Tag Archives: job creation

The Cost Of Luring Jobs

Public Policy and Governance, ,

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.

 

 

Repeating My Mantra…

Public Policy and Governance, , , ,

People who have read this blog for any length of time are familiar with some of my preoccupations–civic literacy and civics education, climate change, competent governance, and job creation. (Admittedly, I have a lot of “hot buttons”…)

I have been fairly consistent in my approach to most of these issues over the years, but I’ve changed my tune when it comes to growing the economy and creating jobs. I used to be persuaded by the argument that significant raises in the minimum wage would lead to job losses–it seemed logical that forcing a business to pay more to worker A would leave that business with fewer dollars with which to hire worker B. What I didn’t understand was the unspoken caveat: all things being equal. In the real world, it turns out that all things aren’t equal.

What the real world evidence shows is that paying workers a living wage–and thus providing them with a modicum of disposable income–is what creates jobs. As I now understand, demand is what creates jobs, not the beneficence of the factory owner. The guy who owns the widget factory isn’t going to hire more workers to make widgets if no one has the money to buy them.

A recent article in The Week emphasized the point

For many years, rich oligarchs have posed as the engines of the economy — the entrepreneurs whose beneficence and wise decisions create economic prosperity. In a 2019 article for Fox News, Sally Pipes, president of the right-wing Pacific Research Institute, called for Americans to “celebrate America’s job creators” during Labor Day. “Let’s honor the people responsible for that grandeur — namely, the profit-seeking entrepreneurs and business people who make our economy hum,” she wrote.

This is bunk. The real engine of the economy is the dollars in the pocket of the humble average citizen.

The article goes further, however. Most economists now recognize that putting additional money in the hands of workers stimulates demand, but they tend to think of that demand in the context of a fixed economic capacity–as a mechanism for getting to full employment in existing factories and other enterprises.

In reality, as Skanda Amarnath and Alex Williams argue at Employ America, spending also affects overall capacity. A factory, for instance, is not some immortal thing — at a minimum, it must be continually maintained because of entropy and ordinary wear and tear on equipment. To remain competitive, it must be regularly upgraded with the latest production technologies. But businesses will logically invest in new capacity only if they see a market for the goods and services that capacity would produce. This is especially true with respect to high-tech manufacturing investment, which is very complex and expensive — taking over half a decade to pay off.

Amarnath and Williams argue that slack demand afflicted America’s economy well before the 2008 recession, and that it is only surging again now because of the huge boom in sales of computer products–a boom generated by two things; the pandemic surge in working from home, and government transfers to individuals, also due to the pandemic.

All of the available evidence confirms that giving poorer people more money generates economic growth. When you give rich people more money–through Republican policies like deregulation, union busting and especially the numerous, generous tax cuts so dear to GOP hearts–they disproportionately save it, rather than spending it and boosting the economy.

As the article says, cash in the pockets of the working poor isn’t just good in in a humanitarian sense (giving people money they need to live.) It’s good because spending those dollars is what will keep businesses humming, investment high, and the economy healthy.

 

Minimum Wage And The Real World

Uncategorized, , ,

There is evidently a lively argument about who authored the much-quoted observation “It Ain’t What You Don’t Know That Gets You Into Trouble. It’s What You Know for Sure That Just Ain’t So.”

The quotation has been attributed to Mark Twain and Will Rogers, among others, but whatever the source and however folksy the articulation, it counts as real wisdom.

I thought about that very human tendency to cling to verities that “we know for sure” are so when I came across some recent research into the consequences of raising the minimum wage, because for a long time, I was convinced by the (very logical, very persuasive) argument that raising wages would depress job creation.

It turns out there was a logical fallacy in the formulation of the argument that, if employer  had to pay his current employees more, he would have less money available to hire additional workers. That actually would be true–all else being equal.  Those of us who accepted the formulation–including your truly–didn’t realize how much else wasn’t equal.

In the real world, putting more money in the pockets of people who don’t have much disposable income actually increases demand and boosts economic growth.

When something they’ve believed turns out to be wrong, reasonable people change their minds. There’s a difference, however, between ideology and a mistaken belief–ideology is stubborn. It rejects contrary evidence, no matter how convincing.

With respect to minimum wage rates, a number of previous, peer-reviewed academic studies have found little to no impact on hiring as states and municipalities have raised the  wage, casting doubt on the “wage hikes will kill jobs” mantra, but the number of states that have recently raised their minimum wage allowed these recent researchers to draw broader conclusions.

