Monday, April 25, 2011

Ohio is spending $1.4 billion to attract jobs. Will it work?

By Dennis Cauchon, USA TODAY

VAN WERT, Ohio — The farmland is flat. The houses are few. The property owners have agreed to sell.

Abandoned buildings sit on a 1,600-acre industrial site in Van Wert.A red barn sits on the 1,600-acre industrial site available for development in Van Wert, Ohio.

All that’s missing is a manufacturer who wants to build a giant factory on 1,600 acres of farmland in northwest Ohio. As the town’s website says: “”

Van Wert’s speculative industrial site — complete with a rail line, gas lines, land-acquisition options and anything else a manufacturer would need — is just one $10 million slice of an extraordinary government experiment to revive this state’s declining economy.

Ohio has launched what appears to be the biggest intervention in the private economy by a state government since at least the Great Depression, according to a USA TODAY review of historical data. The state is preparing new industrial parks and high-tech office buildings, loaning money and giving grants to businesses, and subsidizing clean energy, websites, nanotechnology and warehouses, among other things.

The state will spend $1.4 billion on economic development this year. Indiana, by contrast, will spend $37 million; Florida $11 million. California has 25 people working full-time on economic development. Ohio: more than 400.

Ohio’s attempt to revive its economy is a real-life case of how states act as a laboratory of democracy. This industrial state is testing a provocative economic question: Can government direct the economy into the future, or is that best done by a free market?

In a political twist, Ohio’s economic intervention was a Republican idea, started a decade ago by Gov. Bob Taft. Republican legislators boasted of the effort as a “stimulus” program until the word became associated with Democratic President Obama’s economic recovery plan.

The program has enjoyed broad support from Ohio’s voters, businesses, unions and Republicans and Democrats alike.

“We had to do something in a dramatic way,” Taft says. “It’s a long-term strategy, not an overnight attitude. It’s how states like Ohio must transform themselves. We don’t have any other choice.”

Ohio has lost more than 500,000 jobs in the past decade — 80% of them well-paying manufacturing jobs. Only Michigan has suffered more from the nation’s industrial decline.

It’s unclear whether Ohio’s gamble will pay off.

A USA TODAY review of two dozen of Ohio’s state-funded projects found many behind schedule or failing to deliver the jobs or investment returns promised.

For example, a proposed multibillion-dollar plant that would make synthetic natural gas in Lima (population 38,771) is still an artist’s rendering in search of financing. It has received $70 million in federal, state and local aid and has been in the works for a decade.

However, the recession and other economic forces — such as low natural gas prices — make it difficult to judge the long-term success of the Lima project or other projects financed by the government.

The Van Wert site is one of two new mega-industrial sites Ohio is preparing in hopes that a car company or other manufacturer will choose Ohio rather than Tennessee, Alabama or a foreign nation.

A few miles down the road from Van Wert (population 10,263), the state is creating a 471-acre industrial park in Wapakoneta (population 9,867) that could supply the mega-site. That site’s website has a similar ring: “”

The question the state is asking itself is: Why Ohio?

Companies build elsewhere

Dozens of once-prosperous towns — Akron, Coshocton, Defiance, Mansfield, Newark, Van Wert, Zanesville — are shells of what they once were.

The state is losing young people, and because of the 2010 Census it will lose two of its 18 U.S. House seats.

When Facebook or Google build data centers — buildings that could be located anywhere — they have chosen rural, high-unemployment parts of Oregon and North Carolina.

Ohio is heading down a path Michigan tried on a smaller scale but is abandoning.

Michigan spent about $100 million to $250 million annually on economic development during the past decade, first under Republican Gov. John Engler, then under Democratic Gov. Jennifer Granholm. The effort — even with an extra, one-time injection of $400 million in 2007 — couldn’t stop the state’s economic slide from a collapsing auto industry.

Michigan’s new governor, Republican Rick Snyder, plans to cut economic development spending to $50 million. Instead, he wants to reduce business taxes by more than $1.5 billion and shift the burden to the personal income tax.

Ohio State University economist Mark Partridge says government efforts to plan an economic revival seldom work.

“Politicians and economic development officials overestimate their ability to forecast the future — to predict the next Silicon Valley or even to know beforehand that a Silicon Valley is going to occur,” Partridge says.

Government’s poor record of picking winners and losers means that even well-intentioned programs can hurt more than help, he says.

“A tax incentive for one firm means I have to raise taxes on everyone else or cut services,” Partridge says.

Ohio’s business leaders are more optimistic.

“We’re looking to get industry up and moving again,” says Andrew Doehrel, president of the Ohio Chamber of Commerce. “We’re not saying pick Company XYZ because it has a chance of success. We’re saying pick Company XYZ because they’re into plastics and Akron is successful in that field. It’s targeting that is necessary and useful.”

