ARRA as a Corporate Rescue Plan

A war of words is raging over the impact of the Obama Administration’s $787 billion stimulus program, which is now one-year old. Conservative members of Congress are mounting a relentless assault on what they see as an abject failure, even as many of them unabashedly promote and at least implicitly take credit for individual American Recovery and Reinvestment Act (ARRA) projects in their home districts.

Meanwhile, the office of Vice President Joe Biden has issued a report insisting that ARRA has created or saved 2 million jobs and has brought many states back from the brink of fiscal disaster. The stimulus effort, Biden insists, “is going well.”

The debate boils down to an age-old disagreement between those opposed to allegedly wasteful social spending and those who believe government has to reinforce the social safety net during a time of economic distress.

Both sides are ignoring the fact that ARRA, to a significant degree, is a rescue plan not just for unemployed workers and struggling state governments, but also for parts of corporate America. This goes far beyond the roughly $50 billion in business tax breaks that Republicans last year insisted be part of the plan.

The Recovery Act represents a big step in the direction of what was once called industrial policy. Billions of ARRA dollars are being used by the federal government to encourage the development of new industries in areas such as renewable energy and health information technology that are seen as the foundation of future economic growth. Billions more are being spent on traditional procurement contracts to boost private-sector activity.

Here are some examples of larger injections of ARRA funds going directly to the corporate sector:

ADVANCED ENERGY MANUFACTURING TAX CREDITS

Hemlock Semiconductor, a joint venture of Dow Corning (itself a joint venture of Dow Chemical and Corning Inc.) and two Japanese companies: $141 million for the production in Michigan of polycrystalline silicon used in solar panels.

Wacker Polysilicon North America LLC, a subsidiary of the German chemical company Wacker Chemie: $128 million for a plant in Tennessee that will produce polysilicon for solar cells.

United Technologies Corporation, the big military contractor: $110 million for new equipment at its Pratt & Whitney plants to help produce more energy-efficient jet engines.

Alstom, the big French power and transportation equipment firm: $63 million for a Tennessee facility that will produce the world’s largest steam turbines for nuclear power plants.

GRANTS FOR DEVELOPMENT OF ADVANCED BATTERIES FOR ELECTRIC VEHICLES

Johnson Controls: $299 million for work on nickel-cobalt-metal battery cells

A123 Systems Inc.: $249 million for work on nano-iron phosphate cathode powder and electrode coatings.

General Motors: $105 million for production of high-volume battery packs for the GM Volt.

“CLEAN” COAL POWER INITIATIVE

American Electric Power Company: $334 million for the development of a chilled ammonia process to capture CO2 at a power plant in West Virginia.

Southern Company Services: $295 million for the retrofitting of a CO2 capture installation at a coal-fired power plant in Alabama.

BROADBAND EXPANSION

ION HoldCo LLC, a partnership led by Sovernet Communications: a $39 million grant to expand fiber-optic broadband in rural areas of upstate New York.

Biddeford Internet Corp. (dba GWI): a $25 million grant to extend a fiber-optic network to rural and disadvantaged parts of Maine.

ENERGY LOAN GUARANTEES

Solyndra Inc.: a $535 million loan guarantee to support the construction of a commercial-scale manufacturing facility for cylindrical solar photovoltaic panels.

PROCUREMENT CONTRACTS

Lockheed Martin: $165 million to work on the crew vehicle for NASA’s Project Orion.

Clark Construction Group: $152 million to design and build a new headquarters for the U.S. Coast Guard in Washington, DC.

General Motors: $104 million to supply light trucks, station wagons and alternative fuel vehicles to the General Services Administration.

GlaxoSmithKline: $62 million from the Department of Health and Human Services to do research on the H1N1 flu vaccine.

To this list can be added the thousands of contracts that states have awarded to private companies to carry out ARRA-funded activities such as highway repair, school construction and environmental remediation.

It is surprising that there has been so little debate on the relative merits of all these projects and programs – as well as on the wisdom of providing direct subsidies to profit-making entities. Are these grants, contracts, tax credits and loan guarantees a smart investment in the future or nothing more than business boondoggles?

