Then there's the rising price tag. As the private relocation industry becomes more skilled at shaking down public-development officials, the cost per job has skyrocketed. In 1980 Tennessee paid $11,000 for each job in a new Nissan plant. At mid-decade, the price in an Indiana auto plant deal was $50,000 per job. Today the going rate ranges from $65,000 per job (BMW in South Carolina) to $200,000 per job (Mercedes in Alabama), comparable with the cost of generating employment through notoriously wasteful public-works programs.
The subsidy war is also a lose-lose proposition because it inevitably generates what Federal Reserve Bank of Minnesota senior officials Melvin Burstein and Arthur Rolnick describe as a surfeit of private goods. It induces states -- or communities like Rio Rancho -- to misallocate their total resources, neglecting the proper mix of public goods (which might include education, roads, and communication) in favor of wooing the private sector.
Further, subsidy battles are inherently stacked in favor of larger companies, which are able to mount continuous lobbying campaigns. Subsidies rarely help more creative, high-growth companies. Collectively, small to midsize companies produce many more high-quality jobs -- at lower costs -- than a typical giant company plant does. Politicians and bureaucrats, however, prefer to deal with larger, one-stop entities -- particularly those that can bring effective public-relations and lobbying machinery to the table.
That's why the huge majority and largest volume of business-development payments go to multinational firms that may actually be scaling back their total U.S. employment. Even worse, the growing tendency of bigger companies to hopscotch from one state-subsidy scheme to another severely disrupts business activity and confidence throughout the country.
The new civil war supercharges this disruption of the American economy. It fragments once-vital industrial regions into geographically disparate, isolated pieces.
Finally, the subsidy war diverts political and business attention from far more important government and economic concerns. Tired of dealing with crime, education, and inner-city social issues, politicians lustfully chase after sports franchises or take meetings with big-time companies looking for handouts. And instead of confronting Japanese competition or building technical skills for the future, many companies become obsessed with wringing the best possible tax or real estate deal from obliging bureaucrats.
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The Would-Be Peacemakers
Given the stakes, America's incentive business has received surprisingly little scrutiny. But a handful of public-minded citizens have challenged whether the subsidy wars that state and local officials are waging make sense. Take, for example, the one-man crusade a small-town lawyer, Bill Maready, launched in North Carolina.
Maready was incensed by deals like a $1-million grant to PepsiCo Inc. to create 1,000 jobs that actually produced just 400 and the publicly funded construction of a $500,000 parking garage for mammoth R. J. Reynolds Tobacco Co. Calling such giveaways "corporate extortion," he filed suit, alleging that public subsidies to private companies violate the North Carolina constitution. To the horror of North Carolina's prosubsidy governor, Jim Hunt, last August a Winston-Salem judge agreed. Pending appeal, the suit threw the state's massive development bureaucracy into a panic.
But a truce in the new civil war will require more than well-intentioned efforts. At present, three serious proposals have been put forth to reign in a process that is out of control:
1. The most comprehensive proposal comes from Burstein and Rolnick. Deeply troubled in 1992 when Minnesota massively subsidized a professional basketball team and then paid incentives worth nearly $670 million to an airline that has yet to create the jobs it promised, Burstein and Rolnick last year cowrote an influential report calling for a federal ban on state business incentives.
When states compete to build libraries or schools, Burstein and Rolnick argue, the nation as a whole benefits because states are investing in public-sector goods that complement private development. When money that would otherwise be used for those investments is paid to individual firms, however, everyone loses -- including the region whose job and tax bases are depleted by the relocation and the firm's new home, which can't pay for needed public amenities.
The result is a classic "collective action" problem: all states together are hurt by business subsidies, but individually none is willing to disarm until everyone else does. The only way to break the subsidy addiction is to pass a national law outlawing subsidies altogether.
Opposition from governors and development bureaucracies to Burstein and Rolnick's proposal was predictable, but the proposal writers also took flack from an unlikely source -- archconservative congressional representatives who might have been expected to embrace cutbacks in inefficient government intervention. Many hail from states that vigorously pursue subsidies. Rather than offend interests back home, they recoil from pushing Washington to dictate proper conduct for state officials. Congress seems unlikely to end the new civil war.
2. Groups like the National Governors' Association take a different tack. Recognizing the antifederal mood in Congress, their notion is that if subsidies are inevitable, they should at least be made more effective. They advise that economic officials insist on measurable development goals before they make payments, that all funds be subject to recovery or "clawback" by the state if goals are not reached, and that performance standards for establishing program targets become much more precise.
