Posted Online: April 13, 2013, 9:00 am
The blueprint for Illinois' recovery
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By Phil Angelo
The scene is the third floor of the Federal Reserve Bank in the downtown Chicago financial district.
Photo: Paul Colletti|
Fans take photos of the stage as the Maroon 5 concert begins at the i wireless center in Moline on Friday, March 1, 2013.
More than 100 of Illinois' economic experts are gathered — university professors, mayors, bankers, economists, business leaders and developers. The topic of discussion in a daylong meeting is "Managing Economic Development in Times of Fiscal Uncertainty."
This is the inner sanctum for Midwestern economics. Because it's a federal building, there's security. You put your belt, glasses and keys in a tray and walk through a scanner. The event, which is co-sponsored by the Federal Reserve Bank and the nonprofit Civic Federation think tank of Chicago, is sold out.
The speaker of the moment is Ivan Baker, director of economic development for Tinley Park. Baker is the eighth of 11 speakers, panelists or moderators for the day.
Tinley Park is a rare economic success story in the struggling south suburbs of Chicago. It has a balanced budget and weathered the recession with no municipal layoffs and no tax increases. It has low unemployment and few business vacancies.
Bloomberg Business Week named Tinley Park "America's Best Place to Raise Children." That's not one of the best places. Not the top 10. The best.
Baker begins his presentation by calling everyone to their feet."Stay standing if you kept your job through the recession." A few sit down.
"Stay standing if you kept your job through the last two recessions (that would include the tech bust)." Another handful sit.
"Stay standing if you have kept your job through three recessions," he says. The crowd winnows a bit further.
"Keep standing if you made it through the savings and loan crisis," he says. "Do you remember stagflation (the Carter years of double digit unemployment and double digit inflation)? How about WIN (Whip Inflation Now — the anti-inflation plan of the Ford administration)?"
After all of this perhaps a fifth of the audience, which includes a lot of middle-agers, is still up.
"What we're in right now," Baker tells the audience, "is a cycle." Recessions are going to happen, he says. "Most communities were not ready." Many, he noted, are neither reading their history, nor learning from it.
"Remember the end of the savings and loan crisis, when banks said they would never loan on overvalued real estate again?" he asked.
Now he and the other experts are offering prescriptions for pulling Illinois up. It's a state that has not kept up with those around it. Economic growth in Illinois has been "disappointing," says William Testa, director of regional research for the Federal Reserve Bank in Chicago.
How do we change that?
Low taxes may not be the solution
The target on the political stump may be Illinois' last income tax increase.
When it happened, other states took full advantage. Wisconsin Gov. Scott Walker beckoned Illinois business to "Escape to Wisconsin." Indiana''s Mitch Daniels, now the president of Purdue University, described Illinois as "the dysfunctional family down the block."
But Testa and Therese McGuire, professor of management and strategy at the Kellogg School of Management at Northwestern, say results of any "low tax" policy would be mixed.
McGuire cites the example of Colorado, which enacted an aggressive Taxpayer Bill of Rights in 1992, limiting all future tax increases to inflation and population growth. No inflation, no new taxes. No new people, no new taxes either.
"The evidence is too weak for me to believe that cutting taxes grows the economy," she said.
Testa said Illinois' particular geography may make the economy here "more sensitive" to changes in tax policy than other states. About two-thirds of Illinois' economic activity is in the Metro Chicago area, within easy driving distance of two other states. It may not take a great change to drive some consumers over the border.
Testa said that historically, Illinois is not a high spending state. The problem, he said, is that the state has chosen to keep services while not paying for them. As a result, Illinois' per capita debt load dwarfs all its neighbors.
Every Illinois man, woman and child owes $9,376 for public pensions, services and health care now in the pipeline. That's four times the load of that in Indiana. Wisconsin has a debt load of $273 per person.
Yet, to close the gap, Testa said Illinois "must be careful" about leaning on revenue alone. The resulting taxes would put the state at a competitive disadvantage when it comes to competing for business.
Uncertainty and services
As much as the actual taxes themselves, uncertainty about what the state will do next, hurts the economy, McGuire says.
Small firms, especially, she said, develop a "wait and see" approach. Newspapers blizzard their readers with stories about potential bills.
