An Ohio Republican Governor decides that he wishes to create an economic development entity funded by state government bonds in which economic experts from outside the Ohio Department of Development serves on a board to determine which economic development projects to fund a growing arms race among the States for economic development dollars.
John Kasich and JobsOhio? Nope, try Bob Taft and Third Frontier. According to USA Today, Ohio will spend $1.4 billion to attract jobs, a huge chunk of that is Third Frontier money as Kasich’s JobsOhio with its liquor profit funded revenue stream will only reach $100 million. And yet that $100 million alone is more than other States spend in all of their economic development efforts:
The state will spend $1.4 billion on economic development this year. Indiana, by contrast, will spend $37 million; Florida $11 million. California has 25 people working full-time on economic development. Ohio: more than 400.
Now the USA Today story is flawed because it appears they are counting all staff and spending by the Ohio Department of Development, including in areas that the agency has been forced to pick up over the years that have virtually nothing to do with job creation or retention. However, even if you just focus on the $100 million a year that Kasich says JobsOhio will have to spend with securitization of the State’s liquor profits, Ohio is set to spend more on these corporate giveaway “incentive” packages than any other State.
Regardless, the prevailing thought among academic experts is that these economic development programs rarely do much to help a State’s economy:
Ohio State University economist Mark Partridge says government efforts to plan an economic revival seldom work.
“Politicians and economic development officials overestimate their ability to forecast the future — to predict the next Silicon Valley or even to know beforehand that a Silicon Valley is going to occur,” Partridge says.
Government’s poor record of picking winners and losers means that even well-intentioned programs can hurt more than help, he says.
“A tax incentive for one firm means I have to raise taxes on everyone else or cut services,” Partridge says.
Nonetheless, that hasn’t stopped Kasich and his supporters for bragging about the “jobs race” Bloomberg recently suggested Kasich’s JobsOhio/liquor profits securitization might create. The problem is that as today’s USA Today article notes, some States are actually cutting back on such economic development programs because they believe they are ineffective while Ohio is going even deeper.
Even the Wall Street Journal has recently reported on JobsOhio and Kasich’s spending binge in economic development as doing nothing more than encouraging businesses here to engage in an incentive racket:
Economists have long debated the wisdom of such incentives. Supporters say they help states build diverse local economies and boost employment, ultimately generating more tax revenue than they cost. Detractors say perks sometimes go to businesses that would have come anyway, and in other cases just enable companies to play one region against another for a sweeter deal.
“Companies are being forced by shareholders to play the incentive game to get the best deal possible,” says Brent Pollina, vice president of Pollina Corporate Real Estate Inc., a site-selection firm that represents businesses planning moves. Ever since the recession struck, he says, “companies are trying to get as much up-front as possible from communities.”
The State of New York has actually weathered the recession better than Ohio and has an unemployment rate almost a point (8.0%) lower than Ohio’s (8.9%.) It also quadrupled the amount it spent annually on the State’s economic development efforts. Take a look at the chart on the right to see what they got for their money. With a 400% increase in spending, they saw a third of their manufacturing jobs drop. Was it worth it? New York’s Governor says it was not.
The other problem with these programs is that as States become strapped for cash, they start to crack down on businesses who made optimistic job predictions before the recession when receiving state economic development assistance that don’t pan out.
Take Mark Kvamme’s clawbacks in Ohio, for example. The WSJ notes that one of the first companies Mark Kvamme is hoping to clawback State funding for is a Washington Courthouse auto supplier who received $35,000 in 2006 to create 800 jobs. Because it’s only created half of those jobs, Ohio is seeking $15k back. Is this an instance of fraud? No. I think the business can honestly say it didn’t predict back in 2006 the coming meltdown in both the auto industry (GM) and the global recession, it’s actually remarkable that the company is still in business, let alone able to expand to over half the numbers it projected in 2006:
“Give me a break,” says Chris Fairchild, the auto-parts firm’s controller. “For crying out loud, we’re doing our darnedest. While other local businesses have gone bankrupt or gone to Mexico or other states, we’re right here. You’d think there would be a little respect for that.”
Now the supplier is complaining that Ohio’s inflexible attitude towards these commitments is creating an “anti-business” atmosphere. Mark Kvamme, though, doesn’t care for the supplier’s excuses:
“We need every single dollar we can get our hands on.”—Mark Kvamme, WSJ (04/22/11).
And sometimes even when those promises are kept, they don’t turn out so well:
Officials in Henry County, Va., regret they didn’t strike a tougher deal with American of Martinsville, a maker of sofas and recliners.
The business got a $280,000 state grant in 2009 for an expansion of its local plant, which was supposed to include retaining 121 jobs and adding 94 more within three years. The firm would be considered in default if it filed for bankruptcy during that time or didn’t create 75% of the jobs.
The jobs came; by April 2010, the facility had 200 employees. But they didn’t stay. That month, the plant abruptly closed.
Trying to protect its investment, Henry County put liens on the sofas and loungers still on the premises, but the furniture maker filed for bankruptcy reorganization in June. The court ruled the county an unsecured creditor and it never was repaid, says county administrator Benny Summerlin. “Now we’re stuck,” he says.
Ohio already spends a lot of money on economic development. The reality is that another $100 million won’t make a lick of difference, especially the way the Kasich Administration is spending it. Kasich spent over $22,000 per job “saved” by helping Bob Evans move from Columbus to New Albany. Diebold works out to be about $37,333.33 per job. American Greetings works out to $53,428.57 per job saved over fifteen years. According to its 2009 Annual Report, the State of Indiana’s “JobsOhio”-like entity only spent $8,700 in incentives per jobs saved/created. (IEDC 2009 Annual Report, pg. 3.) Under the Strickland-Fisher Administration, Ohio had nearly twice the rate of job creation as Indiana and the rest of the nation. I’m not sure with deals like Kasich is announcing that trend can continue.
And again, these aren’t deals that Kasich requires job expansion or even full job retention. As far as we can tell from at least the published reports of the American Greetings and Diebold deals, the companies can keep every penny of the State’s promised economic aid while still slashing their Ohio payrolls anywhere from 13% to 20% for any reason (or no reason at all.) So Diebold can keep millions in State tax incentives while firing one out of every five of its employees while a small business in Washington Courthouse has to repay $15k because it didn’t create some 400 jobs during the recession and GM meltdown it failed to predict? How does this make sense?
Governor Kasich may think he’s creating an arms race among the States, but its not one that Ohio’s economy is likely to come out on top as a result.