Eighteen states rang in 2019 with minimum wage increases — some that will ultimately rise as high as $15 an hour — and so far, opponents’ dire predictions of job losses have not come true.

What it means: The data paint a clear picture: Higher minimum wage requirements haven’t reduced hiring in low-wage industries or overall.

State of play: Opponents have long argued that raising the minimum wage will cause workers to lose their jobs and prompt fast food chains (and other stores) to raise prices. But job losses and price hikes haven’t been pronounced in the aftermath of a recent wave of city and state wage-boost laws.

And more economists are arguing that the link between minimum wage hikes and job losses was more hype than science.

What we’re hearing: “The minimum wage increase is not showing the detrimental effects people once would’ve predicted,” Diane Swonk, chief economist at international accounting firm Grant Thornton, tells Axios.

“A lot of what we’re seeing in politics is old economic ideology, not what economics is telling us today.”

The doom-and-gloom that opponents have predicted, “are part of the political policy debate,” Jeffrey Clemens, an economics professor at UC San Diego, tells Axios.

His research for the conservative American Enterprise Institute is often quoted in arguments against minimum wage increases.

But Clemens told Axios: “People will tend to make the most extreme argument that suits their policy preferences, and it’s not surprising if that ends up being out of whack with the way things unfold on the ground.”

As part of the study, researchers used Bureau of Labor Statistics data to compare the rate of  job growth in four states with low minimum wages against the rate in eight states with high minimum wages. All 12 states saw growth in restaurant, bar and hotel jobs.
Four states had job growth higher than the U.S. median, and three of them have raised their state’s minimum wage; three of the five states having the slowest job growth kept their wage at the federal minimum of $7.25 an hour.

The bottom line: Opposition to higher minimum wage laws is increasingly based in ideology and orthodoxy rather than real-world evidence, economists say.

The evidence says I used to believe something that just wasn’t so. Given that evidence, I don’t believe it any more.

That isn’t so hard, is it?

 

Corporate Tax Cuts: Rhetoric and Reality

Random Blogging, ,

Right now, most eyes are on Congressional Republicans and their last-ditch effort to destroy the Affordable Care Act, but those eyes will soon turn to the various tax “reform” efforts waiting in the wings.

Bookies are probably taking odds on the likelihood of Congress actually managing to reform the tax code. What constitutes reform, of course, is in the eye (or pocketbook) of the beholder–and that brings us to the arguments about corporate tax rates.

Proponents of a lower tax rate for corporations–Paul Ryan, President Trump and most Congressional Republicans–argue that reducing the rate will spur job creation. Opponents see no evidence for that assertion, and note that few corporations actually pay the current rate now–thanks to various credits and deductions, most of them pay an effective rate that is considerably lower.

Since the argument for reducing corporate taxes rests primarily on the assertion that such a reduction will translate into jobs, the Institute for Policy Studies researched that claim.

To investigate this claim, we set out to analyze the job-creating performance of the 92 publicly held American corporations that reported a U.S. profit every year from 2008 through 2015 and paid less than 20 percent of these earnings in federal corporate income tax.

These 92 corporations offer an ideal test for the proposition that lower tax rates encourage corporations to create jobs. By exploiting loopholes in the existing federal tax code, all these firms have reduced their tax rates to the level that Speaker Ryan and President Trump claim will stimulate job creation. Did these reduced tax rates actually lead to greater employment within the 92 firms? We crunched data available from the Institute on Taxation and Economic Policy to find the answer.

You can probably guess what the researchers found.

Tax breaks did not spur job creation.

  • America’s 92 most consistently profitable tax-dodging firms registered median job growth of negative 1 percent between 2008 and 2016. The job growth rate over those same years among U.S. private sector firms as a whole: 6 percent.
  • More than half of the 92 tax-avoiders, 48 firms in all, eliminated jobs between 2008 and 2016, downsizing by a combined total of 483,000 positions. 

Tax-dodging corporations paid their CEOs more than other big firms.

  • Average CEO pay among the 92 firms rose 18 percent, to $13.4 million in real terms, between 2008 and 2016, compared to a 13 percent increase among S&P 500 CEOs. U.S. private sector worker pay increased by only 4 percent during this period.
  • CEOs at the 48 job-slashing companies within our 92-firm sample pocketed even larger paychecks. In 2016 they grabbed $14.9 million on average, 14 percent more than the $13.1 million for typical S&P 500 CEOs.

