Would Aristotle wear a mask?
States and local jurisdictions across our region use a variety of tax incentives and subsidies to attract businesses and create jobs. But information about those enticements– how much they’re worth, and whether they actually translate into increased employment and economic activity– is often unavailable to the public. We examine new initiatives to cast light on public incentives and subsidies.
- Ed Lazere Executive Director, D.C. Fiscal Policy Institute
- Philip Mattera Research Director and Director of the Corporate Research Project, Good Jobs First
- Matthew Mitchell Senior Research Fellow, Mercatus Center at George Mason University
MR. KOJO NNAMDIFrom WAMU 88.5 at American University in Washington, welcome to "The Kojo Nnamdi Show," connecting your neighborhood with the world. There are economic carrots local governments dangle in front of business. Thinking of investing in our communities? There's a subsidy for that. Thinking of building a new mixed-used project or a stadium in D.C.? How about a tax abasement or a low-cost loan? Thinking of starting a bio tech company in Fairfax or Montgomery County? How about a job-creation tax credit?
MR. KOJO NNAMDIBusiness subsidies have become a preferred tool for state and local governments hoping to attract jobs and expand the tax base. But those deals are often shrouded in secrecy. Transparency activists on the left and right are pushing to make that data available online. But what happens if you make this information available to the general public? And how can we know whether those subsidies really translate into jobs?
MR. KOJO NNAMDIJoining us to discuss this is Philip Mattera, research director and director of the Corporate Research Project, Good Jobs First, which crated an online database called Subsidy Tracker that details incentives offered by governments across the country. Phil Mattera, thank you for joining us.
MR. PHILIP MATTERAHappy to be here.
NNAMDIAlso back with us is Ed Lazere, executive director of the D.C. Fiscal Policy Institute. How are you doing, Ed?
MR. ED LAZEREI'm well, Kojo. How are you?
NNAMDII am well. Good to see you.
NNAMDIAlso joining us in studio is Matthew Mitchell, senior research fellow at the Mercatus Center at George Mason University. Matthew Mitchell, thank you for joining us.
MR. MATTHEW MITCHELLThanks for having me.
NNAMDIIt's a conversation that you, too, can join, 800-433-8850. What do you think of government subsidizing businesses on the basis of promises, usually to create jobs? 800-433-8850. You can send email to firstname.lastname@example.org. Send us a tweet, @kojoshow, or go to our website, kojoshow.org. Join the conversation there. Do you think that's the best use of government resources? Phil Mattera, I'll start with you.
NNAMDIPoliticians love ribbon cuttings. They love being able to tout the hundreds or maybe thousands of jobs they brought to their communities. But they can't necessarily make those things happen on their own. What they can do is offer a variety of enticements to business. Give us a sense of what subsidies look like at a state and local level. What can governments offer? And what can they expect to get in return?
MATTERAWell, there's actually a smorgasbord of subsidies that are available. You know, some of them relate to taxes. There are corporate income tax credits. There are property tax abatements. There are sales tax exemptions. There's tax increment financing and many more. And then there are other things that are not tax related. There are just grants. There are low-cost loans. There's venture capital money.
MATTERAThere's, you know, no end to the forms of financial assistance that state and local governments are willing to provide. And, in total, it's estimated that this amounts to about $70 billion a year in the country as a whole.
NNAMDIAnd Good Jobs First says there are about nine broad categories of subsidies. I suspect if you go to our website, kojoshow.org, you can see a link there. It's an open question when and if subsidies can be effective in attracting businesses and stimulating the kind of growth local jurisdictions want. What do you think?
MATTERAWell, it definitely is an open question. And we feel that the first step in answering that question is for the public to know about these subsidies, to know which companies are getting them, to know how much they're receiving and what are the outcomes of that. In the past few years, more states and localities have been making some of that information public. But they've been doing it in ways that are not always accessible to the average person.
MATTERAThey issue the information in obscure reports or on hard-to-find websites. So what we've done at Good Jobs First is to collect all of that far-flung information and put it together in one centralized database called Subsidy Tracker, which is on our website at goodjobsfirst.org. And, in addition to collecting all the published information, we're trying to get unpublished information from many jurisdictions to enrich the amount of data that's available.
NNAMDIAs I mentioned earlier, we do have a link to the Good Jobs First website at our website, kojoshow.org. But, Ed Lazere, I'd like to hear you respond to the same question based especially on your experiences here in Washington about when and if subsidies can be effective in attracting the kind of business and stimulating the growth that this local jurisdiction, in your view, wants or needs.
LAZERESure. I think the reality is that subsidies can make a difference and can bring jobs and can be beneficial to communities, but only if the hard questions are asked and, as Phil noted, if the information is available. What we tend to find is those questions aren't really asked. So, for example, the city has -- the District of Columbia has a pretty generous set of benefits for high-tech companies to come to the District. And no one has really looked at whether that's made a difference in bringing more high-tech jobs.
