The Cost Of Luring Jobs

Over the past decade or so, like this blog, Americans’ political discussions and debates have focused on national issues and the increasing gridlock in Washington. There are several reasons for that. The decline of local journalism  has meant that local issues that might trigger local activism are increasingly less likely to be covered, while more national media highlights the growing dysfunction of the federal government. And many of the challenges we face are national–or global–in scope.

Although it’s understandable that local policies tend to fly “under the radar,” that doesn’t make those issues unimportant. For one thing, individual citizens who are powerless to change goings-on in Washington can affect many local issues.

Governing Magazine recently focused on one such issue: economic development.

The article pointed out what even casual observers have long suspected, and what the data confirms–most state and local governments approach economic development in costly and unproductive ways. The article’s subhead really sums up the conclusion: “Governments can’t seem to stop offering huge incentives to corporations, even though it’s clear they don’t have much effect on companies’ decisions. Does paying $288,000 for one job really make sense?”

The rather obvious answer to that question is no. But economic development officials are responding to the pandemic by doubling down–ignoring overwhelming evidence and instead doing more of what they know. (This situation reminds me of America’s long, counterproductive drug war. As I said in a speech some years ago, if a doctor performed a hundred identical surgeries and every single patient died, would you insist that the proper response was to have him do more of them? The logic is the same.)

Seeking to create jobs and help their local economies climb out of the pandemic recession, state and local officials are raising the ante on subsidies to big corporations. But if history is any guide, ever-increasing tax breaks and other economic development incentives will likely lead to slower — not faster — growth. Given that state and local governments have already been wasting $95 billion every year in an economic race to the bottom, more subsidies will just dig the hole deeper.

The article highlighted North Carolina’s largest-ever subsidy: $865 million for an Apple  research and development center promising 3,000 new jobs. But Apple would probably have chosen North Carolina in any event–without those subsidies.

Smart companies like Apple understand that the real long-term attraction is not subsidies so much as the great economic foundation North Carolina has built: investments in top-notch research universities, a tech-ready workforce and a business-friendly environment. North Carolina is indeed a perfect place to locate a cutting-edge research center. Site Selection magazine has consistently ranked it as a top state for business climate.

Interestingly, when Apple located a facility in Austin, Texas gave the company about $10,000 per job. North Carolina promised some $288,000 per job.

Research tells us that only one in eight subsidies effects a change to a location or expansion decision, and that some 90 percent are a complete waste of money. Companies happily accept the money, but their decisions are based far more on the availability of a talented local workforce, region-specific advantages and access to supply chains and customers.

For example, Google and Fidelity Investments recently announced expansions to their existing operations in the Research Triangle — without asking North Carolina for subsidies. Both emphasized the area’s skilled workforce as the primary draw.

The consensus of academic research is that corporate handouts don’t create broad benefits for the community providing them. That’s because subsidies motivate wasteful corporate investments and create public funding trade-offs. Every dollar spent on subsidies is a dollar that can’t be used to improve infrastructure, education or public safety, or to cut taxes on smaller businesses and households.

This expensive and unnecessary fiscal competition between local units of government adds absolutely nothing to the national economy–after all, nationally, moving enterprise A from city B to city C is a zero-sum exercise. And as the article notes, paying companies to move to your state siphons off funds that could be used for things that actually make your state attractive to those companies–like a first-rate public education system that not only turns out a skilled workforce, but is an amenity valued by the management folks who would be locating in your state.

The evidence shows that one of the most persuasive “subsidies” a state can offer is an attractive quality of life.

When policymakers ignore evidence, when they make decisions on the basis of ideology–or worse, when policy decisions are simply the result of  “we’ve always done it this way” or “everyone else does it this way”–the costs aren’t limited to the dollar amount of the subsidies.

 

 

19 thoughts on “The Cost Of Luring Jobs

  1. Perhaps states like North Carolina would rather spend $288,000 on a subsidy to Apple than spend it on public education. After all, who knows how much critical race theory would be taught if more teachers could be hired?

  2. “Yea, but everybody else is offering Amazon economic development benefits…”

    This is the rationalization of economic developers to justify their paycheck from _______.