With a significant portion of the Recovery Act going to aid corporations, we also have a right to ask why they are not creating more jobs with the taxpayer funds they have received. It would also be helpful to know – though the limitations of ARRA data collection make this difficult – how good are the jobs that have been created (in terms of wages and benefits) and whether those jobs are being equitably distributed among different portions of the population.

If we are ever going to reach any meaningful conclusions about the whole stimulus endeavor, we’ve got to go beyond tired debates about Big Government versus the Free Market. Like the bailout of the banks and the auto companies, ARRA is changing the relationship between the public and private sectors. Now we need to know whether the new arrangement is working and who is reaping the benefits.

Can the Redlining of U.S. Workers Be Stopped?

wind turbineWe’re meant to believe that corporations make their investment decisions based on carefully considered financial and competitive considerations. Yet a recent announcement by a Chinese manufacturer of turbines for wind energy shows how political pressure can quickly change business priorities.

In late October the company, A-Power Energy Generation Systems, announced that it had been chosen to supply some 240 turbines for a large wind farm planned for Texas. That would have been just another in a long series of manufacturing-goes-to-China stories, but for reports that the group launching the $1.5 billion project—a joint venture of China’s Shenyang Power, Texas-based Cielo Wind Power and private equity firm U.S. Renewable Energy Group—was intending to take advantage of U.S. government funding through the Recovery Act.

New York Senator Chuck Schumer raised a stink about this in an open letter to Energy Secretary Steven Chu, highlighting reports that while the Texas wind farm would create a modest number of local jobs, the much bigger employment impact—2,000 to 3,000 jobs—would be felt at A-Power’s factories in China.

The ensuing uproar—with protests coming from figures as divergent as Steelworkers union president Leo Gerard and rightwing Missouri Senator Kit Bond—got the joint venture’s attention. While not abandoning the plan to import turbines for the Texas wind farm, A-Power and U.S. Renewable Energy Group announced on November 17 that they would construct a new wind turbine factory in the United States with a workforce of about 1,000.

That’s good news for the job-starved American economy, but all the attention given to A-Power has obscured a set of larger problems concerning the U.S. renewable energy industry.

The first is that the operation of facilities such as wind farms does not generate much employment—once built, they basically run themselves. The real employment potential is in manufacturing the turbines and other components used to generate wind and solar energy.

The disturbing fact is that, with the exception of General Electric, large U.S. companies have shown little interest in domestic production of these components. This has created an opening for foreign firms such as Gamesa (from Spain), Vestas (Denmark), Siemens (Germany) and Sanyo (Japan) to capture a large share of U.S. production of wind and solar components. Over the past few years they have invested hundreds of millions of dollars in plants from Pennsylvania to Oregon—and have often received lavish state and local economic development subsidies for doing so.

Unfortunately, the economic crisis has taken its toll on this sector, and expansion plans are being curtailed or postponed. For example, wind turbine maker Vestas, which has invested heavily in Colorado and planned to boost its workforce in that state to 2,500, recently said it would slow its pace of hiring.

To make matters worse, some of the newer U.S.-based wind and solar manufacturing companies that claim to be interested in domestic production have been lured by the siren call of cheap overseas labor. Evergreen Solar, for instance, recently revealed that it plans to shift assembly of solar panels from its heavily subsidized plant in Devens, Massachusetts to Wuhan, China. It would follow in the footsteps of U.S. firms such as First Solar, which already does most of its manufacturing in Malaysia, and TPI Composites, which produces wind turbine blades in Mexico and China.

It’s also not the case that foreign firms are always worse than domestic ones when it comes to respecting the rights of workers. Within the wind and solar sector there are U.S. companies that seek to weaken their unions (such as GE) or keep them out altogether (e.g., DMI Industries, which fought a Teamsters organizing drive). At the same time, there is Spain’s Gamesa, which accepted the desire of its workers in Pennsylvania to unionize and has developed a cooperative relationship with the Steelworkers.

From a labor perspective, the issue is not whether a company is foreign or domestic. What counts is whether it is redlining U.S. workers or giving them a chance to participate in producing the components of the economy of the future.

