Economic Development Subsidies are “Job Creation” for Central Planners

America’s governors and mayors are hard at work advancing socialist principles in our communities.

Few of them see it that way, of course. But across America, state and local economic development agencies are wielding a dizzying array of tax credits, grants, subsidies, loan guarantees, Tax Increment Finance (TIF) districts, planning exemptions, Downtown Development Authorities, and other mechanisms for subsidizing selected businesses. In many cities, no project of any significant size is expected to be completed without some form of subsidy—which means that no project of any size gets done without the involvement of politicians and bureaucrats.

Once the deal is signed, government economic development agencies then pump out a steady stream of press releases, social media posts, and other messages giving those politicians—and not the free market—credit for local economic growth and job creation. This constant taxpayer-funded celebration of government interference in local economies contributes to Americans’ growing openness to socialist-lite principles of central economic planning and state management of economic activity.

It’s time to take these programs seriously as very real threats to free markets and limited government in our communities.

Politicians Take Credit, Film at 11

Economic development subsidies have become so commonplace that few Americans find it unusual for politicians to be involved in private corporations announcing business decisions, often with higher billing than the corporations themselves. Consider these recent economic development headlines from across the country:

• “ATLANTA—Governor Brian P. Kemp today announced that Nestlé Purina PetCare Company will invest $550 million to expand its Hartwell pet food manufacturing facility, creating up to 130 jobs in Hart County.”
• “NASHVILLE, Tenn.—Tennessee Gov. Bill Lee and Department of Economic and Community Development Commissioner Bob Rolfe announced that Gutterglove will invest $5.4 million to establish new manufacturing and distribution operations in La Vergne.”
• “RALEIGH, N.C.—Chick-fil-A®, one of the nation’s leading quick service restaurant companies, will locate a major distribution center in Alamance County, investing an estimated $52 million to build the new facility, Governor Roy Cooper announced today.”
• “COLUMBUS, Ohio—Ohio Governor Mike DeWine and Lt. Governor Jon Husted announced Monday the approval of assistance for 16 projects set to create 4,183 new jobs and retain 1,051 jobs statewide.”
• “TOPEKA, Kan.—Gov. Laura Kelly and area officials held a virtual news conference Wednesday to announce a ‘major economic development update.’ Commerce officials said Urban Outfitters has selected Kansas City, Kansas, for an ecommerce fulfillment center. It is expected to create up to 2,000 new jobs.”

Not so long ago, these kinds of statements would have been met with confusion. Why would a state’s chief executive make such announcement about a business’s plans, rather than the company’s CEO? But over the past few decades, governors and mayors have increasingly shouldered their way into a starring role. They’ve discovered that taking public credit for private business decisions is a powerful political tool.

We can actually measure the political forces—and benefits—in play. Research from Nate Jensen at the University of Texas at Austin and Eddy Malesky at Duke University found that a governor who took credit with voters for “winning” 1,000 manufacturing jobs through a subsidy deal could gain as much as a 9% increase in support from independent voters. That’s more than enough to shift many tight re-election campaigns, and the evidence shows that politicians are behaving accordingly. Recently, Cailin Slattery of Columbia University and Owen Zidar at Princeton went looking for an explanation for why some states see sudden large increases in their subsidy spending between one year and the next. The reason for states’ unexpected generosity with their subsidy checkbooks, they discovered, wasn’t that states were responding to recessions or unemployment or other economic factors.

Rather, it was because the governor was running for reelection.

Researchers have found plenty of other evidence for the fundamentally political nature of “economic development” subsidy programs: Companies are nearly four times more likely to receive a subsidy from a state if they’ve made campaign donations to state politicians. The more lobbyists an industry has in the state capitol, the more subsidies it receives. Governors are more likely to draw Opportunity Zone boundaries to include their political allies’ districts. When state subsidies are used as political tools in close elections, big businesses benefit but startups and small businesses are more likely to fail.

In short, economic development subsidies don’t create jobs. But they do make voters believe that politicians are responsible for creating jobs.

