John Locke Update / Research Brief

Economic Incentives Unlikely To Influence Corporate Relocations

posted on in City & County Government, Economic Growth & Development, Fiscal Insight, Local Government, Spending & Taxes
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A bill introduced this week in the North Carolina Senate would choose “economic development” policies over economic growth policies. It’s not a good choice if the aim is actually to promote economic growth. But economic development always sounds good, plus it photographs well at ribbon cutting fanfares.

Roy Cordato explains the difference in the John Locke Foundation Policy Solutions 2018.

Policies for economic development “target specific localities, regions, and businesses for special privileges at the expense of the rest of the state.” (Note that “at the expense of the rest of the state.”) They also “lure politicians and bureaucrats anxious to direct private resources toward their pet projects while erroneously claiming that they are promoting the good of the state as a whole.”

Who directs the resources? Politicians and bureaucrats. Whose resources are they directing? Other people and businesses’ (the rest of the state). What gets in the way? Laws limiting how much of other people’s resources they can direct.

On the other hand, policies that promote economic growth are “aimed at allowing businesses to act efficiently and entrepreneurs to innovate and pursue opportunities as they see them.” They’re based on the premise that “private entrepreneurs using their own money or the money of voluntary investors know best how resources should be allocated. The problem facing policymakers then is to see to it 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 process.”

Who directs the resources? The people who own them. Whose resources are they directing? Their own. (Suddenly those questions are redundant.) What gets in the way? Laws, taxes, and regulatory policies hindering them from employing their resources in ways they believe will be the most productive.

This week, the North Carolina Senate approved Senate Bill 820. As the bill began its journey through the chamber, Dan Way of Carolina Journal reported on the move to entrench economic development over economic growth:

The Senate Finance Committee has approved Senate Bill 820, which would raise the amount of corporate handouts to large companies considering moving their headquarters to North Carolina.

The committee voted Tuesday, Nov. 27, to raise the cap on the Job Development Investment Grant Program from $6,500 per job to $16,000. …

Finance Committee Chairman Jerry Tillman, R-Randolph, said raising the cap would help the N.C. Department of Commerce recruit “big boys with deep pockets who are out there looking” to relocate corporate headquarters. They would bring jobs paying $300,000 to $400,000.

Tillman said several large companies are considering moving their corporate headquarters to Wake and Mecklenburg counties, with the potential to create several thousand jobs. The effort is an attempt to catch up to South Carolina, which has similar programs, and is beating North Carolina to the draw in landing corporate headquarters, he said.

It is one of the most fundamental economic realities that when laws allow people to direct their own lives and resources as best suits them, their doing so ends up promoting the social welfare of the whole society. Adam Smith described this process occurring as if people looking out for their own self-interest were being led by an “invisible hand” to make society better off, too.

The allure of playing ‘Visible Hand’ to visible handout recipients

Metaphorically or not, invisible hands are invisible. Practically invisible, as there are so many hands at work that it can’t be visualized. The economic growth that comes from all their untold efforts combined can only be felt — or seen after the fact in the aggregate.

But with incentives programs like the Jobs Development Investment Grants (JDIG) program and other state incentives programs, suddenly there is a very “visible hand.” It comes with its own handy fiction: If it weren’t for JDIG, we wouldn’t have [insert name of a new employer who receives the JDIG incentive].

And since it’s geared to “big boys,” the very large corporations, we have very visible hands grasping for very visible handouts. Still, research suggests that economic incentives are unlikely to influence corporate relocations. They tend to be pot sweeteners after the fact for a business move made for much more important business reasons.

Here’s another problem: there aren’t many big boys. And playing the visible hand for the big boys means stepping on all the little guys, of which there are a ton. Setting aside whether that is a policy to promote economic growth, is that good government? No.

Thing is, 99 percent of employers in North Carolina are small businesses. These are the little guys who can’t afford lobbying and rent-seeking in state legislatures. They don’t specialize in ribbon-cutting ceremonies, golden shovel groundbreaking displays, and other photo ops to thank politicians. They’re trying to make ends meet and serve their communities in their own special ways.

Economic growth policies make it easier for them by keeping state tax and regulatory burdens low. It’s a better choice than playing the incentives game for the 1 percent.

But making that choice means choosing not to indulge in the self-gratifying fiction that economic activity comes at the direction and generosity of politicians and bureaucrats, rather than by the strivings and efforts of untold, unsung numbers of enterprising risk-takers.

Jon Sanders is an economist studying state regulations, that spreading kudzu of invasive government and unintended consequences. As director of regulatory studies and research editor at the John Locke Foundation, Jon gets in the weeds of all kinds of policy… ...

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