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Economic growth slowing in Austin?

This story was written by Dan Zehr and appeared in the Austin American-Statesman on September 19, 2014.

Austin’s economic expansion cooled last year, federal data show
Revisions to earlier years reveal a larger local economy than previously thought, but initial data show slower growth in 2013.

The Austin metropolitan area economy expanded faster in 2012 than initially reported – surpassing the $100 billion mark a year earlier than expected – but the region’s economic growth rate slowed considerably last year, according to data released this week.

After adjusting for inflation, the Austin-area economy grew 2.2 percent in 2013 — faster than the average U.S. metro area but slower than 141 of the country’s other metro areas, according to advance gross domestic product data from the U.S. Bureau of Economic Analysis.

While the agency regularly revises its advance data in subsequent years, the magnitude of deceleration suggested that the Austin economy didn’t maintain the scorching growth it had posted in the three years since the recession.

In that span, the slowest year of growth came in 2011, when the Austin-area economy expanded 4.4 percent – double the Bureau of Economic Analysis’ preliminary estimate for 2013.

“Employment growth has not slowed, so it’s difficult to know what to expect out of a future revision,” said Brian Kelsey, principal of Civic Analytics, an Austin-based economic development consultancy. “But I would be concerned to see such a sharp drop-off, especially relative to the higher growth rates in other (metro areas). That’s not what we’ve come to expect in Austin.”

The potential for revisions lends some murkiness to the local economic picture, but 2013 wasn’t a banner economic year across the country. The federal government slashed billions of dollars in outlays through the budget sequestration that started in March, and it then endured a 16-day shutdown in October.

Meanwhile, in Texas, the hangover from the Legislature’s 2011 budget cuts lingered into the start of 2013, before some of that spending was restored, said Pia Orrenius, vice president and senior economist at the Federal Reserve Bank of Dallas. In fact, economic growth slowed in all five of Texas’ largest metro areas, according to the federal data.

This year, all indications suggest that the state and metro economies will bounce back, Orrenius said. Employment growth has soared. The construction and energy sectors are booming, and the high-tech sector is continuing the rebound it began toward the end of last year.

“It (2013) was not a great year for us, but we’re not there anymore,” Orrenius said. “We’re off the charts again this year. I think you’re going to see a big rebound in 2014.”

In Austin, that could mean significant growth for an economy that was already larger than originally thought. When the Bureau of Economic Analysis released its initial figures for 2012, it pegged the Austin economy at $98.7 billion, leading many local economic experts to suggest the area would easily surpass the $100 billion mark in 2013.

Yet in its revisions released Tuesday, the agency said the local economy had actually nicked that mark back in 2012, coming in at a revised $100.1 billion in 2012 dollars. The agency said the metro area’s gross domestic product rose to $103.9 billion last year, before accounting for inflation.

While the changes to 2012 and prior years weren’t unusually large, an agency official said, at least part of the upward revision stemmed from a change in the way the Bureau of Economic Analysis handles certain business expenditures. It now counts such items as research and development spending as investments rather than expenses, a change that added to GDP totals.

That changed appeared to contribute at least part of the upward revisions to Austin’s GDP, said Sharon Panek, a Bureau of Economic Analysis section chief who helps oversee metro-area and state data.

More people than production?

Despite the rebound Orrenius and others expect to see in 2014, last year’s slower economic growth in Central Texas raised some questions about the area’s ongoing innovation and productivity.

While an imperfect measure, per capita GDP provides at least a rough proxy of living standards — and in Austin, that measure actually ticked lower in 2013, to $52,110 from $52,355 in 2012, according to the Bureau of Economic Analysis.

“I think it is concerning that, despite all the job growth, GDP growth and wealth creation we’ve experienced in Austin, we aren’t gaining ground on GDP per capita, even measured against the U.S. average,” Kelsey said.

By this measure, Austin ranked 60th out of the country’s 382 metro areas and was essentially even with the U.S. metro-area average, which ticked up to $52,093.

In the past, Kelsey said, Central Texas boosters justified the region’s lower per capita GDP or per capita income levels by noting the area’s lower cost of living. Those measures didn’t matter as much because a dollar could go further here than in many other big cities.

“You don’t hear that much anymore,” he said.

As the economic theory goes, innovation tends to increase productivity and drive higher standards of living. Yet Austin’s booming population growth might be overwhelming any such gains.

Diverse job base

Still, the diversity of the Central Texas job base and the rapid rise of its employment levels suggest a fundamentally sound and vibrant metro-area economy, said Karl Kuykendall, an economist at IHS Global Insight Inc.

Kuykendall said the new economic data shows expansion in several key Austin sectors, including the financial and the professional and business services industries. It was two smaller sectors — transportation and utilities, and natural resources and mining—that appeared to drag most on the local economy, according to the Bureau of Economic Analysis data.

