The subsidy-focused ‘economic development’ model that prevails in America’s state and local governments simply doesn’t work.
Politicians and corporations are conspiring to the detriment of working Americans.
Y ou can call it economic development, call it crony capitalism, call it corporate welfare — just don’t call it effective government policy. In 2022, the confluence of midterm elections, an inflationary economy, backlash to Covid-19 lockdowns, and a shifting political landscape sent America’s governors and mayors rushing to the nearest ribbon-cutting or groundbreaking ceremony to take credit for “creating jobs” in an effort to save their own.
This is the largely untold story of state and local “economic development” in America. It’s a pervasive problem, as every state and most municipalities have statutory mechanisms that enable elected officials to influence site-selection decisions by providing some sort of targeted incentive to businesses. These subsidies can take a broad range of forms including tax abatements or transferable credits, grants, loans or loan guarantees, dedicated public infrastructure, regulatory exemptions, and any number of other mechanisms to increase private profits at public expense.
They’re also deeply ineffective. In fact, there are few areas of public policy where the research consensus is so strongly against the status quo. The subsidy-focused “economic development” model that prevails in America’s state and local governments simply doesn’t work.
This is not a fringe point of view. Prominent urbanist Richard Florida calls economic development incentives “useless,” and he’s one of the gentler critics. A landmark 2004 study from University of Iowa researchers in the Journal of the American Planning Association was similarly blunt: “The best case is that incentives work about 10% of the time, and are simply a waste of money the other 90%.”
It may not be shocking to anyone who has paid attention to the history of the past century that politicians and bureaucrats are ineffective at managing economies, but it’s important to understand exactly why this particular variety of central planning fails. The fundamental question to be answered in determining subsidy programs’ effectiveness is what economists call the “but for” question: “But for the subsidy, what would the company have done?”
It turns out that at least three-quarters of the time, the answer is, “the exact same thing they ended up doing.” (And that’s the best-case scenario, according to a widely cited review of 30 different studies, which finds that “somewhere between 2 percent and 25 percent” of incentives actually change corporate decisions, meaning that somewhere between 98 percent and 75 percent of economic development subsidies are useless at best.)
That’s the submerged rock of reality on which the fanciful “economic impact” claims about these programs eventually founder: If you’re not changing a company’s decision about where to go or what to build, then your subsidy accomplished nothing and is ultimately delivering a negative ROI.
Elected officials, bureaucrats at economic-development agencies, and site-selection consultants dispute this, claiming up and down that their subsidies are changing corporate decisions and that researchers don’t understand how things are done in the “real world.” However, even the site-selection industry’s own research says otherwise. For 36 years, Area Development Magazine has been surveying corporate site selectors to understand the factors that go into their decisions about what to build and where. These surveys broadly support the “ivory tower” academic research findings: Yes, state and local subsidies can affect the site-selection process, but they hold much less sway over corporate decisions than economic development agencies’ press releases would have you believe. The 2021 survey was dominated by issues of labor cost and availability, energy availability and costs, and supply-chain factors such as shipping costs and infrastructure quality. “State and local incentives” ranked eighth, below the overall corporate tax rate and virtually tied with environmental regulations for importance.
To see this in practice, consider North Carolina’s $846 million, 30-year subsidy deal with Apple in 2021 to build a new corporate campus in the Research Triangle. For context, Apple sold $365.8 billion in products and services that year. Anyone who understands how business decisions are made knows how extremely unlikely it is that less than a single day’s worth of revenues spread out thinly over the next three decades would meaningfully change a company’s decision about where to put a major R&D facility. It’s much more likely that Apple went to where the tech talent is, and the state’s politicians played along so that they could take credit for “winning” the foreordained facility.
Industry data, academic research, and real-world results all point in the same direction. That’s why a 2018 overview of the evidence by researchers at the University of Connecticut and the University of North Carolina could come to as clear a conclusion as you’re likely to find in an academic study: “This simple but direct finding — that incentives do not create jobs — should prove critical to policymakers.”
Regular Capital Matters readers will likely not be shocked to discover that overwhelming evidence for the ineffectiveness of a government program did not, in fact, “prove critical to policymakers.”
