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Last
week the Kaine administration announced
Virginia's biggest economic development coup
of the year: the decision by Volkswagen USA to
relocate its corporate headquarters from a Detroit
suburb to Fairfax County. Volkswagen, manufacturer
of the popular VW Beetle, will invest $100
million to build a new H.Q. facility, which could
generate up to $900,000 a year in property taxes for the
county and bring 400 high-paying jobs, averaging
$125,000 each. Virginia basked in favorable
publicity. The Detroit Free Press printed
this encomium to Fairfax County and Virginia from CEO Stefan Jacoby: “We are a
company of innovators and bold-thinking people who
want to challenge the status quo and we know we will
fit very well here." The
VW deal meets all the Economy 2.0(1)
measures of economic development success:
jobs, high salaries and tax revenues. That's why the
Kaine administration felt comfortable investing $6
million in economic development incentives to cement
the deal. In
a free market economy, the German company should be free to locate
anywhere it chooses, and if it selects Northern Virginia to get
closer to its customer base, enjoy access to Dulles
International Airport and participate in one of the
nation's most vibrant economic centers, then
Virginians should celebrate the fact that their
state is held in such high regard. But is the VW relocation the kind of deal
that the Commonwealth of Virginia should be subsidizing?
What Return
on Investment will Virginia generate on that $6
million expenditure? The
underlying premise of the VW incentives is that job
creation is good. But not all jobs are created
equal. Job growth clearly is good in places like Southside and Southwest
Virginia
where it creates opportunities for people who are
unemployed or underemployed. But what is the point
in creating jobs if labor markets, like those in
Northern Virginia, are tight and jobs are already
going unfilled? If job creation simply sucks more
people into the region, pumps up the population and
bloats demand for infrastructure and public
services that municipalities are already
hard-pressed to provide, is it really providing any
public benefit? Indeed,
the VW deal raises even larger questions: What is
the purpose of economic development anyway? Is the
goal of public policy in Virginia to simply create
more jobs and a bigger tax base -- regardless of the
cost in subsidies, congestion, housing prices and
the obligation to provide public services? Or should
the purpose of public policy be to increase incomes,
raise living standards and create more livable
regions for the people who already live here?
If so, what metrics should
we use to track well being? Let's
dig into the numbers behind the VW deal. Fairfax County is
projected to increase the number of jobs by roughly 250,000,
or 21.9 percent, between 2004 and 2014,
according to data in the Fairfax
community profile published by the Virginia
Employment Commission. At
that pace of job growth, Fairfax County's
technology-intensive economy has little employment slack. Over the
past few years, unemployment has consistently stayed
below 3.0 percent, bobbing above that level only
briefly during the recession year of 2002. Today,
unemployment is about 2.3 percent. Economists
generally consider 4.0 percent to be full
employment, allowing a little breathing room for people
who are entering the workforce and switching jobs. What Fairfax
County is experiencing today, and has experienced
for years, is a labor shortage. Ultimately,
the only way those 400 Volkswagen headquarters jobs
will be filled is by importing people from outside
the region -- most of them from outside the state. Many employees will probably transfer
directly from the Michigan facility. Even if VW
supplements the transferees with local hires, the
companies where those employees previously worked will have to replace
them with someone else, and they most likely will
come from outside the region. If we factor in the multiplier
effect -- the spin-off jobs in the service and
retail sectors to support those 400 employees -- this
deal could easily account for the in-migration of
additional 100 to 200 new residents to Northern Virginia.
For the most part, these retail and service workers
will not be making $125,000 per year. Where
will these 500 to 600 new workers live? Ironically, only a small
portion will reside in Fairfax County. After a
population spurt in the 1990s, Fairfax population
growth is expected to slow this decade to around 6.5
percent, and then to about 6.0 percent between 2010
and 2020, according to the VEC profile. Although the county could accommodate
more people if it wanted to, it doesn't want to. The
county is mostly built out, and it is not expediting the re-development of old
neighborhoods at higher densities fast enough to provide housing
for any more than the 60,000 people per decade
anticipated by the VEC. If
Fairfax County expects job growth of 250,000
and population growth of only 60,000, it's
reasonable to assume that roughly three out of four VW employees will live somewhere
other than Fairfax County -- most likely Prince William, Loudoun and
Fauquier counties or points beyond. In other words,
the Commonwealth of Virginia is subsidizing the
growing imbalance of jobs and housing in Northern
Virginia that makes housing inaccessible and strains
the transportation system to the breaking point. How
much will it cost to accommodate the
newcomers? The expense of building county
infrastructure (schools, libraries, public safety
stations)
amounts to between $30,000 to $50,000 per household,
depending upon the locality in question and whose estimate is used.
Those numbers do not include the cost of upgrading
the desperately overcrowded transportation system. I have yet to see
any definitive estimates of how much the state must
spend per newcomer to build new roads and transit
capacity but the figure is certain to run into the
tens of thousands of dollars per driver.
Let’s
assume that the up-front capital costs for providing
new infrastructure -- schools, roads, libraries,
fire stations, public transit, etc. -- averages
between $75,000 and $100,000 per household. That
totals $30 million to $40 million for just the 400 VW
employees -- not counting the impact of the jobs
created through the multiplier effect. The VW employees are well paid, to be
sure, but will they make so much money and pay so
much in taxes that they will pay the operating costs
of their public services plus all of those
up-front capital costs? We just don't know.
Of
course, Fairfax County will benefit from up to
$900,000 in annual property tax revenues on VW's new, $100
million facility. Fairfax County will come out of
the deal whole. But the municipalities where the
other three-quarters VW employees settle will come up short.
Job
creation and higher salaries have unquestionable
economic benefits. But job creation also has costs
when it occurs in New Urban Regions with zero
unemployment and infrastructure stretched to the
breaking point. I just don’t see anyone
acknowledging those costs when justifying the
payment for $6 million in public subsidies.
When you're talking about
average salaries of $125,000 a year, roughly twice
the county-wide average, the VW deal may well represent
a net gain for Virginia and the region, despite all
the issues raised here. But there is
no way to know for sure. It's just as possible that
governance structures and human settlement patterns
are so dysfunctional across most of Northern
Virginia that every newcomer settling outside the
Beltway, no matter what income level, may represent
a net tax loss to the citizens already here. For all we know, Northern Virginia is digging
itself into a deeper fiscal hole every time it
brings in a new job.
But
the fact is, we just don't know. No one has developed
a methodology for calculating the costs and benefits
of job creation. Indeed, no one even acknowledges the need to make such a
calculation. But our blindness to the problem does
not make it any less real.
--
Sept. 17, 2007
(1)
For a definition of Economy 2.0 and other economic
development paradigms, see the previous column in this
series, "Peak
Performance in a Flat World.
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