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.

Great reporting in Albany highlights growing trend towards use of cash grants by states

The Times-Union in Albany, New York, has a great series up on the $1.1 billion (present value) incentive package given to Global Foundries (formerly Advanced Micro Devices) in Malta, New York, near Albany. Coming so soon after the Commercial Appeal series on Electrolux's move to Memphis, I am hopeful that we will continue to see more in-depth analyses of large incentive deals around the country.

This facility received the largest-ever cash grant given by a state or local government to attract an investment, as I determined in my research for Investment Incentives and the Global Competition for Capital. In terms of total value, it was second only to Boeing's $1.98 billion package from state and local governments in Washington. But AMD/Global Foundries highlights a new trend in the evolution of U.S. subsidy patterns. Historically, the vast majority of incentive packages in this country were made up of tax breaks, and cash was a negligible part of the equation. By contrast, in Europe, cash grants have long been the main form of subsidies for new investment, although tax incentives have frequently been used as well. As I explained in Competing for Capital: Europe and North America in a Global Era, this supported the European Commission's goal of having subsidies given as transparently as possible.

AMD/Global Foundries is the largest cash grant given, but it is safe to see that we are seeing a trend toward growing use of cash grants by state governments. Nucor's deal with Louisiana last year foresees up to $160 million in cash grants to the company if it meets all its expansion and job targets. Reporters in several states have told me they are seeing more cash grants. A shift from tax break to cash grant means that the true size of the incentive is growing, since the present value of cash is obviously higher than that of an equivalent nominal tax break spread over a number of years. When states are dealing with huge budget deficits, the last thing we need is for incentive packages to keep growing larger.

Based on my research, the Times Union also points out that New York state is paying a lot more per job than other states for similar fabrication facilities. By my calculation, AMD/Global Foundries received $927,000 per job for its facility there. By contrast, Samsung in Texas received only $190,000 per job and Hemlock Semiconductor in Michigan got $248,000 per job in 2007 (all calculations at present value, not nominal value). Moreover, New York paid 35% of the cost of the project, whereas Texas only paid 4% of Samsung's costs, and Michigan paid 12% of Hemlock Semiconductor's costs.

The case that New York is overpaying is strengthened when we compare what Germany has had to pay to get plants from the exact same company, AMD/Global Foundries. In 2004, the European Commission approved a subsidy worth 22.67% of the investment or $710,000 per job (at 1 euro=$1.35), significantly lower than New York but in the same order of magnitude. However, after rule changes that cut the maximum subsidy for large projects, the Commission only approved an 11.9% subsidy for AMD in 2009 and a 10.83% subsidy for Global Foundries earlier this year (no job data available in the decisions). You can search for all EU state aid cases here.

Again, kudos to the Times Union, and I hope more newspapers are willing to devote resources to documenting the large cost of subsidies such as these when state governments are suffering huge deficits.

UPDATE: $100 Million Incentives: US 25, EU 5

Crowdsourcing works! In my last post on $100+ million incentive packages, I asked for your help in identifying any projects I had missed either in the US or European Union. Readers came up with several suggestions, which led to me discovering even more mega-incentives. I also checked the Good Jobs First blog Dirt Diggers Digest, where I found four projects listed, only one of which had been in my original 13 post-early-2008 packages. Then I went to the accumulated results of Google Alerts, where I found even more. In all, I found a total of 12 more projects in the US, bringing the score to US 25, EU 5. I have identified one possible additional case in the EU, but have yet to confirm it.

Here is my original list of $100 million incentives from September 29:

Company          State           Minimum nominal incentive package

AREVA             ID              $276.6 million present value
Nucor                LA             $373 million
Hemlock            MI             $358.4 million
Spirit Aero         NC            $250.9 million
Cerner/OnGoal  KS             $230 million
Hemlock            TN            $200 million
Electrolux          TN             $188.3 million present value
Ford                  KY            $180 million
Boeing              SC              $900 million
Apple                NC            $320.7 million
Xtreme             MI              $100 million
Schott               NM            $130 million
Panasonic         NJ              $102 million

Here are the additions:

