The rumored closing of St. Paul’s Ford plant is bad news for Ford employees and the Twin Cities economy as a whole.
In the short run, employment, earnings and spending will suffer. But the effects on the overall economy are likely to be much smaller in size and shorter in duration than people might guess. Keep that in mind when considering what — if anything — local or state government should do in response to this development.
In the aggregate, the numbers sound big. The plant employs some 1,800 union workers with average annual earnings of $55,000 each and 200 non-union employees (average salary is not available). Just the annual union payroll amounts to about $100 million based on the average wages. The plant also purchases many goods and services locally.
An end to payrolls and local purchases would reduce economic activity as a whole. There is a “multiplier effect” to spending. Ford workers get paid and spend their paychecks on housing, food, fuel, health care, recreation and so forth. The businesses that supply such goods and services employ other people and make other purchases and so on. Cuts in employment result in cuts in spending, which in turn reduce employment and spending by the affected businesses.
Keep things in perspective, however. Minnesota’s population is 4.6 million, and average personal income per capita is about $36,000. The total is about $166 billion. So the Ford union payroll is about 1/13th of 1 percent of total household income for the state.
The state has some 2.8 million workers, 1.8 million of whom are in the Twin Cities metro area. St. Paul itself has 147,000 workers. So the loss of 2,000 jobs at Ford also would be 1/13th of 1 percent for the state and about 1.4 percent for St. Paul. We experience month-to-month fluctuations like this all the time and no one pays particular attention.
Moreover, the multiplier effects of 2,000 people laid off in one fell swoop are no greater than that of 200 companies laying off 10 workers each. While no one welcomes layoffs, we don’t write headlines when metro area employment goes up or down by 2,000 in one month. Overall effects on retail businesses from such common fluctuations are not significant.
The fact that the union contract for the plant requires workers to be paid through 2007 in case the plant is closed further cushions the economic impact. The economic effects of gradual adjustments usually are less severe than abrupt ones.
So yes, the closing of a factory that has been part of the local economy for most of a century is bad news. But it is not the economic catastrophe for Minnesota, the Twin Cities or even for St. Paul that some will make it out to be.
Should the city or state do anything if the plant is closed? The answer is that it is better to help people rather than companies. Moreover, help extended to affected individuals in large layoffs should not be greater than that given in smaller ones.
Ten years ago, Art Rolnick, senior vice president at the Minneapolis Federal Reserve Bank, and then-Congressman David Minge led an attack on state subsidies to attract businesses or sports teams. They were entirely right. Such subsidies invariably make society as a whole worse off. The same applies to subsidies to keep existing businesses going.
Public money is much more effective when it is spent on retraining workers for other jobs. That is the key lesson from our own history. It is at the heart of the ongoing European debate about labor policies. Countries like Sweden that focus on retraining workers do much better than those like France that focus on keeping specific factories or companies afloat.
Helping workers rather than subsidizing plants is not just better for the economy as a whole, but usually is better for individual workers in the long run. Subsidies to keep old factories running usually just delay the inevitable at a high cost to taxpayers.
Keep in mind that the benefits to society of investing in a worker do not vary with how many workers are laid off at one time. In a dynamic economy, it often is good policy to use public funds for worker retraining at all skill levels. That should be a long-term effort, however, and not just a spasmodic reaction to one highly visible plant closing.
© 2005 Edward Lotterman
Chanarambie Consulting, Inc.