Category Archives: Economic development

Should We Subsidize Rural Economies?

Last week I offered a point-by-point review of Democratic gubernatorial candidate Ralph Northam’s plan to revitalize rural Virginia. In rough summary, I concluded that the plan wouldn’t accomplish much, but on the other hand, it wouldn’t cost much either. The Northam proposals had considerably more merit than a lot of ideas — such as a $15-per-hour minimum wage — that he could have put forth.

Writing in the Richmond Times-Dispatch op-ed section, however, Bart Hinkle took issue with core assumptions of the Northam plan.

First, Hinkle noted that investing in job creation in Southwest Virginia is not necessarily the optimal solution for reducing unemployment. Perhaps people could better improve their circumstances by moving to urban areas that offered greater economic opportunity.

Of course, some people in Southwest Virginia might want to improve their economic circumstances and still stay put. But is it the state’s job to ensure that they can? And if the answer is yes, then what does that imply about, say, struggling economic sectors? Should the state help people stay in fading industries as well as fading regions? If not, why not?

Hinkle also questions the value of providing workers skill-specific training. He cites a Journal of Human Resources study that suggests technological and other changes often leave skill-trained workers behind, and that employers, rather than retrain them, often let them go and bring in new talent. The real need, the study suggests, is “for more general cognitive skills that give workers the ability to adapt to new circumstances and new jobs.”

On a more philosophical plane, Hinkle wonders why the job of providing specific workforce training has devolved to the state in the first place.

If companies need workers who are trained to perform specific tasks, then why don’t those companies do the training themselves? Why should the state — i.e. the taxpayers — shoulder the burden of doing it for them?

Labor, he suggests, is a production input just like raw materials. If Acme Semiconductors wanted to build a plant in Virginia, and it asked the state to ensure a steady supply of silicon, the state probably would tell Acme to pound sand. But if Acme says it wants workers trained to work in a clean room, Virginians feel compelled to help out.

Bacon’s bottom line: These are all good questions.

I am reminded of a Daily Signal article published last week about a federal-state-private job-training program set up in Kentucky coal country, practically next door to Virginia’s coal-mining counties, to teach people in 20 weeks of classroom training how to code. Under the banner of turning “coal country” into “code country,” the program paid interns $400 a week to learn how to write software code, and Interapt promised high-paying jobs to those who completed the course. But after a year and $20 million, the program has fallen far short of expectations. Only 17 people have found jobs in the tech sector.

The Kentucky program may or may not be typical of government-backed workforce training programs generally. Some programs deliver modestly positive results; others are scandalously, almost fraudulently bad. But even if they do help people find jobs, how long will skill sets from a 20-week training program stay relevant? How many graduates will have jobs requiring those skills three, four, or five years from now? Hinkle raises an important point: If companies require workers to possess certain skills, why don’t they train their own? Why has this obligation been fobbed off to government?

While acknowledging the value of Hinkle’s questions — I do lean libertarian, after all — I frame the issue differently. Rural Virginians do need help. If they can find local jobs through targeted training programs, great. If not, mastering new skills will make it easier, by making people more employable, for them to move to jobs in growing metropolitan areas, just as Hinkle thinks they should do.

If state government is going to subsidize anything under the banner of economic development, it should be education and training. Given that I favor continued state support for higher education mainly benefiting the upper middle-class, as noted here, how could I not endorse training expenditures to benefit those lower on the socio-economic ladder?

However, I am acutely cognizant of the dangers in turning job training over to untested government programs or public-private partnerships. Any program must be subjected to rigorous review to ensure that the benefits are commensurate with the costs. Resources are too scarce. We cannot afford to waste them.

Why Do Taxpayers Subsidize Public Colleges?


True, state support for higher education does constitute a subsidy for the upper middle-class. Think of it as a tool to recruit and retain human capital.

Why do taxpayers subsidize public colleges? Dimitrios Halikias and Richard V. Reeves with the Brookings Institution ask that question in a new paper. Four-year colleges, they noted, are dominated by children of the upper-middle class, who can afford the cost of attendance better than most. Why should states expend scarce resources to benefit the well-to-do?

One justification for the subsidies, the authors suggest, is that higher education provides public benefits in addition to the private returns that accrue to the students themselves. They identify two benefits in particular. Universities act as ladders for social mobility, allowing students from less affluent families to improve their lot in life. And they function as laboratories for research, expanding knowledge in ways that benefit the higher population.

A stronger case can be made for public support of institutions that provide one of those two benefit, say Halikias and Reeves. Institutions that do both, they call Leaders. Institutions that do neither, they term Laggards. Those that out-perform in providing mobility, they dub Ladders, and those that excel in research they refer to as Labs.

Drawing upon data from Mobility Report Cards, which rank colleges by their ability to attract low-income students and push them up the income ladder, and university research prowess based on the Carnegie Classification of Institutions of Higher Educationthey assigned each of the nation’s 342 selective, four-year, non mission-oriented universities to one of the four buckets. (They exclude Historically Black Colleges and Universities, liberal arts colleges, and military-oriented institutions. The University of Virginia, which I would classify as research institution, does not appear on the list. Neither does the College of William & Mary, which they presumably count as a liberal arts college.)