LG Chem                  MI              $276 million (thanks to Dean Whittaker for this and the next one)
Johnson Controls       MI              $467.5 million
Motorola                  IL                $113.7 million (thanks to Dirt Diggers Digest for this and the next two)
American Greetings  OH              $104.5 million
Diebold                   OH                 $96 million (DDD expects this to top $100 million when all is tallied)
Yahoo                     NY               $200 million (David Cay Johnston has reported on this and the next one)
Verizon                   NY               $614 million
Xanadu                   NJ                 $200 million
Gaylord Entertain.   CO                $300 million
A123 Systems        MI                 $100 million
Dow Kokam          MI                 $100 million
fortu PowerCell      MI                 $100 million

We now have five times as many $100+ million packages in the US than the EU in the last three years, seven of which exceed the largest package in the EU, at least in nominal value. This continues to underscore my contention that the EU state aid rules successfully reduce the size of incentives there and we need to adapt their rules to our political institutions.

I have heard rumors that there may still be mega-packages still to uncover. Let me know if you hear about them!

Job piracy in Canada, Australia, and the United States

As I mentioned in August, my article "Regulating Investment Attraction: Canada's Code of Conduct in Comparative Perspective," has just appeared in the September issue of the journal Canadian Public Policy.

Job piracy (using subsidies to induce the relocation of an existing facility) is a big problem in the United States. New York City and Kansas City have been subject to repeated raids by neighboring states, and a Good Jobs First study this summer documented extensive job piracy in the Cincinnati and Cleveland metropolitan areas. Two voluntary anti-poaching agreements among groups of states were complete failures.

In the early to mid-1990s, Canada was seeing large-scale job piracy as well. Crown Life Insurance moved 1200 jobs from Toronto to Regina, Saskatchewan, in 1991, receiving a C$250 million loan guarantee to do so. New Brunswick was handing out millions of dollars to call centers to relocate there, including C$11 million to get United Parcel Service to consolidate 870 jobs from three other provinces in Canada. With this background, British Columbia insisted that a ban on job piracy be placed in the 1994 Agreement on Internal Trade signed by the Canadian federal government, all 10 provinces, and the Yukon and Northwest Territories. Though there were other provisions in the Code of Conduct on Incentives, the piracy ban was the only one that was legally binding. But it turned out to be not binding enough.

The United Parcel Service subsidy was subject to a complaint by British Columbia against New Brunswick in 1995. But weak dispute resolution rules in the larger Agreement meant there was no true enforcement mechanism. New Brunswick suffered no consequences, although it eventually got out of the poaching game when Premier Frank McKenna retired. However, since 1995, there have been at least eight other instances where various provinces (Nova Scotia, Prince Edward Island, Quebec, and Ontario) all gave subsidies to companies to move existing operations. One of them, Clarke, Inc., has been featured for years on the website of Nova Scotia Business, Inc., even though it is a prima facie violation of the Code of Conduct. But without a complaint from Ontario, nothing can happen -- and Ontario tried to raid Nova Scotia unsuccessfully to obtain the headquarters of grocery chain Sobeys.

The Code of Conduct does not appear to have had much success. The best that can be said about it is that the relocations subsidized were much smaller than those of the 1990s. Clarke, at 95 jobs, was the largest; the others were significantly smaller than that. In the meantime, the Agreement on Internal Trade has strengthened its dispute resolution process to make violators subject to fines up to C$5 million. It seems possible that a large-scale subsidized relocation would provoke a complaint under the Code.

An interesting contrast is Australia, which has a voluntary anti-piracy agreement that includes five of the country's six states (Queensland is the non-participant). Besides banning job piracy, the Interstate Investment Cooperation Agreement also encourages states to consult with each other when a company tries to play them off against each other. Whereas the National Governors Association says U.S. states have the right to do this, in Australia the states really do consult with each other to reduce what I describe as an information asymmetry in bargaining between governments and companies. Even though there is no enforcement mechanism at all, there have only been a couple of violations since the Agreement was first adopted in 2003. The reason for its relative success seems to be that the five states' politicians genuinely believe that job piracy is bad policy, a view that has been promoted by a federal government research body, the Productivity Commission, for at least 15 years.

