by Adam Hartung | Jan 14, 2021 | eBooks, Investing, Politics, Strategy, Trends
Chicago, and Illinois, are in big economic trouble.
- 7th straight year of population decline. Losing 235,000 people in 10 years, 3x the amount of any other state. Last year saw a decline of 79,500 people – second only to much larger New York – and the rate of people leaving is accelerating.
- Illinois has, on average, property taxes 2x the national average. If you owned the “Home Alone” house in suburban Chicago, since the movie was made in 1990 you would have paid $890,000 in property taxes.
- Chicago is the worst residential real estate market of any large city in America. While values have been rising elsewhere since the Great Recession, in the last decade, property values in Chicago have declined 20%.
- Sales tax is 9%, and on some products 10%+, one of the highest rates in the USA. On-line purchases are taxed at 10.25%, for example. Illinois is one of only 7 states to charge sales tax on gasoline. And Illinois has the highest cell phone tax in the country.
- Illinois roadway toll fees are widespread, and among the highest in the USA, with the majority of those funds going NOT to road improvement but rather into the general budget to cover state expenses.
- Illinois is 46th in private sector job growth – and would be 50th except the #1 source of job growth is government jobs. And 40% of the government workforce makes $100k+/year. The total number of jobs in Illinois December, 2019 was 6.2M – unchanged since 2015 – and up only slightly from 5.9M in 2010 – yielding a pathetically low growth rate for jobs of 1/2 of 1% (.5%) per year
- 1/3 of the state budget is pension payments, and pension debt is 26% of state GDP – highest in the country. Lots of retirees, very few new jobs to pay their pensions.
Thrive to the Future – 4 top trends for 2021 and beyond.
Gibbon wrote “The Decline and Fall of the Roman Empire” as a treatise to uncover how such a powerful empire could lose its greatness. There is no doubt, Chicago and Illinois were once great. The area was known for great jobs, great infrastructure, great transportation system, great homeownership – and for many decades considered one of the best places to live in America. Back when agriculture and manufacturing dominated the economy. But quite obviously, as the world changed, and the sources of economic value (including jobs) changed, the late, great state of Illinois kept pushing on with “business as usual” instead of changing policies and investments to re-orient for the Information Era.
Things were not destined to become this bleak. Chicago could be Austin today – but obviously it isn’t. Where Austin, and Texas, looked at trends and made investments beyond the old “core” of oil and gas, Chicago and Illinois completely failed to look at trends that indicated a clear need to change. Problems, and the path to solve them, have been obvious for years. It was easy to predict this would happen. But a chronic focus on the short-term, rather than the long-term, combined with a complete unwillingness to change how investments were made caused state and city leaders to consistently ignore warning signs and make one bad decision after another.
Indicators of Decline
I’m an expert on trend-based planning, so let’s take a look at the telltales this was coming and how those telltale indicators were ignored:
- In February, 2006 (yes 15 years ago) I wrote that Illinois was the #1 net job loss market in the country. This factoid highlighted an emerging problem in the underlying economy. The state was still considerably dependent on old-line agriculture/food giants, those businesses were crumbling and unlikely to recover as the economy shifted. Notably Kraft was in its 5th year of what was to be a turnaround (that never happened) and Sara Lee was under incompetent leadership that kept selling businesses to shore up declining revenues and earnings. The state, and city, had failed to develop an infrastructure for investment in start-up companies. There was a total lack of investment money for entrepreneurs from paternalistic large companies such as Motorola and Ameritech. And a lack of money for innovation from banks, venture capital and private equity firms. Existing businesses were aging, cutting jobs and none were focused on investing in new companies to keep the local economy tied to the emerging Information Economy [ link ]
- In February, 2009 Forbes selected Chicago as the 3rd most miserable city in the USA, citing high taxes, no job growth, infrastructure decay, congestion and bad weather. An uproar ensued – but no change. I then noted my 2006 column, and recommended a very serious Disruption in how Chicago was managing its resources. Clearly the “more of the same” strategy trying to defend its past was not working. Unless there was a disruption, Chicago would get worse – not remain the same, and certainly not get better. The signs were clear that from ’06 to ’09 nobody was thinking about the big changes needed [ link ]