    The legislation that Todd Young was allowed to put his name on was supposed to address our tech hubs, which are concentrated in several of the top markets in the USA. Of course, the federal government would spend billions to create new tech hubs in areas of the Midwest and South that are suffering from talented kids leaving for these hot markets. However, the MIT and Stanford researchers behind the bill added a neat twist where the local communities benefited from these tech hubs, but apparently, it’s been watered down or absorbed in another larger bill that Mnuchin is destroying.

    What the researchers from MIT discovered in the tech hubs within the USA is economists (and economic developers) don’t factor in other costs like gentrification, etc. When you conveniently overlook all the costs, the taxpayers don’t understand the big picture. When teachers, EMTs, social workers, etc. cannot afford to live in the markets where they serve, you’re going to have problems.

    Sadly, without a strong and vibrant local free press, the tough questions about the impact on the community are ignored. What taxpayers get is a press release from the economic developers or Chamber group announcing the great news and the local stenographers just print it out.

  3. “Although it’s understandable that local policies tend to fly “under the radar,” that doesn’t make those issues unimportant. For one thing, individual citizens who are powerless to change goings-on in Washington can affect many local issues.”

    Taking it down to where the cheese binds; the $300 weekly “subsidy” to the unemployed early in the Pandemic closings has carried over now that businesses have reopened – with mask and social spacing remaining in most – the signs posted inside and outside virtually all businesses begging for help are ignored. Will that change with the end of those $300 weekly incomes? In my neighborhood Ace Hardware is accepting walk-in applicants as well as those filling out applications. Finding knowledgeable employees to help shoppers at all Ace stores is now lacking. Kroger still has only two cashier lines open with lines now forming at self-checkout and those home-shoppers blocking aisles with their huge carts and shopping lists, pallets of goods waiting to be shelved and stockers wheeling in more goods are blocking aisles. The CVS is hiring at $15 per hour stating salary, paid training, and all levels of employee to have benefits. It took me 4 DAYS to get a prescription filled due to lack of staff and falling days behind in filling prescriptions.

    With the end of the $300 weekly paychecks for the unemployed, will the individual citizens begin changing these local issues by applying for the thousands of job openings in all cities? It isn’t the subsidies to corporations causing the local problems but the individual citizens who head for concerts and other entertainment venues but won’t apply for available and much needed employee positions in local businesses. And don’t start crying about increasing minimum wage levels; that battle has never ended, maybe – maybe – applying for those open positions would find the beginning of a change in that issue. If we can’t lure applicants for employment in established businesses, how can we lure new businesses without working people?

  4. I will have to say that my wife and I often talk about how counter-intuitive economics can be.

    What seems obvious, like JoAnn’s example of extra benefits shrinking the labor pool, is often much more nuanced than what would seem oblivious, and in that case is only a small part of the current situation.

    I can believe that government incentives for corporate relocations is just another form of corporate subsidy that wastes taxpayer dollars.

    This mornings headline in the Indy Star was about new affordable housing in the Norwood neighborhood of Indianapolis. The local CDC is building new houses for $200K, and selling them for $100K. This might be great in the short term for the person that gets to buy the house, but the unintended consequence of this subsidy is that it will artificially depress the price of real estate in the area. And then after the terms of the subsidy are satisfied, and the new buyer has built up equity in the property, there will be no comparable sales in the area and so he may not be able to sell the house for what it is worth. The direct result is the local CDC is unintentionally depressing the real estate market in that neighborhood.

    In an ideal world every government agency could have a chief economics office, who has a degree in economics, whose job it would be to keep from making boneheaded policy decisions, and help facilitate studies to see if specific polices has the desired impact and what the unintended consequences might have been.

    I don’t think this will ever happen though. The headline “XXXX lands 500 new jobs” will always catch more attention than the trade off of “500 miles of road did not get repaved in poor part of town”, assuming there is a newspaper to even publish this news.

  5. The “War on drugs” was never anything other than a war on poor Blacks, and so doubling down was the only “proper” action on the part of the Republicans in control of DC.
    “That’s because subsidies motivate wasteful corporate investments and create public funding trade-offs. Every dollar spent on subsidies is a dollar that can’t be used to improve infrastructure, education or public safety, or to cut taxes on smaller businesses and households.” Precisely why the Republicans have long sought to spend, yes, even they, “spend” on everything else, so that they can say, “Oh, but there is no money for social do-gooding!”
    What? Policy makers attending to evidence? Hey, are these folks un-American, or something?
    Pascal, Todd, spot-on!

