I Wish I Was in the Land of ... Subsidy

John Sugg at Reason has a review of corporate relocation subsidies down South, and the picture is not pretty:

Jurisdictions across the nation offer such inducements, which
include tax abatement, land acquisition, construction subsidies,
training subsidies, and outright cash grants. Nationally, relocation
incentives total about $50 billion a year, according to the WHR Group,
SIRVA, and other relo­cation consultants. (Such consultants often
collect as much as 30 percent of the grants they negotiate for the
businesses.)...

It's hard to get a precise total of the dollars
involved, but almost every major business relocation in the South is
accompanied by a cornucopia of publicly funded grants, despite ample
evidence that the subsidies have little impact on corporate site
selection. Other regions of the nation, especially ones experiencing
protracted economic downturns, are increasingly emulating the South.
The politicians involved rarely consider broader tax and regulatory
changes that would make their states more attractive to all businesses,
outside and homegrown....

Trendy businesses"”particularly technology firms"”have the greatest
leverage in demanding government subsidies. In February, for example,
biofuel manufacturer Range Fuels, based on lit­tle more than its word
that it could deliver a economically competitive product, was offered
$6 million in state cash, a 97-acre tract in central Georgia, and a set
of tax abatements. At best, the company will employ 70 people.

He's got tons of examples, so you should read it all, but this one sounded just like something out of Wisconsin in Atlas Shrugged:

One business that benefited from such subsidies was the Real Silk
Hosiery factory, which opened in Durant, Mississippi, in the late
1930s. Real Silk rented its factory from a state agency for $5 a year,
enjoyed tax incentives, and had public agencies train its employees and
even build their homes. The Durant plant was shuttered in the mid-'50s.
Like many other Southern industrial facilities abandoned by owners
seeking better deals elsewhere, it closed before the industrial revenue
bonds were paid off. Writing in Time in 1998, reporters Donald Bartlett
and James Steele noted that Mississippi "was the poorest state in the
nation when its corporate-welfare program began in 1936."¦62 years and
hundreds upon hundreds of millions of dollars in economic incentives
later, it remains dead last in per capita income."

In the past, I have observed that the "game" of competitive relocation subsidies between local authorities is very similar to a prisoner's dilemma game.  In the prisoner's dilemma, two prisoners are given a choice: To confess and rat out their partner or to stay silent.  If both stay silent, they get 10 years each in jail.  If one rats out the other, but the other stays silent, the talker gets 5 years and the silent one gets 30 years.  If they both talk, then they both get 20 years.  In this game, each person has the incentive to talk, since for any set of actions of their partner, they are better off talking than not talking.  The irony is that when they both inevitably talk, they end up worse off than if they had stayed silent.

I see the relocation subsidy game as very similar, replacing "state official" for prisoner and "subsidize" for "talk."  Quoting from myself:

In a libertarian world where politicians all just say no to
subsidizing businesses, then businesses would end up reasonably evenly
distributed across the country (due to labor markets, distribution
requirements, etc.) and taxpayers would not be paying any subsidies.
However, because politicians fear that their community will lose if
they don't play the subsidy game like everyone else (the equivalent of
staying silent while your partner is ratting you out in prison) what we
end up with is still having businesses reasonably evenly distributed
across the country, but with massive subsidies in place.

To see this clearer, lets take the example of Major League Baseball
(MLB).  We all know that cities and states have been massively
subsidizing new baseball stadiums for billionaire team owners.  Lets
for a minute say this never happened - that somehow, the mayors of the
50 largest cities got together in 1960 and made a no-stadium-subsidy
pledge.  First, would MLB still exist?  Sure!  Teams like the Giants
have proven that baseball can work financially in a private park, and
baseball thrived for years with private parks.  OK, would baseball be
in the same cities?  Well, without subsidies, baseball would be in the
largest cities, like New York and LA and Chicago, which is exactly
where they are now.  The odd city here or there might be different,
e.g. Tampa Bay might never have gotten a team, but that would in
retrospect have been a good thing.

The net effect in baseball is the same as it is in every other
industry:  Relocation subsidies, when everyone is playing the game, do
nothing to substantially affect the location of jobs and businesses,
but rather just transfer taxpayer money to business owners and workers.

I conclude with this from Sugg's piece:

Holladay, who has headed state economic development agencies in
Georgia, Mississippi, and South Carolina, remembers a conversation with
Zell Miller, then governor of Georgia, at a National Governors
Conference in the '90s. "The topic of subsidies came up," he recalls.
"Zell asked me, "˜Is there any way to end this foolishness?' I answered,
"˜The only way I know is to not elect any more governors.'"‰"

  • Craig

    But look what happens if you dare to relocate from New York:
    http://www.washingtonpost.com/wp-dyn/content/article/2007/04/17/AR2007041701987_2.html

    "Schumer reminded the executives that Bechtel relied heavily on federal contracts, that Democrats were now the majority party, and that Clinton was a member of the Armed Services Committee. Her presumed front-runner status for the 2008 Democratic nomination was never mentioned, Schumer said. But he described it as "the 800-pound gorilla in the room."

    Two weeks later, Bechtel announced it was suspending the move.

  • Rob

    *cough Nascar Hall of Fame *cough

    Next time you are in Charlotte, NC, please return the thanks with a dinner or at least a beer!
    or feel free to send me your 'Thank you!' cards to....

    Obviously I agree with the blog post, but what makes this case even more ridiculous is
    that this past election year, we had 3 ballot initiatives to take out bonds for roads/schools/police/etc !!!

    So, Charlotteans forked over money for a private company, then the gov't came back for more when they didn't have enough for the necessities !!!

  • http://www.hodakvalue.com/blog M. Hodak

    Craig beat me to it. This vignette was actually sent to me by Hillary's staff BRAGGING about her strong-arm tactics.

    http://www.hodakvalue.com/blog