Ken Miller, a commissioner of the Tacoma Housing Authority, is one of the city’s most thoughtful guys. He’s written this analysis of Tacoma’s prospects; a shorter version appears in tomorrow’s print edition.
By Ken Miller
We hear a lot about whether Tacoma is “open for business” and the strategy for growing our economy.
It’s an important but puzzling conversation. I decided to study up.
Just the Facts
My first step was to find out whether Tacoma is actually losing business, and if so, at what rate. I contacted the city’s Tax and License office, where business licenses are issued and cancelled. If you sell goods or services, you need a license. It’s the best way to get a business headcount.
At the beginning of 2011, Tacoma had 22,243 active business licenses, ranging from Greyhound Bus to doggie day care. Through September – nine months later – 435 businesses closed. This is bad. But 1,883 businesses opened, which is good. Even better than 2010, when Tacoma added a net total of 1,345 new businesses.
A Little Theory
It’s not that simple, though; otherwise everyone in the business community would be happy, right? So I turned to a couple of theorists for help.
First I considered the late Jane Jacobs. In The Wealth of Cities she distinguished between a business that re-circulates local money and a business that exports value. This is the difference between the corner candy store and Brown and Haley.
Jacobs asserts the only way to grow the local economy is to be a net exporter of value. It’s the only way to put more money – new money – into the local economy.
This is the distinction underlying the downtown-vs- neighborhoods debate, or the choice between clean water enterprise zones versus tree-lined streets full of shoppers. It’s the difference between Go Local and “think globally, act locally.”
Next I looked at Michael Porter’s Competitive Strategy. After all, we’re working on a competition problem: how can Tacoma attract or keep businesses, rather than losing them to South Carolina or Federal Way? Tom Pierson, President and CEO of the Tacoma Chamber, made this point in his recent op/ed in the News Tribune. He described two recent out of state “raids” on local businesses.
Porter says there are two basic ways to compete: low cost; or high differentiation [that is, being different in a way the customer values]. Further, he says it’s fatal to be “stuck in the middle” without a clear focus on one strategy or the other. Obviously it’s ideal to be superb in both strategies, but that’s like being born with super-powers: cool but unlikely.
If Porter’s right, how should Tacoma compete? With low cost or high differentiation? Reduce the B&O tax or attract “the creative class?” We seem to be stuck in the middle.
Who IS Business Friendly?
Now I had some conceptual tools to go along with a few facts. Next, I looked for examples of business-friendly cities, so we’d have a benchmark.
I studied annual rankings of urban business climates from the Wall Street Journal, Kiplinger’s Personal Finance, Forbes and Inc.
As expected, a handful of cities appeared frequently: Des Moines, Austin, Washington D.C., Denver, Salt Lake, Raleigh, Hartford and Omaha.
But lots of other cities showed up at least once: Boise; Boulder; Pittsburgh; Seattle and many more. In fact, if I looked at the lists for several years, I’d find more than a 100 “business friendliest” cities. Whew! How can they all be so great?
Because the lists look at different factors, essentially reflecting the distinctions drawn by Jane Jacobs and Michael Porter. Some cities are listed because they have thriving downtowns; others because of low taxes. Some have lots of company headquarters; others are known for their creative class. Even a single list might name different cities for different reasons.
It turns out these cities fall in one of three clusters. The first two follow Porter: cities with low business costs; and those offering high differentiation, usually in research facilities and the nature of the workforce. (A few places – like Austin – have both advantages. Austin’s a monster.)
Low cost cities are typically in the south and southwest; high differentiation cities are on the coasts.
The third cluster I’ll call “wild card” cities: they capitalize on some kind of lucky break. Rochester MN, for example, has almost three million visitors a year because of the Mayo Clinic.
What’s Our Best Option?
Let’s assume for the moment Tacoma is going to choose a single strategy. This doesn’t mean we shut down other kinds of business; but it means the dozens of people and millions of dollars spent on economic development will focus sharply.
What’s our play? Can we best succeed through low cost – which is what the business community often argues – or through high differentiation? Or do we have a wild card to play?
Tacoma: the Low-Cost City?
From a business perspective, what does it mean for a location to be low cost? The accounting and consulting firm KPMG discussed the question in a 2010 study titled Competitive Alternatives. KPMG identified five main factors [built up from 26 separate items].
