

Just last year, when the New York City Super Bowl was played in the nearby suburb of East Rutherford, New Jersey, local Mayor James Cassella complained that “in East Rutherford I expect to get disrespected, but the state of New Jersey is being left out of the (pre-game events) mix.”

Thus, in each of the past two years, the Super Bowl has been played in a suburb of a major metropolis.  And each year, the mayor of the suburb has expressed dissatisfaction with the prospect of bearing the costs of public safety while watching the nearby metropolis reap the benefits of public exposure.

Is there any chance that such municipalities may eventually lose interest in hosting the big game? At the moment, no one is yet suggesting such an outcome.

Nevertheless, after many years of hearing similar concerns voiced by city executives playing host to the Winter Olympics, the International Olympic Committee is now struggling with a startling lack of interest in hosting future games. And can you guess what situation will confront the National Football League at next year’s Super Bowl?

Believe it or not, it’s facing a possible third straight year of suburban angst. Although the 2016 Super Bowl 50 Host Committee is referring to the game location as the “San Francisco Bay Area,” its stadium isn’t located in the metropolis itself. Instead, it is located in the suburban city of Santa Clara.

So this is a concern that won’t fade away soon. But how significant is it?

On the one hand, you might believe that such complaints by suburban mayors aren’t worthy of the NFL’s time and concern. After all, by having agreed to permit the construction of the fields in their cities, the citizens of these suburbs implicitly committed to finance the public safety costs of hosting events at those locations.

Nevertheless, at a time when the NFL is suffering through one embarrassment after another, the League can’t possibly enjoy listening to the complaints of city executives who are unhappy about being treated unfairly. Perhaps, in the future, the NFL might choose to be more proactive in addressing their concerns.

Agreeing On Corporate Welfare

Wouldn’t it be reasonable to assume that New Jersey’s Republican Governor Chris Christie and Connecticut’s Democratic Governor Dan Malloy would find nothing in common to agree on? After all, they occupy diametrically opposite positions on the nation’s “conservative vs. liberal” political spectrum.

Recently, indeed, the men have publicly (and vociferously) argued with each other. Six months ago, Governor Malloy wrote a guest editorial for New Jersey’s largest newspaper about Governor Christie’s veto of a proposed gun control law. He declared that: “Gov. Christie … showed a callous lack of respect to the families (who supported the law). Those families deserve better. The people of New Jersey deserve better as well.”

Four months later, while visiting Connecticut to campaign for Governor Malloy’s Republican opponent in the 2014 gubernatorial election campaign, Governor Christie exclaimed that: “The four years of Dan Malloy have been brutal for the people of this state.”

Wow! Callous? Brutal? That is certainly rough language, isn’t it? And yet Governors Christie and Malloy apparently do agree on one government policy. Namely, they both support the distribution of corporate welfare benefits to firms that threaten to leave (or that promise to enter) their states.

Two weeks ago, for instance, New Jersey agreed to give the automobile maker Subaru $118 million to move its corporate headquarters four miles up the road to Camden. Why? It did so because Subaru considered a potential move to Pennsylvania.

Subaru did commit to hire 100 new employees over a ten year period. But was it worth $118 million in corporate welfare benefits for New Jersey to generate 100 new jobs? Interestingly, that deal was actually less costly for taxpayers than an earlier agreement with the NBA’s Philadelphia 76ers. The basketball team received $82 million to move its front office and practice facilities to Camden, and to hire 50 new employees.

Those corporate welfare costs work out to $1.18 million for the new Subaru jobs and $1.64 million for the new 76ers jobs. Why did New Jersey offer the 76ers an additional $460,000 per new job? Perhaps it did so because Subaru’s headquarters is currently located in New Jersey, whereas the 76ers’ headquarters is currently based in Pennsylvania. Apparently, crossing a state border yields additional welfare benefits for relocating corporations, even when the geographic distances of their moves are miniscule!

Meanwhile, United Technologies obtained a $400 million benefit package earlier this year from the state of Connecticut without promising to hire any new employees at all. The firm simply agreed to make certain investments that would “have an impact” on 75,000 existing jobs. And two years ago, a global investment firm named Bridgewater Associates was promised $115 million to move approximately fifteen miles (and six local commuter train stops) down the Connecticut coast line from Westport to Stamford.

