We’re here today in Raleigh to live blog our event with Professor Kenneth Thomas this hour to talk about economic development subsidies. Also check out this live stream of the event, to begin at noon: http://www.ustream.tv/channel/nc-policy-watch
Archived video of this stream can be found here.
Please bear with us with any technical difficulties as we’re exploring this new venue to bring the crucial conversation to you.
A lot of people think they understand what works and what doesn’t in the field of economic incentives. Professor Kenneth Thomas of the University of Missouri at St. Louis is one of those rare individuals to have actually conducted the hard research – both in the U.S. and internationally – to back up his conclusions.
This is a description of his most recent book, Investment Incentives and the Global Competition for Capital:
“The battle of national, state, and local governments to attract investment has been a high priority for decades. For example, US state and local governments give almost $50 billion in location incentives and over $70 billion in total subsidies annually. Developing countries often pay even more for investments despite the fact they are less able to afford to do so. Using case studies from around the world, and at all levels of government, Thomas shows that investment incentives are rarely a good policy, especially for countries lacking education and an infrastructure. Finally, he analyzes the myriad methods of controlling incentives with an emphasis on the EU’s comprehensive and largely successful state aid rules, illustrated by an extended case study of Ireland.”
Investment incentives + operational subsidies = $65 billion.
Governments need investments and companies can be in multiple locations (mobile) puts states in competition for investment.
Drawbacks of subsidy: Efficiency, Equity, Environment.
– Slows down economy, widens income inequity, possible detrimental environment effects.
In competing for capital, model of prisoners’ dilemma. Everyone has incentive for not giving subsidy, but subsidies attract businesses.
Low subsidies in poor areas and no subsidies in rich areas –
best model maximum welfare.
Arguments for subsidies ignores information asymmetry, renting seeking.
“Locational tournaments” – multiple areas compete in bidding war for investments. Everyone has costs, only one winner. Unclear what is appropriate bid for investments, figuring out cost and benefits are difficult. Pushes governments to bid more than they should.
What do subsidies all add up to? Usable estimates for 8 states comprise about 24.6% of US GDP. Total subsidies estimated at $69.8 billion. Thomas revising estimates now with new data, number likely higher.
What other nations are doing to control bidding wars?
Australia – Interstate Investment Cooperation Agreement commit 5 of 6 states to not take investments from other states.
Canada – Code of Conduct on Incentives, legally binds provinces.
EU – Multi Sectoral Framework and Regional Aid Guidelines specifies maximum regional aid given to areas, depending on size of investments and location.
Comparing bidding wars in MSF/RAG with U.S. Comparing largest incentives in US and EU, looking at present value terms.
Conclusion: EU state aid policy generally successful. US needs more transparency, highlight the state level of program cuts and rising subsidies.
Part of RAG have rules for minimum time commitment (5 yrs in EU) for subsidies.
Do areas benefit from companies who come? Long term benefits of job training, infrastructure, etc.
Geographic mobility of worker in EU lower (language, etc).
Nothing on national level in U.S. like RAG other than usage of federal funds can’t be used to move facilities.
The injured parties in bidding war – tax payers. Concentrate gains and diffused cost makes it hard for tax payers to affect the political process in this.
more from Prof Kenneth Thomas at: