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November 16, 2009

A Failure We Might Learn From

I believe in studying failure rather than success. My favorite wall poster (I have a copy both in my office and in my home) is Minart's chart depicting Napoleon's failure in Russia. Napoleon was such a smart guy, and yet he projected himself directly into this whopping failure.

As I've written before in my review of "The Logic of Failure" (excellent book, btw), there's a lot of failure out there and it's often well documented.

Success, on the other hand, is talked about more but often wrapped in myth and obscurity. Success sells - if you look at the "management" section at a bookstore, there's a lot more "success stories" then "debacle diaries™". It seems like nobody succeeds because of "good luck", usually success is driven by the right blend of personal virtue, a shoeshine, and a ready smile.

Curiously, a lot of failures are attributed to "bad luck" or to other people, and very few failures are assigned to personal flaws, hubris, or bad decisions. You'd think that luck would have a balanced 50/50 impact, but in the literature it seems like luck only causes failures. Anyway, I like to study failures. Here's a true story of a failure from this week's news:

In 1995, a registered nurse named Susette Kelo bought a small, pink, 100-year old clapboard house in the Fort Trumbull neighborhood of New London, Connecticut. New London was (and remains) a deteriorating town that has seen a long time pass since its glory days with the whaling industry. A big fiscal problem for New London is that most of its land is held by three tax-exempt colleges.

 

Hoping to improve the city, New London created a "New London Development Corporation" (NLDC) which planned to seize a 9-acre neighborhood in order to induce Pfizer to develop a 26-acre industrial park. Pfizer would also receive an 80% discount on their real estate taxes for 10 years.

Under the threat of seizure, most homeowners sold to the NLDC. Seven homeowners resisted the seizure in the courts. Susette Kelo became the spokesman for the holdouts, who argued that eminent domain was appropriate for public works — highways, trains, and public health — but not for economic development.

In Kelo v. the City of New London, a 5-to-4 Supreme Court majority opinion held that promoting economic development met the “public use” clause of the Fifth Amendment and supported the condemnations. The NY Times editorial board, by the way, really liked the Supreme Court decision.

In a dissenting opinion Justice Sandra Day O’Connor said, “Under the banner of economic development, all private property is now vulnerable to being taken and transferred to another private owner, so long as it might be upgraded.” Justice Clarence Thomas called New London’s plan “a costly urban-renewal project whose stated purpose is a vague promise of new jobs and increased tax revenue, but which is also suspiciously agreeable to the Pfizer Corporation.”

The houses were destroyed, the families forced to move, and the neighborhood was erased. A local citizen bought Kelo's condemned house for $1 and moved it to another location, where it now bears a sign indicating its provenance:


This is what the peice of land that Kelo's house occupied now looks like:


After the houses were destroyed, nothing happened. No R&D complex, no gentrified condos, no influx of high-net-worth PhDs. Nothing. This week brought news from Pfizer:


Pfizer announced this week their intention to abandon the project and close the offices it has in New London; the homes were razed but the research park and office complex was never built. What happened? There was a change; Pfizer acquired Wyeth for $67 billion, and the NewCo had surplus office space. The corporate priority had shifted. They didn't need that land anymore. From the NY Times:
For its part, Pfizer said it had no stake in the outcome of the Kelo case nor any interest in the development of the land that was acquired by eminent domain, according to a statement provided by a spokeswoman, Liz Power.


Remarkably, Pfizer's exit from New London is synchronized exactly with the expiration of their tax discount. Where are they going? Across the river to Groton, where the discount persists.

From the 11/13 New York Times:
From the edge of the Thames River in New London, Conn., Michael Cristofaro surveyed the empty acres where his parents’ neighborhood had stood, before it became the crux of an epic battle over eminent domain. “Look what they did,” Mr. Cristofaro said on Thursday. “They stole our home for economic development. It was all for Pfizer, and now they get up and walk away.

I mention this for at least these reasons:
  • I really am a student of failure, I think failure teaches more than success.
  • I think this shows what happens when you deal with Corporations. With businesses you can do your due diligence and rely on them; there's often a real person who's name is on the shingle. Generally people are trustworthy if you build the deal right. Corporations, on the other hand, are amoral legal entities chasing continually evolving definitions of profitability, strategy, and their market. Businesses have skin in the game; corporations don't. I'd like to restate this into an expression you may see here again: Business people good; corporations bad.
  • I think this shows what happens when Government (in this case, the City of New London) set up quasi-agencies to do hard things. Government is accountable; the voters select the players, and the voters will fire them at the next election if they screw up. The development corporation had the opportunity to take action at no personal risk, without accountability, and - by the way - they're only successful if change happens. That's a recipe for a crapshoot, and usually these situations are not amenable to those odds.
  • I see echoes of USAirways in this.

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