Yves here. Bear in mind that development programs are a form of socialism for the capital-owning classes. Quite often they reward companies for thing they were going to do regardless.
By Kenneth Thomas. Originally published at Middle Class Political Economist
@sandymaxey points me to a new report from the North Carolina Justice Center that is making my head spin. Picking Losers shows that the state’s flagship development program, the Job Development Investment Grant (JDIG), has seen 62 of its 102 projects fail in the period from its inception in 2002 until 2013. That is, 60% of the projects failed to meet either their job, investment, or wage goals, and had to have their awards canceled.
60%! This isn’t baseball, where a .400 batting average is outstanding, a feat that hasn’t been accomplished since Ted Williams in 1941. Let me tell you about a different failure rate: Investment Quebec takes equity stakes in a number of tech start-ups and other new companies. When I interviewed the director in Montreal in 2007, their failure rate was only 20%, a figure he considered needed to be reduced. In North Carolina, we are talking about a failure rate three times as high, despite giving the awards to firms that should not be nearly so risky.
One such firm was Dell Computers. In 2004, the company conducted a bidding war for a new computer manufacturing plant between Virginia and North Carolina. But North Carolina’s analysis of the project was so out of whack that in nominal dollars it offered almost $300 million ($174 million present value) compared to Virginia’s offer of $37 million. The plant shut down completely in 2010.
Here’s the paradox: North Carolina has some of the best taxpayer protections in the country; indeed, state and local governments lost only a few million dollars when Dell failed. The state is rigorous about canceling awards and clawing back monies already paid out. But the problem is that the state’s economic analysis of potential projects is simply atrocious. The 60% failure rate is one sign of this. The Dell fiasco, analyzed by the NC Justice Center and the Corporation for Enterprise Development in 2007, shows another aspect of fanciful economic modeling.
What can be done? I’ve written before about the weakness of economic development cost-benefit analysis. Even by that low standard, North Carolina’s performance is breathtaking. Report author Alan M. Freyer suggests that the Legislature needs to resist calls to expand JDIG or create another fund with the same purpose, maintain its jobs standards, focus on expanding industries, vastly improve its evaluation of potential projects, and focus help on rural counties. I would add that the state should reverse its cuts to education, one of North Carolina’s economic development crown jewels to date, and restrict its subsidies only to those types shown to have a positive national impact, primarily customized training for companies and generalized training for individual workers. Improving skills increases workers’ income, and it also strengthens the U.S. economy as a whole, as opposed to simply building up a company’s bottom line.
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Economic Development programs are about “Jawbs” and “Groaf”. Corporate investment is about profitability. There’s a deep conflict of interests between the two. The program people tend to optimism and translating corporate fantasy projections into predictions of future successes. Talk to any VC about how much faith they put in any company’s projections, especially “start-ups”. Corporations are equally optimistic, in their projections. They’re not measured on meeting them. Their financial people have more realistic scenarios and built-in stop-loss exit strategies. It’s a stacked decks.
Incentives seem pointless in general. Everyone just seems to be chasing the same dollar rather than developing and supporting new unique industries. And the NFL can build its own f*cking stadiums. Same for all of the other sports leagues. Entertainment in general -why do we need film tax incentives….especially in a state like Louisiana where they are brokered and sold to the oil industry. The incentives goose up profits. No new jobs are created, they are just moved from one location to another. And then a state cuts the incentives, lose the projects to another state, and suddenly they are left with huge empty specialty facilities that have no other purpose. This is a dumb way to do business and a spectacular waste of resources.
On it goes. When does the pendulum swing back?
who says, what in history shows, it’s a pendulum and not, instead, a ratchet?
on an unrelated note, I seem to like commas today.
After some huge catastrophe.
Sadly this is par for the course. Apple recently opened a $1 billion dollar (value) data center in north carolina with tax breaks af around 50 million. It brought 50 full-time jobs. 50 is greater than 0 but handing each of those people 1 million to invest locally might do a tad more.
The claim that this isn’t working for working people however will not make much headway as the same state government recently pushed through a regressive tax shift that will raise sales taxes, cut high-bracket income taxes and will create a structural deficit. They claim that this will help struggling areas of the state but they have yet to say how.
Well, loot allocated by politicians is loot allocated by sociopaths. If it’s not corrupt now, the potential has simply been overlooked.
When the “Progressives” create a new way for the government to distribute loot, eventually the sociopaths will figure out a way to get their cut. And, this can’t be “regulated” or “limited” because there’s no such thing as “good government” because there’s no such thing as “good people” in positions of power. This is something “Progressive” will never comprehend because they spend most of their lives hanging around “good people” without any power.
how about limiting access to these funds to companies that are startups, not existing mega-corporation businesses?
That’s an excellent idea, but there’s a huge risk of loopholes. An established corporation might create a new wholly owned subsidiary that would appear to be a startup, and might be unfairly eligible for the tax breaks and incentives that should only be given to a genuinely new entity. The rules would need to be drafted with great care.