Big state spending that brings small rewards

Boeing has been promised $60m to site its headquarters in Illinois. The deal looks a poor one for taxpayers

This article originally appeared in the Financial Times on May 14, 2001 at http://news.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT3JTSZJQMC&live=true.

Good old Chicago. Its officials wagered that only the most generous suitor could win the hot competition to be the new home for Boeing's corporate headquarters - and they were right. Last week, local authorities announced that Chicago had beaten also-rans Denver and Dallas.

Boeing, like its European rival Airbus, is an old hand at extracting cash from Mother Government. This time it won $60m in tax breaks and subsidies from George Ryan, Illinois' governor, and Richard Daley, Chicago's mayor - or $120,000 for each executive transferring to the Land of Lincoln. Denver offered a paltry $13m and Dallas $10m. "Boeing made the right decision," crowed Dick Durbin, one of Illinois' US senators.

The right choice from Mr Durbin's point of view, perhaps. But some locals hearing of Boeing's decision were reminded of another spring day half a decade back, when officials trumpeted news of a similar incentive deal, signed with Motorola. Back then, the state's governor told citizens that the contract underscored "the vitality of our economy and the potential for continued job creation". The new plant, at the end of a commuter line in bucolic Harvard, Illinois, cost the state $36m. Alas, Motorola officials were so busy collecting favours that they failed in their day job - selling cellular phones. By last winter Motorola's misfortunes were so great that it was closing the manufacturing component of the Harvard plant.

Such episodes are becoming increasingly familiar. Trading subsidies targeted at specific companies in exchange for the opportunity to preside at ribbon-cutting ceremonies is an ancient political ploy. But lately regional governments across the globe have taken up the economic development game with new energy. Just ask Scotland's Silicon Glen, where companies that earlier made the news for garnering big subsidies (including Motorola) are now getting ink for the scale of their lay-offs. America's states and cities have become such eager players that opponents have coined a name for their activity: metro mercantilism.

And when localities are eager, it seems, there is almost no limit to what companies can extract from them. Two commodities exchanges recently squeezed $91m in tax breaks from New York for a promise not to flee across the Hudson river to New Jersey. General Motors secured $285m from Michigan for keeping 2,800 workers in the state.

Politicians offer utopian forecasts to justify their gamesmanship. Mr Ryan, for example, sought to bolster his case for the Boeing deal by preparing a study that showed the deal would bring the state $4.5bn in economic benefits, creating five jobs for every relocating executive. Such high claims make the old "multiplier effect" concept seem too tame; perhaps we should speak instead of the "exponential effect"?

But it is not clear that the Boeing deal, or any similar one, is really a bargain. To placate Seattle, Boeing has stressed that the jobs it is relocating are head office ones, not factory spots that proliferate instantly when a new order comes in. If so, the optimism is hard to countenance. Is Mr Ryan referring to the maids and interior decorators who will service executive mini-mansions in suburbia?

But the main problem with this sort of economic development is that somebody has to foot the bill and that somebody is the taxpayer - including less favoured employers. Or, to put the issue in the terms of analogous debate - the international tax haven question - states certainly have the right to "ring-fence", granting breaks to outsiders while ignoring locals. But the overall benefit would be greater if they gave every company - and every employee - equal reductions. Recently, 100 Midwestern economists signed a resolution making just this point and calling on state development tsars to replace the current beggar-thy-neighbour contest with "a fair field with no favours".

A nationwide accounting of the extent or costs of such outlays is hard to come by, since so many are driven by regional activity. But a survey paper by Lawrence Reed of the Mackinac Centre, a Michigan-based think-tank, points out that the big spending brings only small rewards.* In the 1990s Ohio offered 45 different schemes aimed at expanding and relocating companies, including companies moving within the state. Yet this assistance reached less than 0.4 per cent of growing companies in the state.

Other observers argue that the subsidies influence corporate siting decisions very little and so are pure waste. "These things are just icing on the cake," says Michael LaFaive, a colleague of Mr Reed's at the Mackinac Centre. Boeing's decision to grab Illinois' premium package may appear to argue against Mr LaFaive but another feature in the saga bears him out. Had this been a simple bidding war Boeing would have allowed its home town to compete with the rest, if only to heat up the race. Washington state probably would have done a lot to retain its old anchor firm. But Boeing shut Seattle out from the start.

Alas, it seems unlikely that America's state lawmakers will forsake their metro mercantilism any time soon. Most legislators have convinced the world that they are practising "public-sector entrepreneurship" and that their work is as meritorious as the tiniest private sector start-up. What is more, such deals train citizens to look to government to supply yet more, especially when recession looms. As a newspaper vendor pointed out to the Chicago Tribune last week, the transferring Boeing executives will occupy only some of many empty offices at the new headquarters. "Boeing will be a great boost for me, sure," the vendor said. "But now Daley has to fill up the rest of the building."

*The Economic War Between the States, www.mackinac.org

Contact Amity Shlaes

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