- In June, 2010 it was reported that Illinois lost 260,000 jobs between 2000 and 2010 – and that was an indicator of why Chicago and the state were having so many economic problems. I recommended the city and state make significant changes in resource allocation to keep more start-ups local. The University of Illinois was the #4 engineering school in the US, but the vast majority of graduates left to one or the other coasts. Local businesses were not developing new businesses, thus not hiring these top students. Start-ups at the universities, and by recent grads, could not obtain funding, so they fled to where the money was. Economic reliance on stalled companies like Kraft, Sara Lee, Motorola, Lucent, Sears and United had created a Growth Stall that was sure to lead to additional job losses – when the best talent was right there in the state! [link ]
- I followed up a week later that same June with a column on how Mayor Daley was very popular with voters and local businesses, but he was setting up the city (and state) for failure. There was a focus on keeping the “old guard” happy, and doing so by completely ignoring opportunities for future growth. Offering tax breaks and subsidies to recruit corporate headquarters (like Boeing) created very few jobs, and was a poor use of resources that should be diverted to funding start-up tech and bio-tech companies. And financial machinations, like selling the city’s parking rights, gave a short-term lift to the budget, hiding significant weaknesses, while creating massive long-term problems. Chicago and Illinois politicians were focused on short-term actions to get votes, and ignoring the very real jobs problem that was tanking the economy. [ link ]
- By April, 2014 I was able to clearly demonstrate that my predicted economic stagnation spiral had taken hold in Illinois. Defend & Extend investments to shore up declining companies – like Sears – robbed local governments of funds for job creating programs. And a decade + of no job creation was forcing taxes up – at a remarkable rate – which kept businesses from moving to Illinois; kept them from opening software labs, coding facilities, research centers, pharma and bio-pharma production plants, etc. With no growth, but rising costs, the death spiral had begun and needed immediate attention [ link ]
- In September, 2016 the outward migration from Chicago and Illinois had become a powerful trend. Looking at demographics, the market was aging. Rising costs and no growth had pinched budgets to the limit, while pension costs had become an unsustainable burden on the state’s citizens. Just like Japan was in an aging crisis, Illinois was in an aging crisis. And this was destined to create even more problems for the economic death spiral that began before 2006. [ link ]
- So by January, 2017 the demographic tailspin was clearly creating a vacuum pulling people out of Chicago and Illinois. Fully 4 years ago it was obvious that the predicted trends had taken hold, and nothing short of an incredible disruption would save Chicago from becoming the next Detroit. Using the simplest trend planning tools made it clear that unless there was radical change in investments the Chicago empire was at its end. [ link ]
Lessons for business?
Far too many businesses act like Chicago. “Business as usual” dominates. Resources are automatically routed to defending old business lines, rather than investing in new products and solutions. Focusing plans on historical customers, products and markets create blindness to market shifts, and a reluctance to move forward to new technologies and markets. Very little energy is put into trend analysis, and plans are not built based on trends and likely future outcomes (planning from the past dominates over planning for the future.) People who point out likely future bad outcomes unless serious change is undertaken are ignored, or shouted down, or removed entirely. Short-term financial machinations (selling assets, or a business, or offering deep discounts to keep customers) create an illusion of security while long-term trends are undermining the business’ foundation.
We are experts at trend analysis, trend planning and effective resource allocation. It was clear 15 years ago that major resource reallocation was necessary for Chicago to continue growing its economy. Don’t let a fixation on doing more of the same get in the way of your future growth, like Chicago. Let us help you identify critical trends and invest smarter to build on trends and grow.
Key lessons?
First, the world is growing and leading businesses will grow. If you’re not growing, you’re dying. Just like GE and Exxon. Second, never plan from past success, but instead plan for the future. You don’t grow value by being operationally excellent, because the world is forever changing and it will make your past business less valuable even if you do run it well. Third, make sure your plans are all built on trends. Let trends be the wind in your sales, or the current under your boat, or whatever analogy you like – just be sure you’re using TRENDS to drive you business planning, product development and solutions generation. Customers buy trends and help for them to achieve the future.
Did you see the trends, and were you expecting the changes that would happen to your demand? It IS possible to use trends to make good forecasts, and prepare for big market shifts. If you don’t have time to do it, perhaps you should contact us, Spark Partners. We track hundreds of trends, and are experts at developing scenarios applied to your business to help you make better decisions.