Corporate Cookie Monsters

hartongThe Pyrrhic victory achieved by the Stella D’Oro workers in the Bronx — they won an eleven-month strike but are slated to lose their jobs anyway — says a lot about what is wrong with American capitalism.

One lesson is obvious: there is no fairness in a collective bargaining system in which employers can make unreasonable demands (which in this case included a 20 percent pay cut and elimination of paid vacation and sick days), pretend to bargain until an impasse is reached and then bring in strikebreakers when the workers are compelled to walk off the job.

The Stella D’Oro situation was unusual in that a National Labor Relations Board administrative law judge finally ordered the reinstatement of the strikers, but that was only because he found that management failed to provide the union, Local 50 of the Bakery Workers, an audited financial statement to substantiate company claims of financial distress.

Whatever satisfaction the workers, who exhibited amazing solidarity during the strike, took in the NLRB ruling was dampened by the company’s subsequent announcement that it plans to shut down the plant, which has been in operation for more than half a century. The company abided by its WARN Act notice obligation, but in the current economic climate it will be difficult for workers to find other employment within 90 days.

Much has been made of the fact that Stella D’Oro is now owned by Brynwood Partners, one of those bloodsucking private equity firms. Brynwood — headed by Hendrik Hartong Jr. (photo) — certainly deserves plenty of scorn for its treatment of the workers. This is a firm, after all, that did not hesitate to accept taxpayer funds in the form of a 2008 Manufacturing Assistance Grant of $175,000 from the Empire State Development Corporation. It has also received property tax abatements from New York City.

Apparently Brynwood, whose website brags that its investments have earned a 28.8 percent overall rate of return, thought it was under no obligation to give back to the community and to its workers. It is unfortunate that among the investors in Brynwood are public pension funds such as the Pennsylvania State Employees Retirement System.

While the Stella D’Oro dispute is certainly a case of private equity behaving badly, it should be admitted that the cookie company was not always a model employer under its previous owner, publicly traded Kraft Foods, which in 2006 sold the business to Brynwood. In 2002 and 2003 Teamsters Local 550, which represented the company’s delivery drivers, clashed with Stella D’Oro management during negotiations on a new contract. The Teamsters struck the company in February 2003 to block what the union said was a plan to replace union drivers with non-union ones, and soon the walkout spread to other Kraft facilities in the New York metropolitan area. It appears the union got crushed.

The behavior of the Cookie Monsters who have run Stella D’Oro shows that removing barriers to union organizing is not the only urgent task for labor law reform. The system also needs to be changed to prevent unscrupulous employers from undermining unions already in place.

Once High-Flying Developers Now Looking for Federal Aid

Opponents of the auto industry bailout, who warned that it would prompt other business sectors to ask for similar consideration, are probably feeling vindicated. Only days after the Bush Administration did an end run around Senate Republicans and agreed to provide a Detroit rescue package using bank bailout funds, the Wall Street Journal is reporting that commercial real estate developers are seeking their own federal assistance package. They are warning that, without such aid, thousands of office complexes, shopping centers, hotels and the like could join the country’s foreclosure tsunami.

There’s one major difference between the auto industry and commercial real estate that justifies a bailout for one and not the other: the number and quality of jobs at stake. The Big Three provide hundreds of thousands of well-paying jobs (too well-paying according to certain Southern Senators) that have helped workers achieve a middle-class standard of living. Real estate developers, by contrast, are primarily responsible for substandard retail and janitorial positions. While the Service Employees International Union has helped improve wages and benefits for some building services workers, most of those jobs don’t take people far out of poverty. While it would be a shame for janitors and clerks to lose their jobs, preserving those positions does not have the same urgency as saving the estimated 1.2 million direct and indirect jobs linked to the Big Three.

Rather than bailing out their employers, it would make more sense to use federal funds to help retail and janitorial workers find better jobs elsewhere in the economy. In the speculative boom of recent years, the real estate business built far too many office buildings and shopping centers, and many of those properties will probably not survive the current shakeout. While there is a strong case that the country needs a domestic auto industry, it is much harder to argue that every commercial property needs to be kept in operation.

