Washington Policy Blog

Boeing's decision and what it says about Washington's Competitiveness

There's been a lot said over the past twenty-four hours about Boeing's decision to open its second 787 line in Charleston. Naturally, finger-pointing comes next. The Governor is dismayed, senators and representatives are now chiming in. This sure isn't pretty; hanging out in the loser's circle never is.

But OK, what now? Policymakers just got slapped upside the head by a corporation based out of Chicago. Boeing officials looked at Washington and sized us up and looked at Charleston and sized them up. They made a business decision and we lost. That should say something about what we are offering the business community.

Of course there is an internal labor/management dynamic that the state can't influence. Or can it? South Carolina is a right-to-work state, where workers do not have to be members of a union as a condition for employment (a novel concept). Of course, this will never fly in Washington state -- just as long as we're prepared to lose business over it apparently. Should we have the discussion on mandatory unionization if that is truly one of the big causes for Boeing's decision yesterday? If so, then the question really is, why shouldn't we discuss it?

There are many reasons why some states are more competitive than others. Some reasons cannot be helped -- natural resources and open-water access are some of the reasons why Washington is more competitive in lumber, shipping, and agriculture than, say, a Midwest state. Likewise, it would be a bit of a challenge for Washington to compete with Florida over oranges, or Alaska for oil or Louisiana for catfish.

However, beyond natural resource advantages, policymakers and entrepreneurs can make a difference in how a state is perceived viz a viz business friendliness or an infrastructure for innovation. Those are intangibles not decided upon by nature. Microsoft didn't grow and succeed here because of the air, water or lumber. Neither did Boeing, Amazon, T-Mobile, Costco, UPS or most of the other of hundreds of thousands of businesses that were founded in this state. 

This is just the type of issue we'll talk about at Washington Policy Center's 2009 Statewide Small Business Conference. We'll talk about the things that policymakers can control and can improve upon to make our state more attractive to people. Because that seems to be getting lost in the discussion. Businesses don't make these decisions, people make these decisions, often based upon what's best for the company so that it can continue to offer goods or services to its customers -- who just happen to be people as well.

Join us on November 10th at the SeaTac Hilton for discussions on competitiveness, health care, our state's tax system, workers' compensation, unemployment insurance, environmental regulations and more, including sessions on how to survive in this economy and why it's important small business owners remain involved in the political realm.

Find out more information or register online here.

Government doesn't create jobs, businesses do

The headline is a quote from the relatively new director for the Department of Commerce, Rogers Weed. I couldn't agree more. He goes on to say,

"About 80 percent of our state's economy comes from private sector activity, so we must have a strong, mutually beneficial relationship between government and the business community if we are to succeed in our mission to grow and improve jobs throughout the state."

Since the Legislature changed the name and focus of the somewhat amorphous Department of Community, Trade and Economic Development to simply the Department of Commerce, the department has gone through a metamorphosis of sorts. The legislation passed earlier this year not only changed the name of the department but directed the new staff to deliver a plan to better serve the needs of businesses and narrow its focus on economic development. The department is preparing to release its formal plan next week.

One of the things Director Weed mentioned in a meeting once was that when he arrived there was only one half equivalent of a full-time employee tasked with focusing on the needs of small businesses. Obviously that is insufficient, as small businesses make up almost half of the private sector workforce.

But I'm glad Director Weed leads off with the fact that it is not government's job to create jobs. Sometimes it's playing the supporting role, through infrastructure, education or transportation improvements. But other times it's getting out of the way -- streamlining regulations, easing the tax burden, etc.

It's important to have someone in charge who recognizes when government should step in and when it needs to simply get out of the way and let innovators innovate and entrepreneurs take risks.

I look forward to the final Commerce report.

In the meantime, you can see Director Rogers Weed at WPC's November 10th Statewide Small Business Conference at the SeaTac Hilton (smallbusinessconference.org). He will speak during the morning legislative breakfast panel.

Net Neutrality -- Will it Make You Sleep Easier at Night?

My op-ed in the Seattle Times today takes on the very controversial Net Neutrality issue. If you want background info on Net Neutrality, see here, here or here. Essentially though, backers of Net Neutrality think the issue boils down to, "who controls the Internet?," which I actually think is a misplaced premise. However, let's indulge them on this for the time being.

