Pass a Law to Combat Rent-Seeking

Corporate welfare is finally receiving the scrutiny it deserves. In Wisconsin, the Foxconn deal of 2016 looks worse all the time: In exchange for a $4 billion incentive package, the Taiwanese electronics manufacturer was to build a $10 billion factory and create 13,000 jobs by 2032, but the project is far behind schedule and Foxconn has missed its jobs targets by a mile. New York City and state offered Amazon $3 billion in incentives and the company promised to invest $5 billion and create 25,000 jobs over a decade, but the deal collapsed. New Jersey’s Economic Development Authority is under investigation for authorizing tens of millions of dollars in tax breaks for companies that didn’t qualify, seemingly as part of a political payback scheme.

One reason incentive deals haven’t stirred more public opposition is that, unlike the Amazon negotiations, they usually take place in secret. Hundreds of comparable deals are shaping up around the country from month to month, but the public knows little about them. Company lawyers visit local or state officials and inform them company honchos are considering a move to the area. But some other state, they say, is offering enticements—tax breaks, real estate, grants, etc. Can you get us a better deal?

That’s not a proper bidding war. Officials are competing against offers they can’t see. But they want the deal and attendant publicity, and their own money isn’t at stake, so they give the companies just about anything they want.

The upside for the incentivizing government is the jobs windfall. Or is it? Companies don’t always bring the promised number of jobs, and the incentive agreements are secretly renegotiated to reflect more-modest targets. Even if the jobs targets are met, the benefits aren’t necessarily what they appear. The new employees may be hired from elsewhere, in which case the incentivized company has added strains to the area’s infrastructure without helping the jobless rate.

Let’s assume, though, that all works out for the town that attracts the company—new jobs, more wealth, bigger tax base. It works out rather badly for the town the company left. Maybe that place incentivized the same company to uproot from somewhere else years before. Now all it has to show for it is a vacant building and an empty parking lot. The company’s departure is attended by no press conferences; the politicians who cut the ribbons or posed with golden shovels a few years before may have left office by the time the company leaves town.

To be sure, a company may choose to move for entirely defensible reasons. But governments have a way of distorting the motives of corporate decision-makers, luring them with artificially conducive conditions—sales-tax exemptions, property-tax abatements, land purchased for $1. You can’t blame the companies for taking the bait, but often the new location presents unforeseen disadvantages. It may be far from the interstate and cut off from supply lines. The local education system may struggle, or the cultural scene fail to impress, and new talent won’t move there. So the company begins looking elsewhere again, and soon falls under the spell of new market-distorting enticements from other state and local governments.

This never-ending game of subsidy-chasing—economists call it rent-seeking—adds nothing to the national economy and takes away quite a bit. Companies devote more of their resources to finding the best governmental benefits, and less to making better products and providing better services. Studies put the annual amount spent on rent-seeking at well over $1 trillion.

What can be done? Good Jobs First, a Washington-based nonprofit that does indispensable work in tracking public subsidies to private companies, proposes several sound remedies: statutory subsidy caps, interstate compacts against “jobs piracy,” laws forcing disclosure of agreements before they’re signed. The problem with these reforms is that they would have to be self-imposed. Politicians would have to give up the political benefits of scoring big economic-development deals. Unlikely.

Effective limits on subsidy-chasing will have to come from outside. Consider the European model. The European Union imposes significant restrictions on how much member states or regional governments can offer companies to entice them to expand or relocate. Large companies are ineligible for most government-backed subsidies in areas where gross domestic product per person is above 75% of the EU average. Wealthier regions can still offer aid to small and midsize companies (250 or fewer employees), but in most cases they are not permitted to lure large firms away from other regions.

One problem with this arrangement (other than its complexity) is that it allows governments of poorer regions to keep doling out what little resources they have to large firms. But as Kenneth Thomas of the University of Missouri-St. Louis argues, barring wealthy regions from dispensing massive subsidies to large companies would lower the cost of such deals for governments of poorer regions. Further, the EU places limits on all subsidy arrangements on a graded subsidy-to-investment ratio: Depending on the region, a government can’t offer more than a certain percentage of the overall investment.

Read more of this Wall Street Journal op-ed by Barton Swaim by clicking here.