TRENDS MATTER. If you align with trends your business can do GREAT! Are you aligned with trends? What are the threats and opportunities in your strategy and markets? Do you need an outsider to assess what you don’t know you don’t know? You’ll be surprised how valuable an inexpensive assessment can be for your future business. Click for Assessment info. Or, to keep up on trends, subscribe to our weekly podcasts and posts on trends and how they will affect the world of business at www.SparkPartners.com
Give us a call or send an email. Adam@sparkpartners.com 847-726-8465.
by Adam Hartung | Jan 16, 2017 | Economy, Politics, Trends
Trend analysis is the most critical part of planning.
Some trends are hard to spot, because people think they are just a fad. Many folks think electric cars fit that category.
Other trends are hard to accept because they imply a big shift in how we live or work – or how we run our business. Scores of IT people who have written me over the years saying mobile devices on common networks (telecom to AWS) will never replace PCs connected to server farms. The implications of this trend are severely negative related to demand for their skills, so they ignore it.
But every plan should be built on trends, because these forecasts are critical for decision-making. It’s the future that matters, not the past. Too often plans are built on history, when trends clearly indicate that things are going to change, and old assumptions are outdated.
Demographic trends are easy to forecast, and important.
While some trends are hard to forecast, some trends are really easy to spot and forecast. And the easiest trend to understand is demographics. If you don’t use any other trends in your planning, you should have demographic trends at the core of your assumptions.
Take for example the movement of people across the United States. Ever since the wagon train people have been moving west. And, like my friend Buckley Brinkman (executive director and CEO of the Wisconsin Center for Manufacturing and Productivity) likes to say, “ever since the invention of air conditioning people have been moving south.” Yet, I’m startled how few organizations plan for this shift and adjust their strategies and tactics to be more successful.
From July 1, 2015 to July 1, 2016 the seven fastest growing states were western. And of 50 states, only eight lost population.
Growth is sublime, decline is disastrous.
Bruce Henderson, founder of the Boston Consulting Group, used to say that if you want to hunt or farm you’re far better off in the Amazon than you are in the Arctic. Basically, where there are resources, and lots of growth, it’s a lot easier to succeed.
For business, this means that if you want to grow your business – whether you’re installing HVAC systems or building a state-of-the-art battery manufacturing plant – you’ll find it relatively easier in faster growing states. It doesn’t mean there is no competition, but it does mean that growth makes it easier for competitors to succeed.
Contrastingly, there were eight states that lost population in this same 12 months.
This means that competition is intensifying in these states. As people move out there are fewer customers to buy what each business sells, so these companies have to fight harder, and price lower, to grow – or even maintain. As the population declines taxes have to go up because there are fewer taxpayers to cover government costs. These states become less desirable places for business.
The businesses in Illinois, for example, are in the middle of a bare-knuckle brawl over the state budget that has gone on for two years. The Governor and the legislature cannot agree on how to manage costs, or revenues. Bond ratings have been slashed as costs to borrow have gone up. Several services have been shut down, and student costs at universities have gone up while programs have been gutted or discontinued.
Governor Rauner (R – IL) has repeatedly said he wants Illinois to be more like Indiana, its neighbor to the east. Perversely people apparently are listening, because Illinois is shrinking, while Indiana grew a healthy 0.31%. For residents remaining in Illinois this worsens a host of maladies:
• the state’s jobs situation struggles as the number of paying jobs declines, making it harder to recruit new talent, or even keep its own university graduates;
• Illinois’ pension problems worsen, as there are fewer people paying into the pension funds while those drawing out funds keep increasing;
• Illinois is unable to fund schools properly, especially Chicago, due to less income – forcing up property taxes;
• taxes keep rising due to fewer people and businesses (when adding property taxes, sales taxes and income taxes Illinois is now the highest tax state in the country);
• new highways are being built with federal funds, but other infrastructure is in trouble, as city, county and state roads are pothole ridden. Trains and subways become outdated and fall into disrepair. And one-time budget Hail Mary’s, like Chicago selling its parking structures and meters in order to balance the budget for one year, strip citizens of future revenues while they watch parking (and other) service costs skyrocket;
• and Chicago has suffered the lowest real estate recovery rate of the top 30 major U.S. cities –not even returning to prices in 2008.
Growth solves a multitude of sins.
Just like a rising tide raises all boats, growth creates more growth. More people increases demand for everything, which increases business sales, which increases jobs and wages, which increases the value of real estate and household wealth, which increases tax revenue, which allows offering more services to make a state even more appealing.
