Wednesday, July 23, 2014

Proof that Industrial Incentives are Poor Bet

11/20/2009

Mississippi pioneered the use of tax breaks and incentives to lure Northern industry south. Most of the South followed suit, trading tax breaks, land and cash for jobs. North Carolina was a holdout until the late 1990s.

The headlines on two consecutive days said it all: Dell Computer closing shop and laying off over 900 workers and Cree Inc. adding almost 600 jobs. The difference: Dell - headquartered in Texas - was lured to North Carolina with the promise of over $300 million in incentives, while Cree - a homegrown business spun out of N.C. State University technology - requested no state incentives (although in fairness Cree did get an incentive a few years back to build an expansion plant).

When are we going to halt public expenditures on the "buffalo hunt" for footloose industry and instead focus our resources and efforts on the sector that produces by far most of the jobs - existing industry and homegrown business?

As a student of and participant in Southern economic development for almost 30 years, I have long been baffled and disappointed by the turn taken by this state in 1996 to enter into the incentives game. Until that time, North Carolina was seen as the leader in state economic development policies and investments - focusing on our great university system and infrastructure investments like the Research Triangle Park, the Board of Science and Technology, the Microelectronics Center, the N.C. Rural Economic Development Center, the community college system and the Biotechnology Center.

These investments built long-term capacity and supported the creation and maintenance of dynamic and growing businesses. Then, under pressure from the professional economic development community - including site selection consultants - the state enacted the William S. Lee Act, and we were off to the races in the escalating game of incentive-based recruitment. North Carolina gave Dell Computer incentives to open a manufacturing plant near Winston Salem. The plant closed. More stable development is homegrown and homemade.

The argument is not against all recruitment - after all the Research Triangle Park was built on a recruitment strategy. Nor is the argument against all public investments in economic development - for example, water and sewer infrastructure, railroad spurs, access roads, industrial parks, etc. But what is indefensible is incentive-based recruitment in which public money goes into the corporations' bank accounts in what amounts to corporate welfare.

We can see how easily it can get out of hand in hard times, as in the recently reported case of North American Aerodynamics in Roxboro, for which provisions of site selection competition and even the prevailing wage standard were waived!

In fairness, it must be said that the General Assembly has been willing to examine and change the incentives structure. In the past two years, legislators appropriated money for a major study of this subject by our Carolina Center for Competitive Economies in the Kenan Institute for Private Enterprise. There have been efforts to target the incentives to the areas of greatest needs and to make them "earned" by the companies instead of all granted up front.

However, the evidence is that these incentives do not redound to the benefit of distressed rural areas as intended. Dell, for example, was located in Winston-Salem. In the 1930s and '40s, Mississippi bragged about the success of its industrial incentive program. Subsequent studies have found that incentives of this sort are a hollow kind of development.

The scholarly literature on incentives shows that they are a very poor investment of public resources. And, of course, the business sector has become expert at playing off one state against another in something akin to corporate extortion; and who can blame them?

Imagine if the South in general and North Carolina in particular had put all of the money spent on industrial recruitment into education, training and small business support. We would be watching even more Quintiles, Cree, PPD, Southern Seasons, Performance Bicycle and other homegrown entrepreneurial success stories all across North Carolina. And, although there are no silver bullets in economic development, homegrown businesses are more likely to stay put, invest in the local community, provide stable civic leadership and keep the control and wealth local instead of away at some remote corporate headquarters.

This policy of incentive-based recruitment began in the 1930s in my home state of Mississippi, still the poorest state in the union. It spread throughout the South until the last holdout, North Carolina, signed up for this dismal strategy in 1996. Our state needs to abandon this policy and return to its investments in education, technical training and small business support.

Not only is this sound economic development policy, it removes the insult to ourselves that only "outsiders" can create the jobs and that we have to pay them to bring the jobs to our people. We can do better than that.

Jesse L. White Jr., Ph.D., is director of the Office of Economic and Business Development at UNC-Chapel Hill. He is a former federal co-chairman of the Appalachian Regional Commission and executive director of the Southern Growth Policies Board. This column first appeared in the Raleigh News and Observer and is reprinted with permission of the author.

 

Comments

Incentives safety net ?

I'd be interested in knowing if NC created any protections for itself in this deal.  Were there any clawbacks or repayment requirements?  Did they set any standards for the quality of jobs and benefits that would be provided? 

NC economic development

Thank you for making the case against industrial recruitment and the requisite incentives. Unfortunately, regional economic development organizations continue to develop funded projects based on these strategies. The NC Rural Center has recently funded a project based on questionable metrics and a significant portion of the budget is slated to go to organizational partners whose legislative mandate is to focus on recruitment. The political might of such organizations almost necessitates this type of focus- sound projects can't go forward without the support of such organizations- they want a cut of the revenue stream. Other organizations are terrified of the political fall out.  

Taking this thinking a step further: The short term politcal metrics used to allocate funding from foundations and agencies has perpetuated the continuance of such ineffective and inefficient economic development strategies. Everyone loves to tout "jobs gained/retained" and "dollars invested"- whether or not these metrics are sound in conceivance or rendering is debatable, although no one will debate this publicly. As long as funders continue to state their goal is "jobs", than this practice will continue.

To be fair, this dynamic is fairly ubiquitous. North Carolina is hardly the only place in the universe that continues this terrible practice.

closed meetings for incentives need sunshine

The shameful if "legal" practice of holding closed meetings to discuss giving bribes (incentives) to corporate pirates to come take advantage of our citizens should be stopped.  If officials were not ashamed of this they would open these meetings to the public instead of sneaking around and presenting it as a 'done deal' later.

Our impoverished county has the County Manager, Chuck Abernathy, serving as the paid head of the McDowell Economic Development Assoc as well, which is a clear conflict of interest.  Rather than locating all toxic industry in one area away from schools and residential areas this economic leader has purchased and developed on our behalf at least three separate industrial parks. 

Recently $300K of our precious tax dollars was determined to go to expand a bottled water business all for 130 near poverty level jobs.  Not wise when we are still recovering from a drought and residential wells in the area are in danger of going dry.  This is a bad business decision considering that the bottled water business is in great jeopardy due to the toxic contaminant, Bisphenol A, in the bottles that has been linked to cancer, reproductive disease, and male sexual dysfunction.  The bottles themselves are not biodegradable and take up land fill space forever.  Bottled water is said to be less safe than tap water as well.  Additionally, third world countries have been driving these bottled drink companies out of their countries because of the unfair distribution of natural resources.  Yet our county welcomes this LULU (locally undesirable land usage) and bribes the owners of this out of state industry to come take our natural resources for free.  Incentives programs sound more like treason than economic development to me. The Attorney General should investigate these deals for bribery of officials and kick back schemes, especially if the deals appear not to be in the community’s best interest.