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Wednesday, October 12, 2011

Almost all government layoffs are local, but could be paid for by cutting subsidies

Sometimes I feel like a broken record, but it really can't be emphasized too often: state and local subsidies to business have noticeable negative effects on government finances,which are magnified in times of fiscal crisis like the present.

As Kash Mansori points out (h/t Mark Thoma), of the 532,000 government jobs lost from September 2009 to September 2011, fully 470,000 are at the local level.
Source: Kash Mansori, The Street Light

My research suggests that state and local governments give almost $50 billion per year in location incentives to business, and about $70 in total business subsidies. My best guess is that about half of it is at the local level, meaning $25-35 billion per year comes from local governments. It's easy to see that that much money could pay to rehire all those teachers, police, and  other local government workers, and maybe have money left over. At the top end of the estimate, $35 billion could hire half a million workers earning $70,000 a year in salary and benefits, or 700,000 making $50,000 per year.

Make no mistake: we can't just wish state and local subsidies away. Companies leverage their mobility to extract tax breaks (and, increasingly, grants) from governments that need tax revenue and economic activity. But it's impossible to build a politics to oppose these giveaways unless we can document their extent and show what it really is we're giving up when governments award subsidies. Mansori says local budgets are being balanced on the backs of schoolchildren; it would be equally correct to say that local subsidies are paid for out of school budgets, on the backs of teachers and students alike.


  1. I have been trying to think of a way to eliminate TIFs and subsidies. All I've come up with is federal regulation, since states and municipalities seem all too happy to cannibalize one another. What do you think is the best way to reestablish a purer system, wherein locations are chosen on their own merits, rather than on the basis of how much of a break the business gets?

  2. I agree that federal regulation is the only way to stop the destructive competition for investment. Melvin Burnstein and Arthur Rolnick wrote an article on this in the 1994 Annual Report of the Federal Reserve Bank of Minneapolis that was widely reprinted as an op-ed in numerous newspapers around the country as "Congress Should End the Economic War Among the States" ( They provide some concrete suggestions for Congressional action.

    We are a long way from that happening, as the states continue to resist anything like that. The 15+ years since that article was written have seen a good deal of progress on transparency, which I see as the first step for effective political action on this issue. I think the next step is for Congress to pass a law that effectively bans subsidizing job piracy by state and local governments. I think the vast majority of economic development officials see subsidies to induce the relocation of an existing operation as bad policy, so this is the most achievable national reform. States could also ban job piracy between their municipalities.