Automobile industry and trade ; Federal Reserve District, 5th

Charles Gerena

English

Research Papers in Economics

FISCAL SWEETENERS 
Did North Carolina Lure Dell Too Much? 
I
n 2004, North Carolina and Virginia were hoping to
attract Dell to construct a computer assembly plant
within their borders. But there was a stark difference in the
incentive packages offered by both states: North Carolina
presented Dell with more than $270 million in tax breaks
and other incentives while Virginia put $37 million on the
table. North Carolina eventually won the deal and the plant
is now operating in Winston-Salem. But looking back at 
the large discrepancy in the offers has prompted the
Corporation for Enterprise Development and the North
Carolina Budget and Tax Center, both nonprofit organiza-
tions, to study whether the state is getting its money’s worth. 
The report says that much of the difference between the
two packages was the result of the set of assumptions and the
models used to measure the economic impact of the Dell
plant. For instance, the state of North Carolina’s model relies
heavily on a projected sales figure, $2.3 billion annually, to cal-
culate the factory’s impact on Gross State Product (GSP) and
state revenues. The authors of the report think that this sales
estimate is too high. It implies that each Dell worker 
would add $175,000 to the GSP, which is more than twice
what the average job in North Carolina contributed 
in 2004.
Moreover, they feel that a model which  is mostly driven
by a sales figure might not be appropriate for a multistate
firm. While a portion of the plant’s revenues that goes
toward wages and salaries will likely stay in the state, the
profits generated by the factory will probably go back to 
the head company or be paid out to shareholders who don’t
necessarily live in North Carolina. 
To arrive at what they feel are better estimates of the
plant’s impact, the authors build various scenarios that
adjust some of the assumptions, tweak some of the features
of North Carolina’s model, and use an alternative one devel-
oped by the Iowa Department of Economic Development.
They find that the estimated values from this exercise are
nowhere near the $24.5 billion addition to the GSP and the
$707 million net change in state revenues projected by the
Commerce Department over the 20-year life of the project.
The report’s highest estimate shows a mere $8 billion 
addition to GSP and a fall in state revenues of $72 million.
But the authors say that the most obvious omission in the
state’s economic impact model is the failure to take into
account whether firms would have chosen North Carolina
even without an incentive package. Such a consideration
would call for some downward adjustment in the state’s
offer, although it may not be easy to find this critical point.
Even if the report casts some doubt on the power 
of incentives, it does not altogether discourage the use 
of subsidies in attracting businesses. It asks policymakers to
reconsider the methods and assumptions they use. “What is
needed, instead, is for the state of North Carolina to be a
savvy investor — for its subsidies to match and ideally surpass
its competitors not in largess, but in acumen,” says 
the report. But the Commerce Department stands by its
methods. “We think that the model and the numbers we
used are accurate,” says Deborah Barnes, a spokeswoman for 
the department.
Matt Martin, a regional economist at the Richmond Fed,
says that state officials can make a key mistake when they
fail to compare the results of an economic impact model to
the next best alternative use of public funds. “We want to
make a comparison of what the world looks like with 
and without this [project], but not compared with nothing,”
he says.
Martin thinks that another way of gauging whether a
state is offering too much is to compare the average salary
that these jobs will fetch to the cost per job of the incentives
offered by the state. If that cost is a substantial fraction of
what a worker stands to receive, then the state may not be
getting its money’s worth. — VANESSA SUMO
NO MORE GAS GUZZLERS IN VIRGINIA AND WASHINGTON, D.C.?
Hotbeds of Hybrid Sales
E
veryone’s talking about hybrid cars, and sales of these
electric/gasoline-powered vehicles have increased
every year since they were introduced in 2000. Virginia has
ranked among the top-five states for hybrid vehicle registra-
tions since 2003, while Washington, D.C., had the
fourth-largest number of registrations among metro regions
in 2006. Part of that demand may have been due to a 
perk that hybrid car owners had until last July — they could
use high-occupancy vehicle lanes to avoid congestion on
Interstates 95 and 395 in Northern Virginia. Also, hybrid
owners qualify for a federal tax credit of up to $3,150,
depending  on the make and model of the vehicle and when
it was purchased.
Could the nationwide popularity of hybrids have 
something to do with record-high prices at the gas pump?
That may seem like a no-brainer. In fact, the relationship
between gasoline prices and vehicle preferences isn’t 
that simple. Although gasoline prices rose through August
2006, hybrid growth slowed. Registrations of hybrid vehi-
cles increased 28 percent to 254,545 in 2006, compared with
140 percent year-to-year growth in 2005 and 91 percent
growth in 2004, according to data from automotive industry 
consultant R.L. Polk & Co.
Automakers claim that Americans aren’t willing to pay a
large price premium for better fuel economy. Michael Allen,
director of public affairs for the Virginia Automobile Dealers
10 Region Focus • Spring 2007
SHORTTAKES
RF SPRING 07_1-51_Rev7.9  7/12/07  3:05 PM  Page 10Association, says his members have made a similar observa-
tion. “Most people are looking for something that is better
than what they’ve got,” Allen notes. But new models of 
traditional cars have been introduced that fare better
