by Jon Sanders
Research Editor and Senior Fellow, Regulatory Studies, John Locke Foundation
My previous research brief discussed that last year Gov. Roy Cooper pledged over $1.3 billion in corporate welfare to just 58 corporations from state “economic development” incentives programs whose stated purposes are about “job creation.” The tally of new jobs that would be “created” from these giveaways, according to Cooper’s press office, is 15,670.
Are those jobs created out of thin air? No. As explained by as Locke senior economist emeritus Dr. Roy Cordato,
Economic development policies target specific localities, regions, and businesses for special privileges at the expense of the rest of the state. These policies will typically create jobs or economic activity in one part of the state or in one of a handful of industries where subsidies or tax incentives are directed. This expansion, however, comes at the expense of jobs and economic activity elsewhere. (Emphasis added.) …
That’s because economic development policy is not economic growth policy, which is based in ensuring “that property rights are secure, that entrepreneurs can use their property rights in any way they believe will be most productive, and that tax and regulatory policies do not get in the way of this entrepreneurial process.”
The insurmountable fallacy of “economic development” policy is that it requires belief that politicians are better managers of people’s and local businesses’ resources than the people and businesses themselves. While Norman L. Geisler and Frank Turek say “I Don’t Have Enough Faith to Be an Atheist,” I certainly don’t have enough faith to believe that.
If they aren’t, then their “economic development” policies have a net job-killing effect. More jobs will be prevented than created. Such effect is exactly what is found in economic research literature into incentives for economic development — and beyond that, in the crucibles of centrally planned economies from the Soviet Union to Cuba to Venezuela and others.
If the company was planning to move or expand here anyway, then the governor has redirected people’s resources for no good reason.
But even the “job creation” side of things (i.e., ignoring the offsetting jobs not created) requires assuming the recipient corporation would not have chosen to locate or expand in North Carolina but for the injection of corporate welfare (the previous brief term it the “but-for” fallacy: “the pretense that, but for the state giveaways, the projects and jobs would never take place”). There are many factors to a corporate move, and incentives are far down the list.
If the company was planning to do so anyway, then the governor has redirected people’s resources for no good reason.
What if, as implied by economic research, most if not all of those 58 corporate moves would have happened regardless of the state incentives? What would it mean for our job-creation numbers? (Note: again, this question doesn’t account for the offsetting jobs not created.)
The best that could be said in that case would be the state “economic development” incentives could get only a shareof the credit. Politicians want the full credit, of course. But consider, for example, Cooper’s first giveaway announced last year.
On Jan. 7, Cooper announced a $3 million JDIG award to Adverum, which would invest $82.8 million in Durham County building a new gene therapy manufacturing facility and create 200 new jobs. Added in, that $3 million only amounts to 3.5% of the total project cost. But what if that $3 million was not the deciding factor, the one and only thing causing the margins to change and numbers to realign such that Durham County and not somewhere else outside North Carolina got the project? Then at best the state could pat itself on the back for the same proportion — 3.5% — of those 200 jobs, which would represent the state’s share of the total investment.
In other words, the governor’s cronyism would be responsible for only seven jobs for the price of $3 million. That’s $429,000 per job — of resources directed from other people. (And once again, this is before accounting for the incentives’ opportunity cost, the loss of those jobs that otherwise would have been created.)
Maybe that $429K/job calculation is a bit high? Let’s look across the year. Here are the sum totals from those 58 announcements: 15,670 new jobs from 58 companies investing $7.89 billion while getting an additional $1.3 billion from the state. The state would be responsible for 14.1% of the projects’ total cost; 14.1% of those expected new jobs would be about 2,217.
Under the research presumption that incentives most likely weren’t the deciding factors in those projects, then, the cost per job to North Carolina taxpayers would no longer be nearly $82,962 — which by itself is a staggering amount. Instead, it would be up to $586,432 per job.
The lesson according to Cordato:
In North Carolina, no less than in the former Soviet Union, legislators, bureaucrats, or secretaries of Commerce have no way of making anything but economically arbitrary decisions when it comes to allocating market resources. They cannot possibly know how those resources would have been used if left to the free decision making of private sector owners.
Without this information, which is communicated by price signals and the system of profit and loss, they have no way of knowing how their decisions fit into the larger picture of alternative investment possibilities. They can only pretend …
For this reason, incentives-based economic policies are harmful to economic growth. By definition they transfer control over resource use from the more efficient setting of private sector resource owners and entrepreneurs to the less efficient public sector driven by the choices of politicians and bureaucrats.
Can politicians take credit for “creating jobs” when they send other people’s money to a corporate move? No. They “didn’t build that. Somebody else made that happen.”
Economic growth policies, not “economic development” incentives, are the key to letting the job creators, great and small, make job creation happen.