The lesson for the United States is that we should try to ban job piracy because it obviously has no benefit for the country as a whole. In the U.S., of course, we have a stronger dispute resolution process than Canada's Code of Conduct does: If Congress passed a law against interstate job piracy, it could be enforced in federal court. The problem is that too many state politicians don't agree that poaching is a bad policy; they need to be educated or replaced.

$100 million Incentive Packages: US 13, EU 5. Have I Missed Any?

I am reworking my list of the top 25 subsidy packages in the U.S. for a new article I'm working on. In my book, Investment Incentives and the Global Competition for Capital, I used the top 25 projects from 1999 to early 2008. For the article, the table will cover 2001 to the present. In addition, I am interested in uncovering all incentive packages of $100 million or more since early 2008. In the European Union, there are only five $100+ million incentive packages in the last three years. (Source: European Commission, search for cases with decision date after 1/1/2008 and Primary Objective of Regional Development.)

In the United States, by contrast, state and local governments have given at least 13 packages with a nominal subsidy value of $100 million or more since early 2008. (As with the book, I will be calculating their present value, because that is what the European Union does; this allows for better comparability of subsidies and, besides, present value is the more meaningful figure.) Before I send this article off, I want to make sure I haven't missed any, which is why I am asking for your help. Please let me know if there are any projects I've missed. I will, naturally, acknowledge you in the article.

First, here is a corrected version of the table that appeared in the book. In the course of writing a report, not yet published, for the North Carolina Budget and Tax Center, I discovered that our estimate of Google's subsidy in North Carolina was too low. It is corrected here.

Company	Year	City	State	Present Value
Boeing	2003	Everett	WA	$1,984,400,000
Advanced Micro Devices	2006	Malta	NY	$1,118,000,000
ThyssenKrupp	2007	Mount Vernon	AL	$734,304,000
Scripps Research Institute	2003	Palm Beach County	FL	$566,500,000
IBM	2000	East Fishkill	NY	$533,083,333
Volkswagen	2008	Chattanooga	TN	$450,139,048
Kia	2006	West Point	GA	$353,083,333
Toyota	2006	Blue Springs	MS	$291,634,000
Nissan	2000	Canton	MS	$289,666,667
Sematech	2007	Albany	NY	$269,444,444
Hyundai	2002	Montgomery	AL	$233,936,363
Ford	2006	Detroit	MI	$219,780,000
Toyota	2003	San Antonio	TX	$218,100,000
International Sematech	2002	Albany	NY	$175,636,364
Dell	2004	Winston-Salem	NC	$174,230,401
Goodyear	2004	Akron	OH	$173,099,088
Samsung Austin Semiconductor	2006	Austin	TX	$171,244,444
Eli Lilly	1999	Indianapolis	IN	$150,916,667
Marathon Oil	2007	Detroit	MI	$148,800,000
Honda	1999	Lincoln	AL	$144,221,818
Google	2007	Lenoir	NC	$140,592,593
General Motors	2000	Lansing	MI	$138,844,542
Alenia/Vought	2004	Charleston	SC	$133,133,333
Dell	1999	Nashville	TN	$132,373,334
Hemlock Semiconductor	2007	Hemlock	MI	$124,226,666

Source: Investment Incentives and the Global Competition for Capital and author's calculations

While researching this new article, it occurred to me that Kansas City, MO, has given several tax increment financing (TIF) subsidies that exceed the lowest value in this table. In fact, four Kansas City TIFs should have appeared in the table: KC Live, H&R Block, Pershing Road, and Three Trails (source). KC Live, the smallest of these, had a nominal subsidy of $167.9 million. To the best of my knowledge, the EU does not approve subsidies for retail, and I know for a fact that it does not approve them in the steel industry (ThyssenKrupp in the table above, Nucor in the table below).

The following list was begun by identifying the "top projects of the year" for 2008-10 according to Site Selection magazine. Pursuing news stories to determine the incentive package details led to the discovery of several other projects of at least $100 million in nominal subsidy value.