In a June report for the U.S. Conference of Mayors, IHS predicted the Central Texas economy would grow 3.9 percent his year and 4.7 percent in 2015, after adjusting for inflation. And from 2013 to 2012, IHS forecast the Austin area’s inflation-adjusted economic growth would average 4.4 percent annually from 2013 to 2020 — fastest among the country’s 100 largest metro areas.

“They are disappointing results for 2013, but it doesn’t reverse our thinking there,” Kuykendall said. “We’re still projecting Austin to be a very fast-growing metro in the coming years.”

Stagnant wages, rising Millennial consumers spell trouble for auto sales

This article was written by Claudia Grisales and appeared in the Austin American-Statesman on September 17, 2014.

Austin auto sales hit bump in August

Austin-area sales of new vehicles hit an unexpected speed bump in August, posting a nearly 8 percent decline, the first drop for the economic indicator in seven months.

Last month, Austin saw 10,214 new cars, trucks and sport-utility vehicles sold, down from 11,070 vehicles sold in August 2013, according to Dallas-based Freeman Auto Report, which tracks new auto registrations in Travis, Williamson, Hays, Bastrop, Burnet, Blanco and Caldwell counties.

While area auto sales are still up 5.9 percent for the year to date, the August drop could be a sign of slowing business to come in the auto sales industry, experts said.

“We haven’t seen much in the way of wage and income growth for most households, despite the stronger economy lately,” said Brian Kelsey, principal of Civic Analytics, an Austin-based economic development firm. “That, combined with lower reported demand for auto ownership among Millennials, is likely having an impact.”

Sales of new vehicles are a key indicator of a consumer confidence, as purchases of big-ticket items such as new cars tend to indicate consumers aren’t worried about their job status or economic stability.

After a bounce-back year in 2013, Austin area auto dealers have seen an upward sales trend for most of 2014 after getting off to a slow start in January. That month, area new car sales dropped a surprising 9 percent, bucking a trend of robust growth last year.

From February through July, however, new car sales in Central Texas have posted gains of 6.2 percent to 18.1 percent.

Year to date, area auto dealers are still holding onto their overall gains. In the first eight months of the year, 83,977 new vehicles were sold by Central Texas dealers, compared with 79,246 by this time last year, according to the Freeman Auto Report.

Industry experts said the year’s earlier gains were driven by a healthy local economy, strong population growth and incentives from auto manufacturers.

Now, those gains could start slipping. In fact, from July to August, most of the region’s biggest selling brands showed a decline in unit sales.

Chris Markey, new car sales manager for BMW of Austin in Northwest Austin, said that despite the latest sales report, his dealership still recorded a strong month thanks in large part to new sales of the i3 hatchback, the all-electric BMW that began selling this summer.

In June and July, the dealership only had one or two i3s to sell, but that changed in August when the dealership expanded its inventory and sold 20, Markey said.

The dealer has been able to entice potential buyers by offering an extended test drive where customers can check out an i3 for three to four days. The vehicle has a base price of $41,350.

“We are the top i3 dealer in the nation so far,” Markey said.

Overall, the top sellers for monthly August sales were led by the usual suspects: Chevrolet with 1,574 units sold, followed by Ford at 1,246 and Nissan at 1,108.

For the year, Ford remains the top seller with 12,351 vehicles sold, followed by Chevrolet at 11,507 and Toyota at 8,257.

Labor Day

A few points to ponder as you go about your Labor Day in Austin:

There are approximately 60,000 single-parent households in Austin with children under age 18. 90% have at least one person in the household working. 17% have multiple people working.

Average wage in Austin by race/ethnicity:

  • Asian $67,812
  • White $54,708
  • Black $38,688
  • Hispanic $38,388

Maximum monthly affordable housing cost at average wage:

  • Asian $1,695
  • White $1,368
  • Black $967
  • Hispanic $960

Inflation-adjusted average annual increase in average wage since 1996:

  • Asian 3.0%
  • Hispanic 1.1%
  • White 1.0%
  • Black 0.7%

The inflation-adjusted average wage for Black workers in Austin is down 2% since the end of the most recent recession. Rents are up 7% and home prices are up 13% in Austin in the last year alone, according to July figures from Zillow.

Average wage in Austin by sex:

  • Men $63,960
  • Women $42,768

76% of single-parent households with children under age 18 in Austin are headed up by women. Affordable monthly housing cost at an average wage of $42,768 is $1,069. Head over to Zillow or another property listing site and see what you can find right now available, especially in central Austin, for $1,069 or less per month that’s suitable for a single-parent family.

The unemployment rate in Austin is back to pre-recession levels, but there are still about 47,000 unemployed people looking for work, nearly equivalent to the entire student population at UT-Austin.

Clearly, of all the places you could be looking for work right now, Austin’s a good bet. We’re on pace for record job growth this year. But let’s keep in mind that 70% of job growth this year is likely to be in jobs that don’t pay enough, on average, to provide much in the way of housing choice, especially in central Austin where, I’m told, we’re encouraging density and mixed-income neighborhoods.

