Economic Development: A Waste of Money

This past weekend the Wall Street Journal - one of the few remaining newspapers in this country - published an excellent article on so-called economic development (Review section, p. C4). The article is penned by Nathan M Jensen, professor of government at University of Texas, Austin. He is also a senior fellow of the Niskanen Center, a breakaway from the Cato Institute.

In a new book, which he introduces in the Wall Street Journal article, Jensen does what I have been asking for since the first day I heard about Governor Mead's ENDOW project: an evaluation of whether or not corporate welfare works.

Apparently, that has been too much to ask for. To no avail, I have asked the governor - in person - and his entire ENDOW staff; I have asked legislators who say economic development is a great idea. 

I have asked people with economics training who think economic development is a great idea. I have asked every single person I have come across who likes economic development: please show me one study that proves that economic development works.

I had even started working on a study of my own on this subject. 

Thanks to Nathan Jensen, I can spend my time on other research. Even though his research does not specifically target Wyoming, it is highly relevant for us, given the unrelenting efforts by many legislators to spend our tax dollars on Governor Mead's ENDOW project - and WyoFlot.

Calling economic development for what it is - corporate welfare - Jensen leaves us with the unquestionable conclusion that it comes with no identifiable economic benefits. He begins with a reminder of what happened when Amazon declared it was looking for a second headquarters to locate somewhere outside the Left Coast. More than 200 metropolitan areas around the country applied, with perk-filled packages loaded with billions upon billions of dollars. Reports Jensen:
When Amazon announced last month that it would split HQ2 between New York City and Arlington, Va., losing applicants cried foul: They accused Amazon of an extraordinary bait-and-switch, enticing dozens of bidders to increase the competition and the incentive offers, only to end up with two of the most obvious candidates all along. The reality is that this sort of competition for big projects, while unusually large in the Amazon case, is the rule not the exception in economic development and has been for a long time. 
Jensen has written a book about corporate welfare, from which he extracts examples to share with us. Summarizing his research, he notes that there have been scattered examples of corporate welfare throughout history - he mentions the creation of the city of Paterson, NJ in 1791 - but:
What's different in our own era is that most companies aren't actually changing their decisions based on incentives but are pocketing substantial benefits anyway. Studies show that the cost and frequency of incentives packages - which cities and states typically offer companies to either relocate or stay put - have been rising. Secrecy surrounding many of the deals makes a full accounting difficult, but a new database assembled last year by the Upjohn Institute for Employment Research covers programs for 47 cities in 33 states. It found that the cost of such incentives more than tripled from 1990 to 2015
Long story short: corporate welfare pads the pockets of businesses with work-free money while draining taxpayers for purchasing power and money that could have been used for the constitutional functions of government.

To reinforce the point that corporate welfare is ineffective, Jensen reports that "investors mostly don't change their investment decisions based on incentives", with only one quarter of corporate investment decisions being in any way meaningfully affected by tax-paid incentives. Then he provides a summary of his own study of incentives in Texas, where he found that
numerous companies applied for incentives after they had already broken ground and, in some cases, after they had completed building. A few even noted in their applications that they weren't looking at other states for their investments. Yet all of these companies received tax-payer dollars for doing what they would have done anyway.
This is a shocking revelation, and it makes me wonder what really happens when corporate welfare is being doled out here in Wyoming. Let me make clear that I have no reasons to believe anything untoward, but the very facts that Nathan Jensen reports are reasons enough to ask: is Wyoming any different?

Perhaps it is time for a study of the exact circumstances of corporate-welfare deals here in Wyoming. Even more important: it might be time to ask for the highest level of transparency and public scrutiny of any "economic development" deal with any business, from hereon. For example, now that more and more communities around the state are lining up behind WyoFlot - the state-run airline project that came out of ENDOW - we taxpayers should demand to see the details of any deal made with any airline. 

Remember: WyoFlot is a capacity purchase agreement, which means that taxpayers will pay to keep planes flying regardless of whether anyone is onboard them or not.

