Since the 1990s, economic development policies have gained traction in state and local governments throughout the United States. Supporters claim that economic development incentives grow the economy by enticing firms from targeted industries to establish or expand facilities in a specific location. These subsidies are promoted to taxpayers as drivers of job growth; however, the theory, history, and data do not support this claim.
Theory
In a recent article, Citadel economist Russell Sobel argues that economic development incentives reduce economic growth and primarily benefit politicians. He contends that providing subsidies to politically favored corporations is socially wasteful based on the following:
- Providing development incentives to firms comes with an opportunity cost to society. It requires extracting resources from other potential purposes to benefit one politically favored purpose.
- Subsidies disadvantage local firms that do not receive incentives, increasing the likelihood of being forced out of business and reducing market competition.
- Economic development incentives foster corruption among politicians and motivate firms to spend resources inefficiently. Firms know the more money they spend lobbying local and state politicians, the greater the chance of receiving an incentive package. This motivates firms to allocate resources toward securing government handouts instead of devoting resources toward economically productive activity.
- Politicians and firms are rarely held accountable for failed agreements. When a firm falls short of job creation promises, there are generally no repercussions for the firm or liability for policymakers.
History and Data
According to the website subsidytracker.com, since 1987 (the furthest back the website could find reliable data), North Carolina state and local governments have offered more than 16,000 subsidies to firms, valued at nearly $13.5 billion.
Historically, only five other states have provided more welfare benefits to corporations. Currently, North Carolina provides 32 distinct economic development incentive programs that offer a mix of grants, tax refunds, tax credits, and loans to corporations.
The state’s most prominent economic development programs, the One North Carolina Fund and the Job Development Investment Grant (JDIG), were established in 1993 and 2002, respectively. Since their inception, the two programs have promised to create 204,000 jobs, but have only delivered on 95,000.
Of the over 400 JDIG agreements, 187 were withdrawn from or terminated before the firms reached their hiring goals. It is worth noting that 36 of these failed agreements occurred between 2022 and 2023 alone.
Recent Woes
Since 2009, Apple has received nearly $1.3 billion in potential subsidies from North Carolina, which is more than the value of disclosed subsidies to Apple from all other states combined. Most recently, in 2021, policymakers offered Apple a $845 million incentive package to expand its operations in the state by developing a $552 million campus in Research Triangle Park. However, in 2024, Apple announced that it would be delaying the expansion, and to date, construction of the facility has not started.
In 2022, policymakers provided VinFast with the single largest economic development incentive package in the state’s history, valued at more than $1.2 billion over 32 years. However, as of 2024, construction is not underway and they recently announced that the completion of the project is being delayed from 2025 to 2028.
While this poor track record concerns critics, many policymakers continue to laud economic development incentives. One might ponder how politicians and bureaucrats can continue to promote policies that are proven to be economically wasteful. The answer is that policymakers do not offer development incentives for economic reasons; they do so to gain political influence.
Recommendation
Economic development incentives favor specific industries and firms that are subjectively selected by politicians and bureaucrats, at the expense of taxpayers and all other industries and firms within the state. These policies reduce economic growth through inefficient resource allocation and expand political power by allowing policymakers to sway cronies while appearing to be benevolent “job creators.” This is neither good governance nor the optimal path for job growth.
If policymakers want to maximize economic growth and job creation, they should implement policies that level the playing field for all market participants. The most effective method for a state to grow its economy is to pursue policies that equalize market competition while incentivizing entrepreneurship and innovation. A state can unleash the powerful market forces of supply and demand by protecting property rights, keeping taxes low, minimizing regulatory barriers, and eliminating government favoritism. Allowing consumer preferences, not political biases, to determine the success of firms in the marketplace will enhance citizens’ living standards and diminish cronyism.