Further, lack of postsecondary education is holding back a significant portion of Austin’s primary working age population (25-64), including a majority of Black and Hispanic workers, in terms of ability to compete for higher-wage jobs that can support housing costs in Austin.

Of course, most fast-growing cities face these challenges. Austin is not unique in that respect. The pace of change here may separate Austin from other places, but anybody familiar with the housing market in Washington DC, or rapidly gentrifying neighborhoods of San Francisco, may beg to differ.

So the question is: what will we do with our growing prosperity and momentary place in the spotlight to show other cities around the country how a community of “big ideas” can make life better for all workers?

Happy Labor Day.

Debating Austin’s Future

City council races in Austin are heating up, and perceptions of “old” Austin versus “new” Austin seem to be popular firing lines. For the non-Austinites among you, voters in November will be electing representatives for single-member districts for the first time, drawing nearly 80 candidates for ten districts and mayor. It’s a historic turning point in local governance, as well as another milestone for the timeline marking Austin’s evolution from college town to big city. It’s been more of a sprint than a march down that timeline lately–the Austin region is adding approximately 50,000 per year–and the pace of change has elicited many competing viewpoints about the best ways to manage Austin’s growth and development.

I’m a fan, generally, of “new” Austin. Admittedly, my historical perspective is limited–Austin has been home base since 2002–but I enjoy the opportunities and amenities that come along with a thriving economy. However, through luck and good fortune of timing, I’m also in a position to take advantage of opportunities in “new” Austin. We purchased our home in 2005 and don’t have to face the skyrocketing housing costs in Austin. I have an advanced degree. I’m self-employed and not competing with the thousands of well-educated people moving here and looking for jobs.

I don’t know most of the 78 candidates running for city council or mayor. Most of them appear to be thoughtful, well-intentioned people concerned with the future of Austin. So in the spirit of contributing to what I’m sure will be a rich debate between now and November about affordability, equity, and what life is like for most Austinites, here are some points to ponder:

  • Austin is adding an average of 16,000 people with a bachelor’s degree or better every year, most of them moving here from other places. In “boom” years with the strongest job growth–we’re on pace to add about 37,000 jobs in 2014–only 8,000 new jobs are created in occupations that typically require a bachelor’s or advanced degree. In “normal” years, or at least what’s normal for Austin, that figure is more like 4,000. Now, not all the well-educated people moving here are active job seekers in the labor force (Austin is one of the most popular destinations for relocating Boomers and retirees), and there is turnover in existing jobs that need to be filled. But if you are one of the many people in Austin with a bachelor’s degree or better and you are surprised at how difficult it can be to find a well-paying job, you’re not imagining it.
  • 70% of projected job growth this year in Austin will be in occupations that typically require no postsecondary education. For those jobs typically requiring just a high school degree, the average wage is approximately $40,000 (across all levels of experience, not entry-level positions which are usually much lower paying). Housing researchers say that affordability means paying no more than 30% of income on housing costs. So $40,000 per year works out to about $1,000 per month in terms of what workers with a high school diploma, on average, can afford for housing. For workers in jobs requiring less than a high school diploma, affordability means paying no more than about $560 per month for housing.
  • According to the latest rental data available on Zillow*, there are only six neighborhoods in Austin where the median rent is less than $1,000: Highland, St. Johns, Heritage Hills, Pleasant Valley, Parker Lane, and North University. Workers with no postsecondary education make up about 368,000 people in the labor force, and 70% of job growth is occurring in jobs that pay, on average, enough to afford a maximum of $1,000 per month for housing. Six neighborhoods is a pretty limited offering for a city with aspirations of dense, centrally-located, mixed-income neighborhoods.
  • 60% of Hispanics and 40% of African Americans in Austin age 25+ have no postsecondary education. Hispanic and African American workers make up about 310,000 people in the labor force. The average wage for African American workers is about $39,000 per year, and for Hispanic workers is about $38,000 per year. Affordable housing at those wage levels means paying no more than about $975 per month. That, according to Zillow*, reduces your options to four neighborhoods in Austin: Highland, St. Johns, Heritage Hills, and Pleasant Valley. White and Asian workers, by contrast, earn average wages that can support monthly housing costs in the range of $1,500 to $1,700.

If we’re going to debate affordability and equity in Austin, let’s at least start with an understanding of the scope of the issue, and not limit the conversation to the skyrocketing list prices of owner-occupied housing in central Austin. Homeownership is, of course, an important part of the debate about affordability in Austin, but we are a renter-dominated market with a significant portion of the workforce, largely Hispanic and African American, increasingly unable to afford housing in Austin. If diversity is a goal, then we need a better understanding and greater appreciation for the connections between workforce preparation, wages, and housing affordability. I’d throw public transportation in, as well, but that’s a topic for another day.

“New” Austin is great, as long as you can afford to enjoy it.

We’ll be discussing these topics at the next UT Opportunity Forum event on September 12.