According to this methodology, Virginia has three Leaders — and not the ones who usually appear on lists of top universities. As can be seen in the table above, in order of social mobility, they are Old Dominion University, Virginia Commonwealth University and George Mason University. These institutions admit relatively large percentages of students from the lower-income quintile and relatively low percentages from the upper income quintile.

Particularly questionable from the Halikias-Reeves perspective are the low-mobility, low-research laggards: Christopher Newport University, Radford University, Longwood University and James Madison University. Indeed, LU and JMU have the distinction of ranking the lowest in the country by this measure.

Bacon’s bottom line: Regardless of what you might think of the authors’ methodology — it has its weaknesses, as I’m sure administrators of LU and JMU would be quick to point out — but it does raise a really important question. Why do states subsidize college tuition for all? If states must be in the game of subsidizing higher education, why not make all dispensations means tested?

I’m of two minds. As one who espouses libertarian principles, I see no justification to subsidize higher ed. Insofar as there is merit to the logic of the idea of social benefits to the subsidies, then one might make an argument for means-tested financial aid. On the other hand, I’m a taxpayer. I’ve paid large sums to the Commonwealth of Virginia over my lifetime, and a reduced-cost education first for me and then for my children is one of the few perks I’ve received in return (other than benefits like roads, state police and state parks available to anyone.) So, color me conflicted.

There is one important argument, however, that Halikias and Reeves neglected — at least in a Virginia context. Access to a superior system of higher education is a big draw to anyone considering moving to Virginia. If we want to attract human capital, there are few things more enticing than good K-12 schools and affordable, quality colleges. We give tax breaks and subsidies to businesses to lure them into the Old Dominion. Likewise, we subsidize higher education in order to recruit and retain the smartest and best educated employees… who, incidentally, pay the most in taxes. Unlike incentives for out-of-state businesses, Virginia citizens have been paying taxes all along — some for their entire lives.

Virginia often is criticized for spending less on higher-ed subsidies than the national average, and considerably less than our neighbor to the south, North Carolina. In an ideal world, no state would subsidize higher education, colleges would do a better job of controlling their costs and keeping tuition low, and private philanthropists would donate more money to scholarships. But we live in the world we live in, and eliminating state support for higher-ed would severely undercut Virginia’s economic competitiveness and its prospects for economic growth.

Northam’s Affordable, Not-So-Ambitious Plan for Reviving Rural Virginia

Ralph Northam, Democratic Party candidate for governor, grew up on the Eastern Shore, so it’s not surprising that he has given considerable thought to the challenges of economic development in Virginia’s small towns and rural communities. Earlier this week, he unveiled his plan for economic growth in rural Virginia.

If you’re looking for a “Marshall Plan” to reinvigorate rural Virginia, this is not it. The plan is not ambitious, and there may not be enough in it to get rural Virginians especially excited about Northam’s candidacy. But it has this virtue: Proposals don’t require spending vast sums of money, so they are at least feasible from a budgetary perspective. This is a plan that Northam, if elected, has a realistic chance of implementing.

Personally, I distrust “Marshall Plan” approaches to chronic social and economic challenges. Instead, in our fiscally constrained era, I’m a fan of low-cost, low-risk initiatives that will likely yield a positive return on investment. In that spirit, I’ll start by illuminated the most promising ideas in the Northam plan and work my way down the list.

Virginia’s Rapid Readiness Program. Northam proposes a “rapid readiness program” similar to successful workforce training programs in Georgia and Louisiana. “We could get this program started here in Virginia with a ten million dollar investment, with funding tied to business participants, number of projects delivered, and individuals successful trained,” states his plan.

Assuming that Northam is drawing upon the thinking of Virginia Economic Development Partnership CEO Stephen Moret, who set up the Louisiana program, the program would function as a extension of Virginia’s economic development effort by offering a workforce-training solution as an incentive for corporations to invest in Virginia. The program would differ from existing educational/training offerings by creating a team capable of providing customized training within a time frame required by corporations to get their operations up and running.

While the rapid readiness program would be applied across the state, rural areas arguably would benefit the most because such training applies most frequently to light manufacturing projects that typically locate in smaller communities.

I’m not sure $10 million is sufficient to fund this program properly. Regardless, there is a readily available pot of money — Northam and Moret no doubt would disagree with me about this — and that is the Commonwealth Opportunity Fund, which the state dips into to provide “incentives” for economic development projects. But as Moret himself said in a presentation to the State Council of Higher Education for Virginia two days ago, workforce is one of the top three factors (and often the No. 1 factor) that corporations consider when deciding where to locate. Incentives are a secondary factor. Shifting money from incentives to workforce training looks like a no-brainer to me.

Expanding renewable energy. Expanding solar generation is viable rural economic development strategy. Solar farms may create few permanent jobs, but they do increase the tax base, and they often pay streams of royalties to landowners (depending on how particular deals are structured).

“In my home county of Accomack on the Eastern Shore,” says Northam, “the commonwealth’s largest solar farm is in the process of being built, which will ultimately power several data centers owned by Amazon.”

Northam says he is committed to working with Virginia’s electric utilities and the General Assembly to “remove barriers that stand in the way of developing and expanding clean energy efforts.” Note the phrase “remove barriers.” Northam is not asking for new subsidies or tax breaks. Solar doesn’t need subsidies; market forces increasingly favor solar. Rather, Northam wants to remove obstacles that inhibit businesses, entrepreneurs and homeowners from building rooftop solar and solar farms.

