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December 14th, 2011
“To empower job-creators, we must get rid of regulations that prevent them from growing and hiring. This means taking decision-making power away from bureaucrats who don’t understand how job creation works.” Thus writes Newt Gingrich, who has revealed that one type of regulation he hopes to abolish are the child labor laws.
My colleagues and I at Good Jobs First have just issued a report which argues that the way to improve job creation is to impose more regulation.
In Money for Something we look at the economic development programs through which states spend billions of dollars each year in an effort to expand business activity inside their borders. These are the corporate tax credits, tax abatements, tax exemptions, cash grants, low-cost loans and other forms of financial assistance that states lavish on companies to lure one of the dwindling number of new plants, office buildings or distribution centers that the private sector is willing to construct in the USA rather than in China or India.
Unfortunately, many companies regard these benefits as a kind of entitlement and are willing to force states to bid against one another, driving the value of subsidy packages to unrealistic levels. A few years ago, for instance, German steelmaker ThyssenKrupp walked away with $1 billion for building a steel plant in Alabama that Louisiana also coveted.
Or else an established company demands new subsidies under the threat of relocating to another state. Sears has been playing this game shamelessly in Illinois. Two decades ago it got nearly $200 million to move its headquarters from downtown Chicago to a distant suburb. This year, as that deal was expiring, the company demanded new tax breaks from Illinois while it openly flirted with other states. The Illinois legislature has just approved a new $150 deal for Sears (along with breaks for other companies) amid protests that included the unfurling of a banner in the House Chamber reading “Stop Corporate Extortion.”
While the best choice might be to get rid of many of these subsidy programs, as long as they are in place they need to be made more accountable. When purported job creators are getting handouts of taxpayer money, we need to be damned well sure that they perform as expected.
In Money for Something, we evaluate 238 subsidy programs in all 50 states and the District of Columbia in two ways:
* Whether they impose a strict requirement on recipients to create a certain number of jobs
* And whether they make sure those are quality jobs by attaching wage and benefit standards to them.
We found that nearly 50 percent of the programs have no job-related performance requirements. States are spending more than $7 billion on these subsidies and have no guarantee that any job creation will result.
Many of the 103 programs without job creation requirements are designed to encourage investment. Left to their own devices, companies might focus that investment on labor-saving equipment that results in head-count reductions. There’s enough of that happening without using taxpayer funds to encourage even more.
The subsidy programs also leave a lot to be desired when it comes to job quality standards. Fewer than half have a wage requirement, and many of those are based on fixed amounts that can easily become outdated. We found one program in Delaware whose wage standard has for years been set at $7 an hour—a level that is now below the federal minimum wage. Other programs have standards that are only slightly above that federal minimum.
While it is clear that companies should not get subsidies to create sub-standard jobs (especially those that pay so little that workers would qualify for social safety net programs), that doesn’t take it far enough. Companies receiving subsidies should be creating jobs with wages that are significantly above market rates, thereby raising living standards. We found only eleven programs that do so.
State subsidy programs are even more deficient when it comes to benefits. Only 51 of the 238 we looked at require companies to make available health coverage of any kind, and only about half of those compel the employer to contribute to premium costs.
Even if all these standards are in place, they do not guarantee that a subsidy program’s benefits will outweigh its costs. Yet the presence of these safeguards gives public officials some recourse when a recipient’s performance is abysmal.
The question at that point is whether states are willing to enforce the standards they put in place. That is the subject of our next report at Good Jobs First, which will look at the use of clawbacks and other penalty procedures. Subsidy recipients that don’t create quality jobs need to feel the heat.