*Source: Zillow, median rent price, June 2014. Data is the median of the rental price for homes listed for rent on Zillow. Not representative of the universe of rental stock because not all residential rental properties are listed on Zillow.

Underemployment in Austin?

This article was written by Dan Zehr and appeared in the Austin American-Statesman on August 23, 2014.

Zehr: Can Austin have too many college-educated workers?

Only a few of the country’s large metro areas can claim a more-educated workforce than Austin, and none of them added as many four-year degrees to their labor pool as Central Texas did from 2007 to 2011.

Over that five-year span, the Austin metro area gained an annual average of roughly 9,400 residents who had earned at least a bachelor’s degree, according to a blog posted last week by noted urban affairs analyst Aaron Renn. No other metro area with at least 1 million residents posted a higher net gain, Renn said.

With four of every 10 existing residents holding at least a four-year degree, the region’s highly skilled labor pool had already become one of the chief drivers of its ongoing economic boom. But with these thousands of new lambskins being unpacked here each year, is it possible Austin’s workforce could become too educated for its own good?

While it’s hard to imagine that more education isn’t better — it virtually always is from an individual perspective — the answer to this question might very well be yes when looking at the regional economy as a whole, according to an analysis by economic development consultant Brian Kelsey.

Over the past decade-plus, Austin has added a remarkable number of high-skill jobs that require a four-year degree, Kelsey found. Yet over the same general time span, it has added roughly three times as many residents who hold those degrees.

The differential was even greater for people with graduate or professional degrees, he said.

The inevitable result is what many workers, especially those at the front and back ends of their careers, are grappling with today — underemployment.

Kelsey, principal at Austin-based Civic Analytics, compiled the education and labor market data for a Sept. 12 panel to be hosted by the University of Texas Opportunity Forum. The free public event at the LBJ School of Public Affairs is the first in the Forum’s four-part series focused on economic opportunity in Austin.

“There’s usually a concern about hiring someone who’s clearly overqualified because they may not be around very long,” Kelsey said last week. “But this suggests that assumption is not true for Austin over the long term.”

In a situation of persistent over-supply of well-educated residents, he said, an increasing number of workers will stay in jobs for which they’re overqualified and underpaid.

In Austin, some of that might be voluntary, with recent college graduates more immediately focused on pursuits other than their source of compensation.

“You’re back to ‘Slackers,’” Kelsey said. “It’s this notion of do what you need to do to get by, but that’s not the primary motivation of what you’re doing here. It’s not the job.”

In fact, in recent years a handful of employers have explained that they can pay lower wages in Austin, for the same job, than they pay in other Texas cities. A certain segment of the region’s smart, skilled workers will accept lower wages because they’re driven by other creative interests, the managers say.

To the extent that the overqualified stamp doesn’t count against these workers, then Austin’s creativity and education might actually help reduce regional wage growth, Kelsey said.

Getting a precise read on how much Austin’s slacker legacy might weigh on wage growth is a couple steps short of impossible. Data sources don’t capture how many local college graduates stay for the Central Texas lifestyle and despite their careers, but we know plenty of them exist. Nor do the workforce numbers convey how many people move to Austin without jobs.

Regardless of their reasons for staying or moving in, the growing supply of underemployed, college-educated workers could exacerbate rather than counter other potentially wage-depressing trends — in particular, the region’s rapid low-wage job growth.

Projections by EMSI, an economic research firm, suggest Austin employers will add more than 37,000 jobs this year. Of those, EMSI estimates that 70 percent will require nothing more than a high school diploma.

As Kelsey notes, these pressures aren’t leading toward an inevitable outcome, but they will ratchet up questions about affordability and equity around Austin — the key issues the UT Opportunity Forum hopes to explore at its panel.

Right major, wrong degree

Given its mix of jobs, Austin might very well have an over-supply of college-educated workers, but that’s not to suggest the region hasn’t sustained an enviable rate of high-skill, high-wage job growth as well. In fact, many of the largest sets of job openings in the area are for occupations that require two- or four-year degrees.

From mid-June to mid-July, local employers posted more than 1,500 open jobs for software application developers, according to the Conference Board’s Help Wanted Online database. Area firms posted almost 1,000 openings for web developers, and another 800 or so for network and computer systems administrators.

All of those occupations typically require a bachelor’s degree, and even the single largest set of job openings — for registered nurses — require at least an associate’s degree, according to the Greater Austin Chamber of Commerce.

“In some areas, yeah,” underemployment does exist in Austin, said Drew Scheberle, the chamber’s senior vice president for education and talent development. “I think you can look at people who have a bachelor’s degree in the traditional liberal arts area, but you don’t see underemployment in people coming out with nursing degrees, medical degrees, computer science, network administration.”

Scheberle said a sizable share of underemployment in Austin stems from what he calls “right degree, wrong major.” At a recent meeting with about 10 student leaders from universities in the region, he said, only one, a computer science minor, realized how keen employers were for high-tech skills.

