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LESSONS OF MAYTAG

May 11, 2006

An era is coming to an end with the impending shutdown of Maytag's Newton facilities. The causes of the closure will be debated, but ultimately it appears Maytag was unable to move quickly enough to deal with unforgiving worldwide competition. While there will be political finger-pointing, the decision was beyond the politicians. The company's fate was decided by years of management decisions and market forces.

Yet there are policy lessons to be drawn. Consider this item from the Des Moines Register today:

An incentives package, including state money for job training, tax incentives and the promise of a new state-of-the-art factory, couldn't sway company officials from announcing it would shut down operations in Newton beginning this year.

Gov. Tom Vilsack called the state's offer the largest incentives package offered in Iowa. Details of that plan, which could have cost Iowa as much as $95 million, included:

- Building the company a high-tech factory at a cost of $50 million to $75 million. The state would have leased it to the company.

- More than $20 million to retrain Maytag employees to work for Whirlpool.

- Tax and energy incentives that were being ironed out.

The governor's office and state Department of Economic Development declined to provide specific details, saying state officials remained in negotiations with Whirlpool in hopes of keeping other Iowa Maytag facilities open.

"He all but gave them the keys to the state," said Rep. Paul Bell, a Democrat from Newton.

One lesson? States can't bribe their way to a sound economy through subsidies and incentives. The governor was willing to tax every other business in the state to give Whirlpool $41,667 for each job that would be kept in Newton. Even that deal wasn't sweet enough. Apparently Whirlpool is more concerned with running their worldwide business than in trolling for subsidies.

The best that politicians can do for economic development is stay out of the way. That's very hard for them to do, of course. Staying out of the way means enacting a simpler tax system with a broad base and lower rates. That means giving up all of the futile "economic development" credits and spiffs built into the tax code. The Tax Policy blog has an excellent post on this topic, where they quote the president of Pepsi's worldwide operations:

The current U.S. tax code provides a variety of incentives to businesses through credits and other preferences, and PepsiCo benefits from many of these credits and preferences.

Nevertheless, if I were asked to choose between increased credits and other preferences or a lower corporate tax rate, again I would choose the lower tax rate.

As noted above, a reduction in the corporate tax rate would allow businesses to determine for themselves how best to deploy their earnings in order to maximize returns to the business and to the shareholders.

A repeal of Iowa's horrible corporate tax would send a much better message to the Whirlpools of the world than our pathetic bribery attempts.

Another lesson is more subtle, but worth noticing. Iowa isn't really a manufacturing state, and agriculture continues to be a declining factor in our employment picture. Iowa's dynamic economic sectors are banking, financial services, and insurance. While politicians continue to chase manufacturing jobs, the economy has moved on. Maybe at some point we will elect officials with an economic outlook beyond ethanol and beyond returning to the glory days of the 1920 tractor-factory and farming economy.

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