LAZEREAnd what we have found in our research is that it appears that, in general, those tax breaks have gone to businesses that would have come here anyway. So if you're offering blanket tax subsidies for behavior that largely would happen anyway, then the incentives aren't effective. They're only effective, of course, if they really make a difference for companies that wouldn't come here. And those are the hard decisions that policymakers need to make.
NNAMDIMatt Mitchell, I'd like to hear your view. This is a kind of government interference, if you will, in the market.
MITCHELLYeah. So I mean, what I would say is that there's probably two ways that a state can compete for business. And one of them is to offer an environment which is conducive to growth. And that's a sort of environment where you say any kind of firm, whether it starts here or moves here, is going to find that taxes are reasonably low, that regulations are few and reasonable, that it's a good business environment.
MITCHELLThe other way is to ignore all those approaches to have an environment that's not particularly conducive to growth but then to cut special deals for particular firms. And I think this latter one is a particularly pernicious way to try to produce sustainable equitable growth.
NNAMDIIndeed. You're saying that subsidies are really a way for specific deals for particular firms.
NNAMDI800-433-8850, do you believe that subsidies are a good way to spend your tax dollars on the part of the government? 800-433-8850. Phil, they say transparency is the best disinfectant. And, over the last few years, governments and transparency advocates have moved to make all kinds of data available online. Good Jobs First has begun to track, as you mentioned, the subsidy data online.
NNAMDIBut it's also graded the level of openness. The District of Columbia government ranked last in the entire country for its online disclosure. Virginia ranked 25th. Maryland ranked 18th. Can you give us a sense of what good disclosure looks like and what bad disclosure looks like?
MATTERAWell, actually, that is out-of-date because, since that report was issued, D.C. has come out with an economic development report. And Ed can say more about that. And if we were to redo that report now, D.C. would score a lot better because it has finally, after a long time, you know, kind of gone public with a lot of that information. There's some...
NNAMDID.C. is tracking the same course as the Washington Wizards. But go ahead.
MATTERASo D.C. is now -- has a respectable showing. If you consider it a state -- and actually, we've done a number of reports that we call 51 state reports 'cause we consider D.C. a state for these purposes. And now, D.C., you know, has a much more respectable showing, at least in terms of basic transparency. We've also done reports on accountability in -- for these programs. For example, you know, what kinds of requirements do they have for job creation? In other words, do the recipients actually have to do anything to get the money? And D.C. still does not perform very well on that.
MATTERAWe've also done a report on the enforcement of these standards. And the standards also include things like having wage requirements so that subsidized companies have to pay wages of at least a certain level. And D.C. also has significant shortcomings in that regard. Maryland and Virginia are doing better in those areas.
LAZEREAnd, Kojo, just to give you a sense of the value of those reports -- so we learned for the first time last year, because the city put out for the first time an economic development budget, that, in 2010, in the midst of a recession with budget cuts to libraries and rec centers and health care and so on, that the city approved tax breaks for business that will ultimately cost us $170 million in revenue. That's big money in D.C. And we wouldn't have known that, or at least it would have been very hard to collect that information, without this economic development budget.
LAZERESo, I think, the city and Chairman Kwame Brown, who championed the legislation to do an economic development budget, deserve credit. Of course, it then takes you the next step of what did we get for that $170 million? And that is the next step. And when we looked, we realized that, in fact, the city, as Good Jobs First has found, asked very little questions when those tax breaks are given in terms of what the city will get in return, in terms of jobs or affordable housing or other kind of benefits.
NNAMDIIt does seem to me, Matt Mitchell, that is, in a way, in the interest of the city, certainly of its elected officials, not to be too explicitly clear about what these benefits are or not. So if you get a bad reporting card on the basis of the subsidies that you give, in the eyes of some politicians, that would be a good thing.
MITCHELLYeah. So, I mean, these subsidies are a particularly helpful tool for politicians because they allow them to point to really concrete examples of firms cutting ribbons and coming into a state or a city. But some of the -- but it's -- what they don't want to do is to give -- is to be entirely out in the open 'cause they want to have some negotiating power. And so what I would argue is -- actually, to plug Phil's project, economists have a much better understanding of these types of things.
MITCHELLIn fact, because of his database and because of those -- of efforts to try to make these things open, and based on that, we have much better understandings and estimates of what the actual impact of these -- of these types of programs are.
NNAMDIWell, states across the country are engaged in a kind of drawn-out race to attract certain kinds of investments. If one considers, for instance, the movies, this year five of the nine movies nominated for Best Picture received a government subsidy or preferential tax incentive for filming in a state. Last Thursday, we talked with Crystal Palmer, the director of the D.C. Office of Motion Picture and TV Development, about how hard it is to film in D.C. and how D.C. is falling behind Maryland and Virginia in its attempt to attract these projects.