Company          State           Minimum nominal incentive package

AREVA             ID              $276.6 million present value
Nucor                LA             $373 million
Hemlock            MI             $358.4 million
Spirit Aero         NC            $250.9 million
Cerner/OnGoal  KS             $230 million
Hemlock            TN            $200 million
Electrolux          TN             $188.3 million present value
Ford                  KY            $180 million
Boeing              SC              $900 million
Apple                NC            $320.7 million
Xtreme             MI              $100 million
Schott               NM            $130 million
Panasonic         NJ              $102 million

Thus, in the last three years, there have been at least 13 deals for $100 million or more in the U.S. (though the last three may fall below $100 million in present value) compared to just five in the European Union. The deals in the U.S. are larger, too: the largest deal in the EU is for Global Foundries (formerly Advanced Micro Devices) in Dresden, Germany, where EU state aid rules allowed it to receive 211.0 million euros, about $284.9 million. Not only is this dwarfed by what South Carolina gave Boeing, Global Foundries is asking New York State for $1 billion for a new wafer fabrication plant there. As I will argue in the article, new evidence continues to demonstrate that the EU is  successful in reducing the investment incentives granted to mobile investors there, compared to what they get for similar projects in the U.S.

Again, these results are preliminary, but striking. Because of the EU's centralized register of cases, it is more likely that I may have missed 9-figure subsidies in the U.S. than in the EU. Of course, please let me know if I've missed any in either place. Thanks!

What's Up with Political Math?

Matthias Shapiro at Political Math made a big splash on August 16 with a post purporting to show that Texas had had the best employment record since the official start of the recession in December 2007.  How big a splash? Well, Ross Douthat endorsed it in his New York Times column and Zach Pandl at Goldman Sachs (no link, but thanks to Pandl for sending more detail on the analysis) used the raw jobs numbers as the dependent variable for explaining why some states had better employment outcomes than others (energy industry, low exposure to housing bubble, and high tech employment, he concluded).

Shapiro was deluged with responses, including 452 comments on his blog post and no telling how many emails, including a couple from me. Shapiro had made a serious error in what he called "My Personal Favorite Chart," which was that he looked at labor force data and acted like it was population data. Since December 2007, "739,000 people fled into Texas," he said. In fact, he had no data on interstate migration at all, and was misinterpreting the change in the size of the labor force to be the same thing as interstate migration. One commenter, "delaustin," pointed him to a link for interstate migration data (http://www.census.gov/hhes/migration/), where we see, for example, that net interstate (including DC and PR) immigration into Texas in 2009 was 130,234. This, of course, was all migrants, not just members of the labor force, and less than half of Texas' total population is employed. As a result, his "Personal Favorite Chart" was GIGO.

An even more serious problem is that the concept of "employment performance" is extremely sensitive to the way it is measured. Shapiro asserted without argument that population growth is, at worst, "a good problem to have." Of course, since what he was actually measuring was labor force growth, I argued earlier that there was no clear reason to think that adding two unemployed people to the labor force for every new employed person was "a good problem to have."

Shapiro did argue that unemployment rates were not the best measure of employment performance because interstate migration meant that states were rewarded for having their labor force fall in size. Thus, his preferred measure was the ratio of employed persons in June 2011 to that of December 2007, i.e. raw job numbers. By this measure, it turns out from Pandl's study of every state that Texas came in fourth, after North Dakota, Alaska, and DC. (Shapiro says Texas did better than North Dakota; I can't account for their different findings without seeing more of Pandl's methodology.)

If we do use unemployment rates, however, we find that Texas' unemployment rate has deteriorated relative to the national average, rising from 88% of the national average in January 2008 to 92.3% of the national average in July 2008 (and it rose again in August). I showed that by an alternate measure of employment performance, ratio of unemployment rate in July 2011 to that of December 2007, Texas was slightly below the median, with the July 2011 unemployment rate 187% of the December 2007 rate. By this measure, North Dakota and Alaska held the top two spots, just as they did with raw employment numbers. DC, however, is right below the median, at 177%.

As I wrote a couple of weeks ago, the employment/population ratio is often used in place of the unemployment rate to measure employment performance. Since population is a component, it would seem that Shapiro would have less to object to with this metric. Felix Salmon showed that by this measure, Texas has performed worse than the U.S. average during the Perry administration.