Jeff Browning attended the same meeting. As recruiting partner at Austin Ventures, Browning is keenly aware of the talent needs at many of the area’s high-tech companies. The Austin business community needs to do a better job of signaling its workforce needs, he said, so interested students can identify and pursue high-demand skills.

Yet Browning also said he would never council an individual student away from a four-year degree, regardless of the student’s interests. The skills needed in a knowledge-based economy change so rapidly, he said, and companies will get increasingly creative about who they hire as the unemployment rate continues to drop.

But even from a broader economic perspective, Browning believes communities benefit from erring toward an over-supply of college-educated workers. Apple, AthenaHealth, Charles Schwab and the dozens of other companies relocating or expanding in Austin are doing so largely because of the region’s deep pool of highly skilled workers, he said.

“You never know what the economy is going to do in terms of companies growing and the unemployment rate shrinking,” he said. “For workers who proved they’re smart by completing a college curriculum, companies will start asking, ‘How do we take them and retrain them and target them into areas of demand?’”


Women-owned businesses in Texas

This story was written by Claudia Grisales and appeared in the Austin American-Statesman on August 15, 2014.

Business leaders: Texas can do more to help women-owned businesses

More can be done to boost the number of women-owned businesses in Texas, female business leaders told U.S. Sen. John Cornyn and Texas Comptroller Susan Combs during a roundtable discussion in Austin on Thursday.

About 29 percent of businesses in Texas are owned by woman, but with additional intervention that number could be higher, business leaders said.

“These are great stories, some of which I will never forget,” Cornyn, R-Texas, said after hearing female business owners share stories on how they got their starts.

The discussion, held at Chez Zee restaurant in North Austin, started off with discussion of an American Express study that found the number of women-owned businesses in Texas grew by nearly 100 percent from 1997 to 2014. That ranked Texas was second in the nation behind Georgia, which posted a 118 percent growth rate, according to the study.

The study didn’t include specifics on whether that growth rate included women-owned businesses that failed. An American Express spokesperson could not immediately be reached Thursday.

Brian Kelsey, principal of Civic Analytics, an Austin-based economic development firm, said Texas doesn’t appear to stand out from other states in terms of the share of total businesses that are owned by women.

As of 2007, there were more than 600,000 women-owned businesses in Texas, which was about 28 percent of all businesses in Texas, Kelsey said, citing the latest available data from the U.S. Census Bureau. If you look at women-owned businesses as a share of all businesses, Texas ranked 18th, well behind places like Washington D.C., Maryland and New Mexico, he said.

“The important point is to ensure that we do everything we can to lower any barriers that may exist for women to start and grow businesses,” Kelsey said.

Still, Combs said, the growth figures are positive and point to a determined set of female business owners.

“It’s a really big deal,” Combs said, adding later, “we are feisty, we are not afraid to kick anybody in the shins and that’s why we are successful.”

Several area female business leaders, including the founder of Triton Ventures, Sugar Mamas Bakeshop and others, shared how they started their operations, lauded some of the resources that helped aid those starts and also laid out concerns that can hold back such entrepreneurship efforts.

For example, Sugar Mamas Bakeshop owner Olivia Guerra O’Neal, who said she had learned the ropes of starting a business from her father by the age of 10, said that while Austin has been welcoming she’s also faced challenges with her business location and working with the city’s health department.

“We do believe there could be more done to help women-owned business in Texas,” O’Neal said.

Laura Kilcrease, founder and managing director of Triton Ventures, said she has also seen the challenges facing female business owners.

Kilcrease said improving the size of state and federal contracts for small businesses, improving access to capital, boosting education could help grow the number of female-owned businesses in Texas.

“I think education through our universities in our is going to be key,” she said.

Economic Development Incentives

This is the second lengthy op-ed I’ve seen from the state’s top economist for hire defending Governor Perry’s Enterprise Fund and other economic development incentive programs. The legislature periodically reviews the rules governing incentives whenever there’s a public flap, but perhaps the combination of turnover in the governor’s office for the first time in 14 years, the lurching rightward of Republican politics, and the flogging inflicted by Louise Story in the New York Times, has opened the window wider than usual for critics.

So do incentives work? Like most policies, it depends what you mean by “work.” The literature is wide and deep on the efficacy, use, and theoretical foundations of subsidies for economic development purposes. I won’t go into the finer aspects of market failure here. That eye-glazing-over journey is reserved for my students. But for those of you interested in the academic arguments, read Tim Bartik’s Solving the Problems of Economic Development Incentives, and really anything else written by Bartik on economic development. The article is a bit dated now (2005), but it’s still one of the best and most accessible reads for non-academics. I’ll leave it up to you to decide if that’s a testament to Bartik’s command of the topic, or the lack of innovation in the field.

After 15 years of working in and studying the practice of economic development, and teaching it to graduate students during the last few years, here’s what I know:

1. No degree of appeal to scholarly treatise or “21st century” economic development will end the use of incentives. As long as we have politicians and separate tax bases, incentives will be in play.

