ResMed: Please refuse to play the subsidy game

San Diego–based ResMed makes products for the treatment of sleep-disordered breathing. Trouble is, it doesn’t make those products in San Diego. Its main manufacturing facility is in Australia, where the company was founded in 1989. It also has manufacturing plants in Singapore, Malaysia, Paris, and Freudenstadt, Germany. It does make electric motors in Chatsworth, and it has an assembly/distribution plant in South Carolina.

It has 3700 employees worldwide, and only 404 of them are in San Diego.

But the community is atremble. ResMed’s chief executive, Peter Farrell, is unhappy about the election results. He doesn’t want higher taxes, stronger unions, and tougher regulations. He deplores the Democratic Party’s huge majority in the state legislature.

So, he is thinking of moving ResMed’s headquarters elsewhere — to, say, Texas, South Carolina, or Singapore. A specially appointed ResMed subcommittee will study possible relocations and give a report in February. Both U-T San Diego and the San Diego Business Journal gave Farrell a forum to mouth his warnings.

“California just doesn’t have a business-friendly environment,” he complained to the Business Journal.

Unfortunately for taxpayers, “business friendly” is commonly a euphemism for “corporate socialist.” When business executives talk of a “business friendly” state or municipality, they mean “willing to give away taxpayer funds to corporations.” Usually that means taking those funds from schools, infrastructure, and essential government services.

As Farrell was denouncing California, the New York Times was running a series of articles on how American corporations pick the pockets of taxpayers by demanding all manner of enticements — cash grants, loans, tax breaks, property tax abatements, income tax credits and/or exemptions, and free services, including worker training. In return for the payoffs, businesses put a plant in a metro area or promise not to move to friendlier climes.

The Times says that state and local governments shell out $80 billion a year in this out-and-out bribery game, often called “jobs blackmail.” Of that sum, $19 billion yearly has been coming from Texas, whose representatives have been visiting a number of cities, including San Diego, to induce businesses to move. The Times points out that Texas is 11th from the bottom in education spending per pupil among American states. But to balance its budget last year, it cut education spending by $5.4 billion. Asked if he had qualms about filching jobs from other states, Governor Rick Perry — yeah, that guy who wanted to be president — said, “Competition is what drives this country.”

Perry would not understand that it’s competition for corporate innovation and efficiency, not competition for jobs blackmail, that propels the national economy. Nor would Perry understand that this subsidy racket is basically a zero-sum game because one community’s gain is usually another’s loss. In the United States, it can be a losing game if the company decides to move offshore — say, if ResMed decides to move its headquarters to Singapore.

Here’s what relocation incentives usually mean: a community shells out so much money to get a company to build a plant in town that tax revenues falter, infrastructure crumbles, and schools decline severely. In a few years, the company that begged for the subsidy can’t get employees to transfer there. As soon as it legally can, it vamooses, leaving an empty plant.

“States should invest in public services and education, not subsidize big business,” editorializes the Times. One encouraging statistic: California gives out $112 in subsidies per capita, compared with $759 in Texas and $672 in Michigan.

This scam has been going on a long time. I wrote about it in the Union-Tribune in the 1990s, and I was hardly the first journalist to do so. In 1999, economists did an exhaustive study of $176 million in loans, grants, and tax increment financing deals by various government bodies in Minnesota. The result of all those payments: “high costs, low wages, and an absence of standards to ensure that job subsidies produce an effective return on taxpayers’ investment.”

For the Reader, I have written columns about massive subsidies Florida is shelling out to get San Diego research institutions to set up operations in the Sunshine State. Last year, Florida was paying a staggering $1 million per job — more than ten times the amount that is generally considered far too high.

One of the most egregious examples comes from one of the sickest states: Illinois. Once upon a time, mighty Sears Roebuck epitomized Chicago’s muscle. It built the huge Sears Tower in downtown Chicago. Then it got into trouble. In 1989, Illinois shelled out a bundle to get the company to relocate to a Chicago suburb. But last year, the sinking Sears (now named Sears Holdings) threatened to move to Ohio or elsewhere. The state coughed up $275 million to get it to stay. Immediately it laid off workers. It turned out that under its contract with the state, Sears can lay off another 1750 without penalty. So much for job creation.

U-T San Diego published an editorial bemoaning ResMed’s unhappiness and urging Mayor Filner to meet with Farrell and persuade him to stay. I emailed chief executive John Lynch, asking if the newspaper would favor such subsidies as cash grants and loans, tax breaks, free services, and the like to keep the company in town. Lynch replied that reducing taxes and regulation should be considered to retain local companies.

Constance Bienfait, ResMed’s head of investor relations, says it is too early to say what would be acceptable. ResMed’s tax team has already met with the mayor’s office, although management feels that access to tech talent may be enough to keep the company in town. Bienfait said ResMed has “a fiduciary responsibility to look at the best place to operate.”

That goes to the heart of the problem. Decades ago, companies had several constituencies: customers, employees, communities, vendors, shareholders. Beginning in the 1980s, shareholders became the only constituency. Clearly, greed is the reason that companies get subsidized, shareholders get massaged, and employees, taxpayers, and communities get screwed. I hope Farrell won’t play this game. ■