Richard Florida is a co-founder and editor at large of CityLab and a senior editor at The Atlantic. He is a university professor in the University of Toronto’s School of Cities and Rotman School of Management, and a distinguished fellow at New York University’s Schack Institute of Real Estate.
Political scientist Nathan Jensen answers questions about his new book, Incentives to Pander.
One of the most troubling trends in urban development is the sharp rise in the use of economic development incentives. In 1999, 68 percent of U.S. cities and states used financial incentives to attract capital; by 2009, that number had risen to a staggering 95 percent.
In 2016, Nevada handed Tesla more than $1 billion for a battery factory. Later that year, Oregon gave Intel $2 billion for a new semiconductor chip plant. Last year, Wisconsin gave Foxconn $3 billion, and some states are offering more than $7 billion to lure Amazon HQ2. Today, nearly all American cities and states offer incentives in some form to attract business, even though the overwhelming bulk of research on the subject shows that incentives are an ineffective waste of taxpayer money.
In their new book Incentives to Pander: How Politicians Use Corporate Welfare for Political Gain, Nathan Jensen, a professor of government at the University of Texas, Austin, and Edmund Malesky, a professor of political science at Duke University, take a deep dive into what motivates politicians to offer these increasing—and increasingly unproductive—incentive packages. Jensen got interested in incentives while studying the effect of large-scale direct foreign investment in developing countries. What he found especially curious is that states and cities in the United States—the world’s richest and arguably most technologically advanced country—were offering packages that were even bigger than the ones developing economies were using to lure factories and jobs.
We recently spoke with Jensen about the book, his and Malesky’s research, and the incentive mania over Amazon HQ2. Our conversation has been edited for length and clarity.
Talk a little bit about the history of incentives. How long has this been going on?
The earliest we could find was an 1116 Italian incentive for a textile manufacturer. In the U.S., it’s Alexander Hamilton who had the first manufacturing incentive. The idea of giving cash or tax abatements definitely isn’t new.
When did we start to see the really big growth in incentives?
In 1999, about half of the cities offered incentives. By 2009, it’s well over 90 percent. But we also see the rise of “megadeals.” In some cases, we see fewer deals, but more going for the big fish. With Amazon HQ2 and Foxconn, the size of these megadeals is incredible. You see the big boom recently, in the last 10-15 years, of the size of incentives.
What lies behind the rise of these megadeals?
It’s some of the most visible investment coming to a city, and politicians are just throwing everything they possibly can at [companies] to get this big marquee investment, even though a much more effective way is to grow local businesses. But it’s an immediate, really big impact. That’s what makes the megadeals so enticing. It doesn’t have to be headquarters. A politician can point at the big factory in their community and say, “Look what I’ve done.” And in some sense, that seems like a winning political strategy.
You title your book Incentives to Pander. Who is pandering to whom? Is it more that politicians are pandering to corporations, or that politicians, mayors, and governors are pandering to their voters? Or is it both?
There are consultants, there are companies, there are elected officials, there are NGOs. There are a lot of different actors at fault here. But what we focus on is politicians pandering to voters. These politicians are offering these incentives not in smoke-filled rooms, but in ribbon-cutting ceremonies. They are trying to show voters that they are doing something to attract investment, even if they believe that incentives actually might not be effective.
It seems to me there’s a political risk in giving these huge incentives. People can say, “Look, you’ve given away the store to the fat cats.” But your book makes a very strong case that the benefits, at least as perceived by politicians, outweigh the risks.
If you provide an incentive, you can actually get more credit for that. It’s the opposite of what most economists would say. And it works even if the company doesn’t come. It’s an incredibly effective way to deflect blame, saying, “I put my best offer on the table. Clearly the company made the wrong choice, but it’s not my fault.” Politicians often claim that these incentives pay for themselves. They’re often very careful in what details they provide. Elected officials actually provide very little cost-benefit analysis. So you see less scrutiny of these deals.
Before reading your book, I thought this was just a giant American problem. But you talk about incentives being used in all sorts of places around the world.
Yes, we also look at non-democratic regimes. And we see local government officials pandering to higher government officials, meaning they are trying to show, in places like Vietnam and Russia, that they are bringing investment to their district, because that’s how you get promoted. Even if you take the corporate pressure off the table, there are strong motivations for politicians to use these incentives.