Bridgewater declined the offer earlier this year, but only after the state spent $16 million to demolish a boatyard on Stamford Harbor to clear space for the firm. News organizations and community leaders now refer to the empty construction site as “a pile of dirt” and “a money pit.”

Eventually, it may be possible to justify these government expenditures as investments in economic development activities. Who knows? Perhaps Subaru, United Technologies, and Bridgewater would have left New Jersey or Connecticut without these incentive payments. And perhaps the 76ers would have never moved to New Jersey without them.

Nevertheless, it is indeed noteworthy that such strikingly different politicians as Governors Christie and Malloy appear to agree that corporate welfare is a beneficial development strategy. With New Jersey and Connecticut continuing to place in the lowest quintile as the worst states in America for business, though, it may be time for both Governors to reconsider this strategy.

America’s Economy: A Backlash Avoidance Policy

For the past several years, American economists and government officials have been justifying the great financial bailout of 2008/09 in terms of its backlash avoidance effect.

Why backlash avoidance? Well, they explain that excessive consumer and corporate debt represented a primary cause of the 2008/09 crash. And they acknowledge that such overleveraging of debt should usually be rectified by shifting funds from consuming goods and services (i.e. current spending) to repaying debt.

But here’s the rub: if we all decide to stop spending at the same time in order to repay debt, the decline in economic activity could actually worsen the slump that was triggered by the excessive debt. Thus, the economy would experience a backlash effect.

The solution? At the very moment when consumers and corporations feel compelled to “do the right thing” and focus on repaying debt, the government should encourage them to do what is customarily the “wrong thing” and consume more products and services instead. Supplemental government spending (i.e. economic stimulus) may be necessary as well.

Several backlash avoidance policies appear to apply to the American economy of 2014 as well. But today, ironically, government officials may find it advisable to sit back and passively allow the free market to heal the economy.

For instance, the sharp contraction of Gross Domestic Product during the recent winter has been attributed in part to an unexpected decline in health care spending. So should the government rush to stimulate more spending on health care services? Well, no, the Affordable Care Act (i.e. Obama Care) is explicitly designed to reduce the bloated cost structure of the American medical system.

In addition, the home construction market continues to lag below normal historical levels, thus weighing down economic growth. So should the government encourage banks to relax their mortgage lending standards to encourage new residential construction? Of course not; sub prime mortgage loans, also known as “toxic debt,” represented a primary cause of the 2008/09 collapse of the global economy.

Furthermore, the economy continues to be plagued by the unusually harmful effects of long term unemployment among mature workers. So should the government develop new programs to explicitly encourage the hiring of mature workers? Regrettably, such programs may discourage the hiring of recent college graduates, who are struggling with unprecedented levels of student loans.

To be sure, government officials are finding it difficult to passively permit health care spending to slump, home construction to lag, and mature workers to remain unemployed when assistance can be justified on economic (and perhaps even moral) grounds. And yet it was also difficult for officials to authorize the bailout of 2008/09, a decision that may have prevented a second Great Depression.

There is a difference, though, between the situation in 2008/09 and the one that exists today. In 2008/09, an activist government was needed to authorize a bailout. Today, though, by simply allowing economic trends to run their course, the government may be able to ensure a beneficial outcome.

Oddly enough, the much derided paralysis of America’s federal government may help it remain passive in the face of public pressure to take action. In other words, the government’s very dysfunctionality may allow the health care, home construction, and mature worker employment sectors to generate the short term pain that is required to ensure long term prosperity.

Rival Economic Models: Atlantic City vs. Coney Island

As Jane Jacobs once noted in The Economy of Cities, regional economies tend to weaken when they become overly reliant on a single industry. For instance, the Appalachian Mountains, North Carolina, and Michigan all suffered when coal, textiles, and automobiles respectively entered periods of cyclical decline.

In these three cases, though, the industries slowly developed into positions of regional economic dominance over extended periods of time. And even though governmental policies undoubtedly supported their development, the industries primarily benefitted from a wide array of natural, environmental, and human resources that existed in the regions.

There are times, though, when local government officials strive to create dominant industries from “scratch” when such supporting resources don’t exist at all. One such situation is Atlantic City, New Jersey, a fading summer beach resort that rushed headlong into the casino gambling industry on a massive scale during the 1970s. At the time, New Jersey officials hoped that Atlantic City would grow to become “the Playground of the World and the major hospitality center of the Eastern United States.”

