Bad Ideas and Bad Deals in Economic Development Incentives - America's Future Foundation

March 8, 2019

Markets & Free Enterprise

Bad Ideas and Bad Deals in Economic Development Incentives

By: John Mozena

Over the past few decades, politicians, corporations and bureaucrats across the United States have built a massive economic development industry that transfers massive amounts of wealth from governments to private businesses in the name of job creation and economic growth. Increasingly, it’s becoming clear that these deals cause our communities more harm than good.

Every year, it’s estimated that American states and cities hand out more than $70 billion to private companies in subsidy and incentive deals. That figure has tripled since just 1990, and is now equivalent to the revenues of major economic sectors like the national golf, weight loss or pet care industries.

What do taxpayers and communities get in return? The justification for this government engagement in private business activity is that these deals are supposed to create jobs and grow local economies, generating more public good than the cost of the incentives.

Overwhelmingly, the evidence is that they do not.

The primary reason for this is that incentives rarely change what a business was going to do anyway. Companies making the decision where to build, grow or hire are far more concerned about factors such as where their customers are, where their vendors are or whether the local workforce and infrastructure meets their needs than what their tax break might look like. Even Amazon admitted this was true for its “HQ2” search in a Q&A attached to its own announcement:

Q: “What role did economic incentives play in Amazon picking these locations?”

A: “Economic incentives were one factor in our decision — but attracting top talent was the leading driver.”

In fact, the best estimates of researchers are that at least three quarters of the time – and potentially as often as 98 percent of the time – incentives do not meaningfully change company decisions. This means that not only is the money spent on these deals wasted, but that the “we have to do this or the jobs will go elsewhere” argument is also simply wrong.

That also doesn’t mean that the deals where the subsidy makes a difference are necessarily a good idea. All told, as researchers Peter Fisher and Alan Peters wrote in the Journal of the American Planning Association, “…[T]he best case is that incentives work about 10% of the time, and are simply a waste of money the other 90%.”

So, if 90 percent of $70 billion in annual deals is wasted, then we can conclude that roughly $63 billion is being unnecessarily drained from state and local governments every year. That’s real money, enough to fund the entire annual state budgets of Delaware, West Virginia, South Dakota, New Hampshire, Mississippi, Oklahoma, Vermont, Idaho, Maine and most of Iowa – combined.

With all the research-based evidence growing against these policies, shouldn’t we be seeing fewer deals, rather than more? As researchers at UNC-Chapel Hill and the University of Connecticut wrote in a research paper that found little evidence of any measurable benefits from incentive programs across the country, “This simple but direct finding—that incentives do not create jobs—should prove critical to policymakers.”

If the true purpose of these programs was to create jobs, that might be true. But the politicians, businesses and bureaucrats who benefit from them have a powerful incentive to hide the real purpose behind these programs: It’s not to create jobs. Rather, it’s to make voters believe that politicians are responsible for creating jobs.

That belief turns into votes. Researchers at the University of Texas at Austin and Duke University have even quantified it, finding a 9.2 percent increase in independent voter support for governors who can claim they “won” 1,000 manufacturing jobs through incentives.

Fortunately, there might be a way out of this constantly-growing arms race through an unlikely trans- partisan alliance that’s bringing together progressives and even “democratic socialists” from the left with free-market and limited government advocates from the right. Each has their own starting principles, but all are opposed to the toxic combination of big business and big government in this fashion.

Economic development subsidies are “socialism for rich people,” a socialist who opposes them once told me. He’s right, and they need to end.