Biggest U.S. economic story of the year: Federal Government v. Boeing

Buried in the ocean of news regarding our three wars has been what I think is the biggest U.S. economic story of the year: the federal government’s lawsuit against Boeing, seeking to prevent the opening of its $2 billion factory in South Carolina, for which 1000 workers have reportedly already been hired (in case you missed the news altogether: story, story, story).

Whatever the ultimate decision in the lawsuit, the very existence of the dispute will change the business landscape here in the U.S. for the next decade or two. First, the fact that this happened to Boeing, a company with vastly more political power than average (you might say that it is practically an arm of the federal government itself) is significant. There are hardly any U.S. or foreign companies that can rely on similar influence. For a U.S. company, for example, the prospect that Boeing’s $2 billion investment might be effectively confiscated by the government will be one more reason to build the next factory in a foreign country. The U.S. government won’t be able to sue to prevent the startup of production in Mexico, Canada, China, etc. For a Chinese investor, for example, contemplating investing in the U.S., imagine the impact of the story. The Chinese investor has no political influence in the U.S., a tenuous grasp of American geography and language, and no hope of getting the ear of politicians who take calls every week from Boeing and its lobbyists. Given the vicissitudes of American politics and this unpredictable aggression against investors by government, the Chinese businessman is not going to finance the U.S. project unless it can deliver a rate of return comparable to what would be expected in other countries where there is a lot of risk from capricious governments (historically these have been Third World countries led by dictators or owned by families).

The Chrysler and GM bankruptcies already showed bond investors that the black letter law may not have as much to do with how their investment works out as the sentiments of politicians and bureaucrats in Washington, D.C. (link). Now the federal government is stirring up uncertainty among those who would directly operate factories in the U.S. How to price that uncertainty is going to be a huge challenge, but the price is certainly not going to be $0.

[Loosely related: Folks have been expressing confusion as to why the Federal Reserve's monkeying with U.S. currency (e.g., printing money to buy Treasury bonds) hasn't had a bigger effect on business investment and jobs. I think that the answer is that every investor has to get out a checkbook and write a check. Economists and politicians tend to forget that because they've never had to make an investment in a business enterprise, so they don't account for "What happens when a manager is about to write a $2 billion check for a new factory in the U.S. and reads about the Boeing mess?"]

12 Comments

  1. Jose C Silva

    April 27, 2011 @ 1:55 pm

    1

    I have a vague recall of finance since I learned the basics in the XIVth Century; there was the financing part and the investment part, and then the reaping the benefits part. How do the actions of the US government fare against this simplified view?

    Let’s see:

    - Screw up financing options (the GM and Chrysler bond story);

    - Overrule investment decisions (Boeing);

    - Cancel corporate permits after massive investments (Shell in Alaska);

    Yep, that’ll get investors all jumping into US business opportunities.

    Cheers,
    JCS

  2. Alex in Texas

    April 27, 2011 @ 2:26 pm

    2

    The NPR op-ed was a particularly disappointing piece of progressive agit-prop. Arguing that free-market economic libertarians are wrong about how things should work because South Carolina spent so much of their taxpayer’s dollars to lure Boeing to set up shop there is particularly maddening; I don’t know of any libertarian economists who would support such subsidies. In a truly free-market system it would purely be based on where the labor is cheapest for the equivalent productivity and it’s hard to imagine that it would be cheaper in a union-state vs. a right-to-work state.

    If the National Labor Relations Act of 1935 really does make it illegal for a business to chose to move to State B when their workers in State A are constantly striking, then the NLRA has got to go. If you’re free to choose what company to work for, the company has to be free to choose to employ you or not. Full stop.

  3. philg

    April 27, 2011 @ 2:55 pm

    3

    Alex: I don’t think the details are important in terms of coloring investors’ perception of what kind of return they need in the U.S. to compensate for government risk. The headline is enough to drive up the required return.

    [Where do I stand on the merits? It is tough to say. Boeing is so entwined with the government and the government is 40+ percent of the U.S. economy. Telling Boeing where it can and can't put a factory is not inconsistent with other things that the government apparently has the power to do (and that a majority of citizens agree that they want the government to do). For maximum efficiency it might have been better if the economic planning official in Washington had made the decision prior to $2 billion being spent. I'm not sure who would want an empty airliner factory in South Carolina.]

  4. anon

    April 27, 2011 @ 5:19 pm

    4

    “I’m not sure who would want an empty airliner factory in South Carolina”

    I am sure Airbus would love one, cheap. (one reason for their tanker entry was to gain a foothold in the US), but personally, I would try and sell it first to Bombardier, Honda, or Embrauer.

    The problem I have with many sides of each of these arguments is how intertwined
    the companies and the local governments already are.

    I have no problem with company X leaving territory Y as long as company X never got a single tax break, tax waiver, road paving, utility extension, freeway offramp, freeway, … If they accepted such, then regardless of what the balance sheet says and what accountant theory currently claims, I do think the local community has a stake and right to control company X to some degree.

    I say this because while I don’t care about company X, I do care about company Z, which was smaller, small enough to fail, and not large enough to attract or lobby for corporate welfare.

    In a similar vein, I have no problems with right to work states so long as: a) we still have effective OSHA and EPA, and b) we can split health care coverage / retirement / life insurance away from the employer onto some other system (I would prefer universal.) I say this as someone with all sorts of degrees and what would seem to be a perfect resume for starting my own company, and yet, I am basically enslaved to large companies that can provide health care for me. And my health care issue is actually that of a relatively minor, and now fixed, congenital birth defect, but one that still prevents me from getting anything like affordable coverage.

    In fact I know of many people who very much dislike their large corporate welfare sucking employee killing companies but have no real alternative because of health care issues.