You Had One Job

In the great tradition of massive government central planning programs throughout history, state and local economic development subsidy programs consistently fail at their stated purposes of job creation and economic growth.

One big reason for this is that we know that overwhelming majority of subsidized businesses were going to do the same thing even without the subsidy. It’s extremely rare that all other business factors are so finely balanced that a subsidy is what finally tips a site selection decision. Major business decisions such as where to build a factory or office building are overwhelmingly based on actual real-world business factors such as workforce availability, proximity to customers and suppliers, the competitive landscape, regulatory environment, labor laws, infrastructure, raw materials, quality of life, and general tax climate.

A widely cited review of dozens of research studies from Timothy Bartik at the W.E. Upjohn Institute for Employment Research determined that at best, only one in every four economic development subsidies actually changes a business’s existing plans. At worst, Bartik estimated, it’s only one out of every 50. This means that somewhere between 75% and 98% of the economic development deals in America are bad deals the instant they’re signed, even before an ROI calculation gets to the question of whether the company ends up generating more benefits than costs to a community. All told, it’s the rare economic development subsidy that accomplishes what it claims—as researchers at the University of Iowa wrote in the Journal of the American Planning Association, “the best case is that incentives work about 10% of the time, and are simply a waste of money the other 90%.”

This pervasive failure of central economic planning shouldn’t be surprising to any student of free market economics. Similarly, the ability of politicians, bureaucrats, and business leaders to ignore the evidence of those failures shouldn’t be surprising to anyone who knows how government actually works in the real world. If the world were a rational and fact-based place, a broad academic research consensus detailing the pervasive failure of America’s economic development industry would be enough to change public policy. As researchers Mary Donegan at the University of Connecticut and T. William Lester and Nichola Lowe at the University of North Carolina-Chapel Hill recently concluded in an overview of economic development program outcomes across the country, “This simple but direct finding—that incentives do not create jobs—should prove critical to policymakers.”

However, subsidies and incentives are working as intended as political tools. Policymakers have their own self-interest in mind, and between big political benefits and big money to subsidy recipients there are few elected officials or business leaders who are willing to break free of the crony capitalist confluence of big business and big government at the heart of an increasingly powerful industry.

Sinking In the Economic Development “Swamp”

Obviously, not all local elected officials approach economic development as a political exercise. Many who have their communities’ best interests at heart don’t have the information they need to identify potential reforms. Others look at the interests arrayed against them and the difficulty in building a coalition for meaningful reform and decide to pick their battles elsewhere. Those that do take on the fight quickly find themselves under attack from the many powerful beneficiaries of the economic development status quo.

That’s not a fight to pick lightly, especially given the way the economic development industry has grown in size and power in recent years. Price tag estimates vary widely—in part because of an intentional and widespread aversion to transparency—but one realistic estimate from the Mercatus Center is that state and local economic development subsidies across the country total $95 billion per year.

By way of comparison, that’s enough money to fund the eleven smallest state budgets, combined. Or, it’s enough money to fund all federal food assistance programs and still have enough left over to buy the U.S. Navy two new nuclear aircraft carriers every year. That national price tag has tripled in size as a percentage of the nation’s economy since just 1990, expanding largely without meaningful public debate or oversight. A portion of that money goes right back into the process of moving public opinion away from free markets and toward central planning and government control of the economy.

It funds pro-central-planning voices like the 540 “regional development organizations” working every day to promote central economic planning across the country, which the National Association of Development Organizations (NADO) helpfully defines as “area development districts, association of governments, councils of governments, councils of local governments, economic development associations, economic development councils, economic development corporations, economic development districts, local development districts, planning and development councils, planning and development districts, planning district commissions, regional commissions, regional councils, regional development commissions, regional planning and development councils, regional planning commissions, and other types of multi-jurisdictional development entities around the country.”

(Others in the past have come up with simpler names for such entities. “Soviet” was a popular one for many years in some parts of the world.)

Pro-Business, or Pro-Market?

