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Monday, January 24, 2011

State grants to business in doubt: report

At a time when Govs. Corbett (PA) and Christie (NJ) are weighing whether to continue, trim or end their states' multi-million-dollar business subsidy programs, Wells Fargo chief economist John Silvia and his staff have put out a paper warning that decades of state "economic development" grants have failed to prove they are cost-effective at creating jobs or boosting local economies.

The job and tax benefits of these giveaways are poorly measured and "will not likely be justified in the eyes of taxpayers, especially in a time of very tight fiscal budgets," writes Silvia, chief economist at Wells Fargo Securities, in "The State of Economic Development Incentives," a review of private-sector investment programs by Pennsylvania and other states.

Failures are embarrassing: In 2005 North Carolina gave Dell Computer more than a quarter of a billion dollars in income and franchise tax breaks and job development financing for a new plant Dell promised would create 1,200 jobs. But "Dell ended up closing the plant in late 2009, laying off more than 900 employees" as desktop computer sales fell. Tax money "boosted short-term employment and output, but failed to provide a long-term improvement in the local economy."

But most government favors to business are harder to trace. Often "state governments often issue tax-exempt municipal debt to raise capital for financing manufacturing or commercial facilities for private users." And some states go further, giving money directly to private companies. "One of the oldest" such programs is Pennsylvania's Ben Franklin Technology Partners program, which dates to 1983, and which has been justified by the theory that the small tech firms it subsidizes "are said to provide residents with high-skilled, well-paying jobs."

College professors have been providing an intellectual justification for these subsidies by citing Austrian School economist Joseph Schumpeter's 1930s-era writings that call entrepreneurs "the only agents who are capable of carrying out new combinations of resources and transforming organizational forms." Though Schumpeter was a broadly free-market economist, politicians have appropriated his values by giving entrepeneurs public money "as a means for development in their jurisdictions."

Yet it has been "difficult to discern the economic gains from such firms," Silvia writes. Typically, states project possible job and tax gains from "economic development" but don't actually attempt to measure them "after funds are spent.... They do not follow up with a post-hoc fiscal impact." Why? Silvia suspects "political pressure to not release or analyze results."

So as governors weigh cuts, they're left with little evidence that subsidies actually work. Silvia notes the National Conference of State Legislatures says "even basic measurable data" is lacking, and "there is not a clear evaluation of past programs to make informed decisions about where to invest a state's increasingly scarce funds."
Posted by Joseph N. DiStefano @ 11:53 AM  Permalink | 5 comments
Comments   
  • 0 like this / 0 don't   •   Posted 12:29 PM, 01/24/2011
    Most businesses fail. Most venture capital investments go nowhere. For every Cisco, there are hundreds of names, never heard from again. Money is thrown down rat hole after rat hole, not because enterprise formation is a lie and investors are stupid , but because survival is dependent on so many factors that are not apparent on the front end of an investment. This simply is the way of the world. Similarly, governments are not intervening by law, custom or received wisdom, but by following the core principle of capitalism: the accumulation of capital and its reinvestment in enterprise formation. Continually using the power to tax and applying the revenue stream towards debt service, government goes to the exact same capital market as private investors, and invests in likely prospects, exactly like private investors, in hope of gaining successful tax paying business with payrolls that will do likewise. Hence, the process of capital accumulation and reinvestment into productive use is no different whether the sponsor is government or private, the process is the same. The weight of the past, in the form of the Church's prohibition against usury, the social traditions of the guilds in determining who may go into what occupation, and aristocrat and military demands on people, subjugated them to proscribed roles, limited incomes, and in most cases, permanent relegation to menial servitude, all in the name of God, King and tradition. Today's democratically controlled republics are in no way intervening by commanding specific social roles and identities for specific individuals. Rather, they are using the same principles of economic development, with the market mechanism serving the capital injected from the state, rather than capital injected from a private collection of investors. It is still capital being harnessed to create wealth, via the tax base of the citizenry. This is in competition with Wells Fargo, which would like to be the sole lending source.
    — Fernando08
  • 0 like this / 0 don't   •   Posted 2:24 PM, 01/24/2011
    You don't have to be a tea partier (I'm very far from one) to see government waste when it sits in your lap. Let's see:

    -- Philly subsidized Tastykake and Liberty Property Trust and now, when there are troubles, before any other creditors are asked to take a hit, the City is asked and agrees.
    -- Lincoln Financial never added as many jobs as it had promised and then it moved many of its jobs out.
    -- Philly started subsidizing tech companies and electronic switch warehouses at the end of the tech boom.
    -- Philly puts sizable money into tiny non-profits that encourage business but the the administrators often have no personal entrepreneurship experience and the efficacy measures are where?
    -- Aker shipyard...$400billion and needing more subsidy now.

    At best, it's all well-intended. At worst, it's corporate welfare for a chosen few.

    Regardless, it can't possibly be as successful in the long run as if we used the money and staff to improve the tax and regulatory weaknesses that chronically face any business operating in the exclusive 142.6 square miles that is Philadelphia.

    Not to mention...an upward business-friendliness trajectory over time, even if only slightly upward, would be more attractive to all potential businesses considering Philly than the current system that relies on a business trying to get specific subsidies or legislation for his/her particular business.

    This is not supply side economics. It's probably better characterized as "dont-spit-where-you-live" economics.
    — 1stClassCity...Some day
  • 0 like this / 0 don't   •   Posted 8:16 PM, 01/24/2011
    Of course, the Wells Fargo report will show no reason for the grants. Where would business have to go for money?....Really, does it have to be THIS transparent? And didn't anyone teach business writers how to identify an elephant in the room?
    — CiceroSpuriousDeodatus
  • 0 like this / 0 don't   •   Posted 2:52 PM, 01/25/2011
    Cicero, you got it backwards. Banks LOVE government grants to clients because it takes much of the risk out of lending. Nando, when banks lend money, they try to pick businesses that are likely to pay them back. When politicians lend, who do they favor?
    — distefj
  • 0 like this / 0 don't   •   Posted 7:25 PM, 01/25/2011
    Then why are the banks screaming about losing the student loan business? Why do they want Fannie and Freddie to go away so they can have it all to themselves. Don't even try to say the risk thing. The 30 year fixed rate product can only exist as government backed. It is not only risk they are avoiding but any responsibility at all for the larger social order. As to who do politicians lend to? The same people that bankers lend to, in too many instances. Who they feel comfortable with. The history of bank redlining for home loans is well documented. You can down load the racial boundaries of enforced ethnic clusters by policy of not just the government, but by realtors, appraisers and other trade associations who assessed risk based on ethnic and racial groups.

    http://cml.upenn.edu/redlining/HOLC_intro.html
    — Fernando08


5 comments
About Joseph N. DiStefano
Joseph N. DiStefano writes this blog to feed his PhillyDeals column in the Philadelphia Inquirer. Joe has been a member of Bloomberg LP’s New York Finance Team, wrote the book “Comcasted,” taught writing at St. Joseph’s University, and studied economics and history at Penn. Reach Joe at 215-854-5194 and JoeD@phillynews.com
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