Source: Felix Salmon

Two caveats are necessary here. First, Salmon uses a non-standard definition of the population denominator, including all persons regardless of age or institutionalized status. Second, even with this measure, we can see that since the recession began, Texas has performed better than the national average (compare the slopes of the two lines after 2007).

To find out much better, I used the standard Bureau of Labor Statistics definition of the employment population ratio, where population is the civilian, non-institutionalized population aged 16 and older, and took the ratio of that ratio for August 2011 (P for preliminary) to December 2007 (R for revised). As we can see, no state has gotten back to its December 2007 employment/population ratio, but North Dakota has gotten the closest.

                           Employment/Population Ratios by State (%)

State		August 2011 P	Dec 2007 R	Ratio of ratios
North Dakota		69.8	71.4	97.8
Vermont		66.1	67.8	97.5
Mississippi		54.2	55.8	97.1
Minnesota		66.8	68.9	97.0
Kentucky		56.1	58.1	96.6
Alaska		64	66.6	96.1
New Hampshire		65.6	68.6	95.6
Virginia		64.1	67.1	95.5
Nebraska		68.1	71.3	95.5
Maine		60.1	63	95.4
Texas		59.8	62.7	95.4
Kansas		64.4	67.6	95.3
South Dakota		67.3	71	94.8
Iowa		66	69.7	94.7
Tennessee		56.8	60.1	94.5
Massachusetts		60.2	63.8	94.4
Oregon		58.7	62.3	94.2
Oklahoma		57.6	61.4	93.8
Connecticut		61	65.1	93.7
New York		56.3	60.1	93.7
Ohio		59.1	63.1	93.7
Hawaii		59.5	63.6	93.6
Pennsylvania		57.6	61.7	93.4
Wisconsin		63	67.6	93.2
New Jersey		59.5	63.9	93.1
Missouri		59	63.7	92.6
Arizona		56.2	60.9	92.3
Arkansas		55.1	59.8	92.1
Montana		59.5	64.6	92.1
Louisiana		54.5	59.2	92.1
Wyoming		64.7	70.3	92.0
South Carolina		54	58.9	91.7
Rhode Island		59.1	64.5	91.6
New Mexico		55.8	61	91.5
Illinois		59.4	65	91.4
Florida		55.2	60.5	91.2
Maryland		61.4	67.3	91.2
Washington		59.1	65	90.9
Alabama		53.1	58.7	90.5
Idaho		58.7	65.1	90.2
West Virginia		48.5	53.9	90.0
Indiana		57.1	63.6	89.8
Michigan		53.5	59.9	89.3
California		55.3	62.1	89.0
North Carolina		55.3	62.4	88.6
Delaware		55.7	63.1	88.3
Georgia		56.5	64.1	88.1
Colorado		61.7	70.2	87.9
Nevada		56.2	64	87.8
DC		58	66.2	87.6
Utah		60.8	69.5	87.5

Source: http://www.bls.gov/lau/ststdsadata.txt

Here we find that Texas comes in 11th place. As noted, North Dakota retains the top spot; Alaska is 6th by this measure and does well on all three measures. DC, however, comes in 50th by this measure, rather than third or 27th. This underscores the difficulty in measuring "employment performance." Clearly, more analysis is needed.

Meanwhile, Shapiro promised on August 23 "to try to do a follow-up in the coming week that addresses more of the data." Since then, he managed to publish a long, multi-chart post on an unrelated topic on August 31, but has not delivered any follow-up. Here we are, more than a month later, and it is unclear if any will be forthcoming. I'm sure I'm not the only person curious as to what points Shapiro thinks still hold up.

Poll Results on Electrolux in Memphis

Thanks to everyone who took part in the poll: How likely is it that Electrolux will be in Memphis in 15 years? Here are the results.

0-25%:     11 votes, 65%
26-50%:     5 votes, 29%
51-75%:     1 vote, 6%
76-100%:   0 votes, 0%

Personally, I don't think the likelihood of Electrolux sticking around is very high. Obviously, Memphis is a great distribution hub -- think FedEx -- but this is first and foremost a manufacturing operation. Electrolux has shown it disavows any responsibility to stand by its workers, even in Sweden, even in the CEO's home town. Therefore, my vote would have been 0-25%, and I think the chances are pretty close to 0.