On the other hand, shrinking can become like the whirlpool over a drain. As the problems increase more people decide to leave, making the problems worsen. As more people go, there are fewer people left behind to make things better. Jobs go away, wages fall, demand drops, real estate prices drop, infrastructure projects stop, services stop and yet taxes have to be raised on the fewer remaining residents.
Few trends are more important for planning than understanding demographics. Demographics affect demand for everything, and planning for changes offers businesses the opportunity to be in the right place, at the right time, to be more successful. And, demographic trends are some of the easiest to predict:
• population size
• average age, and sizes of age groups
• average income, and sizes of income groups
• ethnicity
• religion
Plans should be based on trends, not history. Understanding trends, and their trajectory, can help you be in the right market, at the right time, with the right product in order to succeed. There are lots of trends, but one that is fairly obvious, and incredibly important, is simply understanding demographics. Is this built into your planning system?
by Adam Hartung | Aug 4, 2016 | Election, Leadership, Politics
Donald Trump has had a lot of trouble gaining good press lately. Instead, he’s been troubled by people from all corners reacting negatively to his comments regarding the Democrat’s convention, some speakers at the convention, and his unwillingness to endorse re-election for the Republican speaker of the house. For a guy who has been in the limelight a really long time, it seems a bit odd he would be having such a hard time – especially after all the practice he had during the primaries.
The trouble is that Donald Trump still thinks like a CEO. And being a CEO is a lot easier than being the chief executive of a governing body.
CEOs are much more like kings than mayors, governors or presidents:
- They aren’t elected, they are appointed. Usually after a long, bloody in-the-trenches career of fighting with opponents – inside and outside the company.
- They have the final say on pretty much everything. They can choose to listen to their staff, and advisors, or ignore them. Not employees, customers or suppliers can appeal their decisions.
- If they don’t like the input from an employee or advisor, they can simply fire them.
- If they don’t like a supplier, they can replace them with someone else.
- If they don’t like a customer, they can ignore them.
- Their decisions about resources, hiring/firing, policy, strategy, fund raising/pricing, spending – pretty much everything – is not subject to external regulation or legal review or potential lawsuits.
- Most decisions are made by understanding finance. Few require a deep knowledge of law.
- There is really only 1 goal – make money for shareholders. Determining success is not overly complicated, and does not involve multiple, equally powerful constituencies.
- They can make a ton of mistakes, and pretty much nobody can fire them. They don’t stand for re-election, or re-affirmation. There are no “term limits.” There is little to tie them personally to their decisions.
- They have 100% control of all the resources/assets, and can direct those resources wherever they want, whenever they want, without asking permission or dealing with oversight.
- They can say anything they want, and they are unlikely to be admonished or challenged by anyone due to their control of resource allocation and firing.
- 99% of what they say is never reported. They talk to a few people on their staff, and those people can rephrase, adjust, improve, modify the message to make it palatable to employees, customers, suppliers and local communities. There is media attention on them only when they allow it.
- They have the “power of right” on their side. They can make everyone unhappy, but if their decision improves shareholder value (if they are right) then it really doesn’t matter what anyone else thinks
One might challenge this by saying that CEOs report to the Board of Directors. Technically, this is true. But, Boards don’t manage companies. They make few decisions. They are focused on long-term interests like compliance, market entry, sales development, strategy, investor risk minimization, dividend and share buyback policy. About all they can do to a CEO if one of the above items troubles them is fire the CEO, or indicate a lack of support by adjusting compensation. And both of those actions are far from easy. Just look at how hard it is for unhappy shareholders to develop a coalition around an activist investor in order to change the Board — and then actually take action. And, if the activist is successful at taking control of the board, the one action they take is firing the CEO, only to replace that person with someone knew that has all the power of the old CEO.
It is very alluring to think of a CEO and their skills at corporate leadership being applicable to governing. And some have been quite good. Mayor Bloomberg of New York appears to have pleased most of the citizens and agencies in the city, and his background was an entrepreneur and successful CEO.
But, these are not that common. More common are instances like the current Governor of Illinois, Bruce Rauner. A billionaire hedge fund operator, and first-time elected politician, he won office on a pledge of “shaking things up” in state government. His first actions were to begin firing employees, cutting budgets, terminating pension benefits, trying to remove union representation of employees, seeking to bankrupt the Chicago school district, and similar actions. All things a “good CEO” would see as the obvious actions necessary to “fix” a state in a deep financial mess. He looked first at the financials, the P&L and balance sheet, and set about to improve revenues, cut costs and alter asset values. His mantra was to “be more like Indiana, and Texas, which are more business friendly.”
