Home » Money » Devouring the Dreams (and Cash)

Devouring the Dreams (and Cash)

Big incentives lure a big employer into town. It’s the dream many rural regions coping with high unemployment and a “brain drain” of their best and brightest long for and have often put up big subsidies to make it happen. Sadly, however, the dream doesn’t last long and many small cities which put their futures on the line saw the big employer move on. We’ve seen this happen for decades, and usually call it “corporate welfare”.

Today is no different, except for one thing – business is moving much faster and the net time from groundbreaking to heartbreaking is only a few years. That was the experience in Dubuque Iowa and Columbia Missouri who spent a total of $84M luring IBM to expand in their towns. Six years on, a struggling IBM has let go of half of their staff in those places.

How effective are these subsidies? And why does this keep happening?

Long ago, IBM was the "Big Brother" threat.  Not so much anymore.

Long ago, IBM was the “Big Brother” threat. Not so much anymore.

The IBM story is typical of heavily subsidized corporate projects in many ways. Dubuque in particular was counting on a spin-off to other high tech startups and a general makeover in the city’s image. The original plan in 2009 was for 1,300 jobs in a large new IT center. The lower wages in the Midwest were attractive, but $12M in state funding made it a sweet deal for the big company. Soon, they were recruiting skilled people from all over the US to come and live in Dubuque.

This January a fourth round of layoffs in the facility was announced, bringing the net number of jobs to 600. It’s nowhere near what was promised.

The fortunes of IBM were rather questionable when the facility was built, of course, and they are shakier today. It’s hard to figure the company’s future and it’s harder to figure what Dubuque can count on. It’s a raw deal for the city, but should they have made it in the first place?

If only companies were rabbits.  Sadly, they want the ca$h money.

If only companies were rabbits. Sadly, they want the ca$h money.

Corporate “incentives” from local governments have been questioned for a long time. The Pew Charitable Trusts has been updating its series on them since the 1990s, carefully tracking subsidies across the nation. Where in the past they found that few came with any kind of cost / benefit analysis, today ten states and the District of Columbia require them. According to the International City/County Management Association (ICMA) 75% of incentive providers now have such analysis in place and routinely measure against it.

That is, a quarter don’t even track how effective the subsidies are.

Those which are tracked can be found in a database called “Subsidy Tracker 3.0” by Good Jobs First. It’s a handy tool for those of us who want to keep watch on corporate welfare in all forms. Not everything is in this database, but the largest ones are. “Megadeals” of $75M or more, 240 of them in total, amounted to $64B in 2013. It’s not a trivial amount of money.

The WTO ruled that state subsidies to this Seattle Boeing plant were illegal.  The result?  Nothing.

The WTO ruled that state subsidies to this Seattle Boeing plant were illegal. The result? Nothing.

The Council on Foreign Relations has an interesting perspective on local subsidies because they are something of an international problem. In fact, we made them one. As part of our general encouragement of free trade around the world, the US negotiated treaties for deals which prohibit local subsidies in other nations. The World Trade Organization (WTO) has ruled against several large subsidies in the US while our own government has pursued several high profile cases abroad. As a matter of Federal policy, such local subsidies are a serious threat to free trade.

That hasn’t made them illegal, however. Given our Constitution it may be impossible.

What the Federal government can do, however, is require regular reporting of these subsidies’ performance and encourage cost / benefit analysis. Disclosure is always the first step towards good regulation as it identifies the problem and may even make it go away. Voters are likely to be outraged once they really see the tab and see beyond the allure of a new high-tech corridor or whatever vision comes with the plan.

What is clear, however, is that as the economy continues to change rapidly the effects of these subsidies are going to be more fleeting. That alone may make them far less desirable. There is always room for improved education and general industrial development that benefits the whole city and smaller start-ups. As long as they are created as rapidly as they go away there is indeed a net benefit to the city.

Is this big IBM crash and burn the last of its kind? Probably not. But it’s a great lesson all the same. Corporate welfare at a local level is a very risky “investment” at best.

12 thoughts on “Devouring the Dreams (and Cash)

  1. I totally agree! You’re absolutely right! Big businesses will take their business elsewhere. Someplace that they don’t have to pay high taxes, or wages and benefits for their employees.

    • If you want to set up a good business climate either with low taxes or with a lot of really good talent that’s worth the additional expense, by all means. But it needs to benefit all businesses if it’s going to do what any community needs – stable work and a productive economy.

    • The car plants that came into the South, particularly the VW plant in Chattanooga, seem to be good investments for the community. Do they really pay for themselves? I have yet to see anyone make that case, but in those cases I’m sure it’s at least close.

  2. There must be some way that the Federal government can pass a law saying that all expenditures must be for the public good and not for the benefit of one corporation.

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  4. I perceive the current trend more as a decentralization of corporate businesses. Why would you keep people in the same place and cover the costs if they can work at home or in smaller offices. Why would your employees want to work in a small city somewhere in the Midwest?
    Younger people generally want to live in the center, be it New York, Vancouver or London. Anyone who thinks that the municipal economy can be saved by great investments in the infrastructure is wrong. Why don’t the politicians get it? Because their knowledge about the current socioeconomic dynamics is limited. They generally think in a way their parents and grandparents did = build a factory that gives jobs to all people in the town. But their kids are already somewhere else.

    • An excellent point. I have been thinking about the infrastructure that rebuilds an economy and I have to say that from what I can tell the basics are still what matter the most. Roads, utilities, etc – and leave the rest way down the list. This does seem like very old thinking, and I very much agree that if you think through the process of decentralization in business today there is a LOT to chew on. Look for more to come. 🙂

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