Opinion: Daily Journal

Real Realism on Incentives

RALEIGH – Be realistic. That’s what defenders of North Carolina’s economic-incentive programs say whenever someone challenges the propriety of giving millions of dollars in cash grants or tax credits to industrial prospects. It doesn’t matter whether the practice is unfair or in tension with fundamental constitutional principles. If other states are doing it, then North Carolina must do it, too, or risk losing jobs and economic opportunities.

The more cerebral heads in this nodding crowd often emanate the term “prisoner’s dilemma” to describe the incentives case. The prisoner’s dilemma is a basic element of game theory. Imagine that two accused burglars are awaiting trial in separate jails. They are suspected of having perpetrated the crime together, but the evidence is circumstantial and establishes conclusively only that the two have committed vandalism. No stolen goods have been recovered, so the burglary cannot be proven without more evidence.

The police go to each prisoner and offer a deal: cop a plea, fess up to your and your compatriot’s guilt, and you get only probation. Your accomplice gets 10 years of prison time for the burglary. However, if both of you admit guilt, you both get convicted of burglary, though the prison time will be only five years each. If neither prisoner cops the plea, there will still be a conviction of vandalism and some punishment, say two years.

The dilemma comes from the prisoners’ inability to cooperate. Obviously, if it can be coordinated, the least-risky course is to say nothing, yielding a relatively short sentence. But the danger is that if the other guy talks and you don’t, you could get 10 years. Even if there were some way to communicate, could you trust your confederate? He may think he’s fooled you into remaining silent, while he cheats on the deal and squeals.

There are many, many permutations of this logic problem, complete with mathematical formulas and real-world applications. I hope I’ve done it just enough justice to continue.

Is the incentives debate a prisoner’s dilemma? Many public officials argue that they personally dislike special tax breaks or subsidies but observe that if they say no and other states say yes, North Carolina will lose. So they say yes, admitting that there is some loss – of fairness, economic efficiency, openness, or some other good – but believing that they have chosen the less-bad option.

They are wrong. Incentives present this kind of dilemma only if policymakers allow themselves to be prisoners of their own assumptions. As intrepid reporters Taft Wireback and Dick Barron write in a Greensboro News & Record series that began on Sunday, our actual experience with incentive policies tends to challenge these assumptions, and in many cases to expose them as delusions. For example, careful reporting of the facts on individual incentive grants shows that they frequently go to projects already likely to occur in the incentive-granting jurisdiction. Some companies game the system to get incentives they didn’t earn. Others, obviously motivated by more significant financial variables, don’t bother to take the giveaways. And the large-scale projects for which incentives are deemed relevant are comparatively rare and cannot realistically be thought of us critical economic junctures.

That’s really the point: incentive policies aren’t realistic. They are predicated on the ability of government officials to know which economic enterprises will succeed or fail and on the notion that a relocation of 100 or 500 or even 2,000 jobs can determine the course of an economy of hundreds of thousands or millions of jobs.

Realism means rejecting such fantasies.

Hood is president of the John Locke Foundation.