I would even take that one step further and say that no amount of public shaming for bad deals will end the use of incentives, either, at least not permanently in most places. Instead of questioning the nature or rules of the game, or of course acknowledging their own role in applying pressure that can often lead to bad deals, communities usually let economic developers take the fall when things go poorly; new staff is hired, and business continues as usual.

2. Sometimes incentives make a difference and sometimes they don’t. You will never really know which is true, before or after a deal is signed.

Site selection is a lucrative business for consultants, whose compensation is often based on the amount of money they can wring out of states and communities through subsidies. But more important is the simple fact that businesses will take free money when it is offered to them. The amount of money saved from tax abatements and other incentives is small potatoes for the large and very profitable companies who make headlines when announcing a new location or significant expansion. But it’s still money. Free money. It’s armchair philosophy of the greatest magnitude to expect companies to forego free money out of some sense of obligation or interest in doing “what’s right” for a state or community.

Yes, critics of incentives are right to point out that most parents working for that company will send their kids to public schools depending on property taxes, use parks and other public amenities, drive on roads built and maintained by local governments, and expect the police, fire department, and EMS to show up when called—all things that suffer when states and communities give up tax revenue. Supporters counter that giving up a portion of new tax revenue is preferable to getting no new revenue at all.

Here’s how it works. Put yourself in an elected official’s shoes and decide what you’d do. You’ve run a campaign on creating jobs or at least ensuring that your community is business-friendly. There’s a site selection consultant in your office saying that your city is one of three under consideration for a project and the other two cities are offering incentives. You have no way of independently evaluating how your city stacks up against the other locations because the other locations are confidential—apparently naming the final three cities can tip off competitors about the company’s business model or growth strategy. So you have no way to assess your bargaining power, but at least the prospective company will sign a statement saying that this is a “competitive” process with other cities offering incentives, which provides a little cover for you. Information asymmetry, indeed. But, nonetheless, you are faced with a difficult choice: (a) refuse to offer incentives and gamble that the company will choose your city anyway; or (b) play it safe.

What would you do? When times are good, and times are really good in Austin right now where this debate is heating up, you may be more likely to gamble. I have no doubt that companies will continue to invest in Austin, with or without incentives. I also have no doubt that some companies would refuse to consider Austin for relocations or expansions if Austin stopped offering incentives.

Same goes for Texas and the debate going on right now about the state’s economic development programs. Supporters and critics are both right, and that makes for a compelling policy debate with staying power. But beware the expert predicting 100% downside if incentives are discontinued. Similarly, beware the critic predicting that most of these jobs will come here anyway.

3. If abstinence is unrealistic, then at least be smart.

Needlessly risky behavior, thankfully, is on a downward trend. Today, clawbacks are widely recognized as an industry standard. An increasing number of cities are using refund incentives, where tax payments are collected up front from a subsidized company and then refunded after the firm’s contractual commitments of jobs, capital investment, etc., are verified. This protects a community’s investment and avoids expensive legal action in the event the subsidized company goes bankrupt, moves away, or otherwise can’t or won’t provide evidence that its commitments under the incentive agreement have been met.

We’ve come a long way, but more improvement is needed. For example, too many states and local governments are still relying on basic economic impact analysis that focuses only on direct and spinoff jobs, wages, and sometimes tax revenue when calculating and communicating a deal’s return on investment. That’s only part of the story. What’s really needed is a fiscal impact study, or a cost-benefit analysis, of the proposed deal, with a full accounting of additional costs to local governments resulting from the new development–i.e. more students in schools, more traffic on roads, greater demand for housing, etc. There are inexpensive tools, such as LOCI, for conducting fiscal impact analysis without having to hire consultants.

For general guidance on best practices, check out Good Jobs First. When an anti-incentive advocacy organization says a city or state is doing a good job, then you can be fairly confident that the example is useful.

Finally, I was asked recently what my incentive policy would look like if I were an elected official. Here’s a broad outline:

  • A level playing field—if you’re going to use incentives, be equitable and inclusive. Make sure that companies of all sizes, new and existing, have the opportunity to participate. Whether you’re creating five jobs or 500 jobs, the policy should apply equally to entrepreneurs, small businesses, and large corporations. Consider a per job created subsidy, rather than using a minimum number of jobs created per project threshold for incentive eligibility. This lowers the barrier to participation for small businesses, which make up 95% of all businesses and about 50% of all jobs in metro areas like Austin.
  • A living wage requirement—decide on the hourly or annual wage a worker must earn to meet her family’s basic needs in your city and only subsidize jobs that pay at or above that line. This approach has several advantages over the more traditional method of using average wages. For example, a policy offering per job subsidies for net new living wage jobs may encourage business owners in lower-wage industries, who would not qualify for incentives based on average wages, to consider whether eligibility for the subsidy would be worth raising wages for new jobs created paying close to a living wage. This would not produce the sea change in paychecks that a minimum wage increase would, but it would be an interesting experiment.
  • Transparency–whether it’s cash or foregone tax revenue, incentives are taxpayer money. Taxpayers deserve to know what they are getting for their investment before a deal is signed. Findings from the cost-benefit analysis should be posted online with sufficient time for review. Taxpayers should have an opportunity to provide feedback on a proposed agreement during at least one public hearing. Reports on incentive payments and company commitments should also be available. The City of Austin incorporated these changes a few years ago, and contrary to doomsday predictions from some, the process has been working quite well.