Utility-scale solar like the Amazon Web Services farms in Accomack need little help — Dominion Energy and Appalachian Power have ample incentive to deploy solar on a large scale. The barriers exist at two levels: local zoning codes and state regulatory policy. Local governments need to make their zoning codes more solar friendly. Meanwhile, state lawmakers need to craft “net metering” legislation that balances the interests of independent solar producers with those of electric utilities who maintain the electric power grid that everyone depends upon.

Broadband for all. Most people would accept the proposition that broadband Internet service is critical infrastructure for economic development today. The problem is that sparsely populated rural areas are not attractive markets to Virginia’s big broadband providers.

Northam points to a pilot project in Southside Virginia in which Virginia’s Tobacco Commission, Microsoft, and the Mid-Atlantic Broadband Company utilize unused portions of the television broadcast spectrum to push out high-quality wireless broadband. So far, more than 100 households have been connected, and the number could reach 1,000 by year’s end.

“Under this innovative public-private program, Virginia’s share of the cost is $500,000, leverage private investment for a total investment of $1 million,” states the Northam plan. “This commonwealth should look to replicate this successful program across rural Virginia.”

How so? He would pull together disparate broadband initiatives across the commonwealth under the direction of a cabinet official “who will be responsible for getting more people connected.” Northam also advocates legislation similar to that adopted in Minnesota that creates a clear set of metrics, including upload and download speeds, to evaluate broadband access. Whatever else you say about these proposals, it doesn’t sound like they will break the bank.

Expanding the University of Virginia-Wise. Northam proposes increasing the educational offerings of the University of Virginia-Wise to encompass high-need, high-growth disciplines such as cybersecurity, unmanned aerial systems, energy, and computer engineering and programs. Expanding UVa-Wise would cost about $15 million initially, Northam says, with a possibility of scaling up funding over time.

We have a unique opportunity … to transform UVA-Wise into an international destination for students and researchers. This will have a tremendous effect on the regional economy because when you can attract students and top talent from around the world for research and development, grants will follow. And with grants and applied research, business opportunities will soon follow. And structured correctly, these businesses will not only start up in Southwest Virginia, but they will remain and grow.

The idea of creating “innovation districts” around college campuses is a hot one right now, and anyone who has seen the Virginia Tech Corporate Research Center can readily understand the potential for economic development near college campuses. But Tech is the top research university in the state. Whether its success can be replicated on even a modest scale by a tiny, largely unknown newcomer is questionable. Tech has invested hundreds of millions, maybe billions, of dollars, over decades building academic programs, hiring star faculty, recruiting graduate students, and assembling the administrative infrastructure it takes to win research contracts.

Competing for research dollars is tough. Well established institutions such as Old Dominion University and the College of William & Mary have seen their research programs falter in recent years. It is a stretch to suggest that a $15 million investment in Wise would spark the miraculous transformation that Northam describes.

Startup tax plan. To help attract and retain new business in rural and economically depressed regions of Virginia, Northam proposes a “zero BPOL and merchant’s capital tax for new startup and small businesses .. for the first two years. This will drive economic activity and startups to rural areas, and result in no loss in existing revenue to local governments.” Once local businesses take root, they will start paying taxes — a win-win.

It’s good to see a Democratic Party candidate advocating tax cuts! But the proposal lacks crucial detail. BPOL and merchant’s capital taxes are local taxes. How does Northam propose eliminating those taxes for two years? Will the state just command localities to change their ordinances? Will the state reimburse them for lost revenue? Does he have the remotest idea of what the initiative would cost? Finally, while the BPOL and merchant’s capital taxes are near the top of the list of things that small businesses in Virginia hate, is there any body of evidence suggesting that a mere two-year reprieve will stimulate more startups?

There’s more to Northam’s plan, but the other proposals, which address workforce development, are statewide in nature and don’t address peculiarly rural issues. So, I won’t dwell on them here.

Perhaps the best thing that can be said about this plan is that Northam isn’t making extravagant promises that he can’t keep. These narrow-bore proposals won’t exactly spark a rural Renaissance, but for the most part, they seem politically and fiscally feasible.

Building a Better Business Climate

Governor Terry McAuliffe wasn’t the only one to welcome Virginia’s No. 7 status in CNBC’s 2017 “Best States for Business” ranking.

“Good news? Of course it is!” wrote Chris Saxman,  executive director of Virginia FREE in an email blast yesterday. “Better is better and moving back into the Top Ten is important for a number of reasons especially since Virginia’s rankings have fallen recently. “

But there was cause for concern, Saxman warned. Virginia’s ranking for the “cost of doing business” category was a crummy 35th.

“Virginia FREE has pointed this glaring problem out in previous commentaries. We also have urged legislators and candidates talk with local business owners in their districts to discover what drives business costs and how state government can mitigate those costs,” he wrote.

Legislators need to work with policy experts in chambers of commerce “to see all sides of the policy changes that are necessary,” Saxman urged. Tackling undue regulatory burdens would help address the poor Cost of Doing Business, he suggested. “However,” he added, “Virginia should get these reforms done correctly and that takes time.”

