The Whys Of Government Waste

The Great American Jobs Scam

By Greg Leroy

Berret Koehler Books, 287 pages, $15.95

At its best, economic development is part science and part sorcery. Public money is invested in a project in the hopes that it will spur more investment-that it will ignite, in Keynes's famous phrase, the "animal spirits" of capitalism. States and cities give tax breaks to a firm because the firm will create jobs, and the workers employed in those jobs will spend their wages, and the money from the wages will circulate through the economy and create more jobs. And so on.

At its worst-and we see the worst more often than the best-economic development is what Alan Greenspan said it was: a way for powerful people to get their hands in the till. The public funds go in but the promised jobs don't emerge. Or the jobs emerge but aren't very good, or the jobs emerge and they are good, but it's unclear whether public money had anything to do with them. The subsidized companies walk away with windfalls of cash, while the public gets?well, it's hard to say what the public gets. Often the public gets screwed. Rarely in the course of human history have so many given so much to so few and gotten so little back.

Greg Leroy has spent much of his career arguing that there are better uses for our public money. And he's right. There are parts of his latest book, The Great American Jobs Scam, that one can quibble with-he overstates the relationship between suburban sprawl and urban decline, and he regrettably jumps on the sprawl-makes-you-fat bandwagon-but on the question of economic development incentives he is entirely correct. And he has a nice chapter on sports stadiums that someone might want to read aloud to Mike Bloomberg. Subsidies are not automatically bad. There are times when they are undeniably helpful. But they are a bit like alcohol: the situations where they are appropriate are far fewer than most people think, the quantities in which they should be deployed are much smaller than most people believe, and while they make everyone feel better, their ability to solve problems is actually quite illusory. Throwing subsidies at a firm often means a lot to an economic development agency-look at us! we're doing something!-but very little to the firm itself.

Why not? Tax incentives are designed to make a city or state appealing by lowering the cost of doing business there. But cutting a cost only matters if that cost is big relative to other expenses. This is the "law of large proportions." For the average business, labor costs are big-often half, and sometimes more, of total expenditures. So cutting labor costs by 20 or 30 percent can result in huge savings. That's why firms once fled the unionized Northeast for the South, and why today they flee the U.S. for the developing world.

Taxes, however, just aren't a big proportion of business expenses. Combined state and local taxes add up, on average, to between 2 and 4 percent of an American firm's expenditures. So even cutting taxes by half, or three-quarters, doesn't lower overall costs by very much. And savings that small can't make much difference in a firm's decision of where to locate. It would be like someone convincing you to move to a new town by offering to pay for your lunch every day. A nice gesture, but unless you were planning to move already, hardly worth the trouble.

Leroy's book is a roll call of economic development's worst excesses. In a style that is simple without being simplistic, he catalogs the frauds (firms that take subsidies and then close down their plants), the woeful missteps (governments hiring consultants who also work for subsidized firms), and the Type II errors-the painfully frequent instances where desperate governments subsidize firms that would have located in their cities anyway.

Prominent in that latter category is New York. In the 1990s the Giuliani Administration, determined not to let financial institutions move to northern New Jersey, binged on tax incentives. The Mayor's office awarded over $2 billion in subsidies, and sent many of them to firms that had no intention of going anywhere. American Express got subsidies, despite saying that its decision to remain downtown "was not predicated on financial incentives." NBC got incentives, even though it had a 35-year lease on a building it had sunk millions of dollars into and was not a flight risk. CBS got incentives, it seems, simply because incentives were going around. "We never threatened to leave the city," the company's chairman said in 1999. "I just wanted us to be treated like everyone else."

Billions spent, virtually no jobs gained. It is hard not read such figures and feel depressed, or the onset of a mild case of libertarianism. The despair is unwarranted. There is a role for government in development policy. But the public will always lose if "development policy" is defined as the indiscriminate granting of tax incentives. Too often, subsidies are political tools rather than economic ones. Creating jobs is one of the most important promises a politician can make, and one of the hardest to keep. Meaningful economic development takes time. It involves mundane tasks like investing in schools, hiring police, fixing potholes and upgrade sewers. Providing public goods is what government does best, and-as Leroy points out-what government should do.

But we are impatient with politicians, and politicians are impatient with the economy. So tax dollars that could go to long term but reliable projects-like schools-get invested instead in projects that are flashy but meaningless. Tax incentives become exercises in reassurance. They let public officials pretend that complex systems like the economy can be lassoed and controlled-that if the city just wins the office tower, the sports stadium or the convention center then it will have the magic bullet, the cure for what ails it. But there are no magic bullets. No incentive package can conjure a new urban economy, and ailing places are not rescued by convention centers. They are rescued by officials who do the small things right. And yet the officials themselves are often rescued by convention centers; what is irrelevant economically is often extremely relevant politically. You can't cut a ribbon in front of a sewer upgrade.

The result is that economic development is often an embarrassment. But it doesn't have to be. Less grandiosity and more sense-sense of the sort found in this book-could do a world of good.