NNAMDIBut one has to wonder, when a majority of the movies nominated for Best Picture received government subsidies, is this kind of creating a race to the bottom? I'll start with you, Matt.
MITCHELLYeah. I mean, I think it is. And Ed and I were talking, actually, before the show, that this is one of those rare examples where you often get agreement from real market-oriented people, such as myself and others, who would like to see a little bit more active role for the state. And part of the reason is that these subsidies often go to the top 1 percent. So why in the world should we -- we may not be able to agree on tax policy. But it seems to me that it is a great opportunity to say, boy, the government shouldn't be spending taxpayer money to -- and transferring it to wealthy Hollywood producers.
LAZEREYou know, you can't really blame companies for asking for tax subsidies when they're being offered. So what you find is that companies tend to locate, for logical reasons, where their markets are best. So Matt talked about the tax climate, but, I think, equally or, in our opinion, more important, companies locate where they are close to their market, where they have skilled labor force, where they can attract executives because there's a good quality of life in that region. Those are the kinds of things that are most attractive to companies.
LAZERESo where they -- they'll pick an area, and then they'll play one jurisdiction off another to get a subsidy with probably the best example being Northrop Grumman, which decided to move its international headquarters to the D.C. area and then set about trying to see what it could get from Maryland, from D.C., from Virginia, knowing that is was going to, in the end, get something. And, in fact, it would've been foolish for Northrop Grumman not to ask for something. In the end, they ended up in Virginia, probably because that was the best place for them to be.
LAZEREAnd yet they got some financial assistance from the state. It's really wasted money.
NNAMDIHere is John. Going to the phones, gentlemen. Please don you headphones. John is in Falls Church, Va. John, you're on the air. Go ahead, please.
JOHNGood morning. I wanted to address a more basic issue of the structure. The structure of government is generally considered three parts that tend to balance one another. We have the -- we also have the government and business and the citizenry, who form a similar triad, which try to balance one another. It seems to me that we now have the government going into the business of business, and that seems like a very bad conflict of interest at the worst.
NNAMDIWell, Phil Mattera, we live in a free market society. Some would argue that, in some respects, the government of business is business.
MATTERAWell, the subsidies suggest that it is not quite a free market in the pure sense because government is stepping in, for better or for worse, and making decisions on assisting certain companies and not others. Now, my problem with this is not in the kind of theoretical realm that government should never step into the market. The problem is that they're often stepping in in a way that's ineffective and counterproductive. Many of the companies that are getting these big subsidy deals don't need them, and, you know, they're not necessary, as Ed said, to get them to locate in a particular area.
MATTERABut, again, if they're available, companies are going to take them. And sometimes the problems are that there are middlemen, these site location consultants, who have a vested interest in playing off one locality against another to get them to bid, you know, artificially high amounts to win an investment. And the company doesn't mind getting a tax break, even if it doesn't need it. The consultant makes out like a bandit, and the losers are the taxpayers who give away more tax revenue than they need to.
NNAMDIWell, Matt Mitchell, allow me to kind of rephrase the statement I just made, and there are those who argue that the business of government is business, that you attract business. This is a free market system. You do what you have to to attract it. What's wrong with that?
MITCHELLYeah, I think, there probably are some people who make that argument. I think it's a pretty bad argument. The business of government should be to provide a level playing field, in my view. And the reason is that in an ideal situation in a market, you would have businesses trying everything they can to figure out ways to provide value to customers.
MITCHELLUnfortunately, when you get into a sort of crony capitalism-type situation, where certain firms and businesses get special favors, then all their energy is not put towards finding new ways to provide value to customers, but for finding new ways to provide value to politicians. And that's -- economist consider that almost entirely a waste because you -- and Washington, D.C. is a perfect example.
MITCHELLYou can look at K Street, and you see that there are hundreds and hundreds of well-paid, extremely smart lawyers, lobbyists that could be out there inventing new things. But, instead, these people are putting all of their energy trying to persuade politicians to give them one sort of favor over another.
NNAMDIGot to take a short break. When we come back, we will continue this conversation on transparency in business incentives. If you've called, stay on the line. We will get to your call. The number is 800-433-8850. Are you a business owner who has benefited from subsidies? We'd love to hear from you, 800-433-8850. We should note that we're planning to discuss this topic from the perspective of economic development authorities later this month with the heads of Fairfax and Montgomery County Economic Development, so, please, stay tuned for that. I'm Kojo Nnamdi.
NNAMDIWelcome back to our conversation about business incentives and transparency. We are talking with Matthew Mitchell, senior research fellow at the Mercatus Center at George Mason University. Phil Mattera is research director and director of the corporate research project at Good Jobs First, which created an online database called Subsidy Tracker that details incentives offered by governments across the country. And Ed Lazere is executive director of the D.C. Fiscal Policy Institute.
NNAMDIThe number to call, 800-433-8850. Do you think subsidies are a good use of government resources? I'd like to go to Manny on the phone in Washington, D.C. Manny, you're on the air. Go ahead, please.
