Foxconn is flailing in Wisconsin (Insert your joke here.) UPDATED

In what may end up as the biggest economic development failure in U.S. history, Foxconn announced Wednesday that its $10 billion Wisconsin factory will not be a factory. Instead, the company says, it will still create 13,000 jobs, but these will be research jobs rather than manufacturing ones. I'll believe it when I see it.

Accompanied by an almost $4.8 billion subsidy package as estimated by Good Jobs First (follow the link to the spreadsheet), the project was heavily criticized even before it was announced in 2017 (my take here and here). The massive subsidy helped normalize the idea of multi-billion investment incentives and gave Amazon a handy benchmark for its own effort to break the bank.

As I analyzed a year and a half ago, it didn't make sense to manufacture electronics in the United States when everything was cheaper in China, unless you were worried about access to the U.S. market. The illegitimate Trump regime had already created an unpredictable and protectionist trade climate, and this was long before the trade war with China really took off. If Foxconn felt it had to locate in the United States, the country was in a strong bargaining position, but by playing the states off against each other, it was still possible for a foreign company to score huge subsidies.

What happens next? As noted, Foxconn still says it will build a huge facility and hire 13,000 workers. But in 2018, it failed to meet its job creation target and forfeited what would have been a $9.5 million subsidy. I predict we will see more such failures from Foxconn until it finally pulls the plug. Indeed, on January 31, Good Jobs First called for the immediate cancellation of the deal, with the company financially responsible for expenses made by the state and by Racine County in connection with the project. This would be a fair resolution of the situation, appropriately leaving egg on the faces of the deal's promoters, the recently defeated Governor Scott Walker and the head of the illegitimate Trump regime.

As you see, I have managed to steer clear of the obvious puns. Instead, I invite you to insert your joke here.

UPDATE: Foxconn now says that it will indeed still build a factory, citing a conversation between CEO Terry Gou and Trump (h/t commenter Joel at Angry Bear). This is certainly clear as mud. As others have pointed out, several promised investments from Foxconn have failed to materialize at anywhere near the scale promised, including in Brazil, Pennsylvania, Indonesia, Vietnam, and India. So I am going to remain skeptical on what was a terrible deal in the first place.

Cross-posted at Angry Bear.

Amazon scores two more $5+ billion bids

A non-blogging friend points me to the announcement today of Maryland's subsidy bid that puts Montgomery County into one of the 20 finalist slots. Shockingly, Governor Larry Hogan (R-MD) put in a bid that would pay Amazon almost the entire cost of its facility, depending on what you think a proper discount rate should be now (hint: low).

"HQ2," which Amazon has stated will amount to an eventual $5 billion in investment, will receive a subsidy package worth over $5 billion in nominal value (but not necessarily present value) from Maryland. The largest element in this package is a jobs tax credit of 5.75% of wages for up to 17 years, on salaries averaging $100,000 per year (minimum $60,000, maximum $500,000). According to the story linked above, Amazon would max out this incentive with just 40,000 jobs. To simplify the math, this element would pay up to $5750 per year to Amazon X 40,000 employees X 17 years, or $3.91 billion.

Other elements of the package include state and local property tax credits (local governments would be 50% reimbursed by the state for their share), a sales tax exemption on construction materials, and an unspecified amount of infrastructure. According to the linked story, there would be "billions of dollars" in transportation upgrades in the state, though the article does not indicate how much would be Amazon-specific and how much would go elsewhere in the area.

