The latest academic evidence suggests that economic development subsidies may create more crony capitalism than market capitalism.

A new study published in “Small Business Economics: An Entrepreneurship Journal” adds to the debate over the effects of state economic development subsidies. Like hundreds of studies before it, the paper concludes that these programs may do more harm than good.

The authors — three academic economists — examined extraordinarily large business subsidy deals awarded across all 50 states between 1997 and 2019, along with data from 40,000 lobbying firms. They found that after a state approves its first mega-subsidy deal, the number of lobbyists in the state increases by 3.6%. Those gains were concentrated in the county that held the state capital, where the number of lobbyists went up by nearly 5%.

Two databases informed the analysis: the Good Jobs First Subsidy Tracker database and the National Establishment Time Series database. The latter tracks employment and sales at millions of establishments nationwide over many years.

Only 17 states gave awards that were at least 3,500 times larger than their state's historical median subsidy. Michigan was one of those states to practice what the researchers called “a substantial policy shift.” Those 17 states formed the study's “treatment” group and were compared with states that did not approve extraordinarily large subsidy deals.

If a state offered at least one extraordinarily large subsidy package — the 3,500 times larger number — lobbying-firm employment in capital counties, measured as a share of total private-sector employment, increased 6%. This finding suggests, according to the article, that such deals may “inadvertently foster crony capitalism and wasteful lobbying rather than the genuine economic development they promise.”

The increase in lobbying matters, and not only because it may lead to more subsidies. When corporations hire lobbyists to secure special favors — such as business subsidies — they divert resources toward activities that are unlikely to generate benefits greater than their costs. Economists call this “rent seeking.”

One study examining rent seeking and economic growth found that when states encourage such behavior, their economic growth slows. That may help explain some of Michigan's recent disappointing performance in job growth and broader economic measurements. It is current state policy to hand out subsidies, tax breaks and other favors to select businesses. These favors carry direct costs. They also harm the state’s prospects by encouraging businesses to take resources away from productive uses and put them toward rent seeking.

Corporations and lobbyists know where to find government favors in the same way bank robbers know where to find a vault. Years ago, accounting giant Ernst & Young even produced a PowerPoint presentation to train lobbyists on how to pursue government favors. The presentation, titled “Turn Your State Government Relations Department from Money Pit to a Cash Cow,” encouraged lobbyists to promote the purported fiscal and economic benefits of incentives while deploying a familiar negotiating tactic: the “‘but for’ threat.” “But for” the subsidy, the argument goes, the company receiving a taxpayer favor may not undertake the project. Policymakers hear it as an ultimatum to either hand out cash or miss out on a jobs announcement.

If all this lobbying produced economic gains beyond additional jobs for lobbyists, a case could be made to tolerate it. But study after study says otherwise.

Hundreds of studies show that state subsidy programs fail to live up to expectations. They are not matched by a comparable body of independent academic research demonstrating broad success for those programs. At best, state officials and others point to the studies from the state’s own consultants, which claim positive results but rely on methodologies of questionable value.

My own study with economist Michael Hicks examined 2,300 Michigan subsidy deals dating back to the early 1980s across nine programs or program categories. We found no measurable impact in five cases and a negative effect in another. Of the three programs associated with additional job growth, each required extraordinarily large subsidies to sustain those gains. In one instance, the state offered $125,000 in subsidies per job per year.

The record of independent, academic research is clear about what subsidies do. That is one more reason to dismantle the state's corporate welfare industrial complex — sooner rather than later.

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