A long partnership

Ohio’s tradition of big government, big business and big unions dates back a century and sometimes has worked well.

The auto industry bailout halted Ohio’s employment collapse and restored some manufacturing jobs. The state’s unemployment rate fell to 8.9% in March, just above the national average.

In a state devastated by foreign competition, free trade is held in unusually low esteem, even among Republicans. When Republican Gov. John Kasich was elected in November, exit polls showed voters by a 7-1 ratio said free-trade agreements had taken away jobs.

Ohio’s $1.4 billion in economic development spending does not include many tax breaks or other programs that provide additional assistance to targeted industries such as clean coal.

Most states offer similar programs. What’s different in Ohio is the scale.

The state has started directing cash, loans and tax breaks to nearly every imaginable part of the economy — dairies, auto suppliers, business incubators, plastics research and biotechnology. It’s building modern industrial and office parks — and fixing up old ones — even though prospects for filling the sites is speculative.

The push to reinvent Ohio’s economy began in 2002 when voters approved borrowing for an economic development program called “Third Frontier.” Voters have extended the $2.3 billion program — part of the state’s larger economic development effort — through 2015.

From that, the economic development effort has expanded to nearly every sector of the economy in every town in this state of 11.5 million.

“We still want to be the state that makes things,” says Mark Kvamme, a Silicon Valley venture capitalist brought in to help reorganize the economic development effort.

Kasich, the new governor, has moved some programs into a quasi-private operation called JobsOhio that he hopes will be faster and more effective.

This new approach positions the government to act more like a risk-taking investor, Kvamme says. For example, JobsOhio might own a share of an upstart business in return for its investment. “Ohio should be able to do what Stanford University has done — own some of the upside,” Kvamme says. “When Google went public, Stanford made billions. Think what that could mean for Ohio.” Stanford made money by licensing technology to Google in exchange for shares and fees.

Kasich is expanding Ohio’s tradition of large-scale, government-directed development programs. His new budget proposes spending an extra $100 million a year in liquor profits on economic development. That amount alone dwarfs economic development spending in almost every other state.

An unusual marriage

Quasar energy group is the poster child for what Ohio is trying to accomplish — a marriage of business and academics.

The start-up company converts waste — sewage, cow manure, food — into natural gas. It got a $2 million state grant, a $3 million state loan and $1 million in federal funds to build a waste-to-energy plant in Columbus.

Quasar will move into a new government-subsidized office building on the Wooster campus of Ohio State University. This 57-acre BioHio Research Park, Ohio’s effort to create a “food and agriculture technology cluster,” got about $10 million in state and local subsidies.

The state’s matchmaking has helped both sides. “Entrepreneurs make it sound easier than it is. Academics help you get over the hurdles,” says Mel Kurtz, Quasar’s president.

Kurtz’s slice of the hundreds of millions of dollars Ohio is spending on alternative energy shows the ambitious scale of Ohio’s efforts. North Carolina awarded $1 million in state money to alternative energy businesses last year. No single grant was bigger than $100,000.

Ohio hopes for thousands of waste-to-energy plants, not just a few, Kurtz says. “This is building an industry, not a business,” he says.

The size of Ohio’s economic development spending has made subsidies part of everyday life for its major businesses.

Cincinnati-based Procter and Gamble, the consumer giant, got $250,000 in November to pave a parking lot.

“It’s sort of a rich-gets-richer situation,” complained state Sen. Ray Miller, a Democrat who voted against the grant.

American Greetings, a holiday card giant, is getting state subsidies to move its 2,000-employee operation from one Ohio town to another. Restaurant chain Bob Evans is getting state money to move its headquarters from a low-income neighborhood in Columbus to an affluent suburb.

Ohio cities and counties routinely add tax breaks for almost any business or developer that asks. One unusual Ohio subsidy: collecting municipal income taxes from workers and giving half the money to their company as a location award.

Free-market advocates say subsidies and tax breaks favor bigger businesses skilled at lobbying. That pushes the burden onto others and unintentionally smothers small entrepreneurs.

“The best thing a city or state can do is make itself attractive to every business. Taxes should be low, regulation moderate and don’t play favorites,” says Clint Bolick, president of Arizona’s Goldwater Institute, which successfully sued Phoenix for subsidizing a shopping mall.

Overdrive, a successful Ohio technology firm, shows the blurry line between business-friendly and business subsidy.

Entrepreneur Steve Potash was a Cleveland lawyer who turned his computer hobby into a major distributor of audio books and e-books to 10,000 libraries. Overdrive has 130 employees, is riding the e-book boom and has never had an unprofitable quarter.

When Overdrive needed a bigger office, the company called the state and got a $484,000 tax credit.

“There wasn’t a lot of red tape. The state was a pleasure to do business with,” Potash says.

The company will move from one Cleveland suburb to another. It never considered leaving the area. The state aid will help the company speed hiring and growth, Potash says.

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