And if Congress does decide it is necessary to prevent a commercial real estate meltdown, it should keep in mind that these same developers now looking for aid have repeatedly pressured local governments for property tax abatements and other subsidies. A report I wrote last year (with two colleagues) on the big mall owner General Growth Properties, which is now struggling to survive, found that the company had received more than $200 million in such subsidies and another $9 million in savings as a result of aggressive filing of property tax assessment appeals. Previous (unpublished) research I did on the country’s largest mall operator, Simon Properties, found $380 million in subsidies and savings from assessment appeals. In both cases, the data come from an examination of only a portion of the malls owned by the company. Also remember that Wal-Mart used a gimmick called captive real estate investment trusts to avoid paying an estimated $2.3 billion in state taxes.

Perhaps Congress should require developers to use part of any bailout to repay the subsidies they received from local governments that are now facing dire fiscal conditions.

But even that would not provide a compelling case for a commercial real estate bailout. In a country that still hasn’t devised a comprehensive plan for stopping home foreclosures, we shouldn’t be worrying about saving the owners of superfluous office towers and big box stores.

Richard Shelby: United States Senator or Foreign Corporate Agent?

Alabama Senator Richard Shelby has emerged as the leader of Republican opposition to a federal rescue of the Big Three U.S. automakers. Shelby would have us believe that his position flows out of a deep belief in market forces. “The strength of the American system,” he said recently,” is it allows us to take risks—to create, to innovate, to grow, to succeed and sometimes to fail.”

While Shelby (seen in photo with Saddam Hussein) is credited by some for consistency in that he also opposed the big federal bailout of financial institutions, he’s been called a hypocrite because his home state lavished major economic development subsidies on Asian and European automakers—a total of more than $750 million to Mercedes, Honda, Toyota and Hyundai over the past 15 years. These transplants, all non-union, have given the Yellowhammer State one of the country’s largest auto sectors, albeit one that is foreign controlled.

Shelby insists that Alabama’s handouts to the foreign automakers are not relevant to the current debate, but what he and his critics are both ignoring is that the funds channeled to the likes of Mercedes and Honda have not been only state and local. The federal government has also provided assistance to the transplants, and Shelby, along with other members of the Alabama Congressional delegation, helped that happen.

A stroll through the archives of Alabama’s newspapers on Nexis makes this clear. In 1993, when Mercedes was lured to the state with a $250 million incentive package, Shelby praised the deal, stating: “Alabama put together a smart investment package that in both the short and long term will yield solid results for our state” (Birmingham News, 9/29/93). Federal money helped pay for some of the highway improvements that were promised to Mercedes to make the site more appealing (Birmingham News, 10/21/93).

In 1999, when Honda was induced to build a plant in Alabama with a $250 million package of its own, the Alabama delegation quickly mobilized. On May 7, 1999, Michael Brumas of the Birmingham News reported: “Alabama members of Congress said Thursday they will be looking for ways the federal government can help underwrite part of the costs associated with building the new Honda plant at Lincoln. And the lawmakers pledged to help the automaker maneuver through the federal bureaucracy as it prepares to build the plant.” The article said Shelby, as chair of a transportation appropriations subcommittee, was expected to funnel money for road projects near the site.

In 2001, when the Korean automaker Hyundai was deciding where to locate its first U.S. plant, Shelby and other members of the Alabama delegation met with the company (Birmingham News, 10/11/01). After the state won the plant with yet another package of around $250 million, Shelby arranged for $445,000 in federal funds to go to the Alabama Tombigbee Regional Commission, which planned to arrange free bus and van service to take construction workers to the Hyundai site (Montgomery Advertiser, 9/10/02). And these are only the cases that found their way into the press.

Shelby is far from the only senator to have used his office to arrange for federal funds to help a company in his state. But the fact that Shelby has worked so hard for the foreign automakers and now opposes measures deemed necessary to protect the jobs of three million American workers in the auto industry and related sectors makes one wonder whether he should be seen as a U.S. Senator or a foreign corporate agent.