    It is a loss to people as humans with a limited lifespan, it is a loss to society economically to enslave people to a crappy company just to get health coverage.

    Split health care coverage off and amongst the many benefits is that it will free people to take risks and explore careers they actually like. That will actually improve the workers and Boeing vis-à-vis each other. And so too the rest of US employees and their corporate overlords.

  5. Fabian Gonzales

    April 28, 2011 @ 5:06 am

    5

    “I have no problem with company X leaving territory Y as long as company X never got a single tax break, tax waiver, road paving, utility extension, freeway offramp, freeway, … If they accepted such, then regardless of what the balance sheet says and what accountant theory currently claims, I do think the local community has a stake and right to control company X to some degree.”

    Anon: Even if company X paid taxes? Taxes are supposed to pay for the goods you list. Your argument is like saying that the state can control where you can live and work to some degree, because the community paid for your schooling (or roads, or whatever).

    Having grown up in a socialist economy I’m a big believer in the free market, and seeing the intervention from the U.S. government at almost every level of the economy is mind-boggling. I predict the U.S. will see a relative economic decline for decades as a result.

  6. Tom

    April 28, 2011 @ 11:16 am

    6

    Tax breaks, subsidies and infrastructure improvements are all provided for the net affect of employment and economic improvement provided by a big company. These investments are made as part of a business agreement which is beneficial to all parties involved.

    The U.S. Government has no legal right to challenge free enterprise. The points in the article are very clear and accurate, why would a company build a factory in the U.S. if the Government can decide you can’t open it. Will the Government pay for the resulting capitial investment loss via tax breaks for the company?

    Remember, The Government is YOU and ME! Do you want to pay for a $2 Billion factory because a Union isn’t happy that the company is moving to a lower cost structure? What’s next? Enacting a law that prevents a U.S. based company from building factories outside of the U.S.?

    We’ve seen this kind of government before. It was called the USSR and it didn’t work. Ask the people there how they faired economically.

  7. Jon D

    April 29, 2011 @ 12:52 am

    7

    The problem is not that Boeing wants to open an assembly line in a right-to-work state.

    The issue at hand is that Boeing is required by statute to negotiate in good faith (As are the unions.) Negotiating in good faith means addressing open contractual issues not moving the discussion out of bounds and saying “settle or else we take our ball and go home.”

    By the same token a union engaged in negotiations would not be allowed to say; “Give our 737 line workers what we want or we wildcat and shut down your 787 line.”

    When Boeing threatened the IAM with a move during negotiations they violated their duty to negotiate in good faith.

    It was an obvious blunder that managers who are extremely well compensated to ensure their “talent” is top tier should not have made. It was a rookie mistake and it should cost them.

  8. Ryan

    April 30, 2011 @ 2:28 pm

    8

    Philip, This is at core a simple contract dispute; the NLRB is alleging that Boeing violated its own freely signed labor contract and the matter will be settled in a court of law like any other contract dispute.

    Here, I will note than even the most far right libertarian considers legally binding contracts essential to the functioning of a modern society.

    And here I will ask why there is so much endless rhetoric about how enforcing contracts and laws (e.g. tax codes and banking regulations) will “discourage” business investment. Who cares? Law breaking must be unacceptable for a society to function. It is a baseline requirement. The only question now is whether Boeing is guilty and what the punishment should be. If the company is financially strapped perhaps they should be cut a break, like any family renegotiating a mortgage might deserve to be (though i pcti e this seems to be far more rare than a powerful corp getting a break on vague free market grounds).

  9. philg

    April 30, 2011 @ 3:42 pm

    9

    Ryan: “a simple contract dispute”? http://westmoreland.house.gov/News/DocumentSingle.aspx?DocumentID=238575 and all of the other sources that I found say that “This is the first time in history the NLRB has argued that a company is violating federal law simply based on where they choose to locate a factory.”

    A simple contract dispute is something that a foreign investor might conceivably be able to understand. Foreseeing a government action that was outside the scope of anything that the U.S. government had done for more than 200 years seems more like something that a prophet or psychic would be capable of. Most investors lack the skills of prophecy or psychic prediction.

    [Separately, I don't think it makes sense to call a union agreement a "simple contract", which implies that it was voluntarily entered into by both parties. http://en.wikipedia.org/wiki/National_Labor_Relations_Act forces employers to enter such contracts, even if they desire not to. Similarly, except in "right to work" states, employees who do not wish to be part of the union are nonetheless forced to pay dues out of every paycheck. These complexities won't necessarily stop investment, of course, and they aren't any worse than many of the obstacles to doing business in Third World countries, but investors withhold investment in Third World countries until they are pretty sure of getting all of their money back quickly.]

  10. Paul in Seattle

    May 4, 2011 @ 7:13 pm

    10

    This suit was brought to slow the flight from those states where labor is strong. This is a states’ rights issue. The US Supreme Court is not likely to see the merit in reviewing this case. Other companies might see the opportunity to get out of union states and follow Boeing’s lead. That is the real concern of the AFL/CIO–to slow the flight of high paying union jobs from current manufacturing states, like Massachusetts, the home of Harvard, the sponsor of this blog. A more interesting questions is the impact this suit might have on widespread union negotiations over the next few years.

  11. Stephen

    May 10, 2011 @ 6:26 am

    11

    Your concerns are real, Phil, but all Obama needs to do is to repeal the law of unintended consequences. Then laws benefiting labour unions will not cause a reduction in business activity in those states that have them, and the US as a whole will not suffer a chilling effect on foreign inward investment.

    He can do that, right? Can’t he do anything?

  12. Friedrich

    May 11, 2011 @ 10:50 am

    12

    Here’s one opinion about it from inside Boeing…
    http://online.wsj.com/article/SB10001424052748703730804576315141682547796.html

Log in