By far the most important cost factor is people, driving as much as 75-85 percent of “location” cost in a service business and 60 percent or more in manufacturing, construction and distribution. Labor cost isn’t just salaries and wages; it includes health care and other benefits, how long it takes to fill an opening, the rate of turnover and how hard it is to remove an employee.
Our market – Tacoma, Pierce County and Puget Sound – has high labor cost, in part because of strong unions, in part because of state legislation on minimum wage and workers’ comp.
Intrinsically this isn’t good or bad; it’s just a fact. But if Tacoma wants to use a low cost strategy, the single biggest obstacle is our labor cost. Right-to-work states will beat us every time.
The next most important cost factor according to KMPG is facilities: plants, warehouses and offices. These have a wide range of impact, from a few percent for manufacturing to 18 percent for some office businesses. Space comparisons are complicated and can change fast; but Tacoma seems competitive.
An on-line search for leasing 10,000 square feet built since 2000 in Washington yielded 82 properties, starting at $32 per square foot in Seattle; the first Tacoma listing was 16th on the list at $22 per square foot.
The third cost factor is taxes, about 15 percent of location-sensitive costs. Here the easiest comparison is by state. The Tax Foundation, considering all kinds of taxes in all 50 states ranks Washington 11th on the State Business Tax Climate Index. That’s pretty good, especially considering we’re ranked higher than some go-go places like Texas (13th) and Mississippi (21st). If Tacoma taxes follow the state ranking, we’re in the top 20 percent of the country.
The last factors in location cost are utilities and transportation, and here again we should come out pretty well. We have relatively low cost power, an excellent port with rail connections and decent ground transportation.
The strategic question, then, is will a low cost strategy work for Tacoma’s economic development? We’re in good shape in terms of taxes, facility costs, utilities and transportation. But we’re expensive in terms of labor. Unless we can do something about the relative cost of salaries, wages, benefits and worker protections, it will be tough to compete as a low cost town. We can chip away at cost, but we won’t land a smashing blow.
Tacoma: Different Somehow
After low cost, the second strategic option is high differentiation. Places known for innovation – Seattle, Boston, North Carolina’s Research Triangle – are expensive in terms of labor, space and taxes; but they make up for costs with a high-octane mix of ideas and talent. These cities are flooded with patent holders and risk takers in all sorts of fields.
And they’re full of support systems: entrepreneur networks, venture capital firms, incubators. If you want to invest in talent and ideas, these are the places you go.
Can we win as a high differentiation city? Let’s take stock. We have a few differentiated companies already and a small angel network. We have an incubator, though it’s focused more on local service businesses than on scalable innovation.
But do we have a continuous source of new ideas, like a research university? Or a critical mass of bright, energetic people looking for the next big thing? Or risk-taking investors eager to entice talent? I don’t think so.
Plus we’re slow. After years of discussion, the Center for Urban Waters finally opened in 2010; and while the City’s web site goes on about the Center’s environmental friendliness, it says not a word about its research priorities, the number of scientists in action or the commercial ventures it’s attracting.
Remember the UW’s Institute of Technology, with over $5 million in private donations? Remember when this was going to be the engine for dynamic growth?
It grants 60 undergraduate degrees and about 20 masters. Sure, students intern and work at Intel and Microsoft, but mostly they take operational roles at places like Weyerhaeuser, the Veterans Medical Center and the Museum of Glass. Again, there’s no website mention of economic impact through intellectual property or start-ups. Because the Institute isn’t breaking new intellectual ground.
We simply don’t have a robust source of new ideas. And so it’s going to be very hard to differentiate Tacoma as the place where ideas come to life. We don’t have the supportive networks, the money, the talented people. Or if we do, they don’t stay. By one estimate, 90 percent of UPS grads from out of town leave Tacoma when they graduate. And while SAMI and SOTA are great, they’re modeled on other schools in other places. Catching up is not innovation.
In terms of high differentiation the way other cities do it, we cannot compete. New York City, for example, has put together a $400 million package of land and cash to attract a top flight engineering school. Stanford and Cornell are the finalists; one of them will open a Manhattan campus, so New York can continue to distinguish itself in new ways in the future.
Trapped Like Rats!
