Tag Archives: incentives

All Cost, No Benefit

Every city of any size, and every state, has a government agency charged with “economic development.” Economic development is almost always a euphemism for luring new employers to the city or state.

A productive discussion about what a genuine effort to improve the local economy should and should not entail is considerably overdue. Such a re-examination remains unlikely, but here and there, investigations of current practices do remind us that not everything we call an “incentive” deserves the name.

Which brings us to Wisconsin, Scott Walker and Foxcomm. A report from the Brookings Institution recently described that embarrassing boondoggle:

In 2017, the state of Wisconsin agreed to provide $4 billion in state and local tax incentives to the electronics manufacturing giant Foxconn. In return, the Taiwan-based company promised to build a new manufacturing plant in the state for flat-screen television displays and the subsequent creation of 13,000 new jobs.

It didn’t happen. Those 13,000 jobs never materialized, and plans for the manufacturing plant have been consistently scaled back. Even if the project had gone through as planned, there is no way the Foxconn subsidy would have made money for the state, or provided earnings benefits for residents that exceed its costs. It now appears that few of Foxconn’s promises will be fulfilled, even though local governments have gone into debt over the project.

The Foxcomm “deal” was widely panned at the time, but as Brookings reports, criticisms of that effort were mostly based on the enormous size of the incentives being offered, not on the underlying concept. But since 1990, even the average size of these business incentives has tripled, threatening public services and the social safety net.

Even when the incentive being offered is comparatively modest, however, research doesn’t confirm the underlying assumptions of the approach. At least 75% of the time, the incentives don’t really affect the relocation decision one way or the other.

They’re all cost and no benefit. Furthermore, even when incentives do tip a location decision, they do not pay for themselves. They may create new jobs, but frequently they also bring in new workers from outside the city or state, which raises costs to public services that offset at least 90% of any increased revenue…On average, only 10-30% of new jobs go to state residents who are not already employed.

Are there incentives that would work? Brookings says there are, and offers the following checklist:

Do the incentives target the right businesses?

Will the business provide multiplier effects? When the business buys from local suppliers, it helps increase jobs at those companies. Workers employed at the business, too, will buy from local retailers, increasing those jobs.

Is the business “traded”—i.e., selling its goods and services outside of the state or community? Incentives to non-tradeable firms will just displace jobs at other local non-tradable firms.

Is the real job multiplier accurately calculated? Multipliers can be overstated if they ignore the increased local costs that accompany business growth.

Is the business locally owned? Locally owned firms spend more of their revenue locally, benefiting the hometown economy.

Do the incentives target the right areas?

Incentives should target economically distressed local areas, with more available labor that is not employed. That way, the share of new jobs that go to local residents can be two to three times as great, compared to already-booming areas.

Do the incentives target high-tech businesses in an area with an above-average high-tech base? High-tech businesses have additional multiplier effects because they support and spawn other local firms whose workers and ideas flow from one to another. But this only works when the area has a sufficiently large “cluster” of tech firms to build from.

Are they the right type of incentives?

Are they structured so cash incentives occur upfront? Upfront incentives are more cost-effective in affecting business location decisions, because they are more relevant to business decisionmakers who focus on the short term.

Do they include enticements/requirements to hire locally? For example, customized training programs can encourage firms to hire the local unemployed.
Do they include a healthy share of customized businesses services, or is it all cash giveaways? Business services such as job training, business advice to smaller businesses, and new transportation infrastructure can have job creation effects per dollar that are five to 10 times greater than tax or cash incentives.

Do the incentives avoid robbing Peter to pay Paul? If governments pay for incentives by decreasing public spending on education, training, or infrastructure, the negative economic development effects of those budget cuts may exceed any benefits from the incentives.

Finally, is there a decent model to accurately assess the impact of the incentive?

There are practical ways to evaluate incentives. We can compare assisted with unassisted firms, or assisted areas with unassisted areas. There are good estimates of how many location decisions will be swayed by a cash incentive package of a particular size, and how many jobs per dollar will be created by a high-quality customized job training program. State and local government researchers can combine these evaluation approaches with models of local labor markets and fiscal impact to see whether a specific incentive package’s benefits are likely to exceed its costs.

