Crony capitalism. We’ve all heard the phrase before. Indeed, it’s been used recently to describe Gov. Malloy’s First Five initiative providing incentives to corporations that promise to create jobs in the state.
But what does it really mean? Is crony capitalism as bad as it sounds or does it actually work well in practice? As is often the case in such matters, it depends on whom you talk to. Let it be said here and now that I’m uncomfortable having the government decide, in a market-based economy, who wins and who loses, as the Obama administration did two years ago, for example, when it bailed out General Motors and assumed a significant ownership stake in the company. And the practice of handing out cash and tax incentives to lure companies or persuade them to make investments and stay put is little more than institutional bribery.
On the other hand — there’s always an other hand — there are practical considerations when government officials are faced with the reality of losing jobs during an economic downturn. The situation becomes infinitely more complicated when states try to compete with one another for the most favorable business climate. And the competition can become especially intense in the Northeast, where states are typically small and the ability of corporations to easily relocate lets them play all the governors like a fiddle.
It is a reality that Connecticut has the worst record in the nation for creating new jobs over the last two decades. To his credit, Gov. Malloy is trying to change that. And in signing the largest tax increase in state history, he’s decided to ignore the claim of Republicans and the CBIA, now largely debunked, that the state punishes our business community with excessively high taxes.
So Malloy has approached the matter of job creation and retention with a combination of tax incentives, grants and loans to five select companies that agree to create hundreds of jobs. A sixth, UBS, will receive $20 million in incentives but won’t be a part of the First Five since the company hasn’t actually pledged to create jobs in the state, but merely to refrain from slashing them.
To be sure, this is a cringe-worthy moment. Hundreds of millions will be doled out to wealthy corporations such as Disney and CIGNA to entice them not to leave the state in the hope that their continued presence will stanch the bleeding.
As repulsive as this spectacle is, it could get even worse. What kinds of assurances does Malloy have from ESPN, TicketNetwork and UBS that they won’t take the money and run anyway? I’m sure Malloy is acutely aware of what happened to his Democratic colleague in Massachusetts, Gov. Deval Patrick, who watched in horror as Fidelity Investments blindsided him earlier this year with the announcement that it was moving 1,000 jobs out of the Bay State to locations just over the border in New Hampshire and Rhode Island. This after Fidelity benefited from a tax break that the state granted to mutual fund companies in 1996 that was estimated to save Fidelity about $20 million a year.
Then there is the matter of Evergreen Solar, on which Patrick bestowed $58 million in direct subsidies and tax breaks on the condition that the company build a plant in Massachusetts. Earlier this year, scarcely four years after the handout, Evergreen closed the Devens, Mass., plant and fired 800 workers. Company officials claimed Evergreen could not compete with solar panel companies in China, where the government is far more generous with its subsidies than those penny-pinching American states. Earlier this month, Evergreen filed for Chapter 11 bankruptcy, pissing away tens of millions of taxpayer dollars.
And there is the comical case of former Gov. John G. Rowland. In the late 1990s, he got the General Assembly to dangle financing for a new stadium in Hartford before New England Patriots owner Robert Kraft, who in turn used it as leverage to shame the Massachusetts legislature into giving him site improvement funds for a new stadium in Foxborough. Kraft cleverly used Connecticut to extort … er, extract … more money out of the Bay State and make Rowland look like a jilted bride at the altar. That episode should serve as a cautionary tale for both states.
I know. It’s easy for me to say because I’m not responsible for the economic well being of 3.5 million Nutmeggers. But rather than bribe corporations to stay in Connecticut and create a few hundred jobs here and there, I’d rather nurture an environment that says we’re open for business. And I’m not just talking about taxes since those seem to be competitive with nearby states.
How about reducing the regulatory burden on businesses? The recently passed paid sick-leave legislation — the only one of its kind in the nation — is but one example of a clumsy mandate that can send businesses looking for alternative locations. And I like Sen. Minority Leader John McKinney’s idea of common-sense unemployment insurance reform and of a “manufacturing reinvestment account which would be funded with money the state takes off the tax rolls for these companies, put it in a community bank, and allowed companies to borrow from it to invest in their businesses.”
And there’s more. The state has “the worst permitting regime in the country,” as Fred Carstensen, director of the Connecticut Center for Economic Analysis at UConn, told attendees at a forum earlier this week at Manchester Community College:
It took one Fortune 500 company in Connecticut an unfathomable 497 days to get a permit to paint its headquarters. An Ansonia-based company filed for a water permit in 2002. Nine years later, the company is still waiting on the permit.
Companies avoid Connecticut because they have no idea how long it will take them to get permits. Instead they move to states more responsive to their needs, Carstensen said.
Government foot-dragging, regulatory zeal and inconsistency create a climate of uncertainty — the one thing businesses hate more than high taxes. If your business doesn’t know what to expect from the government month to month or year to year, then even a boatload of crony capital won’t persuade you to stay and invest in your state’s economy.
Terry Cowgill blogs at terrycowgill.blogspot.com and was an award-winning editor and senior writer for The Lakeville Journal Company. He is host of Conversations with Terry Cowgill, an hour-long monthly interview program on CATV6 on Comcast’s northwest Connecticut system.