Tea-Publican economic theory holds that giving tax incentives to businesses to relocate to your state will increase economic activity and create jobs. A new study finds that the results of such tax incentives are negligible, and often costly.
Nathan Jensen and Jason Wiens report at the Washington Monthly, States’ Job Creation Shell Game:
Earlier this year, the State of Massachusetts and the City of Boston offered property tax breaks and grants totaling $145 million to General Electric in exchange for the company moving its headquarters to Boston from Connecticut.
In 2014, the State of Nevada outbid Arizona, California, New Mexico and Texas with an offer of free land, tax cuts, electricity discounts and other perks to lure the auto manufacturer Tesla to build a battery production facility in the state. The factory and its 6,500 jobs were estimated to cost Nevada more than $1.2 billion.
Many states, including Texas, New York and Louisiana, fund “war chests” specifically aimed at bringing companies and jobs to their state, often poaching these firms from other states. All told, estimates indicate this game of tug-of-war among states costs taxpayers $70 billion a year – while creating very few, if any, new jobs and lining the pockets of the companies taking advantage of these incentives.
Supporters claim programs like these bring new business activity and employment opportunities to residents of the state. Yet, research has found that rather than paying for new jobs and growth, taxpayers are funding business activity that would have likely occurred anyway. In other words, a small subset of businesses (usually large ones) profit at taxpayers’ expense for hiring or expansions the businesses already had planned.
Studies funded by the Ewing Marion Kauffman Foundation took an in-depth look at the flagship business incentive programs in two states: Kansas and Missouri. The findings were striking.
In Kansas, the almost $1 billion spent from 2006 to 2011 on the state’s incentive program had no impact on job creation. Businesses that received an incentive were no more likely to create new jobs than those firms that did not receive an incentive. Moreover, in a survey of 24 recipients of incentives, two-thirds of firms indicated they would have invested even if they hadn’t received an incentive.
Across the state line, companies in Missouri created between one and two jobs per incentive. While this may seem like good news, it amounts to an incredibly costly job creation strategy, with each of these jobs costing Missouri taxpayers $1 million. Over $700 million in incentives were spent to create a few hundred jobs.
These findings reveal a fundamental flaw in incentive programs: they are redundant. But they are also expensive, encourage states to allocate resources away from other critical needs (such as education), create potential for corruption, and promote a job creation shell game in which businesses move a few miles across state borders to qualify as “new jobs” without creating new job opportunities.
In response to critiques like these, some states have implemented “clawback” provisions that allow the state to recoup some or all of the taxpayers’ money when a company fails to keep its job creation promises.
But other states are starting to just say no. In Florida, the legislature recently rejected a request from the Governor for $250 million to fund the Quick Action Closing Fund, which Florida uses to lure companies to relocate to the state. More states should do the same.
In a time of extreme polarization of American politics, there are few policy areas where both sides can agree. Call it “corporate welfare” or “big government picking winners and losers,” but the labels are less important than the policy implications. Incentive programs provide a transfer from taxpayers to companies for little societal benefit.
In related economic news, Neil Irwin writes at The Upshot at the New York Times, We’re in a Low-Growth World. How Did We Get Here?:
One central fact about the global economy lurks just beneath the year’s remarkable headlines: Economic growth in advanced nations has been weaker for longer than it has been in the lifetime of most people on earth.
The United States is adding jobs at a healthy clip, as a new report showed Friday, and the unemployment rate is relatively low. But that is happening despite a long-term trend of much lower growth, both in the United States and other advanced nations, than was evident for most of the post-World War II era.
This trend helps explain why incomes have risen so slowly since the turn of the century, especially for those who are not top earners. It is behind the cheap gasoline you put in the car and the ultralow interest rates you earn on your savings.
This slow growth is not some new phenomenon, but rather the way it has been for 15 years and counting. In the United States, per-person gross domestic product rose by an average of 2.2 percent a year from 1947 through 2000 — but starting in 2001 has averaged only 0.9 percent. The economies of Western Europe and Japan have done worse than that.
Over long periods, that shift implies a radically slower improvement in living standards. In the year 2000, per-person G.D.P. — which generally tracks with the average American’s income — was about $45,000. But if growth in the second half of the 20th century had been as weak as it has been since then, that number would have been only about $20,000.