First off, no one entity controls the Internet. There are literally scores of Internet Service Providers (ISPs) throughout the nation. Each one is spending millions or billions of dollars connecting their customers to the backbone of the network. The companies do this because they recognize the demand for data and services. My op-ed points out that by the year 2012, the Internet will be at least 75 times larger than it was in 2002.

Economist John Rutledge today pointed out that between 2007 and 2009 web video increased from 42% of all Internet traffic to 52%. And with technologies like telepresence emerging, and as Washington state especially embraces this notion of an innovation economy, we are likely to see demand for high-speed connection continue to expand rapidly.

So why then do we need Net Neutrality? Coincidentally enough the Seattle Times' editorial board chimes in, quoting new FCC Chairman Julius Genachowski, "The Internet's creators didn't want the network architecture -- or any single entity -- to pick winners and losers. Because it might pick the wrong one." But anyone who has dealt with government regulators knows that there seldom is any regulatory structure that remains neutral to all sides. Eventually, pressure is brought to bear on politicians and regulators from special interest groups that want to game the system. What happens next is inevitable. The system, e.g. government regulators, starts picking winners and losers.

Many of the FCC's proposed rules sound innocuous and the Times also opines that "Service providers cannot be allowed to block access to competitor's sites. They cannot be allowed to block or disfavor lawful traffic, including streaming video or real-time games. And they must be transparent about their network management practices."

First off, just imagine if that actually happened. Such an uproar would ensue that there is no way any ISP would even consider blocking access to legal content. But this argument is a red herring. This is not what Net Neutrality is really about. Net Neutrality is really focused on forcing ISPs to deliver more bandwidth capacity without raising prices to the consumer. We are seeing the endgame being played out overseas (see entry on Finland making broadband Internet a legal right) where ISPs are becoming more like highly-regulated utilities, or worse yet, state-run utilities. 

I would be in favor of more ISPs being transparent about their network management practices, but we shouldn't expect them to give out any proprietary information. There are several steps I think that ISPs can do to mitigate this incessant push on Net Neutrality. But AOL and other ISPs from the early days of the commercial Internet (early 1990s) really put the screws to today's ISPs when the all-you-can-eat pricing model became the standard. Net Neutrality supporters are big fans of all-you-can-access plans for low price. There's nothing wrong with wanting more services for less money, but regulating that into existence is problematic.

It is also interesting to note that the American Internet consumer today consumes an exponentially higher amount of data today than 15 years ago, but pays largely the same amount. I call that progress and it didn't take a decree by Congress or the FCC to make it so.

Oklahoma looking at offloading workers' comp agency

Last week, Forbes published yet another case of a state government debating whether or not to ditch its state-run industrial insurance system in favor of more private competition. (Read about West Virginia's effort here)

Oklahoma's CompSource, a nonprofit insurer that receives heavy state and federal tax breaks based upon its status as a unit of the state, insures over 26,000 policyholders -- most of them engaged in dangerous industries such as oil, natural gas and construction. The Forbes article says that CompSource "specializes in small firms or those who workers have dangerous jobs in fields...which private insurers won't take because the chance of paying claims is too high."

However, also according to the article, CompSource "has been criticized over the years by those who believe its status as a state agency gives it an economic advantage over private insurers and that the state should not be in the business of writing insurance."

Skeptics of the sale of CompSource say that it will be a difficult process because the agency has a loss rate of nearly 100 percent, meaning there will be few buyers of a business that generates no profit.

It is not unusual for skeptics of private competition to tout "market failure" or "thin markets" or "public good" as a reason to forgo turning state assets or programs over to for-profit entities that might be able to squeeze some benefit out of the operation. The fear is often that a for-profit business will not act in the public good and will cut services or raise rates to squeeze out the most vulnerable.

But these fears are unfounded and economic reality belies their fears if there is a competitive marketplace, and it appears that Oklahoma benefits from multiple industrial insurance providers. Competitive pressure forces firms to offer better products at lower prices and keeps runaway costs in check because otherwise the companies offering the industrial insurance services will not make money.

The problem with rationalizing that government gains nothing by running an industrial insurance agency, as opposed to a for-profit entity, is that government does in fact benefit. Government, like any non-profit or for-profit business, is always interested in growing in size and influence or by generating surplus revenue to subsidize other state operations.