MR. MANNY HIDALGOHi, Kojo. Thanks for taking my call.
HIDALGOYou have two people there that are doing excellent work: D.C. FPI and Jobs First. And they've been a great resource for us at Latino Economic Development Corporation.
NNAMDIAre you suggesting that Matt Mitchell isn't doing a good job? But go ahead, please.
HIDALGO(unintelligible) not yet, but I'm sure he's doing a great job, too. So we have an interesting situation going on in Wheaton, Md. And so I'd love to get you guys to speak to the role of corporate subsidies and securing benefits for low- to moderate-income communities where...
NNAMDIIs this Manny Hidalgo?
HIDALGOYes, it is.
NNAMDIHi, Manny. Go ahead.
HIDALGOHow are you? And so I was just driving from Wheaton here to our office in D.C., and then I happened to catch you guys. But I think it's a great topic because it may -- we -- when this started to happen, basically, the county is pushing for a $40 million subsidy to bring B.F. Saul to do a massive project in the Wheaton -- what they call the triangle of Wheaton, the downtown section.
HIDALGOAnd we've been trying hard through the -- something we launched called Coalition for Fair Redevelopment of Wheaton to secure some benefits for the low- and moderate-income community of Wheaton, which is majority immigrant, and most of that Latino and definitely working class. And we've, you know, had very little success whatsoever. And we continue to wage this battle, but I -- it could help for more people to know what role these subsidies can play in advocating for low- to moderate-income communities.
NNAMDII should mention that Manny Hidalgo is head of the Latino Economic Development Organization. But, Ed Lazere, care to respond?
LAZEREWell, I think the transparency helps force this issue in that if it's clear how much subsidy is being offered to a particular business, it gives ammunition, I think, to the community to say, what are we getting in return? And I'll just give you one example here in the District where, a year or two ago, we approved -- the city approved legislation to give a tax break to a five-star hotel to open up in Adams Morgan. And when the legislation was initially introduced, it was simply a 15-year 100 percent property tax break for this hotel.
LAZEREAnd in the final -- and due to local activism from the ANC, the Advisory Neighborhood Commission, and others, the subsidy went through, but the developer had to promise that half of the construction hours would be done from D.C. workers, that half of the permanent jobs in the hotel would be D.C. residents, that the developer would work with neighborhood organizations to do training and apprenticeships for neighborhood residents to then take those jobs, and with the provision that the tax break wouldn't be allowed in any year if they didn't meet any of those targets.
LAZERENow, that doesn't necessarily still mean the tax break was a great deal. It's a lot of money, a lot of loss, and no one really measured the job gains over -- to -- compared to the cost to the city. But those are real benefits if they happen for the folks around that hotel.
NNAMDIWe'll get into if they happen in a minute. But, Matt Mitchell, I wanted to ask you where interest that Manny Hidalgo represents minority, disadvantaged communities fit into the free market network, in your view.
MITCHELLWell, a couple of ways. So the first thing I'd say is that, ideally, a safety net should be designed to protect individuals. It shouldn't be designed to protect firms. And part of the problem with these things is that the economic development, if, you know, you say you're going to try to target a particular type of community, it's really very difficult for government to effectively target it.
MITCHELLIt's much better to say -- and we can use from recent examples -- if a firm fails, they should be allowed to -- the people on the firm, you know, if they qualify for certain safety net programs, they should be allowed to accept them. But the alternative is to put the firm on life support, the firm itself, and to bail out the firm. And, you know, we...
NNAMDIToo big to fail.
MITCHELLYes, exactly. You know, we can debate safety net -- safety nets, but, I think, almost certainly, they shouldn't apply to firms. They should apply to people.
NNAMDIOK. Manny Hidalgo, thank you very much for your call. And speaking of whether or not, Ed Lazere, these terms are actually enforced, I'd like to read an email and set up a situation. The email is from Beth, who said, "Funny you should be discussing this topic. Recently, Southwest and AirTran merged here in Georgia with promises of jobs to the area. Imagine my shock when I heard that the merger was finalized and the 15 positions were filled with people who had relocated from Southwest's original hub."
NNAMDI"Where are the promised jobs for incentives received? Still waiting to find out." And then there's this, "When a company seeks government subsidies, it often signed on to an agreement that it will create X number of jobs. Many of these deals have something called a claw back. Basically, if the company doesn't deliver what it promised, the state can take back the incentive. But it turns out it's very difficult to determine how many jobs a project brings. Isn't that correct? Because even if it's an imperfect tool, the claw back lays down a marker of expectations."
NNAMDI"Example, last year the appliance maker Electrolux announced a plan to build a new plant regional headquarters and distribution center in Memphis, Tenn. To land Electrolux and the promise of 1,200 jobs, the state and local government gave it a huge incentive package worth $188 million, according to the Memphis Commercial Appeal newspaper. That breaks down to $152,000 per job, but the kicker is what they waived. They had no claw back.