Why do I say this offer is shocking? 1) It normalizes not just billion-dollar incentive packages, but multi-billion subsidy awards. Foxconn got $4 billion last year from Wisconsin, according to the Good Jobs First Megadeals spreadsheet, October 2017 update. Now, Amazon has received at least three (see below for St. Louis) offers of over $5 billion. In the European Union, a $1 billion incentive is virtually impossible even in the poorest EU regions, and absolutely impossible in cities as wealthy as the 20 finalists here. Indeed, few if any of the 20 would be allowed to offer any subsidy whatsoever. 2) What is possibly even worse, it normalizes paying subsidies greater than the cost of the investment (100+ % aid intensity, in terms of European Union state aid rules). Seriously, if a government is going to pay more than the entire cost of the investment, it should have a legitimate, large ownership stake, rather than using "investment" as a euphemism for "subsidy." 3) Have none of these cities noticed that unemployment is at historically low levels? That's precisely a reason not to give away the store. Let's look at the state unemployment rate for the 20 qualifiers in November 2017:

Colorado:           2.9%
Tennessee:         3.1%
Florida:              3.6%
Massachusetts:  3.6%
Indiana:             3.7%
Virginia:            3.7%
Texas:                3.8%   (two finalists)
Maryland:          3.9%
Georgia:            4.3%
North Carolina: 4.3%
California:         4.5%
Pennsylvania:    4.6%   (two finalists)
New York:         4.7%
Ohio:                 4.8%
Illinois:              4.9%
New Jersey:       5.1%
Ontario:              5.5%  (December 2017)
Washington DC  6.4%

Source: For U.S. states and DC, Bureau of Labor Statistics, Local Area Unemployment Statistics. For Ontario, Alberta Government Economic Dashboard, published 5 January 2018.

I'm not the only person who is shocked. Greg LeRoy, executive director of Good Jobs First, told Middle Class Political Economist: "As a Maryland taxpayer, I am aghast that Gov. Hogan would propose to subsidize Amazon's new headquarters 100 percent with public dollars. I refuse to pay higher taxes for a company one-sixth owned by the richest person on earth."

LeRoy also pointed out that the St. Louis bid was released to the public last week after the city failed to be named a finalist. According to the St. Louis Business Journal, a partnership of the state of Missouri, the city of St. Louis, St. Louis County, the state of Illinois, and Illinois' St. Clair County offered Amazon $7.1 billion in subsidies, edging out Newark's $7 billion bid as the largest offering known so far. As with the Maryland bid, this is shocking for all the same reasons. Indeed, Missouri had one of the lower unemployment rates in November 2017, a mere 3.4%.

The Maryland and Missouri subsidy packages are simply horrifying. I wrote over six years ago that state and local subsidies were "more out of control than ever." In these six years, we have already seen five $2+ billion incentive packages, with at least one more on the way, and companies emboldened to request not millions, but billions of dollars of subsidies. I fear we are looking at a new ratcheting up of the investment attraction wars.

Why subsidize protectionism motivated foreign investors?

The already infamous case of Foxconn in Wisconsin illustrates a dynamic we are likely to witness more before we are rid of the illegitimate Trump regime. One of the regime's hallmarks has been a set of unpredictable trade policies with a definite protectionist tilt. The United States was withdrawn from the Trans Pacific Partnership agreement on January 23. On May 19, the regime officially announced it would renegotiate the North American Free Trade Agreement (NAFTA).

If you're a company dependent on exports to the United States, these are worrisome developments. Given that the country had $2.7 trillion in imports and an overall trade deficit of $502.3 billion in 2016, there are quite a few companies dependent on exporting to the United States. Therefore, the environment is threatening for them at present.

The classic response, as I wrote before, is to protect access to the U.S. market by making your product in the United States. This is what foreign automakers did in the 1980s, in the face of so-called "voluntary export restraints" on Japanese cars. Being committed to a particular site means that a company's bargaining power with the host government is sharply reduced. However, thanks to U.S. federalism, all is not lost for a company that really needs to locate in the United States.

Since each state has access to large revenues and budgets, and because the U.S. Constitution has not been interpreted to mean that location incentives violate the Commerce Clause (read: Cuno v. Daimler-Chrysler), state and local governments are able to reward companies for doing something they would have done anyway: Come to the United States. Even in the Foxconn case, where the firm obviously wanted to be in House Speaker Paul Ryan's district, it created the illusion that it might go elsewhere, which was all it had to do to get Wisconsin to cough up an obscene $3+ billion subsidy. (We won't know how much in total until we find out the cost for local tax increment financing.)

