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The Progressive Economics Forum

NYT study on public subsidies in the US

This is a little old, but it was brought to my attention late and it seems to be of durable relevance. Last month, the New York Times (NYT) published an article chronicling public giveaways to corporations in the United States. What is extraordinary is that the article is the result of ten months – 10 months! – of investigative journalism on the topic, during which time over a hundred of public and corporate officials were interviewed and over 150 000 awards by all levels of governments were analysed. The NYT even put together a searchable database of all these awards. Frankly, this is quite an impressive piece of investigative journalism.

The conclusions are not unexpected: (1) There is an inter-state competition to attract or retain private investment (once started, it obeys a prisoner’s dilemma logic); (2) there is no particular indication that the public awards have that much influence on firm decision (to invest, stay, or go); (3) Other factors seem to be more important, like the quality of education, infrastructure, living environment for the employees, etc. i.e. stuff that could be paid for with the money given to corporations. What is interesting, though, is how candidly managers basically admitted to this (though they said they “owed it to their shareholders to go and get the most handouts possible”), while public officials essentially said they were powerless to act otherwise. This sounds like a classic case of coordination failure… but then again, following (2) and (3) above, other public investment could be prioritised.

Is there a good comparative study out there of the impact/influence of some of these handouts in Canada ? If not, It would be interesting to make one, to see if patterns of corporate handouts vary across provinces and government levels, perhaps with an attempt to assess the actual impact on investment flows (and calculate the return on public investment).

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Comments

Comment from Moira Law
Time: January 15, 2013, 9:14 am

Such a study could contribute a needed public service.

Comment from Paul Tulloch
Time: January 15, 2013, 10:50 am

Targeted investments by policy makers is something I still believe in, and sometimes I think it gets easily thrown into the mix of handouts.

Lets take one that is close to my current thoughts- innovation within High Performance Computing, Big Data and Machine Learning. Would it be considered a handout if a government agency attempted to introduce/accelerate the pace of innovation, diffusion and sustainability of firms to internalize many of these newer technologies into the the existing value chain of the business enterprise? If I was a government and gave out free super computers to major corporations, is that viewed as a handout? If indeed I handed out these multimillion dollar computational devices, and also helped the corporations hire and train a cohort of new workers within these spaces, is that a hand out? If once these workers and companies are in place and contribute billions in tax revenues and increase productive capacities, would these investigators understand the policy and economy behind such endeavors?

Of course I do believe there are blatant hand outs such as across the board tax corp tax cuts. However, I feel very strongly, that targeted investment and handouts are different. The danger is viewing them under a similar lens and that is simply starting up a witch hunt.

Somehow I have this feeling that this article, which is very enlightening, can border onto this notion of all government help is a handout.

Comment from Mathieu Dufour
Time: January 18, 2013, 11:14 am

Good point, Paul, but there are a lot of “if’s” in your example…

At the very least, there should probably be more effort at monitoring the actual impact of different types of intervention for a while after they are made, figuring out what “works”, what does not, and why. A sort of cost-benefit analysis after the fact, made public knowledge for public accountability purposes.

Comment from Paul Tulloch
Time: January 21, 2013, 9:03 am

I agree in essence with the points of the study- just do not want to get caught in that massive swell of government handouts whitewash.

But I do agree, there is a more need for transparency. I believe one example would be the notion of P3′s here in Canada. Lots of problems with that arrangement, and in many ways I view the P3 as a government handout with the added dimension of it being permanently imbedded into the tax payer.

So I do take this study very seriously and more work is needed on this area, especially the P3 permanent government handout aspect- the helicopter company Ornge here in Ontario is a good example of that.

Comment from Nik Barry-Shaw
Time: January 23, 2013, 2:56 pm

Mathieu, I don’t think your point (2) is supported by the article. The threat to move to overseas may be fearmongering pure and simple, but incentives clearly do have an impact on where investment happens WITHIN the U.S. Otherwise, there would be no competition. The point the article makes is that incentives don’t increase total output, just shift it around:

“Soon after, economists at Federal Reserve branches were questioning the use of incentives. One, in Minnesota, used mathematical proofs and game theory to show that competition between states did not increase overall economic value. Several other economists have since called the practice a zero-sum game.”

It is in fact worse than zero sum, because it means greater socialization of losses and privatization of profits, as the incentive competition spirals.

Paul: If you are right, contra Mathieu, that the state CAN pick winners, then why leave things in the hands of the private sector at all? Why not get equity? Why not socialize investment, say, via public banks and workers’ and community control? Why go half-way?

Comment from Keith Newman
Time: January 23, 2013, 9:44 pm

Nik,
On a different topic: you may be interested to know there’s a conference with Syriza people in New York City on January 24 at 6pm. Short notice I realise. Take a look at: http://www.modernmoneyandpublicpurpose.com/

Comment from Paul Tulloch
Time: January 24, 2013, 7:46 am

Nik

Nothing is absolute, never. There are some small nodes of order in the chaos. It is regulation and rules that take that chaos by the scruff of the neck and give it a small influence in pointing out a direction. It is both the state and the private sector that does fulfill that role. Not everything is for profit if it were then one of the most successful spaces for tech development in the world would be private sector entity- but the last time I checked DARPA was a public sector undertaking.

Comment from Mathieu Dufour
Time: January 29, 2013, 1:46 am

Well, actually, I do think that governments can pick winners. South Korea (before being slammed by the West through the IMF et al. during the Asian crisis) is a testimony to that, for example. I’m just not a big fan of policies that allocate money with minimal strings attached, leaving the government in the position of constantly asking firms to behave. If governments are going to finance, they should have a fair amount of control. And indeed, as Nik says, we may not always need “big state” (and big state has other problems, as the authoritarianism of the aforementioned South Korea attests) to implement forms of community control/oversight either. Then again, we should probably not forego the overall planning/coordination/industrial policy process – scale remains important.

I am not so sure about the first part of Nik’s comment. In many ways, a move’s a move, be it from Tennesse to California or from Arizona to Mexico. Some moves are bigger than others, but the general point remains that if a firm wants to move it does… and you never quite know if it did want to or not. My assessment is that the evidence about regional competition being more warranted than national one, notwithstanding what coordination and prisoner dilemma games might say, is mixed. The overall answer probably depends on the relative weight of different factors in a firm’s decision (point (3)). Indeed, looking at the NYT database (which is far from the last word on this), many state don’t do much… and don’t seem that much worse off for it. Going from the interviews, may of the officials who gave out the money felt compelled to, but precious few could really say it mattered, and for what…

My favourite anecdote on the issue is from a few years back. Bombardier was threatening to close down some of its operations in Québec and move to Northern Ireland (after having said that it did not like the uncertainty in the Québec political climate) if it did not get a higher financial support than what governments were offering. One of the government levels (I forget which one) caved in and doled out the difference. About two weeks later, Bombardier announced its yearly results and it turned out that said difference was just about the level of the CEO’s bonus for that year. So that’s what had been missing from the government’s offer: The CEO’s bonus. So Bombardier’s still there, employs people, buys stuff upstream and all, but really? We have to pay the CEO’s bonus?

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