Only, governors have nowhere near the power of CEOs. He has been unable to get the legislature to agree with his ideas, most have not passed, and the state has languished without a budget going on 2 years. The Illinois Supreme Court said the pension was untouchable – something no CEO has to worry about. And it’s nowhere near as easy to bankrupt a school district as a company you own that needs debt/asset restructuring because of all those nasty laws and judges that get in the way. Additionally, government employee unions are not the same as private unions, and nowhere near as easy to “bust” due to pesky laws passed by previous governors and legislators that you can’t just wipe away with a simple decision.
With the state running a deficit, as a CEO he sees the need to undertake the pain of cutting services. Just like he’d cut “wasteful spending” on things he deemed non-essential at one of the companies he ran. So refusing funding during budget negotiations for health care worker overtime, child care, and dozens of other services that primarily are directed at small groups seems like a “hard decision, well needed.” And if the lack of funding means the college student loan program dries up, well those students will just have to wait to go to college, or find funding elsewhere. And if that becomes so acute that a few state colleges have to close, well that’s just the impact of trying to align spending with the reality of revenues, and the customers will have to find those services elsewhere.
And when every decision is subjected to media reporting, suddenly every single decision is questioned. There is no anonymity behind a decision. People don’t just see a college close and wonder “how did that happen” because there are ample journalists around to report exactly why it happened, and that it all goes back to the Governor. Just like the idea of matching employee rights, pay requirements, contract provisioning and regulations to other states – when your every argument is reported by the media it can come off sounding a lot like as state CEO you don’t much like the state you govern, and would prefer to live somewhere else. Perhaps your next action will be to take the headquarters (now the statehouse) to a neighboring state where you can get a tax abatement?
Donald Trump the CEO has loved the headlines, and the media. He was the businessman-turned-reality-TV-star who made the phrase “you’re fired” famous. Because on that show, he was the CEO. He could make any decision he wanted; unchallenged. And viewers could turn on his show, or not, it really didn’t matter. And he only needed to get a small fraction of the population to watch his show for it to make money, not a majority. And he appears to be very genuinely a CEO. As a CEO, as a TV celebrity — and now as a candidate for President.
Obviously, governing body chief executives have to be able to create coalitions in order to get things done. It doesn’t matter the party, it requires obtaining the backing of your own party (just as John Boehner about what happens when that falters) as well as the backing of those who don’t agree with you. ou don’t have the luxury of being the “tough guy” because if you twist the arm to hard today, these lawmakers, regulators and judges (who have long memories) will deny you something you really, really want tomorrow. And you have to be ready to work with journalists to tell your story in a way that helps build coalitions, because they decide what to tell people you said, and they decide how often to repeat it. And you can’t rely on your own money to take care of you. You have to raise money, a lot of money, not just for your campaign, but to make it available to give away through various PACs (Political Action Committees) to the people who need it for their re-elections in order to keep them backing you, and your ideas. Because if you can’t get enough people to agree on your platforms, then everything just comes to a stop — like the government of Illinois. Or the times the U.S. Government closed for a few days due to a budget impasse.
And, in the end, the voters who elected you can decide not to re-elect you. Just ask Jimmy Carter and George H.W. Bush about that.
On the whole, it’s a whole lot easier to be a CEO than to be a mayor, or governor, or President. And CEOs are paid a whole lot better. Like the moviemaker Mel Brooks (another person born in New York by the way) said in History of the World, Part 1 “it’s good to be king.“
by Adam Hartung | Apr 30, 2014 | Current Affairs, Innovation, Leadership
Economic growth is a great thing. When the economy booms people make more, so they pay more income taxes. They spend more, which generates more sales tax. They upgrade homes and buy bigger homes, which have higher property taxes. But even though they pay more dollars in taxes, people are happy because they have more cash, and often the percent of their income spent overall on taxes is lower.
A virtuous circle where everyone benefits. Growth helps the citizens, and the community prospers.