Case-in-point: if CompSource really is a 100 percent loss agency, that means it must rely on subsidies from other Oklahoma state agencies to make up losses in order to provide the policies. Private sector businesses, non-or-for-profit, cannot do that and must look for efficiencies or other ways to remain solvent. The benefit to taxpayers is that they are not subsidizing other workers' industrial insurance.

Boeing is the Canary in the Coal Mine

Yesterday's release of the Governor's "Business Case for Consolidating Boeing 787 Assembly in Washington" again raises the question,  "Is Washington a good place for businesses?" Discussion about this subject heated up last week with the Department of Labor and Industries' preliminary 7.6% rate increase for 2010, and took on even more momentum with the Forbes article ranking Washington #2 for businesses and the Tax Foundation ranking us 9th best state for business taxation.

When it comes to establishing a competitive environment for businesses to compete, the state has to be careful to avoid picking winners and losers among private companies; using taxes or regulations to create carve-outs or otherwise prop up businesses. This creates a distortion effect that makes some businesses, whether private or quasi-private, appear better off than they should be. It also socializes the cost of a business model that the market deems inadequate, which is antithetical to free enterprise.

In 2003, Boeing asked for, and received (implemented over a few years) a 40% cut in its B&O tax until 2024. This tax cut applies to companies that manufacture and sell commercial aircraft and components. To be fair, there are over 250 aerospace companies in Washington state and they account for over $36 billion in economic value and employ over 80,000 workers. So, obviously, aerospace is a BIG deal to the Evergreen state. But tax and regulatory cuts to one specific industry alienate the hundreds of thousands of other businesses that do not qualify for these benefits.

What happens then? The other industry sectors and businesses start asking for special tax rates and incentives. And why not? The aerospace sector makes up 15% of the state economy, so why shouldn't the other 85% of businesses get similar benefits? 

When policymakers go to bat for the business community, they should make sure that incentives are broad-based, that the tax system does not favor one industry over another, and that the regulatory structure applies a light and transparent hand on all businesses.

The best way to prove to Boeing that Washington is serious about attracting new businesses and encouraging businesses already here to expand would be to pass real reform in the workers' comp system, to take regulatory reform seriously, and tackle the health care cost issue. Some steps have been made in the past, but those pale in the face of what actually needs to be done (case in point the workers' comp rate and continued skyrocketing health care costs).

Maybe Washington state appears business-friendly to outside observers who don't have to live, work or own a business here. Or perhaps Boeing's apparent desire to relocate tells us things we didn't want to hear about how friendly our business climate really is.

New Policy Note Addresses Spokane's Community Bill of Rights Proposal

Washington Policy Center today released a Policy Note that dives into Spokane's Proposition 4 -- the Community Bill of Rights. Voters inside Spokane city limits will vote on whether to amend the city's charter to include several new or expanded "rights" for citizens.

These rights include:

• Residents have the right to a locally-based economy,
• Residents have the right to affordable preventative health care,
• Residents have the right to affordable and safe housing,
• Residents have the right to affordable and renewable energy,
• The natural environment has the right to exist and flourish,
• Residents have the right to determine the future of their neighborhoods, 
• Workers have the right to be paid the prevailing wage, and the right to work as apprentices, on certain construction projects,
• Workers have the right to employer neutrality when unionizing, and the right to constitutional protections within the workplace.

The Policy Note points out:

• The Community Bill of Rights will expand government entitlement programs, not individual rights,
• Taxpayers could be on the hook to pay for proposed programs that have no funding mechanism in place,
• The broad policy agenda is not affordable under the city's current budget,
• The measure will likely face scrutiny in courts under the state's "single subject law."

The Policy Note also highlights potential costs associated with some of the measure's mandates, such as mandating affordable, renewable energy and the potential cost of insuring affordable, preventative care for Spokane citizens.

Finally, we also point out that many of the rights enumerated in the Community Bill of Rights proposal contradict each other, such as heightened environmental regulations increasing the cost of affordable housing, which would also be required for the city to provide. The Community Bill of Rights would also strip businesses from possessing any legal rights if a citizen were to file claim against a business in violation of the rights laid out in this proposal.