That’s a key point I made in my previous post about the best-state-for-business ranking. Improving the business climate takes time. It takes dozens of incremental, often obscure reforms. And it takes more than the superman exertions of a single governor. Ideally, if the reforms are to last, they should arise from bipartisan consensus. In an era of polarized politics, consensus may be harder to achieve than ever — but it’s more necessary than ever.

Taking a Peek Behind the CNBC Best-State-for-Business Ranking

Click for more legible image.

Governor Terry McAuliffe said yesterday that he was “thrilled” Virginia had moved up six spots to 7th place in CNBC’s Best States for Business 2017 rankings — and when McAuliffe says he’s thrilled, you can take that to the bank. Whatever else you think about the job he’s done as governor, there is no denying his ardor for his job as Virginia’s chief economic-development salesman and his enthusiasm for every Virginia accomplishment large and small.

In a prepared statement issued yesterday, McAuliffe put his spin on what the news said about his leadership as governor.

“The effects from federal sequestration in 2013 did substantial damage to our economy. When I took office, we came in with a clear and simple plan to diversify our industries and make Virginia less dependent on the whims of Washington. Thanks to significant reforms and historic investments in our education system, innovative workforce development strategies and the record-breaking recruitment of new business capital and jobs, we are mitigating the damage of federal dysfunction and building an economy that works better for everyone.”

McAuliffe isn’t doing anything that any other governor wouldn’t do — taking credit for good news — but the public should take assertions like this with a grain of salt. Dramatic rises and falls in CNBC’s rankings could reflect changes in the economy and CNBC’s scoring methodology as much as anything that McAuliffe (or his peers and predecessors) did.

Take a look at the chart above, which breaks down CNBC’s overall score by 10 categories. Virginia performs worse in five categories since McAuliffe took office in 2014: infrastructure, cost of business, technology & innovation, education and business friendliness. Despite what McAuliffe terms the state’s “historic investment in education,” Virginia’s education rank is lower than when he became governor.

McAuliffe can claim credit for improvements in access to capital, cost of living, and quality of life if he wants to, but it strains credulity to suggest that the incremental policy changes he made as governor had much effect on them. 

Virginia’s gain as a best state to do business – from No. 8 to No. 7 — over McAuliffe’s tenure can be attributed mainly to the Old Dominion’s higher rankings for “workforce” and “economy.”

CNBC gives “workforce” the heaviest weight in its ranking — 425 out of 2,200 points, reflecting the increasing emphasis that businesses give the attribute. Fortunately for us, that is Virginia’ top-performing category. The Old Dominion ranked No. 2 in the country this year. As a bonus, the weight that CNBC assigned the category increased from 400 points last year. To some degree, Virginia owes its better best-place-for-business rank to changes in the way the network calculates its scores.

Now, it’s also true that Virginia’s workforce rating improved as well. Here’s what goes into CNBC’s scoring for that category (my emphasis):

We rate states based on the education level of their workforce, the numbers of available employees and the states’ demonstrated abilities to retain college-educated workers. We consider each state’s concentration of STEM (science, technology, engineering, and math) workers, increasingly in demand by business. We measure workforce productivity based on each state’s economic output per job. We look at the relative success of each state’s worker training programs in placing their participants in jobs. We also consider union membership and the states’ right-to-work laws.

Virginia scores well in the “workforce” ranking in large part because of the state’s ability — or perhaps I should say Northern Virginia’s ability — to recruit educated workers from outside the state. It is true that Virginia’s higher-ed system is producing more STEM degrees than ever before, but producing STEM degrees is no guarantee of keeping STEM degrees in the state — just ask the state of Michigan. It is also true that McAuliffe signed the Virginia GO workforce legislation, but that program has not been in effect long enough to have a material influence on workforce training programs.

Clearly, Virginia is doing something right when it comes to building a 21st-century workforce, but it’s far from clear that recent actions emanating from Richmond can explain the short-term fluctuations in the CNBC scoring for the workforce indicator.

Virginia’s “economy” rank has improved as well in the past year, accounting for 300 points in CNBC’s 2,200-point ranking. McAuliffe has done an effective job as Virginia super-salesman. And he has worked to diversify Virginia’s economy from its reliance upon federal defense spending, touting everything from drones and cyber-security to Virginia’s ports and renewable energy. But have his actions been so extraordinary as to move the needle on Virginia’s “economy” score?

Here’s how CNBC computes its score for that category:

We look at economic growth, job creation, consumer spending, and the health of the residential real estate market. We measure each state’s fiscal health by looking at its credit ratings and outlook, as well as its overall budget picture. Because of their own economic impact as well as the ripple effect, we consider the number of major corporations headquartered in each state.

Consumer spending and the residential real estate market are not sectors that state policy affects. Overall economic growth is influenced mainly by (a) the level of federal spending and (b) Virginia’s mix of fast- and slow-growth industries. As for the state’s fiscal health, well, the governor shares responsibility for that with the General Assembly.

Bacon’s bottom line: My purpose is not to discredit McAuliffe’s performance as economic-development chieftain, which has been pretty good overall, but to dampen expectations that this governor (or any governor) has much impact on year-to-year changes in Virginia’s business climate. Burnishing a state’s business climate takes a long-term commitment from governors, legislators, business and civic leaders, and local government officials. I’ll have more to say about that in my next post.

