Last month New York’s Attorney-General Andrew Cuomo criticized banks – including Citi, Merrill Lynch, Goldman Sachs, Morgan Stanley and JPMorgan Chase – for paying large (okay, huge) executive bonuses when the companies were losing money.
He called this an illicit transfer of shareholder wealth to the pockets of individual managers.
Cuomo’s report spurs me to tell you about a certain illicit transfer of taxpayer money to private pockets, one that’s been bothering me a lot...
A hot day on the US-Mexico border. Twin cities, one on either side of the international line. An economic development initiative that went wrong. Or did it?
US and Japanese maquila firms came to our twin cities for easy access to ocean ports and to major US markets. Other attractions were the usual for maquilas: cheap labor and tax-free transfers across the border.
The cities got job creation. The cities were ready to welcome the expected traffic congestion that accompanies economic growth.
Two other events came to pass. One was predictable but perhaps not planned for: that the maquiladoras would use just-in-time (JIT) deliveries to streamline their manufacturing and minimize their inventory costs. The second was less predictable: More and more suppliers to the maquila firms located on the US side of the border.
JIT minimizes inventory costs because the 'OEM' (the manufacturer) doesn’t have to maintain extensive warehouse facilities, and doesn’t have to tie up cash in inventory. Materials arrive only when needed. It’s assembled into finished products and shipped out immediately. JIT shifts inventory costs to suppliers, who must bring to the manufacturer what’s needed, exactly when it’s needed.
It also shifts costs to taxpayers, as we shall see.
The maquila scheme (later supplemented by the terms of NAFTA) supposed that manufacturers and suppliers would locate on the Mexican side. As it turned out, less labor-intensive suppliers preferred to do business on the US side of the border, which they saw as a more congenial, predictable, and safe business environment.
These two unplanned developments had two consequences. Instead of generating (for example) one delivery truck trip per week, each maquiladora locating in the Mexican city generated four truck trips per day. Due to the locations of suppliers and distributors, a much higher than expected percentage of these trips involve border crossings.
Now, each vehicle crossing the border must deal with Mexican Customs, US Homeland Security (Immigration and Customs), and truck safety inspection. At least three separate stops. Aerial photos of the crossing point, e.g., this one at Mapquest, or Figure 2 of the EPA report "Truck Stop Electrification and Anti-Idling as a Diesel Emissions Reduction Strategy at U.S.-Mexico Ports of Entry," show immense queues. The costs of the trips – what with the delays in crossing – include driver and government inspector salaries, depreciation and wasted fuel as trucks idle for hours.
A full and realistic accounting of the costs must also mention the frustration of tourists who are crowded off the highway by trucks, or who are delayed in reaching their cross-border destinations, or who are so discouraged that they stay home, or vacation and shop elsewhere.
The companies are now asking for expansion of the existing border crossings, and construction of a new crossing. The state transportation commissions on both sides of the border are eager to pour more concrete, and thus increase their budgets and influence. The state and city governments want to accommodate the maquila firms, because they’re afraid that otherwise the firms will relocate to other border towns with more malleable local governments.
Let’s face four blunt facts:
- We pay taxes to build roads and amenities that benefit everyone, or at least a broad swath of the population. When a road brings us free-spending tourists, that’s a legitimate reason to spend tax money on roads. When the road just brings supplies to a handful of companies – and crowds out the tourists – it’s not a legitimate public expense.
- From an economic development perspective, we’d rather have the companies build warehouses. The warehouses are taxable infrastructure that, as ìimproved real estate,î will still be there if the company ever folds or leaves the region. Far preferable to JIT delivery, which doesn’t contribute to the tax base and in fact takes from it.
- Companies are backing away from JIT anyway, either abandoning it or going to hybrid supply chains. Even when the main trunk roads are not congested, local city streets are congested. Unpredictable traffic jams mean that true JIT is impossible.
- The companies are not likely to move away.
Why won’t they move away? Ironically, the crossing expansion was being discussed at a local college that was preparing to turn out an increased number of logistics graduates to work in the maquilas. The maquilas told the college that they wanted the expanded border crossings, but that their greatest need was for qualified graduates. The maquilas on the Mexican side need logistics and manufacturing experts; the higher-tech suppliers on the US side need engineers.
I should mention also that the city on the US side (where the college is located) boasts a quality of life that far exceeds the QOL of any comparable border city. In other words, qualified graduates want to live and work here.
As Richard Florida writes – and as proven by Intel’s empty threats to leave Oregon – when the knowledge workforce is highly qualified and highly entrenched, the companies are stuck. In the case of our twin cities, the college will turn out the qualified, entrenched grads that will keep the companies here, regardless of whether border crossings are expanded.
Is more concrete and more crossing guards the best investment for the US state that is in a budget crisis and has many pressing expenditure opportunities elsewhere? Are the twin cities and their respective states ready to call the bluff of the maquila firms? Would expanded border crossings lay unused when the companies finally abandon Just-in-Time anyway? How long will it be before streamlined Homeland Security procedures, and elimination of safety inspection for Mexican trucks entering the US, decrease waiting times at existing crossing points?
It’s hard to fault the companies for asking for all they can get from the local governments. It’s hard to fault the transportation commissions from trying to increase their influence and maintain their budgets. It’s not surprising that the maquilas are better negotiators than underpaid local economic development officials. All that does not change the fact that we have a problem.
The problem is that we do not know how to jointly plan and allocate private costs and public costs.
The problem is that we don’t know how to incentivize private companies or state agencies to keep the public interest in mind. As a professor, I must say the problem is that we teach corporate finance and public finance in separate silos, and fail to teach multiple companies and agencies how to coordinate with each other.
Until we teach system tools instead of tools for suboptimizing, we’ll see unnecessary concrete poured. Until we teach a realistic view of the business-government interface, we’ll see more public investment diverted for private gain. We won’t know whether economic development initiatives "work" or not.