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The other side of giving corporate food stamps

  • By Matt Walsh
  • | 5:05 p.m. January 28, 2011
  • | 2 Free Articles Remaining!
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This stuff never ends.

Well-intentioned economic development agents throughout Florida, leaders of chambers of commerce and elected officeholders who want to be judged favorably cannot resist.

They cannot resist the idea of giving an out-of-state business millions of dollars of taxpayer money as an inducement to move the company to their respective counties.

Think of the jobs!

Think of the economic boost to our region!

We must do this to stay competitive with every other state!

And on and on it goes. In fact, on and on it has gone — for at least the past 28 years of our observing Florida business.

It reminds us what Dr. Richard Vedder, distinguished professor of economics at Ohio University and one of the foremost national scholars on economic incentives, told us this week when we spoke to him about the subject:

“Rome went to hell after they built the colliseum. We should learn from Rome.”

In the latest “elephant hunt,” it's not a pro sports team officials are chasing. Gulf Coast politicians, economic development officials and business proponents in Collier, Hillsborough and Sarasota counties, as well as in Tallahassee, are ensconced in courting the leaders of Bar Harbor, Maine-based Jackson Laboratory. The $160 million (annual revenues), not-for-profit genetics research organization is considering locating a new research lab that would employ about 250 people. The catch is: It is seeking in the neighborhood of $260 million in taxpayer funding to build its Florida institute — with the money being split 50-50 at the local and state levels.

The noise in favor of this subsidization is rising, just as it is for state taxpayers to subsidize a high-speed train.

What everyone easily can see and salivate over are the jobs that would be created to build the Jackson lab and then the ripple effects and spin-offs in the economy as a result. Think of how Jackson Laboratory would help diversify the Gulf Coast economies.

One of the Gulf Coast dailies went to Orlando to show how subsidizing the California-based Sanford-Burnham Institute has paid off. Along with Gov. Jeb Bush leading efforts to funnel $300 million in taxpayer funding and tax breaks to Sanford-Burnham, Florida lawmakers also earmarked tax dollars to build a University of Central Florida Medical School in the same vicinity. More tax dollars went toward the construction of UCF's School of Biomedical Sciences.

All this has spawned more investment. The Sarasota Herald-Tribune reported Nemours Children's Hospital is investing $400 million in new facilities, and the U.S. government is spending $600 million on a Veterans Affairs Medical Center.

“There are cases of success stories” that can be attributed to taxpayer subsidies, says Professor Vedder.

But overall, Vedder says, “The evidence, as best as I can tell, is that states that put money into corporate food stamps don't get a high pay-off.”

Get that? “Food stamps.” Corporate welfare.

Add to Vedder's research a timely report from Wells Fargo Securities' Economics Group, “The State of Economic Development Incentives.” In their eight-page report, Wells Fargo's economists conclude — with ample references to previous academic studies — that states do a lousy job of tracking the return on investment of corporate subsidies.

“As a result of these measurement deficiencies ... there is not a clear evaluation of past programs for policy makers to make informed decisions about where to invest a state's increasingly scarce funds,” the economists write. “Without better ways to measure state development incentive outcomes, the economic success of such initiatives remains uncertain.”

These comments go back to the “seen.” We see the new medical schools, research labs and hospitals. But as is always the case with these corporate welfare programs, no one considers the “unseen.”

“It's a stealth kind of thing,” Vedder says. When, say, Jackson Laboratory builds and opens in Florida, we'll see the jobs that are created. “What's lost or not seen,” he says, “are the jobs invisibly lost or that would have otherwise occurred.

“That $260 million doesn't come out of thin air,” he says. It comes from taxpayers — taken by force from their pockets and handed to some special benefactor.

As the late Nobel economist Milton Friedman often lectured on, what the politicians seldom take into consideration when giving big subsidies to corporations is how else that $260 million might be used if left in the hands of the taxpayers — the people who worked hard to earn it to begin with.

Few politicians consider taxpayers likely would use that money for other economic activity that could create as many or more jobs and spin-offs as Jackson Laboratory. It's wrong for a politician to think he can be smarter and better at allocating other people's scarce resources.

Indeed, just look at what entrepreneurial capitalism has done without government interference.

“Politicians make political decisions not on the basis of cold economic realities the way consumers and businesses do,” Vedder says. “Any time the government is spending $100 million, it is crowding out other spending that is more likely to be done more intelligently (by the private sector), because the private sector doesn't have political influences.”

In his heart, Gov. Rick Scott knows this. He said it many times on the campaign trail — government doesn't create wealth or jobs. Its resources only come from the private sector.

Sure, we all would like to see Jackson Laboratory set up shop on the Gulf Coast. But let's win on the merits of our overall business and economic climate, not on thievery from taxpayers.

It's alluring and sexy to be in the hunt for big elephants like Jackson Laboratory. But it is neither moral nor justified to take $260 million from taxpayers and give an unearned benefit to any corporation.


The authors of the Wells Fargo Securities Economics Group's commentary on economic development incentives offered these steps on measuring incentives:

Two key factors that need to be considered as state and local governments evaluate economic development programs are the time horizon for which to evaluate the program and the impact of normal business cycle fluctuations on the outcomes of the incentive programs ...

The first question that needs to be asked in any post-hoc economic analysis is over what period the outcomes of the economic incentive program should be measured. If the expectation is that an incentive program will create jobs and tax revenue, at what point can a firm lay off employees or scale back operations and still be deemed a successful economic development program?

In addition, the time horizon is directly related to the normal fluctuations of the business cycles. If incentives are provided toward the beginning of a recessionary period and the firm is forced to cut production and employment, the firm's incentive may be measured as a failure, but in fact, given the economic climate, the result cannot be directly attributed to the incentive, but rather to general business conditions ...

One important choice that needs to be made in the evaluation of economic incentive programs is at what point the incentive program is evaluated. In the private sector, investment outcomes are constantly measured and assessed for profitability. On the other hand, many state-sponsored economic incentive programs have some type of market analysis that attempts to estimate the economic impact of investing in a project before it begins, but they do not measure the actual outcomes of the projects ...

... To ensure the effectiveness of economic incentive programs, state and local governments need to conduct preliminary cost-benefit and fiscal-impact analyses. These analyses should include the time horizon for measurement, including also some clearly defined benchmarks, such as the number of jobs created, the amount of tax revenue that is generated by the investment or other measures that the state or local government deems significant to the success of the incentive funded project.

In addition, funding levels should be justified in light of the estimated return on investment that has been calculated by an objective third party.

Finally, a post-hoc study of the actual returns should be conducted to determine the actual return on investment that the state or local government received.

Most important, the results of these studies need to be made public, ensuring that policymakers are held accountable for the investment decisions that are made.


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