An Imaginary Dialogue on Business Incentives
By Bill Schweke on 04/17/2007 @ 04:55 PM
Typically, business incentive reformers win the intellectual arguments about the downsides of business incentives, but state and local policymakers refuse to stop providing incentives. The following imagined dialogue between a wonk reformer and a business recruiting buffalo hunter captures the back-and-forth of such a conversation. But there is one big difference: this conversation may offer a way out of the present impasse.
Wonk: Business incentives are a waste of money, nationally speaking. They only make sense if they are designed to correct a market failure or really move private investment into poorer communities. The typical recipient of public largess does not need the money to do the deal. They are instead shaking down the jurisdiction for what they can get. Continued incentive use also perpetuates an unceasing incentives arms race between jurisdictions and a virtual war between the states.
Buffalo Hunter: That is easy for you to say. It might be high-minded of you to take such a perspective, but I have to think state and local. These are my constituencies and my customers. Sometimes an incentive can land a deal for my state and create some much-needed jobs.
Wonk: That's noble, but this is a game that you cannot win ultimately. If you also roll back your regulations and tax base to court footloose firms, it can lead to a race to the bottom. Eventually, you will inevitably fall behind in the incentives competition: you match your peers, and then come up with a new fiscal gimmick only to see it copied by others. It just pushes the price tag up and up. Plus, there is also the danger of the winner's curse : you land the deal, but end up paying way too much for it. Essentially, the company holds all the cards because only it knows what will tip the deal one way or the other.
Buffalo Hunter: Fine, but I can't just sit on my hands. If I'm heading down the wrong path, get the feds to stop me. Regulate sub-national subsidy use, like the European Community does. Or get the World Trade Organization to pay more attention to America's implicit industrial policies and crack down on the most egregious of these.
Wonk: That's not really the point. Just looking at the deals themselves, you should be a smart investor, not a chump. When negotiating you need to be sure to add stronger performance standards, increase transparency, conduct independent cost-benefit analyses, and so forth. It will help you to be more cost-effective with your incentives and weed out the bad programs.
Buffalo Hunter: Maybe, but my constituents can't eat good government. Telling them I avoided some bad deals only goes so far. They want jobs.
Wonk: Of course they do, but the most important way to create jobs and wealth is to invest wisely in early childhood and K-12 education, research and development, higher education, infrastructure, and workforce retraining. Modernize the tax structure and provide professional and predictable regulation.
Buffalo Hunter: I completely agree, but it takes so long to generate the jobs and enterprises that are yielded by these public investments. Plus, it is kind of invisible, compared to cutting ribbons at the construction site of a new 100-job project.
Wonk: Well, what if I were to tell you that I have a viable alternative to the limited promise of that ribbon cutting ceremony? What if I can give you an option that generates real returns in one year or less? It is guaranteed to foster development in all counties of a state--not just the most affluent places, such as the metro areas (though it can help them, too). It is a game that everybody can play and win. It can really aid small businesses, and can help those workers and communities that are losing jobs today. The option that I propose is a smarter approach: growth tax credits and direct grant incentives for targeted job creation.
Buffalo Hunter: I'm listening. Please continue.