Two More Signs that City of Richmond Is Kicking Donkey

Kicking donkey

The City of Richmond is on a tear. Not only is it seeing more real estate investment than it has it decades, the city is laying the groundwork for future growth and re-development. Its competitive advantage over neighboring suburban counties seems to get stronger with every passing day.

Word has leaked to local media of a privately led plans to replace the aging Richmond Coliseum as part of a larger initiative to revitalize a critical piece of the downtown district. A small working group led by Dominion Energy CEO Thomas Farrell and including Virginia Commonwealth University and the Altria Group has confirmed its desire to replace the decrepit Coliseum civic arena, which suffers from major deficiencies and drains $1.6 million a year from city coffers. Plans include a hotel to serve visitors to the nearby convention center, and encompass the historical Blues Armory building.

The working group, which is so preliminary that it does not yet have a name, is not ready to release details on the scope of the project, its cost or its financing.

Normally, when I hear of civic leaders talking up a big downtown redevelopment project, I immediately reach for my wallet. Most schemes call upon city governments to make major financial contributions, which are justified on the basis of fantasy projections of jobs, tax revenue, and spin-off investment. All too often these projects experience cost overruns, or projections fall short. (Just ask the City of Norfolk, which had its “donkey” handed to it for cost overruns of the Tide light rail project, and more recently, the Virginian-Pilot reports today, experienced a $16 million cost overrun on the $105 million Main hotel and conference center project downtown.)

But the larger point is that downtown Richmond excites the interest of the city’s major institutions and business leaders. There is something to work with. The Biotechnology Research Park has transformed the area to the north and east of the Coliseum. The neighboring Jackson Ward district to the west has been gentrified. Broad Street to the south is roaring back.  Developers are converting warehouses and obsolete office buildings into apartments and condos downtown. The Coliseum’s location is prime real estate, and it is under-utilized. Who knows, miracles do happen. Perhaps it will prove possible to re-develop the land around the Coliseum without massive subsidies.

A significant side benefit of a re-development project would be to improve connectivity downtown. As the Richmond Times-Dispatch reports: “The plan envisions a transformation of the traditional street grid, now partly sunken below grade in places and blocked entirely in others” to better connect the VCU health system, the government center around City Hall, and the biotechnology research park.

An impetus behind the initiative was the city’s commitment to build Bus Rapid Transit along Broad Street. The draft Pulse Corridor Plan calls for exploiting the “opportunity area” in the vicinity of the Coliseum. As it happens, the Pulse also will serve the Scotts Addition district, which the city is in the process of rezoning to maximize re-development opportunities.

The Pulse is expected to commence operations in October. One of its ten stops serves Scotts Addition, a light manufacturing district that has been transformed by the conversion of brick industrial buildings into apartments, condos, offices, restaurants, and breweries. City planners call for two new zoning districts: transit-oriented development (TOD) along the Broad Street corridor, and mixed-use for the rest of Scotts Addition.

The city’s planning staff calls the draft TOD-1 district “unabashedly urban,” reports the McGuireWoods land use team. The recommended ordinance is “intended to encourage redevelopment and place-making, including adaptive reuse of underutilized buildings, to create a high-quality urban realm.” Zoning would require walkable streetscapes and allow buildings of up to 12 stories in height. Most buildings would have a maximum setback of 10 feet. Parking requirements would be lifted for all uses other than hotels and large, multifamily residential buildings.

Beyond the Broad Street corridor, Scott’s Addition would be rezoned from light industrial to a mixed-use business district. Zoning would encourage “street-oriented commercial” corridors, requiring street-front retail as part of any residential use, and prohibiting car-oriented uses like gas stations and parking decks. Amendments would permit “maker” light manufacturing uses of under 10,000 square feet, which, if approved, could extend the ongoing boom in breweries, cideries and distilleries.

If both rezonings are approved, says the McGuireWoods land use team, “there may be significant opportunities for RVA’s commercial real estate community to actualize the city’s vision for denser, more urban development in this area.” 

The Pulse extends into Henrico County, terminating near the Willow Lawn mall. If county officials are planning to take advantage of the BRT service, there is no sign of it in my Google results. The only rezoning activity near Willow Lawn took place last year: approving a development and lighting plan for a Chick-fil-A.

One positive sign, however, is that Henrico has hired Clarion Associates to lead a comprehensive update of its zoning and subdivision ordinances — the first such effort in six decades. The revisions are expected to take two years, however, so even if the county commits to a vision of selective urbanization, the city of Richmond likely will continue to whup donkey.

Dominion Explores Pumped Storage in SW Virginia

Graphic credit: Dominion Energy

Much to my astonishment, Dominion Energy is taking a serious look at building a pumped-storage hydro-electric power plant in Virginia’s coalfields. I wrote about the idea back in February but it struck me as a long shot. So much for my superficial impression. It now transpires that Dominion is identifying potential sites in far Southwest Virginia and hopes to narrow the list later this year.

If Dominion decides to proceed, it will notify potentially affected landowners and set up meetings to gain public support, according to Dominion spokesman Greg Edwards. Though still in the early exploratory phase, Dominion describes the prospects as “very exciting.”