Many of the firms that eliminated jobs plowed their savings into stock-buybacks; as the researchers pointed out, such buybacks inflate the value of the stocks and stock options that are a routine part of executive pay packages. The top ten “job-cutters” in the research sample spent $45 billion dollars over the last nine years on stock repurchases– “six times as much as the Standard & Poore 500 corporate average.”

The report identifies some of the worst corporate offenders (AT&T, Exxon-Mobil, GE and several others), all of which have effective tax rates lower than the goal set by Ryan and his crew, and all of which shed employees while raising executive pay.

As the researchers conclude:

Our nation also desperately needs a tax reform debate that dispenses with the fantastical notion that corporate tax cuts will automatically create good jobs for American workers. Policy makers should be focusing instead on ensuring that corporate America pays its fair share of the cost of job-creating public investments in infrastructure and other urgent needs.

A solid first step would be to eliminate loopholes that grant preferential treatment of foreign profits. U.S. corporations should have to pay what they owe on their current offshore holdings and not be allowed to defer these payments indefinitely. By continuing to allow offshore tax sheltering, policy makers are shifting the tax burden onto ordinary Americans and creating a disincentive for job creation in the United States.

As numerous economists and businesspeople have pointed out, jobs are created in response to increased demand for goods and services.

Increases in demand occur when significant numbers of working and middle-class people have disposable income–not when a small group of already obscenely wealthy CEO’s get paid even more.

 

The (P)art of the Deal

Local Government, ,

Economic development efforts often seem like a zero-sum game; Indiana offers training funds or infrastructure improvements or property tax abatements to businesses relocating from, say, Illinois, and Illinois does the same for businesses coming from Indiana.

Even within the state, municipalities try to lure employers to City A from City B by offering tempting “goodies.”

There are lots of problems with this state of affairs. It tends to be unfair to small businesses that have been longtime corporate citizens, and all too often, the relocation would have occurred without the (legal) bribe represented by these incentives. Worst of all, however, is the reluctance of the state to require or enforce appropriate “clawback” provisions.

When state or city government offers incentives to businesses, it is in return for that business undertaking to create a certain number of jobs. The idea is that the government will recoup its up-front investment in the form of additional taxes paid by a growing workforce. The agreement, or contract, obligating the unit of government to provide the incentive should include provisions protecting the government in case of default; in other words, if the business fails to create the promised jobs, or moves its operations elsewhere, it should be required to repay the amounts advanced.

Fair enough. You do what you say you will do, or you pay us back. The Pence administration, however, pursues a narrow version of the clawback.

An IndyStar analysis found that the Indiana Economic Development Corporation — which Pence leads — has approved $24 million in incentives to 10 companies that sent work to foreign countries. Of those incentives, nearly $8.7 million has been paid out so far.

During that same period, those companies terminated or announced layoffs of more than 3,800 Hoosier workers while shifting production to other countries, where labor tends to be far less expensive.

The state has clawed back or put a hold on some or all of the incentives in four of those cases, returning $746,000 in taxpayer subsidies. But in the other six cases, the companies faced no consequences.

The primary reason: The job creation and retention requirements in the state’s incentive agreements are usually narrowly tailored to a single facility, leaving workers at other sites owned by the same company vulnerable to offshoring.

During the last legislative session, House Democrats  authored language that would have required corporations that move facilities out of Indiana to re-pay any property tax incentives they had received, and also would have prevented those companies from receiving other state tax breaks. The proposal–which was an amendment to another bill–ultimately went nowhere.

Meanwhile, as the Star reported, the state’s much-touted job growth figures pale in comparison to the jobs lost to offshoring.

Those records show that the same 10 companies or their related subsidiaries have laid off or plan to layoff more than 3,820 workers in Indiana because work has been shifted to other countries since 2013.

Those losses are more than three times larger than the number of jobs that would have been created under the state’s incentive agreements, even if they had all come to fruition.

Here’s the thing: companies have the right to move their operations. But that shouldn’t mean they have the right to move and keep the tax dollars that Hoosiers forked over in the expectation that they would honor their commitments, stay in the state, and create jobs.

A deal is a deal–and the state should play hardball, not wiffle-ball.