The U.S. is an outlier in some sense. There is this incredible competition across American states for investment. We’re just shifting investment across locations within the U.S., not attracting new investment. Brazil is another place that does have this massive competition sub-nationally. But in most other countries, we see it at the national level. Central governments are providing incentives, and in some cases like the UAE or China, very large incentives. This is a global phenomenon.
Are state and local incentive packages in the U.S. as big or bigger than those offered by national governments elsewhere?
Some of the state packages are just massive, bigger than country packages. Some countries in the European Union are limited by E.U. restrictions and rules, which put limits on what a local or national government can offer. In that sense, the E.U. looks very different from the United States.
What about the rise of nondisclosure agreements (NDAs) on incentive deals? Might this affect the ability of politicians to capitalize politically on these bidding games?
Nondisclosure is interesting. With Amazon’s HQ2, some cities are choosing to not reveal their bids. This is an important point. Politicians are not going to show you everything they do. Message control is incredibly important.
A politician is not going to talk about a lost investment if they don’t have to. If it’s a quiet negotiation and a company chooses to go elsewhere, they might choose not to bring it up at all. But if it does become a point of contention and people know that, say, Amazon chose another location, incentives are a great way to diffuse this blame. Politicians still have enough discretion on what to release that they can use this pretty effectively.
What are your thoughts on Amazon HQ2: Is it a continuation of or a break with the past? Do you think it’ll stimulate other companies to hold similar competitions and even more, possibly even larger, megadeals?
The really unique thing about Amazon was the public call. I’m not sure that PR worked favorably for them, having such a broad call. I don’t know if other companies are going to do that. Apple has said they’re not going to do it that way.
The offers that are being put on the table include traditional cash incentives and regular tax abatements. But I’m a little shocked by this: Places like Maryland are calculating how much the new Amazon employees would pay in state tax and refunding that back to the company. Essentially, you’re paying taxes not to the government, the city, or the state. Instead, your taxes are being routed back to your company.
Think of a new company coming to your community. There will be increasing demands for infrastructure and public transportation, and good things come with that, but so do costs, and you’re giving away all that revenue. That’s shocking. And I am worried that other companies have talked about asking for similar deals. I do feel like this could signal a change, one that is very troubling.
You’ve been trying to collect more information on the Amazon HQ2 bids. How many places have you been able to find information on the bid, and how many places just have kept them completely secret?
There are very few bids that have become fully public. And even some of those that are fully public, the city may offer the details, but we don’t know the state component. So we’re talking about full information on maybe 10 bids. Quite a few are heavily redacted; some completely redact their incentives. The average city actually didn’t release anything. And they won’t release anything, because they routed it through their chamber of commerce or some other public-private partnership that’s not subject to public records requests.
Most of the cities that I contact for copies of their bids through public-records requests say essentially, “We don’t have a copy of the bid; we only sent some information to this agency and they never sent us back the bid.” They are clearly trying to keep that bid out of the public record.
Are there some kinds of incentives that work better than others?
There aren’t that many successful programs that we see, success being: did they actually change real behavior, did they actually induce new investment, and did they actually drive up wages.
But if we think of a market failure, such as capital-constrained small businesses not having the ability to borrow, that can be a situation for some types of incentive. Or, if there are other barriers like discrimination in lending for minority business owners, that’s exactly the place where government intervention [via] some sort of incentive program or lending program could be effective.
But when we’re thinking about using incentives to attract new investment, it’s really hard to think about the practical cases that have worked, or where the process has not been captured by special interests. A traditional incentive program is largely giving money to companies to do what they would do anyway.
Do you think there’s any way out of this pandering game? Is there a way to limit the use of incentives, or are we just stuck with something that’s going to metastasize and get worse?
I think the solutions that we’ve seen are a kind of federal-government solution. Brazil has done this to some extent, and the European Union has done this with limited effect. In the United States, it’s not clear what that federal mechanism would be, but there is discussion about incentives being taxable, with incentives becoming part of a company’s taxable income.
The other route is about making incentives transparent. Let’s not just show the amount of money that’s been given, but also show the tradeoffs. When you start to show voters not just the incentives, but also what the alternatives are that their money could be used for—whether tax cuts or more spending on education—political support for these incentives falls dramatically.
What could a state like Maryland have done with the billions of dollars it would give to Amazon, and what would the impact of that money be on the community? A key role for government is to ensure that kind of transparency.