Simple Minds 

"The Tennessean" takes on the Dell deal

"The Tennessean" takes on the Dell deal

He’s been their ace in the hole. As Tennessean staffers have defended reporter Sheila Wissner’s devastating analysis of the Dell deal—a study that concluded the costs of bringing the PC manufacturer to Nashville would outweigh the benefits by over $70 million—the newspaper has repeatedly reported that Reuben Kyle, the mayor’s very own hand-picked economist, agrees with the newspaper’s study. Kyle’s endorsement, perhaps more than anything else in its study, has been The Tennessean’s most compelling piece of evidence that the Dell deal may not be good for the city.

And the paper knows it. For instance, as the paper responded to furious criticism of the analysis from both Mayor Bredesen and Tennessee’s economic development commissioner, Bill Baxter, special projects editor Robert Sherborne told The Commercial Appeal: “The mayor’s own analyst reviewed what we’ve done and said he couldn’t fault it.”

Actually, that’s not true.

The Scene contacted Kyle, an economist at MTSU, who indeed did speak with Wissner several times before the publication of her analysis. “When we started talking about indirect costs, I told her it was a legitimate question to ask,” Kyle said of the Tennessean study. “But if I were to do this analysis, I would go about it a different way,” he says. “I don’t endorse her numbers, nor do I necessarily think that she estimated the costs accurately.”

There goes the ace.

In the wake of The Tennessean’s analysis of the Dell deal, which first ran two Sundays ago, several Council members who once supported the initiative are reconsidering their votes. The mayor has launched a blistering counterattack at the newspaper, while the three main mayoral candidates are trying to reconcile their earlier support of the Dell deal with The Tennessean’s rather negative findings. For the first time in recent memory, our morning daily has shaken up city hall.

But, regardless of where you stand on the surprisingly divisive Dell issue, or how much you enjoy seeing the prickly Mayor Phil finally get blistered by someone other than Bruce Barry or Tim Chavez, The Tennessean’s analysis of the deal’s indirect costs is riddled with specific shortcomings. More tellingly, the morning daily failed to convey to the reader the tremendous amount of rough estimation, if not raw guesswork, that went into its study.

Here is the crux of the problem: Calculating incentive-based deals like the Dell package is not an exact science. While it’s relatively easy to determine the direct costs that come with the deal’s tax breaks, land giveaways, and incentive clauses, it’s infinitely more difficult to evaluate the deal’s indirect costs, which essentially include the impact on the city’s services and infrastructure.

There are, however, two ways to study indirect costs: The first—which is used by The Tennessean—is called the average cost method, in which you determine how much it costs the city to provide municipal basics to the average citizen. You simply take the city budget, subtract the amount of money that goes to debt service, and divide the remainder by the number of people who live in the county. That figure is essentially how much it costs to provide services like police protection, fire protection, and garbage collection to the average citizen. It is an average cost of government for each Davidson County resident.

After that average cost figure is in hand, you simply multiply it by the number of people a company like Dell will bring to the area. Voilá! There are your indirect costs.

Estimating that Dell’s relocation would bring 7,473 new residents to Davidson County, The Tennessean calculated the total costs of the deal at a whopping $171.3 million over a 40-year period. This figure is way above the $97 million in net benefits the deal is projected to bring over an identical time period.

The genius of The Tennessean’s average cost method is that it’s relatively easy to do. Any reporter with a rudimentary knowledge of high school mathematics can calculate how much it costs to provide services to the average citizen and, correspondingly, how much it would cost the city to absorb new residents. The problem, however, is that the average cost method fails to consider that as a developed city adds new residents, the cost of providing services to each resident declines. This is a result of so-called “economies of scale.” Quite frankly, anyone who covers local government should realize that an influx of new residents will not affect all Metro departments in the same way. That is to say, a rise in the local population may strain the Water Department, but it may have no effect whatsoever on the Parks Department.

Rather than use an average cost method, many economists prefer a so-called “marginal cost” method for evaluating deals like Dell’s. In a marginal cost analysis, you must figure out what parts of government spending would increase because of the population growth. Spreading out 7,000 or so residents throughout Metro may very well stress the school system—although probably not by a predictable amount—but it won’t have any affect on the public library system, for instance.

The problem with the marginal cost method is that you can’t simply plug the variables into your desktop computer. Says Kyle, who is a proponent of marginal cost analysis: “It’s a lot easier to figure out average costs than marginal costs. (Calculating) marginal costs involves a much greater knowledge of Metro Government.”

Some economists, however, do believe that the average cost method can accurately estimate the impact of a package like the Dell deal. “Incremental (marginal) costs and average costs are very much the same thing,” says Malcom Getz, Vanderbilt’s director of undergraduate studies in economics and business administration. Getz was also a quoted source in The Tennessean’s story. “When you go to larger cities, you see a larger tax burden. That leads me to believe average costs and incremental costs are very close to the same.”

There is no clear consensus among economists about how best to study a deal like Dell’s. But in no story (that I could find) did The Tennessean try to explain the difference between the average and marginal cost method. Admittedly, it’s a daily paper, not a stuffy, economic journal. But the paper can’t have it both ways. If it’s going to purport to analyze the financial impact of a 40-year, multimillion dollar deal, it should evaluate the widely acknowledged limits of its method.

And in all fairness, if The Tennessean is going to stress the indirect costs of Dell’s relocation, it should also examine the indirect benefits. While unemployment in Nashville is already low, Dell’s relocation can help keep it that way. And with low unemployment typically comes reduced crime rates and lower demands on social services including health care. Finally, a major Fortune 500 employer like Dell might spur small businesses to offer more competitive benefits and salaries to retain their employees. Calculating the Dell deal’s indirect benefits may sound disingenuous, but it’s not much different than estimating its indirect costs.

Throughout his nearly 8-year reign in office, Mayor Bredesen has received a free ride from the morning daily. The paper has endorsed him three times for mayor and once for governor, while supporting nearly every one of his pet municipal projects. That our morning daily is finally giving him a fight is refreshing, if long overdue. But the paper’s vigilance does not excuse a half-baked study of what is probably the most important business relocation here in quite some time.

Stars and martyrs

♦ Reporter Will Pinkston will leave The Tennessean in mid-July to go work for The Wall Street Journal’s “Southeast Regional Edition” based in Atlanta. Pinkston broke a host of major stories including the developments in the Dell deal and MDHA’s questionable real estate transactions.

♦`In last week’s column, I criticized a political story by “John” Yates, calling on him and his editors to get off their “lazy asses” and report on the differences between the mayoral candidates. Yates later called and suggested that I too should get off my lazy ass and spell his name correctly. Fair enough—Mr. Yates’ first name is Jon.

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