For the industrial era, this virtuous circle was great for Illinois. Farmlands continued to prosper with bountiful crops, while new manufacturing jobs created higher incomes for those leaving the farms. The roadways and airports grew, while income taxes remained almost paltry by national standards. And Illinois could boast some of the country’s best public schools even while property taxes were below national averages. This growth environment kept locals in the state, and attracted people from the plains, other parts of the midwest, south and northeast as well as immigrants from foreign lands. Industrial growth propelled a great environment.
Last week many people were surprised by a recent Gallup survey showing that Illinois leads the USA in people wanting to leave their home state. A whopping 50% of the population would like to leave. And Illinois was 2nd from the top with percentage of people who have high intent to actually leave (at 19%.) So if those two groups overlap Illinois could lose 10% of its population in short order!
If ever there was one, this has to be a wake-up call!
The seeds of this problem were sown many years ago. When manufacturing started going offshore, Illinois was hard hit. A Center for Government Studies report shows that between 2000 and 2010 the number of people employed in Illinois actually declined by 115,000 (1.5%). Farming, wholesale and retail trade jobs fell by 135,000. But far worse was the decline in manufacturing jobs, which dropped by a whopping 311,000. Those were jobs which had been Illinois’ growth foundation for 60 years. And they were the employers who provided the network effect of business-to-business growth that kept the state’s virtuous circle spinning.
Despite the obviousness of this shift in employment – from manufacturing to services – the state reacted timidly to replace that employment base with another growth vehicle. In an era of growing financial services, Illinois failed to develop a strong banking sector, and in fact watched First Chicago/Bank One become JPMorganChase and leave – along with almost all its other large brethren. Despite leading engineering universities (University of Illinois Chicago, University of Illinois Urbana/Champaign, Northwestern, Illinois Institute of Technology, Northern Illinois, etc.) Illinois failed to develop a vibrant angel investing or venture capital community, and digital entrepreneurs were pushed toward the coasts for funding – and increasingly the talent followed them out of state.
It did not take long for the virtuous circle to become a stagnation spiral. As jobs left the state there was lower demand for housing, so people couldn’t sell their houses – especially after 2007. The housing bust that racked America hit the Chicago area, and all of Illinois, harder than many metros. And home prices have failed to recover at anything close to the national average. Chicago still leads major metro areas in percentage of homes with underwater mortgages. To maintain money for schools and roads communities were forced to raise property taxes. Today many people, especially in the 6 Chicago “collar counties,” pay property taxes that are higher than similar homes in Los Angeles and San Francisco! Property taxes that have become among the highest in the country.
With no growth in spending, communities raised sales taxes to generate more income. Today most Illinois citizens pay between 9-10% sales tax, again amongst the highest in the country. Which encourages even greater on-line shopping, and deterioration in the local retail trade.
Road maintenance, and general funding at the state level, pushed the state to raise highway tolls. What were $.25 toll machines on major arteries in the 1990s now cost $.75 (tripled) and the rate is double that ($1.50) if you don’t install an electronic toll device in your auto (sorry out-of-state drivers.)
Lacking growth, state income tax receipts could not keep up with state demands – especially for pensions that depended on both a vibrant stock market as well as higher state income. So Illinois doubled the income tax rate in an effort to fund pensions and avoid bankruptcy.
Yet, despite seeing taxes in all areas increase, residents are subject to declining services. Potholes remain an ever-present danger for drivers. Municipal traffic services (buses and rail cars) have increased prices by multiples, yet there are fewer routes and longer waits for customers.
Which leads to an even worse element of stagnation – aging population. As the jobs for people 16-44 declined, younger people left the state and that demographic actually declined by 3.2% between 2000 and 2010. Those who remained were older, so the Baby Boomers grew by 21%! However, this aged demographic is not in its prime “spending” years, and instead is much more likely to invest for retirement. Thus further dampening the local economy.
And, an aging population means that the number of children declined – dramatically. The “baby bust” resulted in a 6.2% decline in children under age 10 in Illinois last decade. Fewer children means less demand for school teachers, and all the things related to child rearing, further shrinking the economic growth prospects. While this is good news for property tax payers generally, it’s never a good sign to see closed schools simply because there’s no need for them.
Now the spiral becomes a self-fulfilling prophecy. Retiring boomers on a fixed income realize that they cannot afford to live in a state with such high, and rising, property taxes. Especially when other states have fixed taxes that are 1/4 to 1/3 what they pay in Illinois. These retirees (or soon to be retirees) discover lower property tax states often have sales taxes that are half what they pay in Illinois. The economics of staying become increasingly difficult to bear – while the benefits of leaving look ever more promising.
