The Truth about Economic Incentive Programs.

Author:Kaza, Greg

Incentives to Pander: How Politicians Use Corporate Welfare for Political Gain

By Nathan M. Jensen and Edmund J. Malesky

258 pp.; Cambridge University Press, 2018

The oft-stated goal of government economic development incentive programs is to create jobs. Yet policymakers and program advocates seldom conduct careful analysis of these programs to determine how well they work. Given how many states use these programs liberally yet fail to even keep up with national job-creation rates, one suspects these efforts are largely ineffective. So why do these programs continue to multiply?

In this new book, Nathan Jensen (University of Texas, Austin) and Edmund Malesky (Duke University) advance original arguments that explain the ubiquity of these incentives and offer technically feasible and politically practical reforms to rein in these programs. The issue is topical: in recent decades government pandering with incentives has grown in response to threats by sports teams, movie companies, and manufacturing firms to relocate their operations.

Zero-sum games! Government incentives can be discretionary ("deal-closing funds") or statutory. Oftentimes they are targeted by policymakers to assist only a small number of firms in the vast universe of enterprise--sometimes even a single firm (think of the goodies different states and localities recently offered for Amazon's HQ2). These incentives have grown in size, with at least 17 single-firm state packages eclipsing the $100 million mark in recent decades. Examples include South Carolina's $130 million-plus offer to attract a BMW plant (1992) and Georgia's $258 million to land a Kia plant (2006). Less well known is the aggressiveness of city and county programs. One example Jensen and Malesky share is Lenoir, NC offering a quarter-billion dollars in incentives (mainly tax breaks) over 30 years to woo a Google server farm. That equals roughly $1 million for each center employee.

The economic inefficiency of these programs is a recurring theme in the book. The authors tell the story of an "incentive war" between Kansas and Missouri that resulted in employers of 3,200 workers moving from the east side of the Kansas City metroplex to the west, and employers of 2,800 workers moving from the west to the east, which the authors term "the very essence of a zero-sum game." There is no clear evidence that incentives create net public benefit, however, as numerous academic studies have shown them to be ineffective...

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