"I won't say pensions are everything," said Steve Koch, deputy mayor of Chicago, "but long-term liabilities are a profound issue." He said 20 cents out of every state dollar now goes to pensions, and unless the problem is solved, it will "crush us completely."
Koch said it has been too easy for the public sector to ignore reality. "This is not what people want to hear."
"We can deal with high taxes," McGuire said, "if there is a perceived value." If the taxpayers believe their funds are going for good schools, they will pay. The flip side is that they won't pay willingly for schools where students are not graduating.
Stephen Friedman, president of Friedman Development Advisors, said that schools "for the average person in Chicago" are not good enough.
The limit of gimmicks
One thing Illinois does not want to do is to imitate Michigan, which has had a 10-year recession, while trying every gimmick in the book. The state had tax amnesties (forgiving people who bring the money in), spent its tobacco settlement early, raised tobacco taxes and encouraged public employees to retire early.
Illinois, coincidentally, has tried many of the same things. Michigan also started to tax pensions and closed off deductions for charitable donations.
Mitch Bean, now the principal of Great Lakes Economic Consultants, spent a term heading the Michigan House Fiscal Agency.
"I don't know how you measure uncertainty," he said. But Michigan created uncertainty.
The state came up with a tax system with all sorts of loopholes.
"This is going to pay for my kid to attend an ivy league school," one tax attorney told Bean, when considering the fertile ground of tax appeals.
The message is that tax policy should be clear and simple. Temporary fixes have drawbacks.
Bean was convinced that "most policy changes made the situation worse."
Tax cuts to lure in business also have limits. Koch said that while Chicago will not stop using tax-increment financing, they are a "surprisingly small piece of the puzzle," though a map of the TIF zones in Chicago looks like a multicolored splotch. Baker said the time has come to evaluate the quality of jobs created.
"If you are creating low-paying, low-benefit jobs you are not doing your job," he said.
What does work?
- How about college students. The south loop of Chicago has blossomed in part, Koch says, because of Columbia College, Roosevelt University and DePaul University. Colleges bring in payrolls, students and money to spend and create art and educational events.
- Tourism is a key, whether it's the John Deere Pavilion in Moline, which shows equipment and the history of the worldwide equipment maker, or the i wireless Center in Moline, which brings in top musical acts and entertainer from around the world.
- Immigrants also play a role. John DeVries, director of the Marshall Bennett Institute of Real Estate at Roosevelt University, displayed a slide that showed a key difference between Chicago and other Midwestern cities, like Detroit. While Chicago has attracted Hispanic immigrants Detroit has far fewer.
- Tinley Park's Baker says it's important for communities not to settle for any development. Quality pays off. Tinley Park will not allow churches to consume valuable real estate in commercial zones. It won't allow "trampoline" places in shopping centers.
- "I'm not sure how many mayors are aware of how their communities look from the Amtrak train," Baker said. Tinley Park has a new train station.
- Finally, demographic changes are shifting people back to the central cities. Thus, central cities must have vision.
"Twenty years ago, if a firm wanted to attract employees, someone got in a car and drove 20 miles out into the country and started a business park," Koch said.
That strategy would get you laughed at today. Today's new generation of workers wants the excitement of a central city. So central cities better make sure they are exciting.
DeVries pointed to the Millennium Bean for filling downtown Chicago hotels. He was a supporter of the failed Chicago Olympic bid, though he felt Chicago would have had a stronger bid with more attention to downtown transit planning.
"When the economy is at its worst," he said, "that's when you need to be the most strategic in using your planning dollars."
DeVries is co-author of the just-released "Planning Chicago."
Tom Tait is the mayor of Anaheim, Calif., the home of Disneyland, the Anaheim Ducks and the awkwardly named Los Angeles Angels of Anaheim. It also is a city with a Hispanic population of 50 percent.
California, recently, raised its top income tax rate to 14 percent for individuals. People are leaving for Texas, Tait says.
How does he combat that — and combat it successfully? By cutting red tape. His platform is "Freedom and Kindness." When a potential business owner comes into city hall, they are greeted by a concierge, who will not leave them until every possible permit and every piece of red tape has been cut. They leave that day — ready to start business. Tait has a task force combing city law to repeal unneeded regulations.
In a city of 300,000, 4,000 new businesses started in a year.
"We have to change the culture of government," Tait said. Draw in entrepreneurs in the spirit of Walt Disney, a man "who dreamed of a business not yet invented."