Instead, with few exceptions, states have doubled down on subsidy programs in recent years as the economic disruption of the pandemic — and governments’ often ham-fisted responses to it — only further incentivized panicked politicians into “doing something” to make voters believe that they were relieving economic pain. We already knew that states where governors are running for reelection are twice as likely as those where they’re not to see a sudden large jump in subsidy spending, and 2022 demonstrated that with a vengeance. There were seven states (Georgia, Kansas, Michigan, New York, Ohio, Tennessee, and Texas) with governors running for reelection this year who had announced “job creation” subsidy deals with a potential price tag of a billion dollars or more over the past two years. All seven won their reelection campaigns.
The costs for this politicized profligacy are being added to a massive existing tab that will eventually come due. In 2020, the best estimate of the total price tag for all state and local economic-development programs combined was roughly $95 billion — enough money, at the time, to fund the eleven smallest state budgets, combined.
The long-term impact of these aggregated costs can often be seen more clearly at the state and local levels. For instance, in New York City’s 2019 annual financial report, the city reported losing roughly $3.8 billion of tax revenues to various forms of economic-development abatements. That’s more money than the city budgeted in its November 2019 financial plan to run both the New York Fire Department ($2.1 billion) and the Department of Correction ($1.3 billion).
Many complain that these sorts of subsidy programs are the government “picking winners and losers.” If only that were true. In reality, economic development agencies pick both winners and losers with abandon, shoveling money out the door to all but the most screamingly dubious deals and following what long-time community development researcher Herbert J. Rubin of Northern Illinois University memorably dubbed the “Shoot anything that flies; claim everything that falls” model of economic development.
It’s the investment strategy of a gambler who puts chips down on every number of the roulette wheel and celebrates when they “win” the spin, and outside audits tend to find the kinds of underwater results you’d expect. For instance, a 2020 state audit of Louisiana’s primary subsidy program found that “in the worst-case scenario, the program only generated $0.10 in household income and $0.01 in state tax revenue for every dollar.” The previous year, the state had budgeted $565 million in costs for “Incentive Expenditure Programs” of this kind. That was more than the $439 million budgeted to run Louisiana’s Wildlife & Fisheries, Natural Resources, Environmental Quality, and Agriculture & Fisheries departments, combined.
We got a historic peek behind the scenes at how little due diligence is done in deals with these companies in September when Ocmulgee Superior Courts Chief Judge Brenda Holbert Trammell — exercising her authority under Georgia statute to ensure that as much as $15 billion in public bond debt was being incurred in the public interest — was able to force economic-development officials to detail the work that had gone into a $1.5 dollar subsidy deal with start-up electric vehicle manufacturer Rivian. It was, at the time, the state’s largest economic development deal, and thanks in no small part to local activists who called her attention to flaws in the arrangement, Judge Holbert got agency representatives to admit that they had not retained any investment bankers, economists, or financial analysts to review the agreement. In an utter abdication of their nominal role as government employees tasked with protecting taxpayers’ interests, they hadn’t even pulled up Rivian’s public filings with the Securities and Exchange Commission to form an educated opinion on whether the company’s notable cash burn would allow it to survive long enough to start building trucks in Georgia.
The economic-development authority “has put the issue of the Project’s economic feasibility squarely before the Court and therefore it bears the burden of proving the same — a burden which it has not carried,” Judge Holbert ruled, adding that they also failed “to put forward sufficient evidence that the Project would promote the ‘general welfare within the territory of the Authority.’”
It would be nice to say that this ruling delivered a wake-up call for Georgia’s elected officials and made them rethink the wisdom of making massive speculative bets on, say, electric-vehicle factories. But in the world of economic-development policy, politics trumps proof. That’s why, less than a month after Judge Holbert’s ruling, Georgia’s politicians gathered for a different groundbreaking ceremony for a subsidized electrical-vehicle plant, this one for Hyundai in Savannah, Ga. Both Republican governor Brian Kemp and Democratic U.S. senator Raphael Warnock demonstrated the bipartisan power and political purpose of corporate welfare by taking a break from a hard-fought campaign to be all smiles together at the event, just two weeks before Election Day.
After all, they had the most critical jobs of all to “create or retain” that day: their own.