Lessons from the IBM Layoffs

Vermonters are increasingly worried about the state’s economic prospects. The November 28 announcement of a 500-job downsizing at the huge Essex Jct. IBM plant sent shock waves through Northwestern Vermont. At the same time more job losses were reported at Bogner (Newport, 42), Cellular One (Colchester, 36), Husky (Milton, 20), and Kimberly Clark (East Ryegate, 80).

If there is any silver lining to these clouds, it may lie in a renewed public awareness of what it takes to make a state economy healthy and keep it that way. There are four important lessons to be learned.

First, the cutbacks at IBM do not appear to be related to Vermont’s economic policies. After eight fantastic years, computer industry growth worldwide has slowed to a virtual halt in recent months. IBM, an industry leader, is not immune to that economic slide.

But when a far-flung company like IBM makes choices about cutbacks, it will tend to focus on operations with relatively less of a future, in terms of corporate objectives. The 500 Essex Jct. cutbacks have been made largely from engineering staff and their support personnel. The chip fab production line remains untouched.

As a result, IBM-Vermont will have a higher percentage of manufacturing workers. They are well paid, certainly, but not nearly so valuable to the company as the engineers who devise new applications and manufacturing techniques. When IBM expands again, there is a real possibility that new engineers will not be hired at Essex Jct., but at Fishkill NY, where a chip fab operation is due to go on line in late 2002.

Second, when choosing where to retrench, corporate decision-makers at large corporations can’t help but factor in frustration and higher costs caused by governments. In IBM’s case one might suspect that they included the continued stalling of the Circumferential Highway, which IBM considers very important for getting supplies, products, and its 8000 employees in and out of its job site. The company also faces the daunting prospect of prolonged, costly, and uncertain Act 250 hearings for its proposed new office building (now on hold because of the downturn.) And for any Vermont business there is the constant threat of more governmental health care, workers comp, and employment security mandates on business.

These things add up. Vermonters need to wonder whether at some point someone at IBM’s corporate headquarters may by saying, “why are we putting up with all this stuff?”

Third, IBM makes an enormous economic contribution to the state’s revenues. It pays $6.7 million a year in property taxes. It buys $180 million a year from Vermont businesses. At its peak activity a year ago it had 8500 employees and 5000 contract workers and vendors. These people and small businesses pay a lot of state income taxes. So do the people who sell them food, gas, cars, clothes, fuel oil, and furnishings. Their demand for housing keeps home values high, and thus helps to produce a high property tax base. Vermont is extremely dependent on this one company for its tax revenues.

Finally, over time companies like IBM may or may not prosper and expand. The important thing for policy makers to understand is that when the business climate is favorable, declines at one company are balanced by the expansion of others and the creation of new ventures. When the business climate is unfavorable, there is no upward balancing effect. The result is a downward economic spiral.

The ingredients of a strong business climate are very well known: low and stable tax rates, a minimum of costly mandates on businesses; a fair, swift, and certain regulatory framework; good telecommunications and transportation networks; good employee housing and schools; and a clean and safe environment. It is the business of government to create and maintain that kind of business climate.

When political leaders lose sight of that basic objective and use government as an engine of wealth redistribution, mandate expenses on businesses that make them noncompetitive, afflict them with unpredictable regulatory requirements and delays, and deal out business-bashing rhetoric, the outcome can readily be predicted. Over time, economic activity will seek out states governed by political leaders who have kept their eye on the ball. Vermont has a long way to go before it ranks high on that list.

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December 2001