The number of companies that relocate or expand in a specific area because of economic development incentives is largely “exaggerated.” That’s according to a new report from Tim Bartik, senior economist with the Upjohn Institute in Kalamazoo. His research determined that incentives only influence firms’ decisions between 2 percent and 25 percent of the time. But the findings have also rankled some local economic developers. Birgit Klohs, president and CEO of the The Right Place Inc., said she didn’t believe that the study looked at enough overall incentive projects. More importantly, she said having a “robust” incentive toolbox in place remains critical for retaining local companies that are being hunted on a daily basis by competing states. In an interview with MiBiz, Bartik said he’s not pushing to end incentives entirely, but rather believes that research shows the need for more targeted programs.
What do you think this study says about the overall state of economic development and the industry’s dependence on incentives to encourage business expansion and job growth?
It doesn’t necessarily mean incentives are a bad idea in all cases, or that every incentive program doesn’t work, because I can understand why people might not like this conclusion. But here’s the thing: People like to claim that we only give incentives when they’re needed to tip the location decision. The only way you really could do that is if you could read the minds of the corporate executives making the decision and know what they would have done without the incentive.
What should economic development executives take away from your study?
As a practical matter, I don’t think it’s possible to have a 100-percent ‘but/for’ percentage, or 100 percent tipping percentage (meaning the incentives drove the company’s decision in all cases). But I understand why people want to claim that. It looks as if, ‘Gee, why are you giving incentives if it wasn’t needed to tip the location decision?’ The reality is you don’t know. I think as a practical matter, the public and economic development people should just accept the fact that if you’re going to hand out incentives, in some cases it’s not going to have any effect.
What message should these conclusions send to policymakers who often create the budgets for economic development incentive programs?
If you evaluate economic incentive programs, for the typical size of them, if you assume that every decision is tipped by the incentive, then these things are no-brainers. They should be expanded up the wazoo, because basically, in general, the amount you’re spending per job is much smaller than the benefits per job … What I’m really getting at is that you need to be more realistic about what these programs can do.
Assuming incentives do influence even some location decisions, what kinds of results will determine whether they’re effective or not?
If you look at models of the benefits and costs of these programs … whether or not benefits exceed cost will depend on (whether) the projects have pretty high multipliers, and how high the unemployment rate is in the area and things like that. How likely is the firm to hire locally? Do they pay a wage premium? Typical incentives tip about 10 percent of location decisions.
Are you saying they might have value in that case?
If the incentives are financed by increasing other business taxes, or something that doesn’t impair public services, then the incentives are likely to have net benefits. … But if the incented firms have relatively low multipliers, don’t pay a wage premium, don’t hire locally, and if the incentives may lead to cutbacks in education spending or infrastructure spending or other spending that might be productive, then I think you’re more likely to have an unfavorable benefit-cost ratio.
What are the methods under which incentives should be evaluated?
You need to look at the particulars of how the incentive program is structured. Is it targeting the right businesses? Is it targeting the right areas? Is it being financed in the right way? I’m not saying that incentives eventually pay off, I’m just saying the devil is in the details.
Some legislators and political ideologues describe incentives as corporate welfare and instead push for lower business taxes as a better solution. What do you make of that argument?
In order to have high benefit-cost ratios, (incentives) need to be appropriately targeted. It depends what you think the alternative to that is. If the alternative is cutting business taxes across the board, that’s even less targeted. Let’s say incentives go to companies that are expanding, that are in manufacturing, which tend to pay higher wages. If you cut business taxes across the board, that goes to companies that would never in a million years think of expanding, and it also goes to a lot of companies that pay very low wages. … It goes to everyone. I’m not sure that this argument necessarily implies that it’s a better alternative to cut business taxes across the board, which I know is the position of some people on incentives. That’s not my position.