Incentives don't just lure jobs, they create them

Letter to the editor received in response to the Minneapolis Fed's special issue of The Region magazine, "The Economic War Among the States" (June 1996), and in response to columns that have appeared in the fedgazette on the same topic.

Published October 1, 1996  | October 1996 issue

In regard to the current debate over economic incentives stimulated by Melvin Burstein's and Art Rolnick's "Congress Should End the Economic War Among the States," there are several points with which I would like to take issue and perhaps give another perspective.

Until the 1990s, North Dakota had long been behind the times when it comes to progressive economic development. In the past, our leaders were content to gamble with the prospects of $5 wheat and $30 oil to sustain the North Dakota economy. During the 1980s, low crop and energy prices, driven by worldwide market pressures, and a general lack of business growth drove thousands of primarily young, well-educated residents from the state in search of professional and personal opportunities. At the end of the decade, North Dakota was the only state in the country to have fewer residents in 1990 than in 1930, and elected leaders were dealing with problems such as a $300 million shortfall going into the 1987 legislative session.

At the end of the 1980s, however, it became apparent that this strategy, or lack thereof, would not solidify, grow and diversify the state's economy and provide opportunities for younger generations. The 1990s brought progressive economic development legislation and programs to local, regional and state levels and other pro-business legislation which enhanced the general business climate. The economy has strengthened. Population is now increasing. And more young people are remaining in the state after graduation and returning to the state. And, the Legislature is projected to have over $100 million in surplus going into the 1997 session. Significant credit to this economic turnaround can be attributed to the wise and targeted use of economic incentives. Most North Dakota economic development professionals have demonstrated their ability to "play the game" the right way. This leads me to counter several of Burstein's and Rolnick's points.

Burstein and Rolnick continually emphasize that competing for business projects by offering economic incentives causes the overall economy to suffer. However, they also state that "as long as the subsidies and preferential taxes given to a business are worth less than the revenue the business will contribute to the state over its operating years, the citizens of the state are better off than if their state officials had not played this competitive game. The state has more jobs and hence more tax revenue to pay for public goods than if it had not competed."

This is a valid and important point that is not given enough attention. As is usually the case with anything, moderation is the key. The principle of return on investment is fundamental to any professional business person or economic developer. It is obviously not wise to give $100 million in incentives to a project that will only provide $50 million in return. In the case of North Dakota, and more specifically the Fargo-Cass County Economic Development Corporation, positive return on investment is a golden rule.

A report last year by an independent accounting firm studied 29 North Dakota projects that received public incentive funding. The study estimated that a total investment of $33 million in the form of various tax exemptions, grants and loans will return, in the first 10 years, 4,847 jobs with an estimated $800 million pay-back in several categories:

  • The purchase or construction of $82.1 million of land, buildings and equipment, with a predicted $24.7 million increase in property valuation.

  • The retention of 629 existing jobs and the creation of 2,292 new jobs during the first four years having an estimated annual payroll and benefit package of $53.1 million per year.

  • The existence of 4,787 jobs by the fifth year with an estimated annual payroll and benefit package of approximately $103 million in each of the fifth through ninth years.

  • In the 10th year, there will be 4,847 direct jobs with a total payroll and benefit package estimated at $111.8 million.

  • Perhaps the most conclusive evidence of a positive return on investment is that state and local governments will collect more than $51 million in additional taxes because of money spent on the 29 projects.

In light of this research, I suggest that Burstein and Rolnick consider this kind of research when making their claim that "the overall economy ends up with less of both private and public goods than if such competition [public incentives] was prohibited" as it may not be true in all cases.

Another perhaps flawed hypothesis is that "each business that is enticed to relocate represents a potential loss of efficiency for the overall economy and hence less output ..." because output will be lost as businesses are enticed to move from their optimal locations. This assumes the business was in its optimal location to begin. Consider the converse of this assumption: that the relocating business was not in its optimum location which caused its costs to be higher and growth potential to be lower than they would be at a more efficient location (with a better labor force, better transportation connections, proximity to research universities, etc.). I find it difficult to believe that any well-managed, competitive business would willingly choose to relocate an operation to a more inefficient location simply to collect some economic incentives.

Burstein and Rolnick also apparently fail to recognize the fact that businesses do create new jobs as new products and services are developed. Their research appears not to factor this in, but simply focuses on moving around existing jobs. Virtually all of the economic development projects in Fargo-Cass County have involved business expansions, expansions that involve new products and services and true job creation, not simply moving the same 100 jobs from one community or state to another.

A local example which appears to refute these misguided assumptions is Marvin Windows' decision to locate a plant in Fargo to produce a brand new window product. Key reasons for their decision included: (1) lack of labor force at their existing location in Minnesota, (2) Fargo's ample labor force, (3) a steady stream of engineering graduates and research capacity from North Dakota State University, (4) the raw material used in the windows was already being produced in Fargo and (5) cheaper operating costs in North Dakota. Clearly, new jobs are being created as a new product is developed and their site decision was based largely on efficiency and cost-effective considerations. Incentives were, however, part of the deal.

In conclusion, Burstein and Rolnick are stimulating good discussion on an important issue. However, we must be careful not to make false or shallow assumptions or group such activities as retaining or recruiting "town-skipping" professional sports teams with the issue of real, primary-sector job and wealth creation.

As this debate continues, it is valuable and necessary to examine the positive, existing models and learn the right way to play this "game" in the current environment. Perhaps some reasonable guidelines are needed, but if federal legislation or constitutional amendments outlawing business incentives are imposed, I have confidence in the creativity of the human mind that other ways will quickly replace those methods prohibited to provide the same, perhaps, more indirect incentives to businesses.

Jim Buus
Manager of Public Affairs and Business Development
Fargo (N.D.) Chamber of Commerce