Opinion: billions are wasted in wars over grants for economic development | Business Observer



Michael Farren and Philip St. Jean

(Editor’s note: this originally appeared on Governor.com)

Seeking to create jobs and help their local economies emerge from the pandemic recession, state and local authorities are increasing the focus on subsidies to large corporations. But if history is to be trusted, ever increasing tax breaks and other incentives for economic development are likely to lead to slower, not faster, growth. Since state and local governments have already squandered $ 95 billion each year on an economic race to the bottom, more subsidies will only widen the hole deeper.

Take New Jersey, for example. It made national headlines when its previous state subsidy program collapsed in corruption and scandal, but the state recently replaced it with an even larger $ 14 billion program. And this spring, North Carolina announced its biggest grant: $ 865 million in its successful bid for Apple’s first research and development center on the East Coast and the 3,000 new jobs the company promises to create. .

Adding thousands of local jobs is great news, but why pay Apple to do something it was probably going to do anyway? This is a lesson for anyone who values ​​good government over political demagoguery.

Michael farren

Smart companies like Apple understand that the real long-term draw isn’t so much in grants as it is in the great economic base that North Carolina has built: investments in top research universities, a workforce. work ready for technology and a conducive business environment. North Carolina is indeed a perfect place to locate a cutting edge research center. Site Selection magazine has always ranked it among the best countries for the business climate.

It’s also not the first time North Carolina has been in the running for one of Apple’s extensions. In 2018, the Research Triangle was scrapped for Austin, Texas, although North Carolina lowered the eligibility requirements for the oversized grants available under a special program. Ironically, this program was originally developed to attract the infamous Foxconn factory in Wisconsin. Sometimes failure is luck in disguise.

In fact, most victories in interstate subsidy wars are Pyrrhic victories. It’s pretty clear that North Carolina overpaid when you compare Apple’s newly approved project with Austin’s larger facility, which only received a total of $ 41 million from the state. of Texas and local governments. Here’s an apples-to-apples comparison: Texas gave Apple about $ 10,000 per job. North Carolina has pledged about $ 288,000 per job. It sounds a bit too “user-friendly”.
Apple’s new R&D center also had another contender, but Ohio’s alleged competition for the project may have caused North Carolina to fall victim to the same trap that befell North Carolina. South almost 30 years ago. In 1992, South Carolina was the prime site for a new BMW manufacturing plant when Nebraska stepped in with a much larger grant offer. While Nebraska does not meet critical facility needs, such as access to a port, panicked South Carolina politicians have more than quadrupled their initial supply, and the arms race for economic development has taken another turn. victim.

Adding insult to injury, academic research reveals that only one in eight grants is likely to change a company’s location or decision to expand. This means that almost 90% is a complete waste of money. Companies certainly want grants if they can get them, but care more about local talent, region-specific benefits, and access to supply chains and customers. For example, Google and Fidelity Investments recently announced the expansion of their existing operations in the Research Triangle, without applying for grants from North Carolina. Both emphasized the region’s skilled workforce as the main draw.

The consensus of academic research is that corporate donations do not create broad benefits for the community that provides them. This is because subsidies motivate unnecessary business investment and create public funding tradeoffs. Every dollar spent on grants is a dollar that cannot be used to improve infrastructure, education or public safety, or to reduce taxes for small businesses and households.

With such a clear case against handouts, how did we get here? It turns out that when Mississippi first fired the subsidy wars with its 1930s “Balance Agriculture with Industry” program, the political logic was very similar to today: help the state to recover from the Great Depression.

Philippe Saint-Jean

After Mississippi broke an economic truce originally negotiated in the Constitution to draw manufacturing companies from the North to the South – like a game of musical chairs run by grants rather than party music – other states responded in the same way. Unfortunately, the losses these programs create do not stay local, as most subsidies also reduce national economic growth.

Why are governments still stuck in this dysfunctional state today? Politicians suffer from a “fear of missing out” which locks them into this endless – and sterile – competition. But some principled leaders are joining forces to find a solution. Fifteen states have already introduced legislation to take advantage of an option granted by the Constitution: an interstate pact that would phase out freebies given to businesses. It’s a way to unleash the billions wasted each year on subsidies and unleash economic growth that we don’t even know how to miss.

Politicians are understandably happy to trigger the economy after a harsh recession, but declaring a ceasefire would do much more to improve economic growth.

Michael Farren is an associate researcher at the Mercatus Center at George Mason University. Philip St. Jean is an economist and financial planner.


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