By David Swenson
Iowans are being played for chumps by state and local elected officials when it comes to job creation and economic development.
Recent public announcements boast of record capital investments pledged from firms like the Orascom fertilizer plant in Lee County, Facebook in Altoona, and the Google expansion in Council Bluffs. In realizing those investments, state and local governments will ultimately provide hundreds of millions in tax breaks. For these three examples combined, government subsidies will average more than a million dollars for each of the mere 250 or so jobs promised.
Something is dreadfully wrong.
Iowa will not be paid back for its generosity. Ever. Neither the benefitted firms nor any magical multiplier effect will generate anywhere near the economic activity necessary to offset these massive giveaways.
We will thus subsidize these operations both directly and indirectly for years to come; we will enhance the bottom lines of multinational and immensely profitable firms, while the rest of us bear the burdens of paying a higher share of the taxes or fees for state and local government services that benefit us all, including the subsidized firms.
CONFRONT THE COST
The dominant economic development success calculus in Iowa now involves high levels of capital investment per project and ever-increasing public underwriting, yet yielding precious few jobs. This is not only unsustainable, it borders on malfeasance. Our economic development trustees at the state and the local levels have been given much too much latitude for much too long, and it is time to confront the exorbitant cost of economic development as it is now practiced in the state.
It wasn’t always this way: Governments were mere bit players in this arena three decades ago. But the massive industrial upheaval of the early 1980s coupled with the farm debt crisis and widespread out-migration — Iowa lost 4.3 percent of its population between 1980 and 1990 — gave rise legislatively to a range of overly generous economic development allowances at the state and local levels.
As time progressed, cities, counties and the state slowly expanded the scope of industries or activities they wished to incentivize as well as the amounts they were comfortable spending. This behavior accelerated during the 1990s and the first part of the last decade, and the Great Recession has further turbocharged development incentive growth.
Additionally, each incremental gain in subsidy type and amount created new precedents: the economic development “standing offer” could be nothing less than the most recently benefitted example. Our economic development leaders have ratcheted up the bidding such that they are now paying unconscionable public costs in the name of paltry private-sector job growth.
PITTING THE PLAYERS
Our economic developers, too, are both victim and victimizer. Savvy firms learned early that towns could be pitted against towns, and states could be pitted against states. In the 1980s, we watched Iowa Beef Packers (now Tyson), an early major recipient of state of Iowa economic development assistance, play one potential site against another as it sought to obtain the best local development terms possible. It also played Iowa against other states.
As the firm always knew precisely where it needed to be relative to hog supplies and its markets, and local and state officials knew only what the firm told it, economic developers were bargaining at a tremendous disadvantage. All they could do was try to discern the appropriate standing offer for a firm like that and then sweeten it a bit and hope for the best.
We witnessed this in spades during the ethanol boom between 2005 and 2008. Iowa local and state governments provided a wide and lucrative range of incentives to ethanol plants to build in Iowa even though those plants had to build in corn-rich Iowa to maximize their returns. And as proposed plants pitted one rural community against another, the ethanol plant property tax forgiveness offers grew rapidly from 10 to even 20 years — in several instances, on top of the guaranteed state aid already garnered.
We saw this process at work in two major Iowa deals of late. Iowa was ostensibly in competition with Peoria, Ill., for Orascom, and Altoona was allegedly pitted against Kearny, Neb., for the Facebook deal. In both cases, we are to believe that Iowa “won.”
Last but not least, just this year the state of Iowa and the city of Des Moines awarded incentives to Principal Financial Group for its plans to renovate its Des Moines operations. The firm is not adding workers, and the chances of Principal relocating seem quite remote. They rewarded Principal for doing what it had to do to be profitable in the current environment.
So, it is chumps-squared now: Incredibly rich firms exploit state and local governments’ collective economic development bargaining and policy ineptness while development officials exploit taxpayers’ trust that they are enhancing the commonwealth. Nothing could be further from the truth.
THE PUBLIC GOOD
Public money is special money in that there are so many competing and deserving uses to which it can be put. Accordingly, public officials have a special duty with public money. They are to promote the common good and to obtain as efficiently as possible sets of commonly agreed social objectives.
In economic development, the primary social objective is employment. Higher levels of employment lead to more stable households and lower social costs. Our governments therefore have a primary obligation to maximize social gains, i.e., employment, and to minimize society’s costs in doing so.
Though lip-service is paid to employment gains, officials increasingly tout the amount of capital investment they believe they have leveraged via public spending. The measures of success now are capital outcomes, not efficiently provided gains in employment.
Furthermore, development officials and politicians would have us believe, these increments to state productivity, no matter how expensively acquired, would not have accrued to Iowa’s economy “but-for” their negotiation skills and the bundle of incentives they doled out.
THE BEST TOOLS
Arguably, the best economic development tools Iowa governments possess are the range of efficiently distributed and desired public goods they maintain and honest governance, coupled with a universally acknowledged literate and hardworking labor force.
Those are Iowa’s major bargaining chips, and I contend that the true test of economic development leadership at the state and local levels would involve skillfully parlaying those critical assets into appropriate and efficient growth that benefits Iowa taxpayers in the long run instead of burdening them for decades, as is the current practice.
I am frequently told that I am naive; that this is how the game is now played, and one better get in big or get out altogether. It is so easy to go big with other peoples’ money.
But to me the true test of both political courage and economic development smarts is the person who finally says “enough!” and means it.David Swenson is an associate scientist in the Department of Economics at Iowa State University. Comments: email@example.com