GNP bankruptcy has far-reaching implications

During the last week I have followed with great interest the story unfolding in the Millinocket area. If what I read in the local papers is accurate, a post-mortem case analysis of Great Northern Paper’s bankruptcy in one of my classes could serve as a classic example of managerial nontransparency and ethical disregard. The purpose of this commentary is to shed light on the importance of paper and related manufacturing in Penobscot County. It also offers an estimate of the impact a permanent closure of the GNP mills would have on the county.

In 2000, manufacturers in Penobscot County paid almost $355 million in income to their employees. Compared to all income paid to employees in the county, manufacturers contributed 14.1 percent. Thus, roughly $1 out of every $7 paid to Penobscot County employees comes from manufacturing.

GNP operates in a subsector of the manufacturing sector called “paper and allied products.” Historically, and today, this subsector is the largest contributor to manufacturing income paid in Penobscot County. In 2000, $156 million, or roughly 45 percent of all manufacturing income paid to employees, was derived from paper and allied product manufacturing. From available figures and graphs, the following observation can be made: Manufacturing activity is an important contributor to Penobscot County’s economy and allied product manufacturing is an important contributor to manufacturing activity in that area.

What differentiates export sectors like manufacturing from other sectors in the economy is their impact on other local economic activity. Many people, especially in manufacturing centers like Millinocket, understand this intuitively. They do so because their owners buy inputs from local small businesses, like pulp harvesters, and they spend their money at the local supermarket and pay taxes to support schools and teachers.

Economists measure these local economic activity impacts using multipliers; two common ones are employment and income. For paper and allied products manufacturing, the income multiplier is around 2.5. This means that for every dollar in income paid to the paper millworker, a total of $2.50 becomes present in the local economy; one dollar for the millworker and $1.50 for other workers, as the other dollar spent by the millworker circulates in the local economy. The opposite is also true. When the millworker’s dollar is removed, the total loss is $2.50. Included in the table is a rough estimate of what a permanent closing of the GNP mill might cost Penobscot County.

The table printed below shows that $78 million will be lost from Penobscot County’s economy if the mills close. For the year 2000, employees working in businesses located in Penobscot County earned a total of $2,507,180,000 in work income. The $78 million represents 3.1 percent of this income. This may not seem like much, but income from work in Penobscot County only declined once between 1980 and 2000, between 1990 and 1991 during a real recession. Then it fell by only 1.3 percent.

The analysis presented above is not intended to be exhaustive or definitive. Instead, the intention here is to paint a more detailed economic picture than what has been presented at the public level. In the days and weeks to come, I hope state and federal officials, along with experts from the private sectors and labor unions, will assemble a task force to examine the future economic viability of the GNP mills. An economist experienced in this area should be hired to objectively assess the market and the mill’s potential for profitability operating in that market.

This issue’s implications go beyond just Millinocket, Penobscot County and northern Maine. If Maine seeks to stem or reverse the tide of its young citizens exiting the state and values the role of paper manufacturing in its economy, it should pay attention to GNP’s bankruptcy and its implications.

Robert K. Roper is an associate professor of business management at the University College of Bangor, University of Maine at Augusta. He is the author of “The Economy of Maine Multimedia Program” (CD-ROM, 1997), published by the Margaret Chase Smith Center for Public Policy, University of Maine.