So it seems we’re trapped. Our labor costs are too high for us to compete as a truly low cost city; but our ideas+talent pool is too shallow to compete as a highly differentiated one. We’re stuck in the middle, as Porter would say: moderate costs, moderate differentiation. That spells trouble with a capital T-Town.
Only a wild card can save us. Do we have one?
We do. Actually two.
First is arts and culture tourism. By strokes of luck, Dale Chihuly and Harold LeMay came from here, and folks like Lester Baskin loved the arts. Cheap work space attracts metal artists and painters and thirty-something skaters who letterpress.
By bringing out-of-town money into Tacoma hotels, gift shops and restaurants, our museums and galleries and performance centers can be a unique driver of the economy.
Okay, we’re lucky. But are we really special in our arts and culture assets, or just like any other town?
I used the site museumsusa.org, with almost 10,000 museum listings, to compare our assets with other cities’. We have 35 museums listed, including those in Puyallup and Gig Harbor and Lakewood.
Seattle has 70; San Francisco has 75. Okay, we’re not that big. But we have a few more museums than Minneapolis-St Paul  and Denver  and a lot more than Portland  or Spokane . We are arguably one of the most museum-dense cities in the world. That’s a great card to have.
We have to play it, though. Just holding it doesn’t count. Playing the card means intense, consistent promotion. Instead we’ve cut back our visitor promotion budget. Playing the card means making our museums accessible; we’ve reduced mass transit, our streets are a mess, and our amenities like restaurants and shopping aren’t clustered near the museums.
That’s fixable. It’s just not clear who’s going to fix it. The museums and cultural organizations tend to hang separately from each other, the City is only one of many funders of the Convention & Visitors Bureau, and the business community dismisses cultural tourism as fluffy.
If we can fix our issues, repair the connective tissue and packaging so Tacoma shines as an arts and culture destination, we can start a snowball effect. Creative people will want to come here, some will stay, they’ll have ideas and attract investment…
This isn’t a new concept. The Chamber of Commerce and the City worked on a “creative core” years ago. It makes sense. But someone has to be accountable.
And Now for Something Completely Different…
Drive south a few miles to JBLM and accountability is clear. That’s one of the beauties of the military: you know who’s in charge. And JBLM is the second of our economic development wild cards.
We don’t have to play it, actually. The Joint Base plays itself, bringing in hundreds of millions of dollars and accounting for over 50,000 jobs in Pierce County, according to the Chamber of Commerce. That’s exporting value: outside money from the federal government is spent here. [Sure, some of that federal money came from us, but most of it didn’t.]
Can we do more? Can we systematically keep veterans in the area, to buy homes and start businesses and buy local goods and services? Can we create even more products to sell to the Army and Air Force? Can we make it easier to get to and from JBLM, so the Defense Department wants to keep growing here?
And can we – should we? – create tighter links between the City of Tacoma and JBLM?
This isn’t about war and peace or American foreign policy. If we weren’t home to a powerful military installation, it would be in Oregon or Idaho. From an economic development perspective, JBLM is probably the best thing going.
Let’s first do no harm, and then see if we can derive even more benefit.
What About the Port?
The Port of Tacoma is usually considered a big driver of our economy. Will it continue to be? The Port is in the midst of its own strategic planning and re-branding. Net operating revenue has declined from $22 million in 2003 to $11 million in 2009 and $17 million in 2010 – without adjusting for inflation.
The Panama Canal is being widened to allow “super-max” ships to avoid the West Coast and use East Coast ports, with their billions in capital improvement – and low-cost operations.
So while the Port will be important for decades more, it may not be our main economic engine in the future.
The purpose of this discussion is to clarify what it means for Tacoma to be open for business. The conclusions are simple.
First, the number of businesses in Tacoma is growing though apparently we don’t know why.
Second, we can’t compete as a low-cost city. Our labor costs are too high.
Third, we can’t compete as a high-differentiation city. We don’t have the pool of talent and ideas to attract investment on a large scale.
Fourth, we should play the wild cards in our hand, the happy accidents of museums and military bases.
Simple, right? But simple isn’t the same as easy. Working through the real-world challenges of policy and investment takes a lot more than a few thousand words. But we’ll all be better off if we have the discussions in some common context.
Government and business and citizen groups share a common goal. The challenge is how to reach it.