Give-Aways Don’t Grow Economies
[The following goes to show either there’s nothing new under the sun, or it underscores how ineffectual governments are at changing things that don’t work. At least 30 years ago, the famous economist, Lester Thurow, a Montana native, wrote to say that government give-a-ways, subsidies or special tax breaks does nothing to improve a state or community’s economic well-being. That’s before they started totaling into the billions. -editor]
By Michael Farren
Kansas lawmakers recently approved offering $1.3 billion to a mystery corporation for the company to build a new industrial facility in the state. They may think they’ve taken a step toward a brighter economic future, but in reality, they’ve only started another battle — and maybe even opened another front — in the endless economic subsidy wars among states.
Reporters in Kansas and Japan have unearthed indications that a Panasonic electric vehicle battery plant is the prize in this fight. Missouri would make sense as Kansas’ most likely competitor, given that the two states spent decades (and more than $330 million) poaching companies from each other across State Line Road in Kansas City. If true, this would suggest that Kansas was violating the spirit of its tenuous 2019 border truce with Missouri.
However, reports suggest that Panasonic is actually deciding between a rehabilitated site at an old ammunition plant near De Soto, Kan., and an industrial park outside of Tulsa, Okla. That the sites are 200 miles apart suggests that subsidies might affect Panasonic’s decision, although I’d warrant that the 45 percent cheaper cost of electricity in Tulsa has a larger influence.
If Kansas is competing with Oklahoma rather than Missouri, then one border battle has just been exchanged for another. Do Kansas leaders really want to pick a fight with yet another neighbor? For their part, Oklahoma’s policymakers are now confronted with their own no-win choice between rushing to offer their own subsidies (as reports suggest) or taking the high road and risking the appearance of doing nothing in the face of economic aggression.
That may sound a bit melodramatic, but the truth is even more sensational. States and cities spend an estimated $100 billion every year on an arms race that research shows does little to improve their economic outlook. In fact, corporate handouts actually slow down national economic growth.
This conclusion isn’t controversial; few challenge the idea that bribing companies to choose one jurisdiction over another is a bad use of limited taxpayer dollars. Academic research shows that while subsidies can swing site-specific decisions within a metropolitan area, the handouts don’t sway most corporate location decisions between regions. In other words, in the few situations where subsidies may have a substantial influence on a company’s location decision, they don’t actually increase regional economic growth compared to what would have otherwise occurred without the subsidy — as the Kansas City region has infamously shown.
But the practice continues because politicians are stuck in what economists call a “prisoner’s dilemma.” Just recently, for example, Michigan policymakers, motivated by Tennessee and Kentucky’s combined $1.3 billion in subsidies for a set of Ford EV and battery plants, approved $1.8 billion to subsidize a set of General Motors and Ultium EV and battery plants.
Because there isn’t an easy way for policymakers to commit to mutually beneficial cooperation — yet — the default choice is to continue an economically ruinous competition. Kansas and Missouri took the first step with their temporary truce, agreeing to limit the degree to which each could poach businesses from the other. However, that carriage is scheduled to turn back into a pumpkin in 2025. It may not even last that long if Kansas Gov. Laura Kelly — whose executive order is the most precarious part of the agreement — doesn’t win re-election.
What if, instead, Oklahoma — and any other state seeking to free up billions to expand social services and reduce taxes — were invited to join the truce? In fact, leaders in some states are working on something even better: an interstate compact. It’s a constitutionally based contractual agreement to end the current ruinous form of interstate competition, which wastes taxpayer dollars and starves important social programs of funding. States would still be free to compete over who has the best policies for economic growth, but would forswear the use of subsidies.
Eighteen states so far have proposed interstate compact legislation to permanently end the economic arms race, but it would be especially poetic if Kansas and Missouri were the first states to pass it. They have an extensive history of such compacts together, meaning they’re well suited to serve as national role models in taking the next step toward mutual subsidy disarmament. A rivalry over who can cooperate the most would be the best kind of competition.
Michael Farren is a senior research fellow with the Mercatus Center at George Mason University.