Malloy’s failed business strategy is a disaster

The perception is now worse than reality, not that the reality of specialty drug-maker Alexion’s departure from New Haven to Boston is anything but catastrophic.

Three strikes and you’re out. After General Electric announced its departure in 2016 after about 40 years in-state and Aetna did the same in 2017 after 160 plus years, the departure of the specialty drug-maker seals the Nutmeg State’s reputation as the most business unfriendly state in the nation. No one nationally will believe anything else about Connecticut without a sea change in the state’s policies. Perception is often more difficult to change than reality.

The cruel irony is that Connecticut did almost everything right in Alexion’s case (unlike in GE’s and Aetna’s). The home-grown company was founded in New Haven in 1992. In 2016, Alexion completed and occupied a new state-of-the-art headquarters funded by a $6 million state grant combined with a forgivable $20 million state loan and tax breaks, in return for which Alexion committed to hire and maintain an employment base of at least 650. Like it or not, in this day and age, almost all states must offer incentives to attract and retain business.

However, in competing in this state-v-state contest, a state must do two other important things. First, create a generally friendly business environment, and, second, make an accurate assessment of its own comparative advantages. The Malloy Administration has failed miserably at both.

Much has been written about Connecticut’s unfriendly business environment. At risk of mind-numbing repetition, here are just the key points. The corporate income tax is the 6th highest in the nation. More damaging is Gov. Dannel P. Malloy’s untrustworthiness. After his 2010 election, Malloy pushed through a 20 percent surcharge that elevated the basic 7.5 percent corporate rate to 9 percent. He committed to sunset the surcharge in 2013. He reneged. The surcharge remains.

Secondly, Malloy has insisted upon leading the progressive vanguard, for example, by pushing for the state to be first to adopt paid sick leave. Suffice it to say that the business sector sees reneged promises and progressive “advances” as uninviting, especially when they overlay seriously negative factors, such as Connecticut’s very high energy costs and its clogged transportation infrastructure.

Most fatal of all has been Malloy’s indulgence and/or cowardly capitulation to state employee unions, whose benefits are both so over-generous and so woefully underfunded that no corporation can ignore the inevitability of future tax hikes to finance the madness.

In terms of comparative advantage, Malloy has been foolishly overambitious from the beginning. He has overplayed the hand of a small tweener state sandwiched between two dynamic metropolises, New York City and Boston. Both are world class research centers with multiple internationally renowned universities and multiple teaching hospitals and innovative medical research complexes.

So what does Malloy choose to do? Attempt to transform Connecticut into a bio-medical research powerhouse. Really? He never considered the competition he faced immediately to the north and south?

Malloy jumped with two feet into the bio-med pool with his splashy and expensive $300 million Jackson Labs deal which brought a whopping 300 jobs to the state − at $1 million per. In the years leading up to the deal, Connecticut saw the downsizing of its leading bio-med company, drug-maker Pfizer, which closed some of its labs in Groton and moved them to Cambridge.

The state has one world class enterprise, a large concentration of hedge funds and private equity firms. These are classic owner-operated enterprises. Their wealthy founder-owners earn huge amounts personally and pay fabulous amounts of individual income taxes to the state. Ominously, several have left the state already, as Democrats have hiked individual income tax rates.

The reality of Connecticut’s unfriendly business environment and its misdirected business development strategy is exceeded only by the nation’s perception of the state after the third in this trifecta of high profile corporate departures. It is doubtful now that businesses will even give Connecticut a look, no matter what incentives are on offer – wait, never mind, the state doesn’t have the resources to offer incentives, does it.

Only dramatic policy changes can remedy the situation. Two are obvious. First, the contract just struck with state employees will have to be re-opened and scaled back. Second, the state’s welfare programs, which account for most of state spending and are amongst the most generous in the nation, will have to be cut back as well, as hard hearted as that may sound. Third, the state’s comparative advantages must be re-thought in realistic terms.

The state needs a new leader with the courage to carry out the first two obvious policy changes and the vision to conceive and implement the third.

Red Jahncke is president of Townsend Group International, a business consultancy in Connecticut, and a freelance columnist who writes on public policy issues.

 

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