Even as recently as last year, New Jersey Governor Chris Christie pledged $261 million of taxpayer funds to support Revel, a $2.4 billion resort project. So what return did New Jersey earn on its taxpayer investments?

In a word (or three), not very much! In fact, just last week, Revel declared bankruptcy for the second time. It followed Caesar’s Entertainment, which had announced a few days earlier that it would shut down the Showboat Casino. These followed the closure of the Atlantic Club, which shut down five months ago.

Interestingly, just two hours north of Atlantic City, another fading beach resort that had considered a massive casino development strategy appears to be making more significant economic progress. Two weeks ago, the Coney Island neighborhood of Brooklyn, New York celebrated the launch of the Thunderbolt roller coaster.

Decades ago, the Coney Island amusement parks were anchored by two classic wooden roller coasters, known as the Cyclone and the Thunderbolt, and a giant Ferris wheel called the Wonder Wheel. Although the original Cyclone and Wonder Wheel remain in operation, the original Thunderbolt ceased operations in 1982 and was demolished in 2000.

Consistent with an economic development strategy that focuses on small scale amusements, the new Thunderbolt joins such entertainment options as Minor League Baseball games and Major League Eating competitions. Has this strategy been successful? Very much so; for instance, the global cable sports network ESPN has committed resources to the region, agreeing to broadcast the July 4th Nathan’s Hot Dog Eating Contest through 2017.

It’s possible, to be sure, that Coney Island’s economic development strategy will ultimately fail to the same extent as Atlantic City’s strategy. After all, as Jane Jacobs noted, a unilateral focus on any single economic engine — whether it is trained on relatively inexpensive entertainment options or on very costly casino projects — carries a significant degree of risk.

At the moment, though, it appears that the low cost / low risk entertainment projects of New York are producing far better results than the high cost / high risk casinos of New Jersey. If you doubt it, you might wish to tune into the Nathan’s contest this Friday and see for yourself!

The Big Apple Vs. The City Of Angels

The world of late night television buzzed with excitement last week over the launch of the Jimmy Fallon “era” of The Tonight Show. Fallon is just the sixth permanent host in the 60 year history of the show, a television institution that has been hosted by Johnny Carson and Jay Leno during 51 of the past 52 years.

Many industry commentators have also praised the NBC television network’s decision to return the show to its ancestral New York City roots from its long time home in southern California. Carson originally moved the show west in 1972, during a period when New York City was disintegrating and Los Angeles was booming in population and economic wealth.

At the time, the Big Apple was in the midst of a sickening municipal decline that would hit bottom with a close brush with bankruptcy three years later. Period films like Taxi Driver and Death Wish depicted the metropolis as a city with striking poverty and rampant crime, while television shows like The Brady Bunch and Three’s Company portrayed southern California as a land of eternal sun and easy living.

So how did New York City later manage to resurrect its fortunes so thoroughly? Why is the return of The Tonight Show now perceived as a reasonable business strategy? And when did Los Angeles manage to lose its aura of inevitable economic growth?

If urban planning expert Jane Jacobs were still alive, she would likely point to New York’s success in diversifying its economic base. In her landmark books The Death And Life Of Great American Cities and The Economy Of Cities, Jacobs noted how fiscal (as well as cultural) diversification enables regions to transition from fading industrial sectors to rising ones.

Indeed, forty years ago, New York’s economy was heavily focused on Wall Street finance. And Los Angeles’ economy was similarly focused on the entertainment industry.

Over the past several decades, however, the Big Apple’s economy has expanded into global tourism, trade, and technology. And today, even light manufacturing is making a comeback in places like the Brooklyn Navy Yard and Industry City.

The economy of Los Angeles, however, remains heavily focused on the entertainment industry. Like Detroit and its automobile manufacturers, or Hartford and its insurance companies, the City of Angels is struggling to maintain its dominance in the one industry sector that has served as its engine for growth.

If you were Mayor Eric Garcetti of the City of Los Angeles, would you respond to the region’s loss of the Tonight Show by refocusing your economic development efforts on strengthening the entertainment industry? Or would you shift your focus to diversifying into other industries?