against hybrid vehicles. 
“A lot of people come to the lot looking at hybrids, [but]
when they see the fuel economy of other vehicles [that sell] at
a lower cost, they are buying those vehicles instead of 
the hybrids,” Allen explains. Even SUV lovers can find new 
models with improved mileage, particularly “crossover” vehi-
cles that are built on a car chassis and use a car powertrain. 
Also, the demand for gasoline tends to be inelastic in the
short run; that is, the quantity consumed doesn’t change
much when prices change. However, it becomes more elastic
in the long run as elevated prices prompt consumers to
rethink driving habits. Demand for fuel-efficient cars like
hybrids would be expected to follow a similar pattern.
There is evidence of this trend based on the preliminary
results of a study by economist Sarah West at Macalester
College. West found that if gasoline prices double, sales of
minivans, trucks, and SUVs fall. However, the differences
weren’t statistically significant until she used lagged prices.
When someone thinks about buying a car, current fuel costs
aren’t the only consideration. Changes in prices over time
have more influence.
There are other factors that influence buying decisions.
George Hoffer, an economist at Virginia Commonwealth
University who has studied the automobile industry, says
zero-percent financing and other incentives can boost the
sales of gas guzzlers even when fuel prices are rising and
demand for better mileage increases. SUVs and other light
trucks have wider profit margins than other automobiles,
giving automakers more room to reduce prices while still
making a hefty return.
Car buying decisions have always involved a combination
of personal preference and practicality. While hybrids are
attracting more interest for their road performance and
styling as well as their fuel economy, they still can’t compete
on price. Only the Toyota Prius is competitive, Allen says,
but that’s because the company eats the added production
costs. General Motors and Ford aren’t in the financial 
position to do the same thing. — CHARLES GERENA
HURRY UP AND WAIT
Competition at Airports Affects Delays
W
hile airline delays got worse in February 2007, with
33 percent of flights late, performance improved in
the spring. Flights were late 26 percent of the time in March;
24 percent in April. For all of 2006, about 25 percent of the
nation’s flights got in late. 
Delays and cancellations frustrate travelers. About 67
percent of flights arrived on time in 2006 at the Columbia,
S.C., Metropolitan Airport, compared to the national 
average of 75 percent. Across the Fifth District, several
smaller airports’ punctuality in 2006 was worse than 
the national average, according to the U.S. Bureau of
Transportation Statistics (BTS).
That’s bad news for travelers making summer plans, a
time when thunderstorms, for example, can wash out flights
and spur cancellations. Passenger traffic, according to the
BTS, rose by 1.7 percent during the first two months of 
2007 over the previous year and continues to grow while 
airline staffing has declined.
Late arrivals vary from airport to airport. Although 
nonhub airports generally have fewer delays, Richmond’s
Richard Byrd International Airport’s flights were late 
32 percent of the time. (A flight is considered delayed if it
arrived at or departed the gate 15 minutes or more after 
its scheduled time.) Among larger airports, one of the best
performances was at Baltimore/Washington International
Airport where nearly 80 percent of flights arrived within that
15-minute window. 
Reasons for delays are more complicated than they
appear. Nicholas Rupp, an economist at East Carolina
University in Greenville, N.C., has studied airline on-time
performance using a variety of data. People expect smaller
airports to be less congested with fewer delays. While that’s
generally true, he says, when a hub airline services the 
airport, it can create more congestion.
Competition influences performance, too, with airports
served by a large number of carriers with equal market 
share doing a better job. Airports dominated by a single 
carrier, like Charlotte with US Airways, or Atlanta with
Delta, may not perform as well. Those airports tend to have
more frequent and longer delays, Rupp says. He and 
co-authors Douglas Owens and Wayne Plumly have found 
evidence of lower service quality on less competitive 
airline routes.
But airports that service more than one hub airline 
also can be congested. Since many flights originate from 
hub airports, that can translate into delayed flights at 
small airports.
Smaller airports also have higher cancellation rates,
“because they’re less able to handle adverse circumstances
than the big airports. If a bad snowstorm comes through, a
big airport is better equipped to handle it. Or a maintenance
issue, a big airport has better access to backup crews, planes,
parts, and maintenance, whereas small airport don’t,” 
says Rupp.
Part of the reason for delays at all airports is simple supply
and demand. More carriers are offering more flights, but
without a ramp-up in runway capacity. “That is something
that we’re going to hear more about,” he says. “They don’t
build many new airports.” — BETTY JOYCE NASH
Spring 2007 • Region Focus 11 Spring 2007 • Region Focus 11
CORRECTION: In the Winter 2007 Region Focus, the story
“Options on the Outs” incorrectly explained the meaning of
“out of the money” employee stock options. Such options
have exercise prices above the trading prices, which is why
they are worthless to the holders.
RF SPRING 07_1-51_Rev7.9  7/12/07  3:05 PM  Page 11

No more gas guzzlers in Virginia and Washington, D.C.? : Hotbeds of hybrid sales

http://www.richmondfed.org/publications/research/region_focus/2007/spring/pdf/short_takes.pdf

No more gas guzzlers in Virginia and Washington, D.C.? : Hotbeds of hybrid sales

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics