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Wednesday, January 30, 2013

Big steel mill — how good a deal?

Posted By on Wed, Jan 30, 2013 at 7:38 AM

THE BEER EFFECT: John Correnti said construction workers drink a lot of beer, a colorful way of illustrating multiplier effect of new industry.
  • THE BEER EFFECT: John Correnti said construction workers drink a lot of beer, a colorful way of illustrating multiplier effect of new industry.
What's not to like about 500 good-paying jobs at a steel mill in an economically depressed part of the state, which was announced yesterday at the Capitol?

There are potential air quality issues, true.

There's also the cost/benefit question for the state, which is prepared to put at least $75 million in general revenue into the deal. That's about $142,000 per job. At $75,000 pay per year, those workers will generate about $4,500 a year in income tax. They'll spend that money, too, of course. Every resident in Arkansas generates about $600 per year in sales tax, so figure $2,000 a year for a 3-person family supported by a steel worker. At $6,500 in direct benefits, you're looking at a long payout.

There are more multipliers, of course. Truck drivers and railroad employes, at least those who live in Arkansas, will be paid, plus construction workers in the beginning and others. Some big expenses of the operation don't immediately offer obvious multipliers. The scrap metal forged in the mill comes from out of state. Electricity used in the process, a major expense, will be getting a tax break from the legislature. The hope is that the installation will spur related businesses. But I couldn't help but notice that Mississippi County, despite three existing steel mills that have located there since the 1980s, has a higher unemployment rate than the state as a whole and has continued to lose population.

We don't yet know who John Correnti's investors are. He's the leader of the new enterprise. Russians were his moneybags in Mississippi. It's of interest only to the extent that their residency and how this corporation is structured could have tax implications, both state and federal. It would be nice to know more.

Did Nucor and related steel companies get direct state subsidies to locate in Mississippi County? I don't recall anything of this magnitude. It is, as Correnti said, "steel mill heaven." A big river, good highways, good railroads, good electricity supplier, good workers. Is a state subsidy necessary on top of this? The state believes so and they may be right given how states are ready to be held up for tribute by just about any corporate idea that comes along.

I don't know the bottom line on the state's benefit against expense. But I think legislators who'd like to see a sound analysis before committing $9 million a year in general revenue are doing due diligence. I hope it's a sound analysis, not full of the funny money multiplier so beloved of chamber of commerce soap salesmen. If it's a deal too good for the state to refuse, then make the deal. If it's not clearcut, let's debate.

Meanwhile, I thought David Ramsey, who covered the news yesterday for the Times made a good observation in another relevant current context:

This struck me, from Correnti: “last one I did about five years ago, the day we started construction, the sales tax receipts in that particular county went up 17.2 percent. It’s amazing what 2,000 construction workers do. They eat a lot, they drink a lot of beer.”

This was played as a laugh line and everyone seemed happy to cheer, but the ideas here are in stark contrast to Republican dogma.

You know what he means. Republicans generally frown on borrowing money to stimulate the economy and doubt the economic multiplier effect. They also tend to downplay the tax revenue generated by government spending, which, after all, goes to pay people's wages, which pour into the economy.

House Speaker Davy Carter recently called state tax revenue from federal spending on Medicaid expansion “funny money.” It will be interesting to see if state tax revenues are included in the legislature’s independent economic analysis of this deal.

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