How can this happen? Probably the two biggest reasons are that the company is mobile, especially when it hasn't committed any money yet, and that there is a tremendous information asymmetry working against governments. Lots more information is available on governments and their officials than is available about a company and its true preferences. Even when a corporation is strongly telegraphing its preferred site, you never can be 100% sure that site will be the winner, or that it will be the winner even if it gives no investment incentives. Corporations make up competing sites even when there aren't any (a site location consultant tells me he always recommends that; see Competing for Capital). They exploit their information advantage well. As a result, governments give them investment attraction subsidies and the average taxpayer pays for it.

How do we know that Foxconn is coming to the United States because it is worried about protectionism? Because it made no economic sense for Foxconn to build here otherwise. There are good reasons Foxconn makes all iPhones in China: land, labor, and just about everything else are way less expensive than in the United States, *and* provincial and municipal governments will give them generous location incentives to favor one over the other. You can't beat that with a stick. But you can beat it if market access is in question.

As long as U.S. protectionism remains ascendant, a growing number of foreign companies will follow Foxconn and hedge their bets to guarantee access to the U.S. market. Due to fiscal federalism, however, the potential advantages from foreign investment (which may not be that great, depending on job losses at existing competitors' facilities) will be diluted or even overwhelmed by the amount of subsidies the newcomers receive. State and local governments need to resist temptation -- to be more precise, we need to find a way politically to make them resist temptation.

H/t to Greg LeRoy for suggesting this article.

Cross-posted at Angry Bear.

Foxconn aims to break the bank

While the head of the illegitimate Trump regime makes multiple headlines telling the New York Times that he is above the law, we have to remember that there are plenty of other issues of concern to the middle class. One of the most striking is the latest huge bidding war for a gigantic Foxconn manufacturing plant (h/t David Haynes), slated to employ a massive 10,000 workers.

The linked article interviews an American consultant based in Beijing, Einar Tangen, who says that Foxconn's standard procedure is to get as much incentives out of state and local governments as possible; indeed, he says, "You can expect Foxconn to get as close to zero cost as they can. They can do it because they bring so many jobs." Yes -- and no.

Yes, 10,000 jobs is a lot of jobs for a single U.S. investment project. But Foxconn has strong motivations to invest in the United States, most importantly the fear of protectionist trade policies that will keep their iPhones and other electronics out of the country. This mirrors the mid-1980s, when exactly the same fear spurred most Japanese automakers to build at least one assembly plant in the United States. If the company has to have a presence in the U.S. market, especially as competitors were doing during the 1980s, the firm does not actually have that strong a bargaining position vis-à-vis the United States.

The problem, just as in the 1980s, is that as long as individual states do not coordinate their bidding (as happens in the European Union), the dynamic of bidding wars will induce them to offer outrageously high location subsidies, sometimes even in excess of 100% of the cost of the investment. Individual states do not take into effect what happens in other states when they do their cost-benefit analyses of economic development projects. The fact that the new investment will directly or indirectly destroy jobs at competing facilities is of no concern to policymakers in, say, Wisconsin, who will not adjust their cost-per-job estimates to reflect this dynamic.

While the United States has a strong bargaining position, individual states bidding against each other do not have a strong bargaining position. Foxconn believes it *has* to come to the United States, but it does not have to locate its new manufacturing plant in Wisconsin. Nor does it have to put it in Michigan, another state apparently in the hunt for this factory. But we can see that there will be a bidding war with at least two states pursuing the facility, and it will drive up the cost of location subsidies spectacularly. Perhaps we'll see a new all-time record.

Oddly enough, even the states have a factor increasing their bargaining power, a low unemployment rate. In May 2017, Wisconsin's unemployment was down to 3.1%, while Michigan's was 4.2%. For Michigan, this represents a decline of 10.7 percentage points (14.9% to 4.2%) since the peak in July 2009. All other things equal, both states should be less desperate to get these jobs than they would have been in 2009.

Call me cynical, but I'll believe it when I see it for the states to refrain from a bidding war.