Papers chime in on Workers' Comp Rate Hike

Some excerpts from the media regarding the Department of L&I's announcement that 2010 Workers' Comp rates will go up an average of 7.6%:

Yakima Herald Republic: "Let's review L&I operations before allowing tax increase."

"When economic times get tough, the moment to reform business operations becomes the most opportune. It's a time to question past assumptions and arrive at a more rigorously disciplined enterprise.

Somehow the state's Department of Labor & Industries doesn't believe in that philosophy. The guiding principle there seems to be to keep adding revenues and charge ahead, no matter what the cost is to others."

Wenatchee World: "We pay more to keep working."

"In a state that just saw its unemployment rate bubble up to 9.2 percent, where jobs are easily lost, where economic recovery is excruciatingly slow, you would think it would not be a good time for the state to increase its tax on employment...

...The debate goes on, among Olympia’s hardy perennials. Someday it may change, but for workers it will be as it is with all creeping payroll taxes — close your eyes and pretend you’re not the one who pays."

Spokane's Spokesman-Review: "Lawmakers must reform workplace insurance."

"When the Washington Department of Labor and Industries proposed a 7.6 percent increase in industrial insurance premiums this week, several business organizations told the agency something its officials already knew. This is a rotten time to heap another $117 million burden on the state’s struggling employers."

Now Forbes Weighs in Again on Best States for Business

This has been the week of business-related rankings. On Thursday, Forbes released its latest "Best States for Business" rankings. Washington moved up two spots to occupy the silver medal position, behind only Virginia.

The Forbes ranking has created a stir in our state for a number of years. One thing for certain is that Washington has consistently moved up the ranking rung, ending up now as the second best place for business. That's the good news. The other side of the coin, and Forbes points this out, is that many other of the states that previously ranked high, took a nose-dive largely because of the turmoil in the housing and financial markets. No state was untouched by the Great Recession, but some were hit disproportionately hard (here's looking at you Nevada, Florida and Arizona). 

It is also important to note that many of theses states, which were hit hard by housing downturns, and therefore depleted state coffers, saw setbacks in their rankings because the state government turned around by raising taxes on businesses and citizens, thereby reducing their overall score.

Washington fared a lot better than other states during this last downturn, but how much of it had to do with government intervention versus the adaptability of our producers? States like NV, FL, and AZ saw massive hits to the housing industry, in large part because the housing bubble burst. Michigan saw the implosion of the Big Three Detroit auto-makers. California's tax and regulatory climate broke its economic back. People are literally fleeing New Jersey for greener pastures (read the third-to-last paragraph in the Forbes story).

By contrast, Washington is enjoying higher-than-ever exports per capita. We recently topped $10K per person exports per capita -- the first time that has ever happened in the nation. The cheap dollar certainly helped. We have very inexpensive energy rates -- for the time being -- thanks largely to hydropower. Our citizenry and workforce are highly educated. And many of our high-growth industries through the last several years have been in white-collar, high-wage, innovation fields such as software engineering.

As Dr. Arun Raha, the state's chief economist, said at AWB's Policy Summit earlier this week, we are seeing an unprecedented global recovery, even though our own economy remains fragile, and export industries will help Washington recover much faster than otherwise would have happened. 

So, there is a lot to be hopeful about, but for as many industries that may see growth in the near term, there are an equal number that may very well fall back into recessionary mode. All is not well quite yet and it is important that policymakers focus on areas where smart and responsible decisions will have a beneficial impact on the economy and our businesses.

For instance, even though we rank 2nd best in the nation in the overall ranking, we ranked a below-average 27th in the "Business Costs Index." Let's lower the cost of doing business in our state and make Washington #1.

Workers' Comp Costs Go up 7.6% for 2010

The Department of Labor and Industries today proposed a 7.6% increase in workers' comp premiums for 2010. It would be the largest premium increase since 2004 if adopted. Preliminary rate increase speculation from the Department earlier this summer had hinted towards a 15-20% possible rate increase. 

Since 2001 workers' comp rates have increased or (decreased):

2001: (2.2%)
2002: 1.8%
2003: 29.2%
2004: 9.8%
2005: 3.7%
2006: (0.3%)
2007: (2%)
2008: 3.2%
2009: 3%
2010: 7.6%

State law requires employers to carry industrial insurance and only a small portion of the state’s thousands of employers are allowed to self-insure. All others are required to use the state’s system. Currently the state program covers over 2.5 million workers and over 170,000 employers and collects over $1.6 billion in annual premiums.