  6. Regretfully, I must suggest that Sheila stick to politics and the law. This discussion of economic development spending is devoid of the subtleties of the task. Instead it makes claims based on superficial evidence and populist conclusions so common in the literature.
    Economic development is a long-term matter; I have never seen a fifty-year study or even a ten-year comparative analysis. Of course, I don’t know everything written on the subject, but I have seen much over the past sixty years of economic research.

  7. Cities and states offering tax breaks to corporations in the hope that those businesses will relocate to their area is just another example of corporate welfare. It would be great if corporations decided that they need to help create a social safety net for people since the GOP claims this is socialism.

    I’ve had the idea that maybe we could get rid of lots of pot holes on our roads if corporations were expected to maintain them in an area around where they are located.

    The excessive salaries and benefits of CEO’s is due to this highly individualistic culture and a corporate oligarchy that flings gold coins at the workers from their private jets.

    I agree with Shiela that we have more power to create positive changes in local policies than on the feds. Our voice seems to matter more at the state and local level.

  8. “This mornings headline in the Indy Star was about new affordable housing in the Norwood neighborhood of Indianapolis. The local CDC is building new houses for $200K, and selling them for $100K.”

    Dan; what I make of your statement above is increased property taxes, even with the cap, for the buyers and a tax write-off as a loss for the builders.

    Luring jobs to accomplish gentrification of our old neighborhoods will continue to displace the residents and businesses who built and maintained those areas as best they could. The developers lured here with tax benefits and payoffs will lure workers and make money or they will ignore the areas and let them decay to ruin and then claim a tax write-off. Either way; the developers win and the residents and businesses lose.

  9. The effect of the combination of bounties paid to attract jobs, and the Trump wealth redistribution tax plan is to, guess what, further depress worker effective compensation.

    Wealth redistribution has become a game among the wealthy that they can buy enough political influence to win every game at the expense of workers.

    Power to the wealthy historically has been shown to be an unsustainable concept. That’s why the remaining examples of aristocracy are limited in number.

    Have we reached the limit of stable societies putting up with it? Of course, nobody can determine a precise answer to that question but it seems like maybe we have. Otherwise, Republicans would not be acting so defensively about it.

  10. Morton,

    There have been plenty of studies and articles about how economic development spending is wasteful and unproductive. I’m glad Sheila is giving this topic some much needed attention. When it comes to corporate welfare, Indianapolis is one of the worst. Indy’s politicians, both Republicans and Democrats, are always on the same page on the subject. There is never any push back when it comes to taking more tax dollars and directing that money to developers and contractors…who, not coincidentally, also happen to be big political contributors.

    Being against corporate welfare is one thing that could bring progressives and conservatives together. While conservatives may not want to spend those tax dollars and progressives might want to spend those tax dollars on other priorities, both should be united in not wanting those tax dollars handed over to big companies. We should not be allowing companies to force the public to take the risk for private profit. Government should not be picking winners and losers in the marketplace.

    I would point out also that these big companies that get the subsidies don’t create most jobs, it’s small businesses which do that.

    I’m still waiting for that local candidate who runs against corporate welfare. I think there’s plenty of running room for such a candidate.

    Indianapolis is particularly bad when it comes to sports subsidies. There are a lot of studies about how wasteful those taxpayer subsidies are. The Colts and Pacers both received sweetheart taxpayer deals that made those franchises rich. Every few years they demand more taxpayer money and they always get it. Always.

    Indianapolis continues to make huge bets, with taxpayer money, on the convention business. This is despite the fact the convention business has been in a more than decade long decline. In the midst of an historic pandemic, our local government leaders voted (unanimously I believe) to, once again, expand the convention center and build more downtown hotels. Meanwhile, Indy’s neighborhoods are neglected. I feel sorry for those living on the eastside.

    One thing that’s flown under the radar is the City is just months away from emptying out the City-County Building. The City Market, next to it, is already decimated by construction and the empty CCB will kill it off. The City still has not figured out what it will do with the CCB. The commercial real estate market is in the tank. There is no demand for more downtown office space with more and more workers working remotely. There is talk about turning the CCB into residential development because, who wouldn’t like to live in that beautiful CCB? (Sarcasm.) The one thing the City has decided though is that the development of the CCB will require a huge influx of taxpayer dollars for whatever developer takes on the project. That is one thing our local pols always agree – taxpayers should foot the bill for downtown private development.