Entrepreneurs and business leaders see little reason to move more jobs into Illinois. When looking at facility locations they realize they can receive the same tax breaks almost anywhere, but employees would prefer the lower tax environment of other states – especially sun belt states like Texas which has no income tax. As Illinois offers tax breaks to dinosaurs like Sears, desperately trying to keep jobs despite failing corporate prospects, it becomes increasingly difficult to lure anyone other than small-employing headquarters locations into the state. And personal taxes keep going up to compensate for these ill-conceived legacy company support programs.
No wonder so many people think about leaving Illinois. And we haven’t even mentioned the weather (do you know how to spell P-O-L-A-R V-O-R-T-E-X?)
Growth is a wonderful thing. Everyone prospers when economic growth provides the virtual circle of more cash. But when the market turns toward the stagnation spiral – well it sucks for just about everyone.
Just ask the folks in Detroit – who are now auctioning off empty homes for $1,000 on the internet just to stop ongoing blight that is wrecking the city like an economic tsunami.
There is no simple answer for a declining economy like Illinois. But this was a situation that took over 2 decades to create. Failure to recognize the decline in manufacturing, and shift to digital economy jobs, left political and industry leaders arrogantly thinking everything would be fine. An inability to invest in creating a replacement powerhouse industry means the state has few resources to invest in anything at all now. Unable to leverage local university innovation with a comprehensive and effective program for funding projects has created a veritable slipper-slide from Illinois to California or New York for new graduates.
The answer will take a some time to develop, and implement. But one thing is clear, if Illinois’ leaders don’t come up with something soon there will be even fewer people around, and even greater problems developing. It would be easy to dismiss this Gallup poll, or let community pride keep one from taking its implications seriously. But that would be an even worse mistake. This is a serious wake-up call.
by Adam Hartung | May 10, 2011 | Current Affairs, In the Whirlpool, Innovation, Leadership, Lifecycle
Sears is threatening to move its headquarters out of the Chicago area. It’s been in Chicago since the 1880s. Now the company Chairman is threatening to move its headquarters to another state, in order to find lower operating costs and lower taxes.
Predictably “Officals Scrambling to Keep Sears in Illinois” is the Chicago Tribune headlined. That is stupid. Let Sears go. Giving Sears subsidies would be tantamount to putting a 95 year old alcoholic, smoking paraplegic at the top of the heart/lung transplant list! When it comes to subsidies, triage is the most important thing to keep in mind. And honestly, Sears ain’t worth trying to save (even if subsidies could potentially do it!)
“Fast Eddie Lampert” was the hedge fund manager who created Sears Holdings by using his takeover of bankrupt KMart to acquire the former Sears in 2003. Although he was nothing more than a financier and arbitrager, Mr. Lampert claimed he was a retailing genius, having “turned around” Auto Zone. And he promised to turn around the ailing Sears. In his corner he had the modern “Mad Money” screaming investor advocate, Jim Cramer, who endorsed Mr. Lampert because…… the two were once in college togehter. Mr. Cramer promised investors would do well, because he was simply sure Mr. Lampert was smart. Even if he didn’t have a plan for fixing the company.
Sears had once been a retailing goliath, the originator of home shopping with the famous Sears catalogue, and a pioneer in financing purchases. At one time you could obtain all your insurance, banking and brokerage needs at a Sears, while buying clothes, tools and appliances. An innovator, Sears for many years was part of the Dow Jones Industrial Average. But the world had shifted, Home Depot displaced Sears on the DJIA, and the company’s profits and revenues sagged as competitors picked apart the product lines and locations.
Simultaneously KMart had been destroyed by the faster moving and more aggressive Wal-Mart. Wal-Mart’s cost were lower, and its prices lower. Even though KMart had pioneered discount retailing, it could not compete with the fast growing, low cost Wal-Mart. When its bonds were worth pennies, Mr. Lampert bought them and took over the money-losing company.
By combining two losers, Mr. Lampert promised he would make a winner. How, nobody knew. There was no plan to change either chain. Just a claim that both were “great brands” that had within them other “great brands” like Martha Stewart (started before she was convicted and sent to jail), Craftsman and Kenmore. And there was a lot of real estate. Somehow, all those assets simlply had to be worth more than the market value. At least that’s what Mr. Lampert said, and people were ready to believe. And if they had doubts, they could listen to Jim Cramer during his daily Howard Beale impersonation.