NNAMDI"The company was exempted from a diverse of requirement and local governments agreed to keep competing appliance business from settling in the area." What do you say to that, Phil Mattera?
MATTERAWell, that was a particularly egregious case where there was a -- where the company insisted on not having a claw back provision. We did a report on the things like claw backs. It's called money-back guarantees on our website.
MATTERAAnd we found that, you know, quite a few state subsidy programs do have these provisions kind of on the books. The problem is that there are often many loopholes or exceptions to these things so that companies can kind of wriggle out of it. You know, if they claim that an adverse business conditions or even an act of God prevented them from meeting their obligations. So we definitely think claw backs are an essential component of accountability. And there've been some high-profile instances in which states have managed to get something back from companies.
MATTERAFor example, when Dell computer shut down its assembly plan in North Carolina in Winston-Salem, for which it had gotten a $200 million-plus package, they did have to pay back some of the money. Unfortunately, it wasn't as much as they had received, but it was something. And then there was the Evergreen Solar case up in Massachusetts, where a company had gotten a big subsidy package from the state and then decided that they were going to move to China and then went bankrupt. And, again, the state was able to get some, but not all, of the money back.
NNAMDINeed to get back to the phones, but before I do, Ed Lazere -- I'm blanking on some of the memories of this -- but when the City of Washington built the stadium for the Nationals, there were all kinds of, as I recall, claw back agreements about how many city employees had to be employed building the project, how many jobs had to be -- did we ever verify any of those?
LAZEREThere actually were not any direct claw backs.
LAZEREThe stadium really was a pretty bad deal from the get-go for the city, in terms of jobs. I mean, if the goal was to build a stadium and get a baseball team to the region for the value that that brings, it was successful.
LAZEREBut in terms of economic development, I don't think it's proven its worth yet. No, the deal basically had the city pay almost 100 percent of the cost to the stadium, including future capital repairs, not increasing the rent for the team if stadium attendance is low, so, in fact, giving the city -- the team owner a benefit if the team performs poorly. It was really very much stacked in the favor of the owners.
LAZEREThere was in the end an agreement to have apprenticeships and have construction jobs held by D.C. residents at certain percentage. And that was tracked fairly well, but there was nothing -- there was no promise of any payback from the team if those conditions weren't met.
NNAMDIOn to the telephones again. We start this time with Dan in Catonsville, Md. Dan, you're on the air. Go ahead, please.
DANHey, good afternoon. It's really funny. While I was on hold, I got a text message from Good Jobs Better Baltimore, which is finding hard-to-get jobs for the (unintelligible) in Baltimore City. But here is my question. None of these corporations have any compunction about pulling up and shutting down and laying people off if it suits their bottom line. Why should we as taxpayers feel any obligation whatsoever (unintelligible) ? It doesn't make -- it doesn't stand to reason. They don't show us the slightest bit of regard as it relates to our jobs, our health care, you know, our pensions.
DANNone of that stuff matters when it comes between them and what their shareholders want. So I'd really like to hear your guests kick that around.
NNAMDINot to put anyone in an ideological box here, but Good Jobs First and the D.C. Fiscal Policy Institute both tend to have a somewhat skeptical view of private corporate actors and favor smart government intervention. So I'd really like to hear your response to the question we just got asked.
MATTERAWell, there's a bit of a dilemma here, which is that, on the one hand, we don't think that corporations should be getting these subsidies in most instances. But, often, that is the only way that companies are willing to invest. So then we kind of pivot and say, all right, if the subsidies are inevitable, let's at least make them transparent and accountable. And accountability means that -- first, that the jobs that are created have to be -- well, first, they have to be a reasonable number of jobs. The jobs have to pay well.
MATTERAIdeally, there should be some component of local hiring. There should be health care requirements, and then there can be other benefits to the community. In fact, there's a whole movement, the community benefits movement, to make sure that when subsidies are awarded, that the community receives something from it. So this is where we differ from the libertarians. We think that there may be times when subsidies are unavoidable, but we'll tolerate them only if there's the highest degree possible of transparency, accountability and benefit to workers and communities.
NNAMDIBut where you seem to agree with the libertarians is on the issue of transparency and posting what you pay. Is that correct, Matt?
MITCHELLYeah, I would definitely say so.
NNAMDIOK. And, Ed Lazere.
LAZEREWell, I think that the caller actually makes a really important point, is that the businesses that are getting these subsidies are in the business of making money. So they'll take a subsidy, and then when the -- if the market conditions change and it's better to move somewhere else, they'll pick up and move. And, I mean, you can even see it with the Redskins where, you know, they -- we helped build the -- they got help building a stadium out in Prince George's County, I believe.
