A prescription for sanity

A prescription for sanity

- in Weekly Briefing

International expert outlines a better approach to business incentives

Few developments in modern times highlight the overpowering influence of large corporations on American public policy and politics so well as the steady expansion of business “incentives” – the practice of paying companies with public dollars in the hope that they will locate or stay in a particular locale. Especially with the ever-expanding complexity of the tax code and the emergence of an entire industry of lawyers, accountants, consultants and lobbyists dedicated to securing favorable public treatment for high-paying clients, the incentives or “subsidies” game has undergone near-metastatic growth.

North Carolinais, of course, no stranger to this phenomenon. The Dell and Google episodes of the last decade are just the two most visible among hundreds of separate backroom deals cut (or, at least, pursued) by public officials at the state and local levels to lure or hold on to corporate facilities. As was highlighted just last week on The Progressive Pulse blog, North Carolina is currently in the midst of yet another such “buffalo hunt” – one that even has its own embarrassing code name for favored government insiders.

The central problem with the unfettered growth in the use of incentives (at least when it comes to promoting societal common good) is pretty clear: it’s stupid.

Left to run their course uncontrolled, incentives drain public tax coffers, promote government secrecy and special treatment for politically-connected companies and compel governmental bodies to enter into suicidal competition – usually to lure corporations away from their neighbors and fellow citizens.

Unfortunately, getting a handle on the incentives game has proved incredibly tough. Between unhelpful court decisions, ever-more-rapacious corporate actors, politicians of both parties who simply can’t help themselves, and a distressingly ill-informed public, incentives have been like kudzu: of no apparent value to anyone and spreading rapidly just the same.

Back to basics

While no one seems to have yet concocted any kind of politically plausible miracle cure or quick fix for the incessant spread of incentives, some experts are beginning to take some helpful initial steps toward a longer term solution. Like public health officials attempting to fashion a strategy for controlling the spread of a virus, these experts are documenting the problem and sizing it up so that we can at least begin to imagine creative new ways to manage it and maybe even cut it down to size.

NC Policy Watch was lucky enough to play host to one of those experts this week – a professor from the Universityof Missouri, St. Louisnamed Kenneth Thomas who spoke at a Crucial Conversation luncheon in Raleigh.

Like some intrepid researcher for the World Health Organization, Professor Thomas is a pioneer in the effort to understand and manage the spread of business incentives. Over the last couple of decades, Thomas has worked and studied around the world in an effort to see how big the phenomenon is, whether it produces any benefits at all and who, if anyone, has come up with ways to control it.

Rather amazingly, he seems to have been the first person to come up with even a ballpark estimate of how much American states and local governments spend on incentives – a figure that he places at almost $70 billion per year (i.e. almost four times the size ofNorth Carolina’s 2012 general fund budget). According to Thomas, this figure has almost doubled in just the last decade.

Late last fall, Thomas released a new book (Investment Incentives and the Global Competition for Capital) that spells out many of his other findings about the incentives epidemic. Here are some of those findings that he shared with hisRaleigh audience on Wednesday:

  • The size of the incentives problem is massive; the public money spent could provide average wages and benefits to 1.3 million Americans.
  • Under the current regime, incentives are mostly a failure; they’re inequitable, inefficient and frequently harmful to the environment.
  • Incentives promote what he calls “locational” tournaments or bidding wars in which lots of governmental bodies expend significant amounts of money just to get in the game, but in which all but one party gets nothing.
  • Many, many “winners” actually end up as losers because they overbid for projects – something Thomas saysNorth Carolinaclearly did in the Dell and Google cases.

So what to do?

As noted, Thomas had no miracle cures to share, but he did put forth some interesting findings with respect to successes of other countries – promising therapies, if you will, that could, over time, lead to progress here in theU.S.

Perhaps Thomas’ most promising conclusion is one that experts like North Carolina’s own Bill Schweke of the research group CFED has frequently touted on the Policy Watch website – namely that incentives do not always have to be bad. With extremely careful crafting and very strong oversight, incentives can sometimes serve a useful purpose – namely, to help spur private economic development in struggling, low wealth communities. Assuming one is willing to accept the premise that it’s sometimes desirable for public bodies to direct development away from already well-off areas and toward poorer areas, incentives can have a place.

The problem, of course, comes with crafting and keeping the strong rules and regulations. Without them, the cow gets out of the barn and before you know it, you’ve got the current (and ruinous) American free-for-all.

According to Thomas, there are promising models for controlling incentives inAustralia,Canadaand the European Union. Each of these places has attempted to put in place a framework under which various states (or in the case of the E.U., individual countries) agree not to “poach” each other’s businesses.

The E.U. seems to have had the most success. Under rules that bind all member states, government incentives deals must be thoroughly vetted through a complex rules system overseen by a central bureaucracy. Proposals must be transparent and shown to serve the purpose of effectively promoting economic development in a struggling area that would not have otherwise occurred – ruralRomania, for example – and of compensating the company in question fairly.

Though far from perfect and not beyond the kind of corrupting influences at work in theU.S., the E.U. system has produced measurably better results. Thomas’ analysis shows that E.U. subsidies are generally much smaller and more targeted to areas in need. Moreover during the last few decades (the period of Thomas’ study) the E.U. far outpaced theU.S.– both in terms of attracting new capital investments and in its spending for building and improving infrastructure.

Going forward

The bottom line in Thomas’ research thus far seems to be this: While eradication of incentives is probably impossible (and maybe not even desirable), democratic governments can create structures to control them. Naturally, this will be extremely difficult in the U.S. Putting the genie back in the bottle always is. But it would be a terrible mistake not to try.

As with so many societal challenges, the key appears to lie in convincing average Americans to rediscover the importance of cooperation for the public good and of deemphasizing cut-throat, survival-of-the- fittest competition. Let’s hope that word of Thomas’ research and prescriptions continues to spread and make inroads into popular consciousness.


About the author

Rob Schofield, Director of NC Policy Watch, has three decades of experience as a lawyer, lobbyist, writer and commentator. At Policy Watch, Rob writes and edits daily online commentaries and handles numerous public speaking and electronic media appearances. He also delivers a radio commentary that’s broadcast weekdays on WRAL-FM and WCHL and hosts News and Views, a weekly radio news magazine that airs on multiple stations across North Carolina.