Finding the right answer depends on asking the right questions–not on constantly sweetening the pot.

 

Penny Wise…

Investigators looking into those raging, destructive fires in California a couple of months ago have determined that the fires were caused by power lines that came into contact with each other during high winds.

According to Engineering News Record (I know–you have a copy on your coffee table, don’t you?),

The resulting arc ignited dry brush on Dec. 4, 2017 , starting the blaze in Ventura and Santa Barbara counties that resulted in two deaths and blackened more than 440 square miles (1,139 square kilometers), according to the investigation headed by the Ventura County Fire Department .

The arc “deposited hot, burning or molten material onto the ground, in a receptive fuel bed, causing the fire,” said a statement accompanying the investigative report.

Investigators said the Thomas fire first began as two separate blazes started about 15 minutes apart that joined together. They determined Southern California Edison was responsible for both ignitions…

The fire destroyed more than 1,000 structures before it was contained 40 days after it began near the city of Santa Paula . A firefighter and a civilian were killed.

If the damage from the fire itself wasn’t destructive enough,

A month after the blaze started, a downpour on the burn scar unleashed a massive debris flow that killed 21 people and destroyed or damaged hundreds of homes in the seaside community of Montecito . Two people have not been found.

Here’s my complaint. (Okay, my diatribe.)  The ravages of the fire–the destruction of homes, the deaths, the dislocations– could have been avoided had the power lines been buried. And it isn’t just California, and it isn’t just the enormous amount of damage done every year by downed or otherwise unsafe power lines–there’s also an aesthetic issue, at least in cities, where poles and lines clutter the sky.

The immediate response to this complaint is always the same: burying power lines is too expensive. That response is typical of America’s approach to infrastructure generally, which can be perfectly summed up by the old adage “penny wise and pound foolish.”

Over the long term, buried power lines will require less maintenance and will cause far less damage. (Southern California Edison is now in bankruptcy, thanks to the fires.)

It’s the same story with other infrastructure. Streets that are properly paved and repaired last longer and require less annual attention. (Indianapolis’ third-world streets are the result of many years of “fixing” recurring potholes with haphazard and ungainly patches and the application of paper-thin asphalt coatings to untouched, steadily deteriorating street beds.)

There’s an old saying that “long term” to a politician means “until the next election.” The political system’s incentives are all perverse: spend as little as you can (pretend it’s the result of “efficiency”); whatever you do, don’t raise taxes; do the repairs that you absolutely must as cheaply as you possibly can, and let the next guy worry about it.

The problem is, when we don’t do it right–we have to do it over. And over.

Diminished Expectations, Diminished Performance

I haven’t been particularly kind to several of our elected officials lately. Believe it or not, I take no satisfaction in criticizing the failures and foibles of those who’ve been elected to manage the affairs of the republic. Ultimately, after all, the fault lies with the voters who elected them.

We the People don’t have very high standards. We seem to regard these empty suits as “good enough for government work.” In short, the low esteem with which we view our governing institutions has become a self-fulfilling prophecy.

Let’s be brutally frank. Why would people who are moderately competent, let alone “the best and brightest,” want to work with the likes of Ted Cruz, Rand Paul, Michelle Bachmann, Louis Gohmert or literally dozens like them? How can we expect capable management of agencies charged with oversight of complex and interrelated public functions when the politicians to whom those managers must report have absolutely no idea how government and the economy actually work?

We recently heard elected officials insist that an American default on the debt would be “no big deal.” We’ve heard characterizations of the Affordable Care Act and HIPPA that have betrayed total ignorance of the provisions of both laws. We’ve heard assertions of constitutionality and unconstitutionality untethered from even the most tortured reading of our constituent documents.

There’s nothing wrong with policy debates. Indeed, such disputes can be very productive—but only if the debate is grounded in reality, only if it addresses genuine issues and employs credible information.

When aggressive ignorance is a political virtue and professionalism, knowledge and expertise are vices, we shouldn’t be surprised by a deficit in competent public management.

In the jargon of economics, we get the behaviors we incentivize.