LAZEREAnd now, there are people who want to bring them back to D.C., and Prince George's would lose its investment there. I do think that, as a matter of reality, we just have to accept that economic development subsidies aren't going to go away. And as Phil said, what can we do to make -- and what -- as Matt said, what can we do to make sure that they're as open as possible so we know exactly how much is being spent, so that we can try to get some community benefits out of them in the end?
LAZEREAnd I also think there are times when economic development subsidies may make a difference. If you think about Washington, certain parts of the city need no help whatsoever right now. They're booming. They're going to develop no matter what while other parts of the city are not, even though there are residents there who have money to spend, and they go to grocery stores and they spend money on retail. They just tend to do it outside their neighborhood.
LAZERESo if we can use assistance to help skittish investors who may be nervous about going into a neighborhood that doesn't yet have an established retail base, for example, encourage them to locate, that's a community benefit where it actually would make a difference. The problem is we just don't tend to do that very often.
NNAMDIMatt, can you see situations in where -- in which a subsidy may be acceptable? I mean, even if there's a low tax rate throughout an entire area, even if the market system is allowed to work unimpeded, but for reasons as yet we can't figure out, in some cases, the accusations are made that they might be (word?). Businesses aren't prepared to go into certain areas of the city. Can you see situations in which a subsidy might be (unintelligible) ?
MITCHELLYou know, I guess I'm going to stake out a pretty hard line against it. And part of it is that, you know, we have a tradition of rule of law and equity before the law. And I sort of view that any time you start making exceptions, it's much easier to make the next exception. And so one of the things is that -- and I think, frankly, some Republican politicians quite often -- it's usually Republicans -- get this wrong. They think that being pro-market means being pro-business. And that's not at all the case.
MITCHELLFrom Adam Smith on down, economists -- free market economists have always argued that businesses are all too happy to use government to their advantage and to the disadvantage of consumers, if they can. So if businesses can collude with government to either obtain special favors or to obtain monopolies or things like that, they'd be happy to do it. What's nice about a free market is that they don't have that ability to do that.
MITCHELLGovernment is not picking winners and losers, and so, therefore, firms really do have to focus on what do customers want and how can they provide it to them using the fewest number of resources, scarce resources as possible.
NNAMDIHow then would that explain a situation like Prince George's County where people are affluent? They have money. They want to spend it, yet high-end retail won't locate there, or, for that matter, a situation that we have in Ward 8 in the District of Columbia where people want major supermarkets to open there, and they simply won't open there, even though the ground there is obviously fertile ground?
MITCHELLWell, so that gets it to the other point that I made at the beginning, which is there's two ways to compete. And one, in my view, is a virtuous way, and the other is more pernicious. And the virtuous way is to provide an environment that is conducive to growth. And we do see a lot of studies across national studies, across state studies, across time studies that suggest that there are absolutely some places that are much more likely to foster growth than others.
MITCHELLAnd this is -- earlier you asked, you know, what does the free market offer to the poor and disadvantaged? And this, in my view, is probably the strongest argument for more liberated markets, is that they're helpful for the average person, but they're just absolutely indispensable for the poor. So we see that, for example, when you open up trade internationally, it's been one of the most powerful anti-poverty programs ever, literally lifting millions of formerly poor Indians and Chinese out of poverty. This is a real revolution.
MITCHELLAnd you see these again across states. Those states that tend to be more market-oriented, they have much faster growth rates than others, and they have higher per capita income than others.
NNAMDIA debate for another time...
NNAMDI...because we had a discussion yesterday in which people were arguing that there were some aspects of what we call globalization, that, while they were lifting some people out of poverty, were driving others into even greater poverty, a discussion we're going to have for another time. Right now, we're going to take a short break. If you have already called for this discussion about business incentives and transparency, stay on the line. The number is 800-433-8850. Do you see subsidies to businesses to help them locate in your neighborhood as the best use of government resources? 800-433-8850.
NNAMDIYou can send email to email@example.com, or send us a tweet, @kojoshow. I'm Kojo Nnamdi.
NNAMDIWelcome back. We're talking about business incentives and transparency as far as governments, local and state government, providing subsidies for businesses that they'd like to attract into their jurisdictions. We're talking with Ed Lazere. He is the executive director of the D.C. Fiscal Policy Institute. Matthew Mitchell is senior research fellow at the Mercatus Center at George Mason University. And Philip Mattera is research director and director of the Corporate Research Project at Good Jobs First.
NNAMDIGood Jobs First created an online database. It's called Subsidy Tracker, which details incentives offered by governments around the country. We're taking your call at 800-433-8850. You can also send email to firstname.lastname@example.org. We move on now to Masarule (sp?) in Springfield, Va. Masarule, you're on the air. Go ahead, please.
MASARULEHello. Thank you for taking my call. Subsidy by government is essential, required and must be. Lincoln said government for the people. And it is excellent. But we have a double standard. When China, Soviet Russia or other countries do, we say foul. It's not even -- playing field. Cut them off. Stop the importing products. Isn't that a double standard?
