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Tuesday, February 17, 2015

Shocking incentive failure rate in North Carolina

@sandymaxey points me to a new report from the North Carolina Justice Center that is making my head spin. Picking Losers shows that the state's flagship development program, the Job Development Investment Grant (JDIG), has seen 62 of its 102 projects fail in the period from its inception in 2002 until 2013. That is, 60% of the projects failed to meet either their job, investment, or wage goals, and had to have their awards canceled.

60%! This isn't baseball, where a .400 batting average is outstanding, a feat that hasn't been accomplished since Ted Williams in 1941. Let me tell you about a different failure rate: Investment Quebec takes equity stakes in a number of tech start-ups and other new companies. When I interviewed the director in Montreal in 2007, their failure rate was only 20%, a figure he considered needed to be reduced. In North Carolina, we are talking about a failure rate three times as high, despite giving the awards to firms that should not be nearly so risky.

One such firm was Dell Computers. In 2004, the company conducted a bidding war for a new computer manufacturing plant between Virginia and North Carolina. But North Carolina's analysis of the project was so out of whack that in nominal dollars it offered almost $300 million ($174 million present value) compared to Virginia's offer of $37 million. The plant shut down completely in 2010.

Here's the paradox: North Carolina has some of the best taxpayer protections in the country; indeed, state and local governments lost only a few million dollars when Dell failed. The state is rigorous about canceling awards and clawing back monies already paid out. But the problem is that the state's economic analysis of potential projects is simply atrocious. The 60% failure rate is one sign of this. The Dell fiasco, analyzed by the NC Justice Center and the Corporation for Enterprise Development in 2007, shows another aspect of fanciful economic modeling.

What can be done? I've written before about the weakness of economic development cost-benefit analysis. Even by that low standard, North Carolina's performance is breathtaking. Report author Alan M. Freyer suggests that the Legislature needs to resist calls to expand JDIG or create another fund with the same purpose, maintain its jobs standards, focus on expanding industries, vastly improve its evaluation of potential projects, and focus help on rural counties. I would add that the state should reverse its cuts to education, one of North Carolina's economic development crown jewels to date, and restrict its subsidies only to those types shown to have a positive national impact, primarily customized training for companies and generalized training for individual workers. Improving skills increases workers' income, and it also strengthens the U.S. economy as a whole, as opposed to simply building up a company's bottom line.

Cross-posted at Angry Bear.


  1. There are plenty of valid criticisms of these types of incentive programs; however, the 60% failure rate may not bolster your case. The high failure rate was as much a fault of the Great Recession as it was poor evaluation, etc. NC lost 6.5% of its employment during the recession, which is over three times the loss from a typical downturn. As a result, many of the grants were terminated when job numbers did meet grant employment parameters.

    By comparison, it might be interesting to see Investment Quebec's failure rate after 2007.

  2. This study covers a 12-year period, 2002-13. So the failure rate isn't only the Great Recession. If NC's result is typical for all states, that means there are a lot of subsidies in other states that ought to have been sanctioned/clawed back.

    I will try to find more recent data from Investment Quebec. You are right that this will be an interesting comparison.

  3. Wouldn't you need to know what the failure rate in North Carolina is for new businesses that aren't favored by government?

    1. That would be a useful number to have, but whatever it is, you'd expect JDIG to have a lower failure rate since it has so many large company recipients.