John Hood's Syndicated Weekly Column
RALEIGH – Back in the mid-1990s, when North Carolina first began to offer large incentive packages in an attempt to land economic-development deals, I wrote that such targeted incentives had never really been about creating jobs. They were about creating job announcements.
The distinction is important, and the passage of time has only made it more obvious.
Within a dynamic market economy, employers create jobs all the time. They create jobs during booms. They create jobs during busts, though fewer ones. But employers also eliminate jobs, more during busts but also during booms. For the economy as a whole, the key statistic is the net — how many jobs are created minus the number of jobs destroyed.
Giving out special tax breaks, cash payments, or other subsidies to particular firms can certainly be associated with job announcements. Actually, I’ll put it more strongly than that. One of the main reasons politicians offer incentives in the first place is so they can credit for the new jobs being announced, even though in many cases the companies would have made the same location or expansion decision without the incentives.
But to say that incentives work because they lead to job announcements is to miss the boat entirely. Giving subsidies to some politically favored companies inevitably means increasing costs to other companies, typically smaller ones less capable of presenting a credible threat to leave if they aren’t subsidized.
One reason why this happens is that incentives shift the tax burden for local services. The location or expansion of a major employer in a community has a range of effects on the demand for public services. If newcomers to the community take the jobs offered at the new subsidized firm, there will be an increase in traffic, school enrollment, and other demand. If existing residents take the jobs, then they’ll usually be leaving the employ of firms without incentives, firms responsible for a higher proportion of local taxes paid to finance those services.
Either way, you create a growing gap between service costs and net tax collections. Existing firms and households have to make up the difference, in ways that can often lead to lower employment. That’s why the net effect on job creation is not at all the same as the immediate effect on job announcements.
Another reason why job announcements at the front end of incentive deals don’t necessarily result in net job creation is more mundane: much of the time, the job announcements are simply wrong. The announced jobs never materialize. It’s not usually the case that politicians and employers lie about the anticipated effects of an incentive deal. It’s just not possible to predict with precision or confidence the performance of particular companies and their employment needs three, five, or 10 years out. When economic-development officials and politicians claim to have proven that an incentive deal will make money for taxpayers over such time frames, they are being quite silly. Such predictive powers are beyond their capabilities. They are beyond any human being’s capabilities.
What’s more, those who negotiate incentive deals are rarely held accountable for job announcements that don’t pan out. Few even bother to check the numbers. The Winston-Salem Journal’s Richard Craver just did a spectacular job of demonstrating how valuable such diligence can be, however. In a recent piece, he examined 70 local incentives packages awarded since 1990 and found that more than 40 percent of the pledged jobs either were never created or no longer exist.
The bottom line is that over the past decade and a half North Carolina has become known as an easy mark for companies seeking incentives. That’s the main reason our state shows up highly in “business climate” surveys conducted among economic recruiters. They know they’ll get a big package here.
At the same time, though, North Carolina has usually lagged the regional and national averages in actual job creation, and currently has one of the weakest state economies in the nation. It’s another example of our debilitating Blarney Tradition – big talk with little to show for it.
Hood is president of the John Locke Foundation and publisher of CarolinaJournal.com.