NNAMDIMasarule is referring to the ongoing international conflict over things like agricultural subsidy that we object to in other countries yet provide for our own farmers. Who wishes to speak on this first? Matt?
MITCHELLYeah, and it is a double standard. But I don't think the answer to it is to play the same dirty tricks that they play. I mean -- and a great example of this is agriculture because, here, you have a situation where the rich West is providing huge subsidies, and the federal government is really involved with this to huge agribusiness. And who loses? Well, of course, American consumers lose. But, from my perspective, more importantly, African producers lose and Asian producers, and, you know, some of the world's poorest people lose.
NNAMDIThank you very much for your call, Masarule, and thank you for waiting as long as you did to make your point. We move on to Zack in Rockville, Md. Zack, you're on the air. Go ahead, please.
ZACKYeah. Hi. Thank you, Kojo. I had a question about who was actually getting the subsidies, whether or not these are mainly going to well-established businesses, and new businesses are not being given these opportunities, or if these subsidies are being equally distributed amongst all types of businesses.
LAZEREYou know, Zach makes a really good point. And I don't know if it's necessarily -- I don't want to think of it necessarily as established versus new, but sort of big versus small, that these subsidies almost always go to large businesses. So here in the District, when we've been pushing for accountability on tax abatements, the small business community often has been our ally because they don't qualify for these tax benefits.
LAZERESo when we were trying to challenge the Northrop Grumman subsidy that was proposed in the city, $25 million offer, the small business community was on our side because they knew that was a benefit to Northrop Grumman and a disadvantage to them.
MATTERAWell, it also is an issue of established versus new because there is a tendency of economic development officials to want to reward newcomers to the state or the locality and to offer them lavish packages that, in effect, puts established businesses at a disadvantage, a competitive disadvantage to those newcomers. So that is one of the drawbacks of this. And there have been legal challenges -- not very successful in most cases -- you know, arguing that these programs that are explicitly designed to lure companies across state lines, you know, are prejudicial against established businesses.
NNAMDIAn interesting example, though, Matt, is Illinois, which raised taxes on corporations and then gave subsidies to big corporations like Caterpillar.
MITCHELLMm hmm. Yeah, and my understanding of that is -- yes, so they -- it's not a very good business environment to begin with. And they're in trouble. And then they recently raised taxes 66 percent. My understanding, though, is that the governor then suggested we cut special deals or that the state cut special deals for particular firms like Caterpillar. I think those failed to make it through the legislature.
MATTERANo, some of them did.
MITCHELLDid they? OK.
MATTERALike, for example, Sears...
MATTERA...played a kind of a blackmail game with the state. Now, Sears, you have to remember, had moved its headquarters from downtown Chicago, in the Loop, to an outer suburb, you know, more than 20 years ago and got a huge subsidy package to do that. Now, that package was expiring last year, and the company let it be known that, unless it got another big subsidy deal, it was going to move out of state. And they managed to bulldoze the state legislature into giving it a huge package.
MATTERAOther companies, like Motorola Mobility, did the same thing and got $100 million package. This is a very common thing for big companies to do, to kind of threaten to move. It's kind of the opposite of lure -- of when localities try to lure companies in. Companies then say they're going to move out of state unless they get what they want. And, essentially, it's blackmail, job blackmail.
MITCHELLI think it's also one of the ways in which costs are hidden because you give away a special favor, and you think it's just going to be one time. But if the firm can't make it without the special favor, then they're not going to be able to make it once the special favor expires. And they're going to be threatening to leave unless they get another favor.
NNAMDIAnd, Ed Lazere, from the perspective of fairness in the question that Zack raised about big versus small businesses that you were talking about, the companies that don't receive them, that tax abasement, that preferential financing could look a lot like the government giving your competitor a leg up.
LAZEREOh, that's absolutely what it is. I mean, the tax subsidies are subsidies. They are financial assistance to particular businesses, which is why it really only makes sense to do that when the city has determined that we're going to get something good in return and when it is, indeed, a broad, fair policy.
NNAMDIThank you very much for your call, Zack. We move on to Peggy in Olney, Md. Peggy, you're on the air. Go ahead, please.
PEGGYHi. How can we have this conversation without saying Wal-Mart?
PEGGYI mean, from zoning to putting people out of their homes to then closing their businesses, to -- they've received more tax subsidies on all levels than anybody. They're -- they are a major economy all by themselves. Why do we pander to them?
MATTERAWell, we've actually documented more than $1.2 billion that Wal-Mart has received over the years in these subsidies. We created a special website for it called Wal-Mart Subsidy Watch. But something interesting has been happening in the past few years in places like D.C. I think we've, in effect, succeeded in stigmatizing these subsidies so that Wal-Mart is a lot less apt to ask for them when it tries to enter urban markets.