The potential impact is enormous. The pumped-storage power station would have a capacity of 1,000 megawatts, making it even bigger than Dominion’s coal- and wood-burning Virginia City Hybrid Energy Center, which cost $1.8 billion to build and generates $6 million a year in tax revenue for Wise County. “We’re talking about revenues way in excess of what Virginia City generates,” Edwards told the Coalfield Progress.

The idea behind pumped storage is to move water between reservoirs at different elevations. Dominion would let the gravity-fed water run turbines, as shown in the company-supplied graphic above, during periods of peak power demand when the cost of electricity is expensive, and then pump the water back to the upper basin when electricity is cheap. The concept is the same as Dominion’s pumped-storage dam in Bath County, the world’s largest.

Pumped storage will be increasingly attractive as eastern utilities increasingly rely upon wind and solar power, which are intermittent sources of electricity. A pumped storage facility could help even out fluctuations in electric production due to variations in wind and sunshine, or even shift power production from periods of peak solar output during the mid-day to peak demand in the late afternoon/early evening. The massive scale contemplated for the project — 1,000 megawatts, roughly equivalent to the capacity of a state-of-the-art gas-fired facility — suggests that Dominion could be considering the plant for load-shifting purposes. And that could be a game-changer.

Source: Dominion 2017 Integrated Resource Plan. Click for legible image.

Dominion’s Integrated Resource Plan foresees the need for a new nuclear power plant by 2030 (under the strictest CO2 regulatory regime), up to five new gas combustion turbines by 2032, and more than 5,000 megawatts of solar power by 2040. I am entering the realm of speculation here — none of this comes from Dominion — but the addition of a giant pumped-storage facility to Dominion’s generating fleet might enable the company to shift more aggressively to solar power and still maintain grid reliability. Potentially, depending upon transmission line limitations, pumped-storage could eliminate the projected need for four 240-megawatt combustion turbines. (How such a shift would impact the demand for natural gas supplied by the proposed Atlantic Coast Pipeline is a big unanswered question.)

The idea originated with coalfield legislators, not Dominion. Del. Terry Kilgore, R-Gate City, Del. Todd E. Pillion, R-Abingdon, and Sen. Ben Chafin-Lebanon, amended the state code to add pumped-storage hydroelectricity generation and storage to the list of projects which, if built in the Virginia coalfield counties, would be deemed “in the public interest.”

Learning of the proposal during the General Assembly session, Dominion quickly began exploring the idea. Early media reports emphasized the idea of using underground mines as a holding tank for the water, but Edwards told the Coalfield Progress, “We’re not wedded to underground.”

So far, Dominion’s investigations into potential sites have involved working with maps and satellite imagery. The company has looked at “literally hundreds” of possible locations. Even if Dominion finds a suitable site, however, it could take seven to ten years until a pumped-storage facility became operational.

Ferguson Deal Will Help Transform Newport News

City Center in Newport News. Photo credit: Daily Press.

A couple of weeks ago, the City of Newport News announced an economic development coup: Ferguson Enterprises, the nation’s largest distributor of plumbing supplies and one of the city’s largest home-grown companies, will locate an $82.8 million office project in City Center at Oyster Point.

The new campus will house 1,400 information-technology and administrative jobs, of which 1,000 will be relocated from local offices and 434 will be new hires. Salaries will start at $45,000 before benefits. The company, a $14 billion subsidiary of U.K.-based Wolseley plc, had considered sites in California, South Dakota, Nevada and Washington.

Snagging the investment took $15.6 million in state and local incentives. These include the donation of land valued at $3 million, $4.8 million in property tax rebates over the next decade, $2 million from the Commonwealth’s Opportunity Fund, a $2 million city match, $1 million to build a “skybridge” connection to a parking deck, and $700,000 in road improvements. It’s not clear from press reports where the rest of the local incentives are coming from, although they may be associated with construction of the parking deck.

Clearly, fear of losing jobs was a big motivator in granting the incentives. “A city like Newport News to lose 1,000 jobs would have been devastating,” said Governor Terry McAuliffe at the announcement. “I mean, I know the numbers — this was very competitive.”

Of course, those numbers are confidential, so there is no way the public can gauge the necessity of the incentives. As always, my concern is that a private company mau-maued the state and local government into giving subsidies by threatening to make its investment in another state.

Sometimes cost and labor considerations do make it a sound business decision to locate a major operations center elsewhere. But sometimes it doesn’t –sometimes there are advantages to locating important operational activities in proximity to the corporate headquarters — and the company is just using its leverage to extract tax concessions. Neither the governor’s press release nor the news reports give any indication of which was the case.

Ferguson CEO Frank Roach certainly didn’t sound like raw self interest came into play in the deal. “Ferguson is deeply rooted in the Commonwealth and we have been proud to call Virginia home for more than 60 years,” he said. “We are excited to further invest in the City of Newport News.”

Bacon’s bottom line: Yeah, right. Ferguson is so proud of its Virginia roots that it took $15 million in incentives to keep it here. As a subsidiary of a British company that doesn’t give two hoots about Newport News, such sentimental ties don’t carry much weight. Such rhetoric doesn’t sit well with me. Either it is insincere, or Ferguson wanted to stay in Newport News all along, which calls into question the need for subsidies.

