Tax Breaks to Draw Jobs: A Bad Option, and Often the Only One
Posted May 8, 2018 12:33 p.m. EDT
On its face, Wisconsin’s development policy looks somewhat unhinged. The $3 billion it offered to attract Foxconn’s $10 billion flat-screen-television plant to Racine, near the state’s southeastern tip, is an outrageous price tag.
New Jersey’s offer of $5 billion to lure Amazon to Newark — which comes out at $100,000 for each employee the online retailer would bring to town — is also pretty extravagant. Chicago’s $2 billion in incentives seems sensible only by comparison.
Giveaways like these are often a waste of public money. Research on a program of corporate tax breaks in Texas found that 85 to 90 percent of the projects benefiting from such incentives would have gone forward without them.
Even when tax breaks work and spawn new jobs, local residents gain little if anything.
Timothy J. Bartik, an economist at the Upjohn Institute for Employment Research in Kalamazoo, Michigan, estimates that eight of every 10 new jobs will be filled by outsiders. While the new workers will pay taxes, most of the revenue will be spent on public services for a growing population. And the incentives themselves will blow a hole in state and local budgets, draining resources that would be better invested in, say, public education.
So why does everybody do it? State and local government spending on tax incentives like those offered by Wisconsin and New Jersey has increased sharply since 1990, to about $45 billion in 2015, by Bartik’s count. It amounts to roughly all the money that state governments collect from corporate income taxes.
Is this just about opportunistic politicians dipping into state coffers so they can be photographed cutting the ribbon at a spanking new factory? I wouldn’t doubt it. But I would also suggest another, more troublesome motivation: desperation. Fiscal incentives are one of few tools for cities like Racine and Newark to create jobs.
Whether Racine or Newark, Indianapolis or Detroit, Decatur, Ohio, or Bethlehem, Pennsylvania, too many of the cities that built the United States into an industrial power through the first two-thirds of the 20th century still haven’t figured out how to recover from the blow that knocked them over in the third. Racine County, once a healthy manufacturing hub churning out household cleaners, radiators for Caterpillar rigs and the like, has spent a good part of the last 35 years in a funk. Since 1970 it has lost nearly a fourth of its factory jobs, while jobs overall have grown at less than half the national pace. Household incomes in the middle of the distribution have shrunk 14 percent, adjusted for inflation.
It has plenty of company. A study by Alan Berube and Cecile Murray of the Brookings Institution that I wrote about last week looked at 185 urban counties of at least 50,000 people where manufacturing in 1970 accounted for at least one-fifth of all jobs. It found that 70 of the counties had failed to adapt to the economic transformations since then, and 62 of them were in the Northeast or the Midwest.
Others have come to similar conclusions. In a report published Tuesday, Bartik identifies 105 large labor markets of at least 200,000 people that rely heavily on manufacturing. Only 22 of them “succeeded” — which means that job growth has been positive since 2000 and has exceeded the national pace since 2007.
In “Coping With Adversity: Regional Economic Resilience and Public Policy,” Harold Wolman, an urban expert at George Washington University, and his three co-authors observe that much of industrial America has spent a good part of the last 40 years underwater.
Of the 45 metropolitan areas in the Northeast, 27 have experienced what they call “chronic distress” since the late 1970s, with much slower job growth than in the country as a whole for an extended period. In the Midwest, 33 of 90 metropolitan areas have suffered the same fate. And fewer than half of these distressed areas have managed to snap out of their stagnation.
This is a new problem for the U.S. economy. Through the 1970s, the income gap between rich and poor regions narrowed significantly. It was rare to find areas of persistently high unemployment. Workers moved to high-wage areas. Investment flowed to poor places where wages were lower.
In the face of persistent stagnation across a broad swath of the country, economists are reconsidering their long-standing objection to place-based policies, directed at improving the conditions of a local economy.
Lawrence H. Summers, once a top economic adviser to Presidents Bill Clinton and Barack Obama, and two colleagues from Harvard University note in a new paper that the “Eastern heartland” — roughly the states east of the Mississippi that are not on the Atlantic coast — has consistently underperformed in terms of economic growth and employment.
Job growth has lagged, as has overall economic growth. “America appears to be evolving into durable islands of wealth and poverty,” the authors conclude. And that raises a sort of intractable question: What is the appropriate policy tool to bring a decaying industrial island back to life? There are places that have somehow managed. In last week’s column I mentioned St. Cloud, Minnesota. Grand Rapids, Michigan, also inspires optimism. As its auto-parts industry was falling apart, it pivoted to biotech, raising money from local philanthropists to attract the main campus of Michigan State University’s College of Human Medicine to town.
Bartik argues that government initiatives can help to clean up environmentally damaged industrial sites, improve transportation infrastructure and train workers in the skills that local employers seek. So can offering technical assistance to help small businesses develop.
“You need to invest in services that increase local businesses’ productivity,” he told me.
Count me with the pessimists. I agree with Bartik’s ultimate proposition. But I doubt that a new airport or a few new roads or some technical assistance for small businesses can achieve the productivity jolt that the Rust Belt needs. And no amount of training will work if there are no local jobs to be had.
“A variety of things can make things somewhat better,” Wolman told me, but “explicit policies don’t have much to do with whether you are going to be able to claw your way out of chronic distress.”
The grand solution — of course — is investing in human capital. Study after study finds that areas with more educated work forces perform better. They earn higher wages and are more nimble in adapting to economic change.
But “invest in education” is hardly a prescription that Racine can simply pick up and run with. Indeed, solutions are easier to state than to carry out.
“Chronically distressed regions need to regenerate through diversification, entrepreneurship and innovation,” Wolman and his co-authors argue. “But these are more aspirations than strategies or policies.” The old expectations of the industrial heartland — about wages and benefits, about career ladders and job stability — are no longer valid. The region’s social contract, which promised a decent job to anybody who wanted one, has been ripped up. But nothing has yet been put in its place.
As decrepit industrial enclaves wait for some new deal to replace the yanked promises of their glory days, one might forgive the billion-dollar incentives with which they try to recapture their lost prosperity. As Wolman put it, incentives might be a bad idea from the standpoint of overall welfare. But “if I were a state government,” he said, “I would be trying like mad to attract Amazon.”