Jul 16, 2019

Quotable Quotes: Targeted Economic Development Doesn't Work

Michael D. Farren Research Fellow , Philip St. Jean

Many believe economic development subsidies attract businesses to a region. But despite most states and cities offering subsidies, there is little evidence that such programs work. In fact, much of the research on economic development programs suggests that they have negligible effects on a business’s decision about where to locate or expand.

The purported objective of targeted economic development subsidies (or TEDS) is to promote local economic development. In reality, the primary beneficiaries are politicians, who appear to be helping the economy. Often, the true long-term effects of the subsidies are never known.

TEDS don’t generally work because other factors matter more for long-run productivity and profitability. Proximity to customers, suppliers, and transportation hubs, as well as a low cost of living and other desirable local amenities, are more important to location or expansion decisions than subsidies or tax breaks.  At best, subsidies may serve to break the occasional tie between two municipalities in the same region.

The first modern economic development programs made their debut in the 1930s, and have since become an entrenched piece of state and local politics. Businesses that encourage TEDS tend to inflate the importance of subsidies in order to maximize their payout. A lack of transparency and oversight in economic development programs allows politicians to boast of their supposed victories while corporations reap the benefits and taxpayers foot the bill.

TEDS are clearly a poor use of public funds. At the very least, policymakers should increase oversight and transparency of development programs. Doing so would likely dispel the myth that TEDS are important contributors to local economic growth.

Some industry leaders, politicians, and economist development officials are conscious of the negligible effects of TEDS on location and expansion decisions, as the following quotes illustrate.
 

 

Paul O’Neil, former executive at Alcoa and U.S. Treasury Secretary:

 “I never made an investment decision based on the tax code...If you are giving money away I will take it. If you want to give me inducements for something I am going to do anyway, I will take it. But good business people do not do things because of inducements.”

 

Lee Schafer, “ConAgra's move from Omaha to Chicago shows that big cities still reign,” October 10, 2015:

“Nebraska public officials, from the governor on down, were willing this year to give any financial incentive it took to keep ConAgra. It wasn’t interested.”

 

Donald L. Barlett and James B. Steele, “Five Ways Out: There Are Solutions to the Corporate Welfare Mess—But Who Goes First?” November 30, 1998:

“Lynn Markley, a spokeswoman for Frito-Lay, says the company selects a general region where it wants to locate a new plant.  It then prepares a sort of shopping list of requirements for the facility and contacts states about incentives”

 

Nathan Jensen, “Incentives to Pander,” June 8, 2018:

“Just like you could with immigration blame immigrants for crime — because it’s popular, even if you don’t believe it’s true — you can use incentives as a way to take credit for economic development[…] Even if you know a company is coming anyway.”

 

Donald J. Hall Jr., “As Companies Seek Tax Deals, Governments Pay High Price,” December 1, 2012:

“It’s really not creating new jobs, it’s motivated by politicians who want to claim they have brought new jobs into their state.”

 

Timothy J. Bartik, “A New Panel Database on Business Incentives for Economic Development Offered by State and Local Governments in the United State,” 2017:

“Incentives do not have a large correlation with a state’s current or past unemployment or income levels or with future economic growth,”

 

Richard Florida, “The Hypocrisy of Amazon’s HQ2 Process,” May 10, 2018:

“Like all corporate site selection, the HQ2 process is a rigged game, where the company knows the answer in advance and sets up a fictitious competition to wrest maximum incentives.”

 

Then-presidential candidate Donald Trump, in a speech at Wilkes Barre, PA  on October 10, 2016:

“I’ve been watching these politicians go through this for years, I’ve been watching them give low-interest loans. I’ve been watching them give zero-interest loans. These companies don’t even need the money, most of them; they take the money. There were a couple of instances where geniuses with great lawyers gave them money and then they moved anyway…I mean, the whole thing is crazy.”

 

(This will be an ongoing project to collect such quotes. If you have suggestions we’d appreciate submissions to mfarren@mercatus.gmu.edu).

Photo credit: Stephanie Keith/Getty Images

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