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.