Incentives dont make sense, no matter how often cities try them

Posted on April 02, 2007 | Type: Op-Ed | Author: Thomas C. Patterson
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What could Phoenix Mayor Phil Gordon and the five City Council members have been thinking when they authorized a $100 million tax subsidy for CityNorth, a private development planned for northeast Phoenix?

Heres a short list of possible answers. 1) They may have thought a subsidy necessary to assure residents had a place to shop for highend stuff. 2) They may have been unable to refuse the chance to stick it to Scottsdale, their traditional competition in the arena of tax-subsidized development. 3) They may have actually thought such subsidies promote the economic development of the city or 4) They may have wanted to position themselves to take credit for job growth that is bound to occur anyway.

In any case, its economically moronic, even though it tracks a nationwide trend of Big Government handing over money to selected big businesses. The take nationally comes to $50 billion yearly, according to Alan Peters and Peter Fisher of the University of Iowa.

The subsidies are touted as necessary for job growth, to stimulate depressed regions and promote economic development. Unfortunately, they just dont work. After decades of policy experimentation and literally hundreds of scholarly studies...there is a good chance that all of these claims [of benefit] are false, write Peters and Fisher.

The Mackinac Center, a Michigan think tank, analyzed the promises of economic development through subsidy of the Michigan Economic Growth Authority. Michigan has a serious job loss problem. Yet the Mackinac study found that of the 127 deals whose employment consequences could be analyzed, only 10 had met their projections. MEGA is another in a long line of political programs described as economic ones, the study concluded.

Some of the giveaways are comically inept. Last year, New York state provided $1.2 billion in grants and tax reductions to induce AMD to build a microchip factory in the state and create 1,200 jobs. Even if that deal works as planned, the cost would be $1 million per job created!

Not to be outdone, cash-strapped Michigan agreed to give Google $38 million to locate an office in Ann Arbor. Google's market capitalization at the time was $100 billion so the $38 million was just walking-around money to them. Moreover, Google cofounder Larry Page is a University of Michigan alum who was already clearly planning to come back home.

Still, businesses planning to expand or relocate have become expert at conning government officials into thinking they wont come but for government incentives. Site relocation specialists are often expected to help their clients pocket some government money when they relocate.

In fact, the annual conference of the State Government Affairs Council, an organization of corporate government relations types, once heard a presentation titled Turn Your State Government Relations Department from a Money Pit to a Cash Cow. Attendees were advised to use the but for strategy to convince politicians to pay them to do what they were going to do anyway.

So Phoenix leaders once again stumbled into what Friedrich Hayek called the fatal conceit the notion that they can pick economic winners and losers better than the market, in spite of massive evidence to the contrary. They again convinced themselves of the wisdom of de facto raising taxes on businesses already here to pay for subsidies for other businesses about to come. They were gullible enough to think they have to pay people to sell us stuff.

But beyond all that, they also committed a strategic blunder that is nearly incomprehensible.

The Legislature last year was poised to pass a bill, sponsored by Sen. Ken Cheuvront, to force cities to end this mindless competition. The cities were able to avert its passage by earnestly promising to self-police.

Most of the cities took the message to heart. Scottsdale, led by Councilman Jim Lane, was among those who, for now at least, ended the practice. But the very next year after the promises were made, Phoenix awarded its largest subsidy ever to a lucky developer.

Maybe in the end, that's the good part. The Legislature bent over backwards to respect local control, but now has no reasonable choice but to act. The adults have to step in and restore fiscal sanity.

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