Still, all things considered, the deal could have been worse. Yes, the city will be rebating $4.8 million in property tax rebates over ten years, but that’s only half the tax revenue generated by the property, so it still will gain from the deal to the tune of $480,000 per year.  That will be almost enough to pay off its $2 million state match and $1 million for the skybridge within six years. The city also will build a parking deck, but that was part of the planned development of City Center anyway. As for the $700,000 in road improvements, they can be construed as routine public works.

What I like most about the project was barely alluded to in the official pronouncements: Ferguson will become an anchor tenant in City Center, a nucleus for re-developing a city comprised mainly of a run-down downtown adjoining a sea of suburban sprawl-style development. City Center, a project of the Norfolk-based Harvey Lindsay Commercial Real Estate, constitutes an effort to create walkable, mixed-use urbanism.

That’s exactly what Newport News needs to recruit young workers and retain the businesses that hire them. The city badly needs transformation. While the benefits of creating sustainable land use patterns may be hard to quantify, they are real. 

(Hat tip: Paul Yoon.)

Coping Gracefully with Depopulation

Map credit: Virginia Department of Mines, Minerals and Energy

A Roanoke Times editorial asks a provocative question: “Should we just let Appalachia go?” Instead of trying to rebuild a new economy in far Southwest Virginia, should the commonwealth just allow the region to depopulate?

As the editorial points out, the Appalachian mountains and hollers were sparsely populated through the 18th and 19th centuries. Then, in the late 1800s there arose an industrial economy that ran on coal. “Coal happened. Railroads happened. People — many of them immigrants — poured into Appalachia. Roanoke was not the only boom town to spring up then. So did lots of other communities deeper in coal country.”

After an efflorescence during the last 70s/early 80s, coal went into decline. Mechanization eliminated jobs. Thicker, efficient-to-mine coal seams played out. Environmental regulations drove up the cost of mining and combusting coal. And natural gas began displacing coal in the utility market. As long as high-quality metallurgical coal used in steel making can be mined in Appalachia, mining will never totally disappear. But coal will be a shadow of the industry it once was.

Virginia’s coalfields have tried to diversity their economies, but they suffer enormous competitive disadvantages. They are geographically remote, far from large urban centers and interstate highways. They have a paucity of flat land suitable for industrial development. The workforce is poorly educated, substance abuse is widespread, and most ambitious young people who earn college degrees leave for better employment prospects elsewhere. And the quality of amenities and public services is low so that everyone who made significant wealth in coal mining moved out of the region. There is no moneyed business class to spark an entrepreneurial revitalization.

Some coal counties refuse to die. Wise County has been especially creative in trying to reinvent its economy around broadband, data centers and solar energy. Recent state legislation that would favor pumped storage as a complement to solar farms has Dominion Energy giving a serious look at the region. The economic impact of such a facility, if ever built, would exceed that of Dominion’s $1.8-billion Virginia City Hybrid Energy Center, which burns coal and biomass. But the economics of these dreams remain unproven.

“It’s hard to see what industries exist in which Appalachia has a comparative advantage as vast as it had in coal,” the Roanoke Times quotes economist Lyman Stone as writing. “I’m not saying none do or could ever exist; I’m just saying that if they can or do, they don’t seem extremely clear right now.”

In Stone’s estimation, without coal mining to prop up the economy, Appalachia’s population has a long way to fall. He writes: “We can’t let hopes blind us to realities. On some level, population must be associated with economic activity to support it. Coal mining is still declining, and when it’s completely gone, it’s not clear how much economic activity will remain, and therefore how much population can be sustained.”

Bacon’s bottom line: As much as I hate to acknowledge it, Stone’s prognosis is correct. The 21st century economy belongs primarily to populous urban areas. I wouldn’t discourage coalfield residents from trying to salvage their communities — indeed, I very much hope they succeed. But even if creative-thinking localities such as Wise succeed in diversifying their economies, data centers, solar farms and pumped-storage facilities employ very few workers beyond the construction phase. Such projects would bolster the local tax base, enabling counties to maintain basic services, so they are worth pursuing. But they won’t reverse the depopulation of the region.

The coalfield counties, like other remote, rural counties in Virginia, need to think how to decline gracefully. Hard-hit cities and towns in the Midwestern rust belt are learning how to cope with shrinking populations, and perhaps it’s possible to learn lessons from them. What rural counties do not need to do is invest scarce resources in desperate, long-shot bids to turn around their economies. The circumstances are dismal, but living in denial of economic reality will only make things worse.

Thinking on a Higher Plane about Higher Education

Stephen Moret, CEO of the Virginia Economic Development Partnership (VEDP), brought a wealth of experience in corporate recruitment and workforce training when he moved to Virginia from Louisiana. But there’s another aspect of Virginia’s economic development chief that has gained little notice here in the Old Dominion. Last year he earned a doctorate in higher education management from the University of Pennsylvania.

The Ed.D. dissertation that Moret completed last year, “Attainment, Alignment, and Economic Opportunity in America: Linkages Between Higher Education and the Labor Market,” examines the connection between higher education and economic development in the United States, often challenging the conventional wisdom in the process. His findings are worth considering here in Virginia.

