Saturday, March 13, 2010

Inefficiences of Companies Relocations

This article talks about the threats of United Technologies to move out of its longtime headquarters state of Connecticut (I worked at Otis, a UTC company, for the first 12 years of my career).

Rell's office issued a general statement calling for the state to lower business costs, but offered no specific plans on how to accomplish that.

"The comments by the UTC executives today reinforce Governor Rell's message that we must improve our business climate," the statement said. "More taxes, more mandates and more costs for employers are not the answers. Given the current budget deficit, the legislature needs to make some tough choices — but it cannot do so at the expense of our businesses and our employers."

The budget deficits Rell described may limit the state's ability to give millions of dollars in grants and tax breaks, as it has done in the past. [my italics]
Doling out all those tax breaks and incentives is part of the problem.  It is the economic policy version of social engineering. It leads to behavior that is macro-inefficient:
First of all, having companies relocate is often a huge, disruptive inefficiency. People typically make long-term decisions regarding where they live and work in part based on commuting distance. So a relocation of any significant distance--let alone out of state--will have a huge disruption effect on the workforce.[1]

Second, the doling out of tax breaks is inherently inefficient. We all learn in business school that it is one-tenth as expensive to retain an existing customer, versus attracting a new customer. The tax breaks start with luring new companies to the state. But then the existing companies want the same thing, so they threaten to leave. All of that activity employing non-value added state policy officials, lobbyists and lawyers. W-A-S-T-E.
[1] I recognize that in this case, disrupting the workforce may be a feature, not a bug, because the real desire is to out-source to a cheaper location.

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