Once again, gov­ern­ment-sub­si­dized projects fail to de­liver

Antelope Valley Press - - OPINION - Veronique de Rugy is a se­nior re­search fel­low at the Mer­ca­tus Cen­ter at Ge­orge Ma­son Univer­sity.

In June 2018, Pres­i­dent Don­ald Trump at­tended the ground­break­ing cer­e­mony for a Fox­conn fac­tory in Wis­con­sin. Ever ex­u­ber­ant in his com­ments, he called the project the “eighth won­der of the world” and “one of the great deals, ever.” Al­ways a brag­ger, his praise was di­rected at him­self for or­ches­trat­ing the use of state sub­si­dies and tax cred­its to bring the Tai­wanese multi­na­tional elec­tron­ics com­pany to Wis­con­sin for it to man­u­fac­ture high-res­o­lu­tion LCD screens.

To make this deal hap­pen, the state leg­is­la­ture of­fered a sub­sidy pack­age of $4.5 bil­lion, mostly in di­rect cash pay­ments, and lower-priced land ac­quired through em­i­nent do­main. In ex­change, Fox­conn promised to cre­ate more than 13,000 mid­dle-class man­u­fac­tur­ing jobs, a re­vived man­u­fac­tur­ing sec­tor and loads of tax rev­enue -- the com­bi­na­tion of which was pro­jected to pro­duce eco­nomic re­turns rang­ing from $39 bil­lion to $78 bil­lion over the next 15 years. If these re­turns sound like a great deal, you’ve been conned.

A year and a half af­ter Trump pa­raded at the site with his golden shovel, the re­al­ity isn’t as bright. First, a few days be­fore the cer­e­mony, Fox­conn an­nounced that the fac­tory would ul­ti­mately be smaller than the one ini­tially promised. It would also be highly au­to­mated, with al­most all of the assem­bly work done by ro­bots, and would only re­quire 3,000 em­ploy­ees -- 90% of them “knowl­edge work­ers” such as en­gi­neers, pro­gram­mers and de­sign­ers. There’s noth­ing wrong with such a mod­ern fac­tory, ex­cept that it’s not what Trump and other gov­ern­ment of­fi­cials thought they were buy­ing with tax­pay­ers’ money.

And what about the promised eco­nomic growth? Even un­der the deal’s orig­i­nal terms, there’s no way it would have pro­duced much growth. That’s be­cause, as is of­ten the case, the orig­i­nal pro­jec­tions of­fered by eco­nomic de­vel­op­ment con­sul­tants only con­sid­ered the ex­pected ben­e­fits from the sub­si­dies; the costs were ig­nored. In the real world, how­ever, these sub­si­dies don’t fall from the sky. Ev­ery sin­gle cent comes from ad­di­tional taxes paid by ac­tual peo­ple. When you con­sider these costs, the eco­nomic outlook for the project dims quite a bit.

In a re­cent pa­per on the is­sue, my Mer­ca­tus Cen­ter col­leagues Matthew Mitchell and Michael Far­ren did the math and found that “the $3.6 bil­lion in taxes needed to fund the sub­si­dies will likely de­crease Wis­con­sin’s lon­grun GDP by about $20 bil­lion over the 15-year life of the hand­out. And this es­ti­mate doesn’t in­clude the lo­cal, util­ity in­fra­struc­ture, and fed­eral sub­si­dies that to­tal an­other $1.4 bil­lion.” These numbers are harder to sell to tax­pay­ers than the la-la land ones we hear about be­fore ev­ery big sub­sidy deal.

Many might have as­sumed that this par­tic­u­lar deal was go­ing to be a dis­as­ter be­cause it was or­ches­trated by Trump and Scott Walker, Wis­con­sin’s Repub­li­can gov­er­nor at the time. Yes, it’s true that our cur­rent pres­i­dent be­lieves in eco­nomic en­gi­neer­ing and crony­ism -- which is an­other way to de­scribe this kind of deal. Trump has failed else­where when try­ing to spark growth with sub­si­dies. Take, for in­stance, the Car­rier air con­di­tioner plant in In­di­anapo­lis, which re­ceived large state hand­outs un­der Trump’s pres­sure, only to end up lay­ing off hun­dreds of work­ers. But in such mat­ters, many politi­cians on both sides of the aisle have a sim­i­larly lousy record.

And so, it would be a mis­take to as­sume that this de­ba­cle is spe­cific to Trump or to Fox­conn.

A new pa­per in the Jour­nal of Eco­nomic Per­spec­tives by Cailin Slat­tery of Columbia Univer­sity and Owen Zi­dar of Prince­ton Univer­sity looks at state and lo­cal busi­ness tax in­cen­tives and finds yet again that nar­row, firm-spe­cific tax breaks aimed at at­tract­ing busi­nesses and boost­ing em­ploy­ment aren’t the way to go. The study shows that larger, more prof­itable com­pa­nies are more likely to get big­ger hand­outs. The largest deals ben­e­fit the re­cip­i­ents, ac­cord­ing to their re­search, but not the over­all state econ­omy.

Lower-in­come states also tend to be more gen­er­ous with their hand­outs, only to jack up the cost per job cre­ated, some­times up to as much as $400,000 per job.

This study is only one of many on the topic. They all find that these nar­rowly tar­geted sub­si­dies don’t work as ad­ver­tised and are typ­i­cally coun­ter­pro­duc­tive. Un­for­tu­nately, a slo­gan like “sub­si­dized projects aren’t worth the money you pay for them” doesn’t make for a great sound bite at ribbon-cut­ting cer­e­monies.

Com­men­tary Veronique de Rugy

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