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Veronique de Rugy / Jan. 9, 2020

Once Again, Government-Subsidized Projects Fail to Deliver

In June 2018, President Donald Trump attended the groundbreaking ceremony for a Foxconn factory in Wisconsin. Ever exuberant in his comments, he called the project the “eighth wonder of the world” and “one of the great deals, ever.” Always a bragger, his praise was directed at himself for orchestrating the use of state subsidies and tax credits to bring the Taiwanese multinational electronics company to Wisconsin for it to manufacture high-resolution LCD screens.

In June 2018, President Donald Trump attended the groundbreaking ceremony for a Foxconn factory in Wisconsin. Ever exuberant in his comments, he called the project the “eighth wonder of the world” and “one of the great deals, ever.” Always a bragger, his praise was directed at himself for orchestrating the use of state subsidies and tax credits to bring the Taiwanese multinational electronics company to Wisconsin for it to manufacture high-resolution LCD screens.

To make this deal happen, the state legislature offered a subsidy package of $4.5 billion, mostly in direct cash payments, and lower-priced land acquired through eminent domain. In exchange, Foxconn promised to create more than 13,000 middle-class manufacturing jobs, a revived manufacturing sector and loads of tax revenue — the combination of which was projected to produce economic returns ranging from $39 billion to $78 billion over the next 15 years. If these returns sound like a great deal, you’ve been conned.

A year and a half after Trump paraded at the site with his golden shovel, the reality isn’t as bright. First, a few days before the ceremony, Foxconn announced that the factory would ultimately be smaller than the one initially promised. It would also be highly automated, with almost all of the assembly work done by robots, and would only require 3,000 employees — 90% of them “knowledge workers” such as engineers, programmers and designers. There’s nothing wrong with such a modern factory, except that it’s not what Trump and other government officials thought they were buying with taxpayers’ money.

And what about the promised economic growth? Even under the deal’s original terms, there’s no way it would have produced much growth. That’s because, as is often the case, the original projections offered by economic development consultants only considered the expected benefits from the subsidies; the costs were ignored. In the real world, however, these subsidies don’t fall from the sky. Every single cent comes from additional taxes paid by actual people. When you consider these costs, the economic outlook for the project dims quite a bit.

In a recent paper on the issue, my Mercatus Center colleagues Matthew Mitchell and Michael Farren did the math and found that “the $3.6 billion in taxes needed to fund the subsidies will likely decrease Wisconsin’s long-run GDP by about $20 billion over the 15-year life of the handout. And this estimate doesn’t include the local, utility infrastructure, and federal subsidies that total another $1.4 billion.” These numbers are harder to sell to taxpayers than the la-la land ones we hear about before every big subsidy deal.

Many might have assumed that this particular deal was going to be a disaster because it was orchestrated by Trump and Scott Walker, Wisconsin’s Republican governor at the time. Yes, it’s true that our current president believes in economic engineering and cronyism — which is another way to describe this kind of deal. Trump has failed elsewhere when trying to spark growth with subsidies. Take, for instance, the Carrier air conditioner plant in Indianapolis, which received large state handouts under Trump’s pressure, only to end up laying off hundreds of workers. But in such matters, many politicians on both sides of the aisle have a similarly lousy record.

And so, it would be a mistake to assume that this debacle is specific to Trump or to Foxconn.

A new paper in the Journal of Economic Perspectives by Cailin Slattery of Columbia University and Owen Zidar of Princeton University looks at state and local business tax incentives and finds yet again that narrow, firm-specific tax breaks aimed at attracting businesses and boosting employment aren’t the way to go. The study shows that larger, more profitable companies are more likely to get bigger handouts. The largest deals benefit the recipients, according to their research, but not the overall state economy. Lower-income states also tend to be more generous with their handouts, only to jack up the cost per job created, sometimes up to as much as $400,000 per job.

This study is only one of many on the topic. They all find that these narrowly targeted subsidies don’t work as advertised and are typically counterproductive. Unfortunately, a slogan like “subsidized projects aren’t worth the money you pay for them” doesn’t make for a great sound bite at ribbon-cutting ceremonies.

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