New study casts more doubt on data center subsidies

A new report by Good Jobs First confirms what has been long-suspected: Data center megadeals of over $50 million in subsidies create very few jobs at a cost per job that easily exceeds $1 million. Indeed, the average for 11 megadeals going to tech giants like Google, Apple, Facebook, and Microsoft came to $1.8 million ($2.1 billion/1174) nominal cost per job.

As I have discussed before, such a figure far exceeds what a typical automobile assembly plant will receive, even though the latter creates far more, and better-paying, jobs than server farms do. An auto facility will receive something around $150-200,000 per job, and it will bring along suppliers to boot (though, unfortunately, sometimes the suppliers will also receive incentives).

The new study finds that by far the most important site location consideration is the cost of electricity and, increasingly, whether the electricity is generated by renewable sources like wind or solar. Thus, many of the biggest data centers are located in states like North Carolina (cheap coal-fired plants), Oregon and Washington (cheap hydropower). States with cheap electricity do not need massive subsidies, but they provide them, anyway.

At least, they usually do. As I have related before, American Express in 2010 announced a $400 million data center in North Carolina, without incentives. But fear not, Amex had not forgotten about using the site selection process as a rent-seeking opportunity. The reason it did not seek incentives, as far as anyone can tell (don't forget about the inherent information asymmetry here), is that the company knew it was going to close a 1900-job call center in Greensboro, which would trigger clawbacks on the data center if it received subsidies for it. So in that case North Carolina gave no incentives for the server farm.

Not only that, Google knows how to build and expand data centers without incentives. Of course, that's in Europe. The Netherlands Foreign Investment Agency confirmed for me that it gave no subsidies to Google for a $773 million, 150-job center opening in Groningen province next year. I was unable to get affirmative confirmation on projects in Ireland, Finland, and Belgium, but none of them show up in the EU's Competition Directorate case database, so presumably they did not receive incentives either.

 The study concludes with sensible recommendations: Transparency where it doesn't exist, capping incentives at $50,000 per job, and knowing when to get out of subsidy auctions for these projects. Maybe simpler still, I would suggest that economic development officials just say no.

Why subsidize data centers?

A number of authors (Good Jobs First, David Cay Johnston, me, and me, among others) have pointed out that data centers (aka server farms) in the United States create very few jobs, yet receive state and local government subsidies that routinely exceed $1 million per job. I'm sure you already know that numbers like those make me ill: the typical automobile assembly plant will receive $150,000 or so per job, and require all sorts of component facilities to feed it -- though, sadly, economic development officials often given incentives to the supplier plants as well.

So why $1 million or more per job? Data centers pay reasonably well, and the biggest are connected to famous tech names like Apple, Google, and Facebook, but it seems to me that it's hard to get around the facts that there just aren't that many jobs, and they don't require an army of supplier facilities bringing indirect jobs.

But surely the competition for jobs is so steep that governments have no choice but to subsidize them? Actually, no. Aside from the fact that $1 million per job probably gives away more than the value of the investment to the government, my investigations have turned up multiple examples of companies building data centers without incentives.

One I've mentioned here before: American Express in 2010 built a $400 million data center in Greensboro, North Carolina, without any incentives at all. The leading explanation has been that Amex had already decided it was going to close a 1900-job call center in Greensboro (announced in 2011), a move it knew would trigger clawbacks of any incentives on the 50-150 job data center -- so it didn't bother seeking subsidies. Did I mention that North Carolina has cheap electricity?

More recently, I have found four Google data centers that opened or expanded without incentives in the last few years. New and expanded facilities in the Netherlands, Ireland, Finland, and Belgium all take advantage of cooler temperatures to reduce their electricity use. While Google did not respond to my email asking whether it received subsidies for those facilities, and IDA Ireland similarly was unresponsive, the Netherlands Foreign Investment Agency did respond with a confirmation that it had provided no "state aid" (EU-speak for subsidies) to the brand-new $773 million, 150-job data center opening in Groningen province in 2017. In addition, a search of the EU's Competition Directorate case database did not reveal any Google state aid cases for data centers. Thus, it appears that none of these cases received incentives.

So why did Google demand over $140 million (present value) in subsidies from North Carolina back in 2007? I think we're looking at the "usual suspect" once again, rent-seeking. Of course, North Carolina couldn't foresee the Amex no-incentive deal that didn't happen until 2010, but now that we can see how Google and American Express do business when they have to, it's time economic development officials around the country learned to "just say no" on data centers.

Cross-posted at Angry Bear.