To make matters worse, fewer and fewer people are seeing the spoils of what growth there is. According to a new analysis by the McKinsey Global Institute, 81 percent of the United States population is in an income bracket with flat or declining income over the last decade. That number was 97 percent in Italy, 70 percent in Britain, and 63 percent in France.
Like most things in economics, the slowdown boils down to supply and demand: the ability of the global economy to produce goods and services, and the desire of consumers and businesses to buy them. What’s worrisome is that weakness in global supply and demand seems to be pushing each other in a vicious circle.
It increasingly looks as if something fundamental is broken in the global growth machine — and that the usual menu of policies, like interest rate cuts and modest fiscal stimulus, aren’t up to the task of fixing it (though some well-devised policies could help).
The underlying reality of low growth will haunt whoever wins the White House in November, as well as leaders in Europe and Japan. An entire way of thinking about the future — that children will inevitably live in a much richer country than their parents — is thrown into question the longer this lasts.
* * *
As a matter of arithmetic, the slowdown in growth has two potential components: people working fewer hours, and less economic output being generated for each hour of labor. Both have contributed to the economy’s underperformance.
The forecasters thought the average output for an hour of labor would rise 29 percent from 2005 to 2014. Instead it was 15 percent.
But it’s not just that each hour of work is producing less than projected. Fewer people are working fewer hours than seemed likely not long ago.
The unemployment rate is actually lower than the C.B.O. projected it to be a decade ago (it saw it as stable at 5.2 percent; it was 4.9 percent in July). But the unemployment rate counts only those actively seeking a job. There were five million fewer Americans in the labor force — neither working nor looking — in 2015 than projected.
An analysis by the White House Council of Economic Advisers last year estimated that about half of the decline in labor force participation since 2009 was caused by aging of the population (which was anticipated in the projection), and about 14 percent from the economic cycle. About a third of the decline was a mysterious “residual”: younger people leaving the work force, perhaps because they saw little opportunity or viewed the potential wages they could earn as inadequate.
Weak productivity and fewer workers are hits to the “supply” side of the economy. But there is evidence that a shortage of demand is a major part of the problem, too.
Think of the economy as a car; if you try to accelerate far beyond the speed it’s capable of, a car won’t go any faster but the engine will overheat. Similarly, if the voluntarily exit of people from the labor force and lower-than-expected gains from technological advances were the entire story behind the growth slowdown, there should be evidence the economy is overheating, resulting in inflation.
That’s not what’s happening. Rather, global central banks are keeping their feet on the economic accelerator, and that is not resulting in any overheating at all.
The distinction is important if there is to be any hope of solving the low-growth problem. If the issue is a shortage of demand, then some more stimulus should help. If it is entirely on the supply side, then government stimulus is not much use, and policy makers should focus on trying to make companies more innovative and coax people back into the work force.
But what if it’s both?
Larry Summers, the Harvard economist and a former top official in the Obama and Clinton administrations, watched as growth stayed low and inflation invisible after the 2008 crisis, despite extraordinary stimulus from central banks. Even before the crisis, economic growth had been relatively tepid despite a housing bubble, war spending and low interest rates.
In November 2013, he combined those observations into a much-discussed speech at an I.M.F. conference arguing that the global economy had, just maybe, settled into a state of “secular stagnation” in which there was insufficient demand, and resulting slow growth, low inflation and low interest rates.
While the theory is anything but settled, the case has become stronger in the last three years.
But it may not be as simple as supply versus demand. Perhaps people have dropped out of the labor force because their skills and connections have atrophied. Perhaps the productivity slump is caused in part by businesses not making capital investments because they don’t think there will be demand for their products.
Mr. Summers, in an interview, frames it as an inversion of “Say’s Law,” the notion that supply creates its own demand: that economywide, people doing the work to create goods and services results in their having the income to then buy those goods and services.
In this case, rather, as he has often put it: “Lack of demand creates lack of supply.”
* * *
In other words, there’s a lot we don’t know about the economic future. What we do know is that if something doesn’t change from the recent trend, the 21st century will be a gloomy one.