Infrastructure for the sake of jobs?

We shouldn’t build infrastructure for the sake of creating jobs.

“Jobs and growth are the results of a productive system, not a proxy for one. Until we reconfigure our places, sustained prosperity will remain elusive.” – Chuck Marohn, If it creates jobs, then it must be good, right?

Jobs and economic growth are a result of having a productive system in place, not the other way around. We need to create real net wealth that benefits not only the local communities, but the region as a whole. Don’t get me wrong, jobs are great. But, building infrastructure with the primary purpose of creating jobs, with little consideration to context, is setting a bad precedence and setting up communities for unexpected liabilities.

This leads me to a new program in Minnesota called Transportation Economic Development (TED) that “is a competitive grant program available to communities for highway improvement and public infrastructure projects that create jobs and support economic development.” Projects can receive up to $7 million and must meet a few qualifications, but the primary concern is purpose #1: “Create and preserve jobs.” It aims to do this by providing funding to help jump start projects that lack local funds.

In theory, this sounds good: we’ll create infrastructure and it will support things like manufacturing, technology, research and development and bio-science. These are all industries that politicians salivate over. The problem is, by concentrating on creating jobs in the short-run, we’re ignoring whether what we’re building is actually a good project that will have a positive return on investment in the long-run.

I’ve taken the time to map all the 2011 TED projects. You can view all of 2011 and most of 2012 on Google Maps, but I wanted to highlight a few examples, most of which are classic “if you build it, they will come” projects.

City of Marshall – $575,000 in TED Funding [Map] [Facts]

The city is installing turning lanes and a bypass lane on Highway 68 near the newly built Lake Road Industrial Park and officials are negotiating with businesses that may want to be located in the park. It’s estimated the $822,500 project will create about 100 jobs.

City of Mankato – $969,218 in TED Funding [Map] [Facts]

This project expands a local industrial park by roughly tripling its size. The interchange and roadway networks are being designed to accommodate a controversial Wal-Mart distribution center, for which the City has already kicked in $2 million in subsidies for a project that may not actually happen. Quick back-story, the distribution center has been in the works since 2005, but has yet to be built.

According to more recent news, the city anticipates the project will support 162 new jobs within 2 years and 405 new jobs within 5 years. Of course, since 2005, it was supposed to have already created about 500 jobs. By the way, I took photos (here and here) in Spring of 2011, and nearly 2 years later, it looks the same.

City of Perham – $3.5 million in TED Funding [Map] [Facts]

Perham is a small town in central Minnesota that is getting a new interchange that will support an estimated 240 jobs. TED will be providing $3.5 million of the $6.7 million project. This project might make sense if the town didn’t already have 3 interchanges leading to the same highway.

These are the types of investments you’ll get if you’re looking to create jobs without consideration for creating infrastructure that will have a long-term benefit to the community. These projects are essentially a continuation of the Growth Ponzi Scheme; infrastructure paid for via state transportation dollars as a way to induce new local growth at the periphery to help cover the cost of the existing infrastructure. Rushing these projects through with state infused dollars for the sake of short-term job growth seems so absolutely short-sighted.

From a local government’s perspective, what good is a job anyways? Most cities don’t have an income tax, nor do they collect sales taxes these jobs might be producing (beyond a few exceptions). Most local governments depend on property tax as the primary source of revenue. Meaning, this should create some incentive at the local level to maximize property taxes, not jobs.

Why isn’t this happening? Maybe it’s because we haven’t had to make it happen – whether that be because of new growth paying for old growth, local government aid funding or DOT transportation dollars. It’s as if we have a credit card bill we can’t pay off each month, but someone comes in at the last moment and pays it off.

Let’s take the Mankato example from above. The city builds and maintains the large industrial park, Wal-Mart moves in, pays property taxes and creates all of the estimated 500 jobs. It’s a distribution facility, so no point of sale isn’t happening locally. Meaning, Mankato’s State-approved local sales tax pot won’t benefit. Property taxes for similar large buildings are around $300,000 in property taxes per year and a full-time distribution employee makes approximately $15 to $18 per hour, or let’s say about $35,000 a year. Now, let’s assume all new employees purchase an average $160,000 house and pay the $2,000 in annual property taxes. Under this best-case scenario, Mankato will net $1.3 million in revenue.

$1.3 million sounds like a lot, but some of these 500 people will have children in public schools, right? That, and they’ll need public safety, too. Oh, and this is Minnesota, so we’ll need snow plows. Plus, let’s not forget that all of the over-sized infrastructure being built at the edge of town will certainly have to be maintained.

We are using short-term job prospects to justify building infrastructure that we don’t need and has no real return on investment. Anytime that we make a long-term decision based primarily on short-term goals, it’s likely to have bad results. It’s like we’re tricking ourselves into thinking that we’re creating prosperity. The best example is TED Funding allocation to the City of St. Charles to build a new 20-acre industrial park. It’ll attract 45 new jobs, all of which appear to be existing Minnesota firms that are relocating. What’s good for St. Charles is some vacant office space an hour’s drive away.

Don’t get me wrong – jobs are great and communities need them. But they aren’t a be all, end all. Jobs and economic growth are the results of productive systems, not the other way around. Until we reconfigure our towns and change our growth patterns, our communities are likely to continue to be starved for jobs and growth. Building pieces of infrastructure with the primary purpose of creating jobs with little consideration to context is a recipe for disaster.

We need to create real net wealth with our infrastructure. Simple as that. Let’s start by taking inventory of our already successful places, incrementally improving them and going from there …

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Two quick additions:

1) I think policies makers have a general misunderstanding of how business owners think. They don’t think of success in terms of jobs, but more so in terms of profit generated in an efficient manner. Upon being asked the question “how was last year?”, you’d never hear a business owner respond, “It was great! We had 10 employees and now we have 20.” Instead, you’re likely to get an answer about how profits were up and/or operation costs were down. Having lots of employees isn’t necessarily a good business practice nor is it in any way an indication of a healthy company.

2) Policies that promote and favor manufacturing and warehousing operations under the sole objective of job creation are misguided. There are better ways to create jobs. While American manufacturing is having a small renaissance, it’s being done with fewer employees and more high-tech machinery. The same goes for warehousing. Long gone are the days of one factory employing hundreds of people. Let’s stop pretending that we’re living in the past.