MATTERAAnd it has not asked for a big discretionary subsidy deal here in D.C. It also hasn't asked for it in New York. And, I think, Wal-Mart has kind of accepted the fact that when it tries to get subsidies, it's going to generate a lot of opposition. Now, there are other reasons to oppose Wal-Mart, but I think they've backed off on their big subsidy demands.
NNAMDIIndeed, Peggy, the reason you haven't heard the word Wal-Mart here is because I guess we're hearing it every place else.
NNAMDIAnd Wal-Mart itself is clearly aware of that. So thank you so much for your call. We move on to Hal in Fairfax, Va. Hal, your turn.
HALYeah. Thank you for taking my call. I think all my thunder has been stolen by the previous two callers, so I'll move on to my third point, which was does this really feed into the narrative that we're in right now, and when I think the 2012 elections is going to really be about, in a lot of cases, which is our -- basically, corruption in politics and how government has now really -- and I think it's been said a lot in this conversation -- has really served as, really, the paved highway for large businesses, large incumbencies in particular, like the Wal-Mart, like the oil and gas industry. You name the business.
HALIt has really become almost a hand-in-glove sort of situation between government and these incumbencies to protect their market position. And this is true, whether it be international or domestic. I mean, it's almost like we're going back...
NNAMDIHow do you see that hurting our politicians, Hal?
HALWell, I should say the politicians are not what I'm concerned about. It's -- I think it hurts the people. I think it hurts us, the consumer, us, the citizen, a lot more. I think the politicians are just simply acting out of fear. And I think...
NNAMDINo. Well, you said it would be a major issue in the upcoming election, and I was wondering what effect you thought it would have.
HALOh, well, I think the effect is going to be more of an underlying effect, Citizens United and whatnot. I think a lot of the issues that are going to be talked about and the issues that are not going to be talked about, are going to be dependent upon which incumbency is going to be injured or not, for instance, with tax reform that we...
NNAMDIWell, we're running out of time, but I think a lot of that depends on whether we can move away from contraception and abortion 'cause the issue is dominating the discussion. Phil, last month, the state of Maryland unveiled something called the Maryland Finance Tracker. Tell us how that site works.
MATTERAWell, that's part of a trend among a number of states to present the subsidy information in a way that's more user-friendly, that's kind of taking advantage of more sophisticated Web graphics and -- because D.C., for example, just puts the information in a PDF report.
NNAMDII was about to talk about the PDFs because you want information that you think is parsable. And you put it in a PDF format, and that becomes difficult.
MATTERAWell, what we do in subsidy tracker is actually convert the data from the PDF and put it into spreadsheet form and enter it into Subsidy Tracker, so it's not an insurmountable obstacle. But we think that governments should make the information available in its original form, you know, more accessible and usable. And one of that -- one way to do that is to have these kinds of database formats the way that Maryland is doing that.
MATTERAWe also think it's important to have addresses so that a mapping can be done. For example, Michigan has a very good website where you can actually go and easily see the geographic location of the subsidies. And we think this is important to be able to do analyses of geographic inequalities 'cause there's a lot of evidence that subsidies often go to areas that need them the least. So mapping is an important way of analyzing subsidies.
NNAMDIEd Lazere, before we run out of time, here in the District there's been a big debate about the influence of developers and other corporate interests in the political process. Specifically, developers have been exploiting a loophole that allows them to contribute to candidates from each LLC they operate, effectively allowing them to give five, 10, even 20 times the legal limit. Where do LLCs fit into this conversation?
LAZEREWell, it's the same sort of issue when it comes to subsidies in that in the city's reports on economic development, it will say which LLCs got a subsidy. But it's often hard to then track that back to the ownership and see whether a given LLC or different LLCs may be related to each other or, in fact, have the same ultimate owner. So it is, really, in many ways, the same issue. I know we're about to go off the air. And I want to just...
LAZEREI do want to make a couple positive points. While D.C. still has a long way to go in terms of its economic development reporting. We don't have searchable databases online. We often can't tell who ultimately is getting the subsidies. There really have been improvements through boring names like things like the Unified Economic Development Budget.
LAZEREAnd also legislation passed just this year, this last year, to require that anytime a business asks for tax abatement, that our independent CFO has to do an analysis of whether the subsidy is justified or not, and what we're going to get in return. And we think that will lead, down the road, to subsidies only going when there's clear evidence of job benefits or other benefits to the city, and things like claw backs that require the developer to pay the money back if they don't meet those terms.
NNAMDIEd Lazere is executive director of the D.C. Fiscal Policy Institute. Ed, thank you for joining us.
NNAMDIMatt Mitchell is senior research fellow at the Mercatus Center at George Mason University. Matthew Mitchell, thank you for joining us.
MITCHELLThanks for having me.
NNAMDIAnd Philip Mattera is research director and director of the Corporate Research Project at Good Jobs First. Phil Mattera, thank you for joining us.
NNAMDIAnd thank you all for listening. I'm Kojo Nnamdi.
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