Thread by @MichaelDFarren

Here’s a summary thread of just-released research by myself and @JohnMoz at @AccountableEcon.
In short, as part of a COVID-19 bailout Congress should mandate that states end their economic development arms race.
mercatus.org/system/files/f…

State and cities will likely see a budget shortfall of $950+ billion. House Democrats already passed a $1 trillion relief bill, but Republicans aren’t eager to rescue states from self-imposed fiscal difficulties. A ban on subsidies offers an easy starting compromise.

The idea is not controversial; many state and local policymakers already want to end what amounts to a subsidy arms race. The problem is that no one wants to be seen as unilaterally disarming:

“I will not unilaterally disarm our economic development while our competitor states are luring businesses, in part, through incentives.”
-NJ @GovMurphy
roi-nj.com/2019/06/05/pol…

“I think both of us would prefer that we wouldn’t have to do that [offer subsidies], but I don’t think either one of us is really ready to unilaterally disarm.”
-KS @GovLauraKelly
kansascity.com/news/business/…

.@MiddleClassPoli’s research has provided the best holistic estimate of the total value of subsidies provided by states and cities every year: $95 billion (2020 $)

.@TimBartik, @cailin_slattery & @omzidar have produced other estimates of certain kinds of subsidies, finding that even these smaller amounts cost $33-$49 billion per year (2020 $).

To better frame this, $95 billion is 4.5% of current state expenditures.
It’s enough to fully fund the annual budgets of 10+ states COMBINED.
Alternately, it could comfortably cover the cost of all state bonds issued every year. Twice.

For comparison, if Congress reduced the $750 billion in annual state grants by a similar amount the savings could pay for the entire cost of all federal food assistance programs AND build 2 new aircraft carriers *every year*

However, it’s impossible to end all subsidies immediately because of existing contracts that must be honored. But by stopping now states and cities will gradually benefit from the ability to repurpose funds equivalent to 4.5% of total state expenditures.

Perhaps that doesn’t seem like much, but amid COVID-19 policymakers will face tough decisions on where to cut expenditures. Every little bit will help, especially when it’s avoiding cuts to critical services like public safety and education.

Perhaps more importantly, they’ll be reclaiming funds that are currently wasted.

How are targeted economic development subsidies a waste of taxpayer money? I’m glad you asked!

First, the vast majority of academic research finds that targeted economic development subsidies have negligible impact, and may even *reduce* economic growth. Here’s my research with @MattMitchell80 @JMHorp & @OliviaJGonzalez explaining why:
mercatus.org/publications/g…

Second, only 1 out of 8 subsidies actually influences the location/expansion decision of the recipient company. In other words, 88% of subsidies are wasted trying to motivate a decision that would happen anyway.
research.upjohn.org/up_workingpape…

As Amazon’s vice president for public policy Brian Huseman explained it, “It’s not just monetary incentives, but it’s looking at the comprehensive environment to allow companies to flourish.”
cnbc.com/2019/07/10/ama…

.@anne_philpot & I explained why this is the case in our research on Amazon’s interstate competition for #HQ2. The egregiousness of that episode offers momentum for policy reform today—it was the #BridgeToNowhere moment for subsidies.
mercatus.org/publications/c…

Third, subsidies come with tradeoffs. Each dollar spent on direct aid to targeted companies isn’t available to shore up pension programs, improve public services, or provide broad tax relief to every household and company.

Fourth, subsidies create barriers to entry and lead to reduced growth for non-privileged corporations, artificially concentrating economic power in an entrenched few. This inhibits competition, reducing attention to customer desires and creating economic inefficiency.

State and local subsidies inevitably have an effect on the complex web of supply chains, customers, and competitors. This means they reduce national economic development—suggesting that state and local subsidies are worthy of Congress’s attention.

The harm & distortions to interstate commerce caused by subsidies clearly fall under Congress’s enumerated powers, meaning that Congress doesn’t *need* to use state bailouts to prohibit state and local subsidies—the current situation just provides additional motivation.

That’s because the modern history of subsides—how they grew out of desire to jumpstart economic growth during the Depression—and recent news—like the battle over Tesla’s Cybertruck gigafactory—indicate that we should expect another surge in subsidies.
techcrunch.com/2020/05/15/tes…

Politicians do this to signal to constituents they’re working to improve community welfare. But the road to economic ruin is paved with such good intentions.

The disparity between political payoffs and economic costs creates a prisoner’s dilemma that makes escape difficult.

A fed. ban on subsidies offers a solution to the dilemma & the economic dysfunction that has prevailed for decades. Many state and local policymakers would welcome the assistance; 14 states proposed sim. leg. for an interstate compact this year. @EndtaxG
endtaxgiveaways.org

State policymakers are fed up with the never-ending race to the bottom:

IL Rep. @BobMorganIL explains: “Tax breaks have historically been justified as a necessary evil. But in many ways… they hold us hostage because other states are offering them”
dhbusinessledger.com/business/20200…

UT Rep. @RepMarcRoberts agrees: “Everybody’s playing this game... We [have to] figure out a way we can all put our swords down together to end this practice, end this race to the bottom and really [stop] cannibalizing ourselves on the backs of taxpayers”
deseret.com/utah/2020/2/25…

CT Rep. Josh Elliott is quite clear: “Connecticut should not be targeting businesses in other states, and other states should not be targeting employers in Connecticut.”
ctmirror.org/2020/01/28/an-…

NY Rep. @RonTKim was one of the first to call for reform: “We can choose to end the needless competition that pits states against each other. Corporations should never take precedence over people”
buzzfeednews.com/article/ronkim…

FL Rep @AnnaForFlorida agrees: "every state is racing to the bottom to serve the largest corporations…That impacts state revenue while at the same time gives large corporations a competitive advantage when compared to our state-based small businesses."
bisnow.com/national/news/…

Mark Funkhouser, former mayor of Kansas City, has called for “a national law that prohibits corporations from extracting bribes from state and local governments and bans governments from donating tax dollars to private entities”
governing.com/gov-institute/…

David Lehman, senior econ. adviser to CT Gov. Lamont agrees: “Here’s what we agree on: incentives don’t drive the economy. That’s not the key to a successful economy.” He wishes the federal government would adopt the EU’s strict rules on subsidies.
ctmirror.org/2020/01/28/an-…

A federal ban would indeed be similar to the EU’s rules against state aid, but it should be made more robust. It will be hard to stop the wastefulness of our current economic arms race with anything short of a complete ban on all preferential subsidies.

Lastly, a ban on subsidies also makes sense because the requested bailouts are ostensibly to save state and local governments from fiscal calamity. There’s plenty of evidence that granting subsidies harms the fiscal health of state and local governments.

The paper also contains some suggestions of how to structure and enforce the ban, but they’re a bit too technical for Twitter.

We appreciate comments, suggestions, (and especially compliments!). This research is part of a series of research projects investigating institutional solutions to the interstate #SubsidyArmsRace.

See my colleague @MattMitchell et al.’s work on the existing state constitutional clauses that should prohibit subsidies (but which have been watered down over the last 150 years) here:
mercatus.org/publications/c…

And watch this space for our soon-to-be-released research on interstate compacts. Or if you’re impatient, see this state testimony for a summary:
mercatus.org/publications/c…

/tweetstorm
(Given that halfway through I hit the Twitter limit for the number of messages in a thread, perhaps it counts as a #Tweetnado?)

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