Only they all were wrong.
Retailing had shifted. Smarter competitors were everywhere. Wal-Mart, Target, Dollar General, Home Depot, Best Buy, Kohl’s, JCPenney, Harbor Freight Tools, Amazon.com and a plethora of other compeltitors had changed the retail market forever. Likewise, manufacturers in apparel, appliances and tools had brough forward better products at better prices. And financing was now readily available from credit card companies.
Surely the real estate would be worth a fortune everyone thought. After all, there was so much of it. And there would never be too much retail space. And real estate never went down in value. At least, that’s what everyone said.
But they were wrong. Real estate was at historic highs compared to income, and ability to pay. Real estate was about to crater. And hardest hit in the commercial market was retail space, as the “great recession” wiped out home values, killed personal credit lines, and wiped out disposable income. Additionally, consumers increasingly were buying on-line instead of trudging off to stores fueling growth at Amazon and its peers rather than Sears – which had no on-line presence.
Those who were optimistic for Sears were looking backward. What had once been valuable they felt surely must be valuable again. But those looking forward could see that market shifts had rendered both KMart and Sears obsolete. They were uncompetitive in an increasingly more competitive marketplace. As competitors kept working harder, doing more, better, faster and cheaper Sears was not even in the game. The merger only made the likelihood of failure greater, because it made the scale fo change even greater.
The results since 2003 have been abysmal. Sales per store, a key retail benchmark, have declined every quarter since Mr. Lampert took over. In an effort to prove his financial acumen, Mr. Lampert led the charge for lower costs. And slash his management team did – cutting jobs at stores, in merchandising and everywhere. Stores were closed every quarter in an effort to keep cutting costs. All Mr. Lampert discussed were earnings, which he kept trying to keep from disintegrating. But with every quarter Sears has become smaller, and smaller. Now, Crains Chicago Business headlined, even the (in)famous chairman has to admit his past failure “Sears Chief Lampert: We Ought to be Doing a Lot Better.”
Sears once built, and owned, America’s tallest structure. But long ago Sears left the Sears Tower. Now it’s called the Willis Tower by the way – there is no Sears Tower any longer. Sears headquarters are offices in suburban Hoffman Estates, and are half empty. Eighty percent of the apparel merchandisers were let go in a recent move, taking that group to California where the outcome has been no better. Constant cost cutting does that. Makes you smaller, and less viable.
And now Sears is, well….. who cares? Do you even know where the closest Sears or Kmart store is to you? Do you know what they sell? Do you know the comparative prices? Do you know what products they carry? Do you know if they have any unique products, or value proposition? Do you know anyone who works at Sears? Or shops there? If the store nearest you closed, would you miss it amidst the Home Depot, Kohl’s or Best Buy competitors? If all Sears stores closed – every single location – would you care?
And now Illinois is considering giving this company subsidies to keep the headquarters here?
Here’s an alternative idea. Using whatever logic the state leaders can develop, using whatever dream scenario and whatever desperation economics they have in mind to save a handful of jobs, figure out what the subsidy might be. Then invest it in Groupon. Groupon is currently the most famous technology start-up in Illinois. Over the next 10 years the Groupon investment just might create a few thousand jobs, and return a nice bit of loot to the state treasury. The Sears money will be gone, and Sears is going to disappear anyway. Really, if you want to give a subsidy, if you want to “double down,” why not bet on a winner?
It really doesn’t have to be Groupon. The state residents will be much better off if the money goes into any business that is growing. Investing in the dying horse simply makes no sense. Beg Amazon, Google or Apple to open a center in Illinois – give them the building for free if you must. At least those will be jobs that won’t disappear. Or invest the money into venture funds that can invest in the next biotech or other company that might become a Groupon. Invest in senior design projects from engineering students at the University of Illinois in Chicago or Urbana/Champaign. Invest in the fillies that have a chance of winning the race!
Sentimenatality isn’t bad. We all deserve the right to “remember the good old days.” But don’t invest your retirement fund, or state tax receipts, in sentimentality. That’s how you end up like Detroit. Instead put that money into things that will grow. So you can be more like silicon valley. Invest in businesses that take advantage of market shifts, and leverage big trends to grow. Let go of sentimentality. And let go of Sears. Before it makes you bankrupt!