Two propositions are widely and uncritically accepted in the Old Dominion: (1) a highly educated workforce is good for economic development, and (2) therefore, we should invest more in higher education. Accordingly, the Virginia Plan for Higher Education sets the goal of making Virginia the best educated state in the U.S. by 2030. The plan articulates the rationale:

An educated population and well-trained workforce increase economic competitiveness, improve the lives of individuals and support greater community engagement. The best-educated state means that Virginia supports higher education at all levels. This spectrum includes workforce credentials such as industry certifications, state licensures, apprenticeships and certificates, as well as traditional degrees.

Moret does not contest the link between an educated workforce and economic development. But the relationship is a complicated one, he says. His dissertation suggests that it is possible to invest too much in higher ed, or invest in the wrong places. Among other issues, Moret discusses the problem of “malemployment,” a form of underemployment in which four-year degree holders work in jobs requiring less education. He worries that many college graduates lack the critical thinking skills needed to succeed in the workplace. And he notes that the benefits from investing in higher education are highly uneven among the states.

Malemployment. Malemployment is a widespread problem in the U.S. Approximately one-quarter to one-third of all college graduates and roughly 45% of recent college graduates are working in jobs that do not require college-level skills. Altogether, about 10 million FTFY (full-year, full-time) employees with a bachelor’s degree are malemployed nationally, working as retail sales clerks, truck drivers, food service managers, cashiers and other occupations.

“Proponents of higher college degree attainment often emphasize the higher earnings and lower unemployment rates enjoyed by college graduates in comparison to those of individuals whose formal education ended with a high school diploma,” writes Moret. “The reality is that significant numbers of college graduates do not secure employment in occupations that require and/or make meaningful use of college-level skills. They often experience much lower earnings premiums as well as lower job satisfaction than their peers.”

The phenomenon varies widely by type of degree. Science and engineering degrees tend to have the lowest rate of malemployment, arts & humanities among the highest rates.

“The sheer size of the malemployed population as well as the nature of the occupations that many malemployed individuals hold suggest this is a widespread and serious issue in the U.S.,” says Moret, calling into question the simplistic idea that a college education is a sure pathway to well-compensated employment.

Critical thinking. Most full-time faculty members at colleges and universities consider development of critical thinking skills (99%) and effective writing skills (93%) to be essential or very important goals of an undergraduate education. Employers say they are looking for the same skills. All too often, degree earners are not gaining mastery of them. At a few institutions, students lose proficiency at college.

Quoting from an academic source, Moret says:

Many seniors graduate without being able to write well enough to satisfy their employers. Many cannot reason clearly or perform competently in analyzing complex, nontechnical problems, even though faculties rank critical thinking as the primary goal of a college education. Few undergraduates receiving a degree are able to speak or read a foreign language. Most have never taken a course in quantitative reasoning.

Many studies of the connection between education and economic growth have focused on years of schooling or educational attainment as the key predictor, says Moret. But recent research has shown that the real predictor is cognitive skills, which may or may not be obtained in college. (I would bet that there is a large overlap between these cognitive under-achievers and college grads experiencing malemployment.)

Migration and educational attainment. Highly educated, recent college graduates are the most likely of any demographic group to move from one state to another. Individuals with a bachelor’s degree are twice as likely to complete an interstate move as those with a high school degree; Ph.D.s are three times as likely. Likewise, people in their 20s and early 30s are more likely to move than any other age group.

Some states export college-level talent to other states, in effect losing the fiscal investment they made in their students, while other states are talent importers, reaping the benefit of others’ investments. The Great Lakes states are the biggest exporters, followed by the Mid-Atlantic, New England and the Plains states. For every 100 bachelor’s degrees conferred in Michigan, the state has lost 22.

Says Moret:

When college degree production substantially exceeds demand in a state, college graduates tend to complete interstate moves in order to secure better employment outcomes. Collectively, these findings suggest that the economic payoff of a college degree is much greater in some states than others, and state leaders must be careful to ensure that their college degree attainment initiatives are not misaligned with the labor market demands of their economies.

Traditionally, Virginia has been a talent “importing” state, which has contributed to the Washington metropolitan area, including Northern Virginia, having the best educated workforce of any metro in the country. The Old Dominion has benefited from other states’ investment in higher education. However, in recent years, coinciding with sequestration and Virginia’s economic slowdown, Virginia has shifted to a talent-exporting state (although the number of people leaving the state is relatively small). Despite this transition, the state forges ahead with a strategic higher-ed plan calling for awarding more degrees, certifications and apprenticeships. Will supply exceed demand? Will we end up exporting talent? Are we investing excessively in higher ed — or perhaps in the wrong places, producing too many B.A. degrees and too few certifications for skills that are demonstrably in demand?

Virginia’s public policy leaders are not asking such questions — or, if they are, their deliberations are not reflected in the news media. But the issues Moret raises in his dissertation are profoundly important. With an economy in the doldrums and a state budget facing chronic stress, Virginians must question all of their hoary assumptions in order to make better use of the state’s limited resources.

As a member of the State Council for Higher Education in Virginia, Moret is in a position to ask the questions that no one else in authority is asking. Let us hope he makes the most of the opportunity.