In some academic circles, the phrase “local economic development incentives” has become an oxymoron along the lines of “military music” or “jumbo shrimp”. The urban economics literature is chock-a-block with studies that demonstrate that economic results of subsidies are at best mixed, and often reveal that state and local subsidies targeted at specific firms systematically overpay relative to the value that the attracted firms add to the local economy, underwrite locational decisions that would have been made anyway, and fail to increase economic growth for the “successful” locality. Auctions among competing states and cities have been described as evidence of a Winner’s Curse, in which the successful bidder necessarily pays more than the value of the asset, and a Prisoner’s Dilemma in which each participant would prefer not to play the game, but fears ending up worse off if others continue to participate. In a different lifetime, I suggested that some of the characteristics of local governance – a watchful local press, political competition, and legal constraints on municipal debt – should limit the capacity of local officials to offer subsidies that seem unlikely to produce local benefits. And yet, the evidence indicates that such behavior is rampant.
What, then, explains the willingness of cities to compete for firms by offering subsidies that have little chance of increasing municipal wealth? Standard responses include the dominance of business interests in local decision making, overoptimism by political officials who often suffer from an “edifice complex” that causes them to favor brick and mortar projects, political ambition, and wishful thinking. In short, the stuff of normal politics simply causes state and local leaders to make bad decisions about subsidies, but that doesn’t distinguish economic development incentives from any other governmental (or private decision-making) process.
That seemed sufficient to me, until I spent some of the recent winter break reading Lawrence Tabak’s recent book Foxconned, an account of the notorious largely failed attempt by Wisconsin and some of its local governments to host a massive LCD display plant that Foxconn, the Chinese firm responsible for assembling large numbers of iPhones in China, proposed to build in the formerly sleepy town of Mount Pleasant. The initial “plan” proposed that Foxconn would invest $10 billion and provide 13,000 jobs in return for which Wisconsin would provide $3 billion in incentives. The plant was seen as a potential shining success story in Trump’s touted efforts to return manufacturing to the United States. Tabak, a journalist who reported on the tortured history of the plant in the local press, recounts how the rosy proposal led to superfluous condemnation of private residences and issuance of substantial local debt to construct a site and accompanying infrastructure for a plant that had little chance of approximating the scope of what was initially proposed.
Part of the delight of Tabak’s telling is his familiarity with the underlying literature in urban economics and behavioral psychology that supports the traditional explanations for state and local subsidies of failed projects. But Tabak’s detailed account adds some elements that make the Foxconn example particularly egregious and suggests that explanations for municipal overinvestment can be more complicated than just “normal politics”. In Tabak’s story mere political overreaching is amplified by conduct that ranges from incompetent to corrupt. Tabak relates how Scott Walker’s administration lined up cronies to support a project of which they had no technical understanding, who were apparently oblivious to Foxconn’s history of unfulfilled promises to localities, and who either ignored or failed to comprehend the mismatch between the available worker population in the immediate area and the requirements for the jobs that Foxconn was offering. Local governments made land use decisions without input from constituents whose lives and localities would be disrupted by the proposed project. Site selection “experts” and consultants for Foxconn projected grossly overoptimistic economic impacts based on modeling software that was never intended to be used for such predictions. Several individuals charged with implementing the project had checkered careers in economic development. One of Tabak’s more interesting observations involves the cultural differences between Foxconn and their potential Midwestern hosts about the meaning of a “promise” of a $10 billion plant. For the Wisconsin team, the promise was an ironclad contract sufficient to trigger funding and construction. For the Foxconn team, the statement was more of a starting point for negotiations that ultimately led to a dramatically downsized project.
The Foxconned story may not be representative of economic development subsidies. Indeed, some may actually work. The key is to define the characteristics of projects that fit well with the needs of the local economy and that, if subsidized, are likely to increase local employment and productivity. Think of Pittsburgh’s efforts to rebrand itself as a center for the finance and health industries after the decline of steel manufacturing. Success might mean subsidizing the relatively small firms that are incubators for innovation and employment rather than grasping at the brass ring of a large established firm, identifying the match between employer needs and employee skills, reducing the size of subsidies to a point where the per job cost is realistic, benchmarking subsidies to hiring, and reducing the length of time for which subsidies are available. Some mechanism for limiting the race-to-the-bottom competitive bidding among state and local governments might also reduce the adverse effects of incentives, but little in the way of cooperative policy seems to be emerging. Reining in the widespread use of tax-increment financing may reduce diversion of property taxes from general municipal purposes to dubious efforts to enhance economic growth. In short, diagnosing the right conditions for economic development incentives is a difficult task. But the Foxconn story provides a cautionary tale and fairly useful guide to the factors that inexorably forecast failure.
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