At the regional level, I would also push for an anti-poaching agreement, like Metro Denver’s Code of Ethics.

So what should the Texas Legislature do about the state’s economic development programs? Would killing the Enterprise Fund and the Emerging Technology Fund hurt the state economy? Certainly, it would be more difficult for communities in Texas to compete with communities in other states without an active state partner. Now, does that mean we need a $500 million cash fund, or could we achieve the same results using different tools?

Let’s consider what else the state could offer. No state income tax takes that off the table as a policy lever. Perhaps sales tax rebates would provide enough encouragement in some cases, but clearly that’s not as compelling as what the Enterprise Fund offers. If we don’t mind offering cash, perhaps from the Rainy Day Fund, but want to use a different process, we could adopt a system common in other states where the legislature is called into special session to consider incentives on a case-by-case basis, but I have a feeling that may not work so well in Texas.

The bottom line is that the Enterprise Fund and the Emerging Technology Fund have been factors in corporate decisions to invest in Texas, but there is no way to know what would have happened without them. And killing the programs won’t settle the debate, either, because you’re not likely to know for sure which future investments could have located here but didn’t.

Taking an ideological stance on incentives is easy. Strangely, so is crowing about the virtues of the “free market” while doling out taxpayer money to companies, for some state leaders. Nonetheless, when designed and managed appropriately, incentives can be an effective tool for improving communities.

Here’s hoping the gamble pays off, whichever way it goes.

Economic Resilience

Buzzwords governing community and economic development policy in Washington DC tend to follow a certain lineage, a sort of genealogy fueled by the symbiotic relationship between think tanks and technocrats. A term or concept, often long-debated and sometimes even settled in academic circles, suddenly takes hold–a spark that starts consuming air in the bubble. Eventually, the bubble adapts, as federal programs integrate, or at least learn to live with, the new concept.

The exact lineage is difficult to map in some cases, because concepts can spark at the same time, like twins.

Innovation > Competitiveness > Clusters

Place-Based > Sustainability > Resilience

A slightly more cynical view would suggest that the latest cause célèbre follows (or perhaps dictates?) the availability of funding, like a dowry that facilitates buzzword offspring:

Clusters (regional) + Resilience (local) = Innovation Districts

Occasionally, this constant rebranding of “what works” does produce things of tangible value for practitioners outside the bubble. For instance, thanks to HUD’s Office of Sustainable Housing and Communities Economic Resilience, we now have examples of  how regional planning can be streamlined to more effectively align economic development, housing, and transportation, such as Region Five Development Commission’s Resilient Region plan in Minnesota and Centralina Council of Governments’ CONNECT Our Future initiative in the Charlotte area.

No buzzwords are necessary to understand why planning silos should be better connected, or broken down altogether. Completing and implementing separate plans for economic development, workforce development, transportation, and housing is expensive, inefficient, and counterproductive, especially for the business owners, community leaders, and residents you are asking to participate in these various planning processes. If resilience means better planning–thus freeing up staff time to do things rather than plan to do things–I’m all for it.

Federal agencies are also investing in research tools that can help practitioners work with stakeholders to determine what “resilience” means for their communities. The U.S. Economic Development Administration (EDA) is leading the way through support of a revamped U.S. Cluster Mapping Project, now with data for counties and the ability to build multi-county regions aligned with Economic Development District boundaries, and an enhanced StatsAmerica website (I’m on the advisory committee). These tools can be really helpful for exploring topics and identifying metrics for tracking resilience, such as the degree to which a region is dependent on a single cluster, or sources of income for residents.

In addition, the Appalachian Regional Commission recently completed an impressive effort with the University of Illinois at Urbana-Champaign and the Center for Regional Economic Competitiveness to measure several types of economic diversity. The work focused on the Appalachian region, but data is available for all U.S. counties, as well as Economic Development Districts (Spoiler: Portland-Vancouver Economic Development District and Southwestern Pennsylvania Commission, you do quite well):

Economic Diversity in Appalachia

Practitioners can explore resilience with more traditional data sources, as well, such as the Census Bureau’s Statistics of U.S. Businesses, looking at how dependent a community is on large or small businesses, for example. As of 2011, there were 17,671 firms in the U.S. with 500 or more employees. These large firms made up less than one percent of total firms in the U.S., but accounted for 52% of total employment and 58% of total payroll. Practitioners may want to compare their communities to the U.S. average as a way of further understanding potential vulnerabilities, such as layoffs or closures at branch plants of large corporations during recessions. For example, 76% of total employment in the Tuskegee, AL, area is in firms with 500+ employees. In Orlando, FL, it’s 63%, also well above the US average. Large firms account for 73% of total payroll in Bloomington-Normal, IL (home of State Farm), compared to only 33% in Santa Fe, NM.