But other states have, or are looking at introducing private-sector competition in the area of industrial insurance. Last year, West Virginia privatized their workers comp insurance system and at the one-year mark the results were dramatic:

• Overall premiums have dropped 30 percent, or more than $150 million
• 198 different workers' compensation insurance companies have filed rates and forms
• There are 120 policies in the residual market representing premiums of about $1.9 million
• More than 90 percent of all claims are ruled upon within the first 30 days
• Claim protest fell 68 percent
• The overall appeals process was streamlined resulting in claim disputes being resolved in a shorter period of time

This rate increase comes during a time when the number of workers' comp claims have decreased in Washington state, but costs to the state have increased. Employers and employees are getting less for their money than before. If Washington were to open up the workers' comp system to private competition, a 30% savings would result in almost half a billion in premium savings for state employers and employees.

UPDATE: The dollar figure associated with the increase is approximately $117 million to both businesses and employees (since employees also pay into the system).

More on this as it develops.

More on reforming the workers' comp system in Washington.

FCC Proposes "Net Neutrality" Rules for Wired and Wireless

FCC Chairman Julius Genachowski, in a speech to the Brookings Institution today, proposed the FCC adopt six rules governing "Net Neutrality." This is the result of the Obama Administration wanting more regulations governing Internet Service Providers (ISPs) -- one of his campaign platforms.

For the uninitiated, Net Neutrality is the misguided attempt at keeping the Internet "Open and Innovative." I've written on this subject several times, see here and here. Net Neutrality proponents basically want to guarantee that ISPs do not manage the data that goes to and fro on their networks. Some are afraid that ISPs will prioritize data so that some data moves through the bandwidth pipes faster than others. The case that most often is associated with this issue is when Comcast slowed down the data connections of some users who were using BitTorrent connections, peer-to-peer connections that most often moves an immense amount of data from user to user.

Comcast slowed down some of these connections because P-2-P connections use up a disproportionate amount of data. Think of it like a buffet line -- when one person is lodged at the buffet station gorging themselves, it creates less availability for other customers. Net Neutrality would bar ISPs from essentially managing their own networks (which they spend billions of dollars on each year to expand).

Some of the main points laid out by Chairman Genachowski today:

• To encourage broadband deployment and preserve and promote the open and interconnected nature of the public Internet, consumers are entitled to access the lawful Internet content of their choice.
• To encourage broadband deployment and preserve and promote the open and interconnected nature of the public Internet, consumers are entitled to run applications and use services of their choice, subject to the needs of law enforcement.
• To encourage broadband deployment and preserve and promote the open and interconnected nature of the public Internet, consumers are entitled to connect their choice of legal devices that do not harm the network.
• To encourage broadband deployment and preserve and promote the open and interconnected nature of the public Internet, consumers are entitled to competition among network providers, application and service providers, and content providers. 

These principles sound pretty innocuous. I mean, who would be against consumer access to lawful Internet content or running their choice of applications on Internet connections? But no one who opposes Net Neutrality has ever advocated for restricting consumer access to lawful content. Proponents have used scare tactics in the past to make consumers think that at some point Comcast et. al., will not let their users access Google, or Yahoo, or some other content providers. No such case has occurred. 

A couple of things stand out about the proposed rules. First, the FCC is now including wireless broadband into the mix. So Net Neutrality rules would extend to the data users access with their mobile devices such as cell phones and laptop connection cards. Secondly, the notion that consumers are entitled to connect their choice of legal devices that do not harm networks sounds good, but will this become a mandate aimed at wireless carriers. If one user purchases a phone to run on the AT&T network, will these rules in the future mandate that the same phone must work on Verizon's network? This is harder than it sounds because the two carriers use different radios (GSM vs. CDMA)?

I am also leery of the "consumers are entitled to competition among network providers" rule. We have one of the most competitive wireless markets in the world. It's certainly not perfect and there is room for improvement, but the FCC (an unelected regulatory body) simply saying "make the market more competitive" could have nefarious unintended consequences since their definition of a competitive market is so vague.