Fake jobs, fake news: Fake Foxconn comes further into focus
It’s long past time that Wisconsinites demand a recount of the money their leaders wasted on the world’s most famous economic development boondoggle. Three years ago this month, with presidential politics at the forefront, the state entered into a contract with Hon Hai Precision Industry — better known as Foxconn. For up to $3.6 billion in state subsidies, the Taiwanese tech giant agreed to build a massive $10 billion factory among the farms of southeastern Wisconsin.
Did Foxconn ever plan to profitably operate its Generation 10.5 LCD manufacturing facility there? Regardless of the answer, the political gambit has become the posterchild for everything wrong with economic development subsidies.
Evidence keeps piling up that what was hailed by President Donald Trump as the “Eighth Wonder of the World” was a facade. Josh Dzieza’s investigative reporting at The Verge gave a glimpse of the chaos behind the scenes: Foxconn sent newly hired workers to a leaky, 50-year-old office building where they were regularly trapped in inoperable elevators, expected to provide their own office supplies, given little direction and verbally abused by managers. Unsurprisingly, many gave up and spent their time watching Netflix.
Foxconn founder and CEO Terry Gou announced he was exploring the construction of an enormous U.S. factory mere days after Trump’s inauguration. His goal was to build goodwill with the president, whose threatened trade war was Foxconn’s “biggest challenge.” The eventual selection of the site indeed seems primed to curry the most political favor possible.
Wisconsin is a swing state that Trump unexpectedly and narrowly won in 2016. The project site lies in the voting districts of Wisconsin Speaker of the Assembly Robin Vos and then-Speaker of the U.S. House of Representatives Paul Ryan. Just miles from then-White House chief of staff Reince Priebus’ home, it was, according to Priebus, the first place that Trump suggested to Foxconn executives at a White House meeting.
Three years later, federal, state, and local governments have poured hundreds of millions into upgrading the utility and roadway infrastructure around the site, which was forcibly acquired through eminent domain. In exchange, Foxconn has built a handful of buildings, the largest of which isn’t even capable of hosting a much-smaller Generation 6 manufacturing facility — the backup plan that Foxconn has claimed it is pursuing.
Given that the company has no plans to complete the project and hire the 13,000 workers it promised, you’d expect the Wisconsin Economic Development Corporation to scrap the deal. Instead, Secretary and CEO Missy Hughes says that while they can’t offer payments for the scaled-back facility, her “commitment to find a path forward remains steadfast.” In other words, the failures to date have not dissuaded Wisconsin officials.
The problem, of course, is that those who dole out subsidies invest public money in someone else’s private venture. Their return isn’t based on the project’s longterm success, but on the often-fleeting public spotlight and political capital they can lay claim to.
Most private investors would accept their lesson and cut their losses. But policymakers are especially susceptible to what economists call the “sunk cost fallacy,” the irrational urge to let past irrecoverable expenses affect future decision making.
It’s freshman-level stuff, but many politicians would fail Econ 101. It’s not really their fault: The political incentives simply don’t encourage wise economic decisionmaking. Private investors take losses when they throw good money after bad, while policymakers pay a price when they admit failure. Many try to cover up past mistakes by betting that more cash can fill up the hole they’ve dug.
Our own cost-benefit analysis of the
Foxconn project suggests that under realistic scenarios, $3.6 billion in state subsidies might even depress economic activity. This is because the taxes that pay for the subsidy have a negative economic impact, and because Foxconn might have chosen the politically advantageous site anyway, which happens more often than you’d think.
Many elected officials have said that they only offer subsidies because other states are doing so. But policymakers who feel stuck have a way out. Legislators in 14 states have already proposed an interstate compact to end economic development subsidies. It’s a way to mutually disarm in this wasteful arms race.
It might just make Foxconn the last such deal any state has to make.