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North Carolina has debated legalizing lottery tickets, sports betting, and video poker, with fierce controversies attending each one. The costliest scam, however, has remained largely unquestioned: economic development incentives.
Providing tax breaks and subsidies to relocating corporations was agreed to be a dreary but unavoidable burden of being Southern, like sweating through a hot, humid August. But there has recently been a bit of a glasnost–an opening of debate–on this long-closed topic. Many North Carolinians are coming to understand that incentives are an irredeemable racket.
A determination to recruit northern businesses has been part of North Carolina’s political DNA for over 100 years. Long burdened by a history of rural poverty, state leaders believed that North Carolina must lift itself out of provincial deprivation by persuading Yankee enterprises to move south.
“Industrial recruitment” became so deeply lodged in the state’s political DNA that few people questioned even the most extravagant efforts to woo the cigar-smoking panjandrums on Wall Street and State Street. In the 1950s, Luther Hodges played Governor Goof Ball by posing on a magazine cover with his pants pulled down to reveal North Carolina-made underwear. North Carolinians did not consider this an embarrassment.
We’ve always been the eager seekers gazing at corporate prizes–jobs, factories, relief from grinding poverty. But we did not go so far as to directly subsidize industrial prospects until the 1990s. When Alabama won a big Mercedes plant that the German automaker had dangled before several southern states, North Carolina leaders decided that we needed to “get in the game” by providing corporate incentives. Since then, we have distributed countless millions of dollars to out-of-state corporations in return for the promise of jobs.
This policy was never based upon sound economics. Economists have long been nearly unanimous in the conclusion that incentives are not an effective economic development tool. Incentives create some jobs by bringing in new companies but destroy other jobs by causing local firms, which are placed at a disadvantage by the subsidies going to out-of-state rivals, to cut jobs on their own shop floors.
Recruitment “deals” also necessitate tax increases by increasing the demand for roads and schools, which further mitigates the benefit of the new company’s investment. States that offer incentives are like Lewis Carroll’s Red Queen, moving tirelessly but making no progress.
Still, North Carolina has offered incentives for decades. But the wasteful nature of this “game” has become so undeniable that abolishing incentives has become a topic of debate. It reflects well on our state’s political culture that the practice of providing incentives has become controversial. In South Carolina, corporate welfare is civic religion. We, by contrast, seem to be learning a lesson from a growing roster of deals gone bust.
One incentives-funded project after another has been cancelled by its corporate benefactor, with the state struggling to recover losses from subsidies already paid out.
Telecommuting has made it effectively impossible to recruit the best knowledge industry jobs, and the manufacturing plants we’re attempting to woo to our state sometimes aren’t getting built. And as the left-leaning writer Harold Meyerson has observed, non-union manufacturing jobs (which is what they are most likely to be in a state where the anti-labor “right-to-work” policy has been enshrined in the state constitution) are often not even good jobs at all. Median income in knowledge economy Raleigh is $14,000 higher than in Greenville, South Carolina, which with the help of incentives has brought in thousands of non-union jobs in auto manufacturing.
I used to think that at least some economic development incentives could pay off. Specifically, I was persuaded by the work of Berkeley economist Enrico Moretti that huge “Million-Dollar Plants” could create so many ancillary jobs that they could transform an entire regional economy. With thousands of new jobs reshaping an area, even a large fiscal subsidy could be justified.
But North Carolina has attempted to play that game, and the state has offered such lavish subsidies for these plants that it has simply become unreasonable. For example, the state offered one auto manufacturer a $1.5 billion package for a $1.6 billion plant. If the state had landed that deal, taxpayers would have subsidized almost the entire cost of the company’s facility.
This has gotten out of hand. At a time when public finances are already under stress, we are allocating scarce resources to corporations that have serially reneged on their promises to create jobs. We have spent decades playing a dirty game with other southern states that has served largely to enrich corporations that have little genuine commitment to North Carolina. It’s finally time to desist. Perhaps, going forward, public dollars should support the public good.
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