What, if anything, can practitioners glean from these statistics to address economic resilience? The literature review completed for the Appalachia project, which you can find on the website, is a good starting point, and you can also learn more about this topic at the NADO annual training conference in Denver later this month.

For the 380+ EDA-funded Economic Development Districts, this “pivot” to resilience, as they say, will soon be part of the requirements for Comprehensive Economic Development Strategies (CEDS). I like the shift, despite the jargon gymnastics that come along with it. Resilience is a helpful framework for examining strengths, weaknesses, opportunities, and threats to a regional economy. It’s broad enough for tailoring to local circumstances, but specific enough to provide common themes for peer learning: natural disaster, industry diversification, BRAC.

Stay tuned for more on this when the new CEDS guidelines are published.

Workforce training deserves higher priority in Texas

This story was written by Dan Zehr and appeared in the Austin American-Statesman on July 23, 2014.

Comptroller: State needs to boost support for job-training programs

Texas has one of the country’s largest and fastest-growing youth populations, but the economic boost they could deliver when they enter the workforce won’t materialize unless the state supports the training programs they need to launch and sustain their careers, according to a new report released from the state comptroller’s office.

The working-age population in Texas is projected to grow about 37 percent over the next three decades, the report said, more than three times the national average. And those young workers could provide the state a key economic advantage, giving it a more vibrant workforce to fill existing jobs and attract new employers, it said.

“Texas has a huge potential source of workers to trim skills gaps and meet employer demands — if this youthful cohort receives the proper training and education,” the report said.

The expansion of the state’s up-and-coming workforce comes as workplace skills requirements are evolving at breakneck speeds. Without the necessary education, this rapid shift toward new and greater skill requirements could leave many of Texas’ young workers with limited access to good jobs.

The report encouraged state lawmakers to help expand an educational pipeline that prepares young workers for careers and then provides them opportunities to upgrade their skills throughout their careers.

In particular, the report recommended a stronger focus on career and technical education programs, the expansion of Early College High School programs, more adult-education options and a broader consideration of alternative training programs, such as apprenticeships and industry-based certificates.

“If you don’t increase that training as the world becomes more diverse, more varied and more complex, then these people are going to be left behind — and employers need all these people,” Comptroller Susan Combs said in an interview.

Exhibit A for the return on educational investments, Combs said, is the Jobs and Education Training (JET) program the Legislature approved in 2009. So far, JET has funded almost $27 million in equipment for training programs around the state, serving more than 69,000 students and generating an net salary increase of $22,000 per student.

“If you multiply that out, you get hundreds of millions of dollars of return,” she said. “This is not throwing money down a rat hole.”

Not every young Texan will want or need a four-year degree, but national earnings data suggest that more education means more earning power over the course of a career. Someone with an associate’s degree will earn an average of $1.7 million over the course of his or her degree, compared with just $973,000 for a high school diploma, the report said, citing a 2011 study by the Georgetown University Center on Education and the Workforce.

And increasingly, associate’s degrees and alternative credentials have become prerequisites for the middle-skill, middle-class jobs that used to require little more than a high-school diploma and a good work ethic. Texas has seen skills gaps appear for many of its technical, high-wage jobs, but the state’s widest gaps have opened up in the middle tier, the report said.

To close those gaps, the report said, Texas will have to expand and raise the profile on a range of technical education programs, including efforts to push more associate’s degree and credential programs into high schools.

While some local economic development and workforce experts agreed with the reports recommendations, they said the report means little if the Legislture doesn’t commit the financial resources needed for the programs.

“Most school districts don’t have the funding available to offer high-quality, comprehensive career and technical education programs,” said Brian Kelsey, principal of Civic Analytics, an Austin-based economic development firm. “Finding instructors can be difficult, especially in rural communities.

“A new report is great,” he said, “but nothing will change unless state leaders get serious about investing in our future workforce.”

The state’s comparatively low levels of per-capita education spending extend beyond K-12 education. In 2010, the report said, Texas funded adult education programs to the tune of just $4.83 per adult without a high school diploma — far less California (106.27), and New York ($30.70).

“Adult education especially has been a ‘backwater program,’ seen as a step child to public education and workforce development programs,” said Christopher King, director of the University of Texas’ Ray Marshall Center for the Study of Human Resources.

Currently, adult education providers in Texas get much of their funding regardless of performance levels, King said. So while the state needs to put more money into these training programs, it should also tie at least a portion of adult-education funding to performance. Combs agreed.

“When you can make case for educational rigor and measureability,” she said, “then you’ve provided enormous value to Texas.”