We can’t just blame the politicians and bureaucrats. Crony capitalism takes at least two to tango, and in most communities, state and local Chambers of Commerce and other business groups are fully on board with the economic development subsidy train. While some Chambers are more active than others and individual businesses sometimes do break from the pack and stand on principles, it’s far more common for business organizations to heavily support corporate welfare programs on behalf of members that are cashing—or hope to cash—the subsidy checks.

In this, they demonstrate the truth of Milton Friedman’s observation that “Almost every businessman is in favor of free enterprise for everybody else, but special privilege and special government protection for himself.” By cheerleading for failed central planning programs in the name of economic development, these “pro-business” groups demonstrate the truth of Friedman’s warning that self-interested businesses “have been a major force in undermining the free enterprise system.”

The real competition, we are told, is not between businesses in the free market. Rather, it’s between government economic development agencies and the size of their subsidy checkbooks.

The Road to Subsidized Serfdom

With this powerful and well-funded big business/big government chorus all singing from the same central planning hymnal, it’s hard to blame the average American for believing that if a city or state doesn’t hand out the biggest and best subsidies and give government officials increasingly unilateral powers to “develop” the economy, then all the jobs will go someplace else. That’s a terribly dangerous mindset to have local governments and local businesses doing their best to promote, and it’s only getting worse as these programs grow larger, louder, and more lavishly funded.

It’s long past time for defenders of limited government and free markets to take this threat seriously.

In The Road to Serfdom, F.A. Hayek warned that the path to tyranny starts with “government control of economic decision-making through central planning.” While very few governors and mayors may be making a conscious effort to advance socialist principles through their economic development agencies, that doesn’t change the reality of what their self-interested actions are doing to sow distrust in free markets and advance acceptance of government control over economic activity.

Enough damage has been done. Free market advocates must start holding these politicians, programs, and agencies accountable for their actions in our communities, especially when it comes to public misinformation that celebrates subsidies as shining advertisements for central planning instead of expensive political tools that leave communities worse off than before.

The Way Forward

Economic development policy reform is an area where libertarians and other free-market-based reformers can find unlikely allies from the left. Even many progressives who support central planning and socialism in theory decry the crony capitalism at play in the current system, echoing Dr. Martin Luther King, Jr.’s famous critique of “socialism for the rich and rugged free market capitalism for the poor.” While our left-leaning allies of convenience may begin at different principles, supporters of free markets and limited government should embrace the rare opportunity to enlist progressives in a rare exercise of reducing the size, scope, and cost of these government programs.

Principled business leaders are also hugely important allies for reform. This includes not only those who don’t receive subsidies, but also those who have grudgingly played the subsidy game on behalf of their businesses and know first-hand how toxic and unnecessary it can be. As Charles Koch and Brian Hooks of Stand Together recently wrote about corporate welfare, “The best advocates against it are business leaders who don’t want it. This is a bigger pool than you might think: 84% of the leaders at companies that don’t benefit from such favoritism logically oppose it. If this describes you, one practical thing you can do is to publicly criticize corporate welfare and explain why. Don’t stay quiet.”

We have evidence that this works in the real world. In Michigan, a last minute legislative push in 2020 for new subsidies failed in part due to public opposition from high profile business executives. “We’re calling on representatives in the state legislature to resist any suggestion of creating another fund for so-called ‘business incentive programs’ in the remaining days of the legislative calendar,” well known corporate executives Dick DeVos and Matthew Haworth wrote in the Detroit News. “Our state’s tab for past promises is already several billions of dollars and has become a weight pulling Michigan down as we attempt to solve challenges ahead… We urge elected officials to not support future business incentive programs and to consider further measures to limit future impact of any existing programs. The cost is already too high and too unfair to continue.”

That’s a powerful message that more Americans need to hear. Right now, our state and local economic development machines are effectively promoting a false narrative about the benefits of government economic planning. It’s the disconnect between what they promise and what they actually deliver that gives us the opportunity to turn these deals into a case study for the failures of central planning and the real-world costs of putting politicians in charge of our prosperity.

If you’re looking for a place to strike a blow in favor of free markets and against our long slide down the road to socialism, your local economic development agency is as good a place as any to start.