  11. What Todd wrote – and I here note that such venues as North Carolina and others have already done their economic development and need not pay more for the economic development of corporate bottom lines at the further expense of taxpayers not only as measured by increased taxes but traffic congestion, tax waivers etc. Local newspapers with real reporters could be agitators for a public vote of yea or nay on each such subsidy, but don’t hold your breath. The politicians want something to brag about in redistribution of someone else’s money.

  12. The issue is not lack of workers, the issue is lack of livable wages. It’s a capitalist system (supposedly). If you offered $100/hr at the Ace for clerks I could almost guarantee there would be plenty of applicants. Somewhere between there and what is currently offered should be the sweet spot. If businesses can’t survive paying market wages they need to rethink their business model. They have probably been living off the backs of their employees getting poverty wages for far too long. The pandemic has caused a rethinking by many workers who question whether working 2 or 3 jobs to make ends meet while risking death and disease is worth it. Who can blame them

  13. To add to Jeff’s comment, if you force people into starvation, you probably would find enough people willing to risk death from disease in order to eat.

    I don’t see safe retail. I have seen unmasked people yelling at workers in stores that require masks. I have seen many stores drop their mask requirements. I wouldn’t want to be a worker facing disease-spreading yahoos on a daily basis, so cutting the subsidies only punishes people who show wisdom.

    I am a lucky one, and I know it. I have been working remotely since the pandemic began and saving money on gas, entertainment, and dining out. While I do, to some degree, support local restaurants with take-out orders, there is only so much I can do on my own.

    I don’t want to force those less fortunate to die because they were forced to work in unsafe conditions. I would compare some of the working conditions to those faced by the unfortunate women who worked in the Triangle Shirtwaist Factory some 110 years ago. They won’t be leaping to their deaths, just slowly dying in hospitals.

    Paul – your anti-corporate welfare candidate already ran — and lost — that is how we met.

  14. Sadly, blogs are just blogs. By definition, they only scratch the surface on any issue. If they are good, they get the readers thinking and maybe reading more in depth tomes on the topic du jour. Suffice it to say that Indiana doesn’t do any better at subsidies than they do at anything else. “If you build it they will come,” is true, if you build what people want.

  15. Often when a company plans a new facility to add to their corporate structure, they promise x number of jobs in return for the subsidy or tax deferment. They are provided with infrastructure at tax-payers’ expense. They depend on public education to train any new hires instead of training for specific job requirements. They also will fill many of those jobs with transferred employees from their other facilities. Usually those transfers are for positions that require specific skills or management promotions when only lateral spots are open within the corporate structure.

    The taxpayers wind up paying for the subsidy, the education of new workers, the infrastructure that is needed to support a large facility. It is a lose/lose for them when those great new jobs are filled not by locals but by workers brought in to fill the highest paying jobs. It is a con from start to finish with the pols claiming credit for suppose economic development when in reality, the big companies reap the benefits and donate a pittance of profits to the pols in return.

  16. Not only do big developers get big subsidies, but don’t have to pay taxes to add to the promo monies that they are reaping. Tifs misused. To add insult to injury to regular citizen taxpayers, developers get to block off majority of lanes of streets in their construction zones. (I’m thinking downtown) and cause traffic jams, h/a’s and delays to everyone trying to go about there daily business. I hear other large US cities keep tighter regulations so citizens aren’t so inconvenienced.
    As far as the job market goes, my heart goes out to the nurses who are risking their lifes and health everyday by going into their workplaces. If government got wise on development & business deals we could reinforce our first line workers and make quality of life better for everyone.

  17. As a Democratic-Socialist I find myself agreeing with Paul @ September 8, 2021 at 10:55 am.

    We have had in Indianapolis for decades a Republicrat Party concerning Corporate Welfare and Crony Capitalism. If it is one thing both Republicans and Democrats agree upon it is Crony Capitalism and Corporate Welfare.

    The politicians pick the winners and reward them with Tax Abatements, direct and indirect subsidies. The small business owner is left to pick-up the tax tab, the winners do not pay. We have this facade of down town prosperity. All the big projects receive their Corporate Welfare: Colts, Pacers, The Convention Center, and the Circle Center Mall.

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