In other words, WyoFlot is not just a one-time corporate-welfare deal, for one investment project. It is an ongoing commitment, year in and year out. However you skin that cat; however you try to spin that project; it is still going to cost taxpayers tens of millions of dollars per year.

Back to Nathan Jensen, who pointedly summarizes the purpose of corporate welfare:
Though incentives are rarely effective in changing firms' investment decisions, they do allow politicians to attend ribbon-cutting ceremonies where they can highlight their own role in attracting a new company (or retaining an old one) and creating jobs.
Furthermore,
Economic development is frequently a secret affair, and the secrecy is often couched as helping local government to retain a competitive advantage. Numerous states have exceptions to their state public records laws and choose to apply them to economic development deals in progress, as both New York and Virginia did [in the Amazon case] during the yearlong bidding process.
People with business backgrounds will tell us that secrecy is common in the business world and therefore nothing strange in corporate-welfare deals. The first part of that statement is uncontroversial; the second is not. In regular business deals, financing is voluntary. People choose, or choose not to, enter deals where they put their own money at risk. In corporate welfare, the funder is the taxpayer, who, if he disapproves of how his money is being put at risk, will ultimately go to jail. 

Wherever tax money goes, transparency should follow.

Jensen appears to leave out one important metric of the effects of corporate welfare: a measurement of tax dollars generated vs. tax dollars spent. He may be discussing it in his book, which I have ordered his book and will report on it as soon as I have read it. For now, though, we can safely conclude, based on what Jensen tells us in his Wall Street Journal article, that I have been right all along in claiming that the typical economic-development project does not produce enough tax revenue to repay taxpayers what they invested upfront.

I will, again, return to this issue as soon as Jensen's book is in my hands. Until then, let us review a set of data that is related to the problem of corporate welfare. Many of our legislators - not to mention our outgoing governor - often talk about the need for the state government to be involved with private businesses because we do not have a strong enough growth in jobs in our state. The point about jobs is correct: outside of minerals, our private sector is notoriously weak when it comes to jobs creation. 

However, the problem is not quite what the proponents of economic development make it out to be. There are two facts that are usually ignored in the debate. First, the minerals industry, while important in many ways, is not our biggest private employer, even though it is sometimes portrayed as such. The fact of the matter is that the minerals industry is only responsible for ten percent of all private-sector jobs in our state (and that includes all support functions). Therefore, the weakness in private jobs growth is spread out across all industries - making the lack of jobs growth an economy-wide problem, not an industry problem. 

This tells us that any policy solutions must be general - economy-wide - not selective as in giving away taxpayer money to select companies.

The second fact that is often ignored is that we have a government workforce that is far bigger than taxpayers can afford. As I have been explaining for years: our state has the largest government workforce in the country, and it is not a problem that just popped up on the radar. It has been going on for years. 

Table 1 below reports calculations of the Government Employment Ratio (GER) for all states, and for most of them as far back as 1990. The GER is the number of private employees per 1,000 state and local government employees. It is one of several ways to measure the size of government in a state. 

These numbers are cut-outs for the month of October for each year. The most authoritative calculations of the GER are based on annual averages, which we will get back to in January when we get the December numbers for 2018. However, since the October sample covers such a long period of time, it can be viewed as a reasonably good view of the trend in private vs. government employment. 

And what a trend it is. Except for a short period in the mid-2000s, our state has topped the national GER rankings since state employment numbers became readily available in 1990. For almost three decades, our legislators and governors have maxed out what taxpayers can provide, by allowing state and local agencies to hire as many people as they can possibly stuff their offices with:

Table 1
Source of raw data: Bureau of Labor Statistics

Corporate welfare is a waste of money as well as legislative and executive-branch time. Our elected officials would do much more for the private sector in our state if they addressed the denominator of the GER: the reasons why we have such a large government workforce in the first place. By aligning our GER with mainstream America, where it is below 200, we would free up a skilled workforce to go into private employment - and we could effortlessly keep our taxes competitive instead of raising them in every cardinal direction

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