“But everybody does it” — Cities and states addicted to soliciting for corporate favors

For all the money spent, the majority of research on the economic impact of incentives has found that, at the national level, there is either no effect at all, or a modest negative effect.

Arthur Rolnick, a senior fellow at the Humphrey School of Public Affairs at the University of Minnesota and a former senior vice-president of the Federal Reserve Bank of Minneapolis, has been urging states to stop participating in bidding wars for decades. “It’s at best a zero-sum game,” he said. “The evidence is pretty clear that these incentives don’t actually create jobs; they just move them from one part of the country to another.”

In some cases, the incentives might play a part in an international companies decision to locate in the United States, Rolnick said, but more often than not the companies would have located somewhere in the country without any incentives, as Rolnick believes was the case with both Airbus and Mercedes.

“There might be a very small number of cases where the companies came here instead of going to Canada or Mexico,” he said, “but companies don’t just decide to move to a new country because some officials were offering them some money.”

Subsidies as toxic to the national economy?

Mark Partridge, an economist at Ohio State University, agreed, and added that there is good evidence that even when foreign companies do locate in the United States, there is often a negative effect on domestic businesses, cancelling out much of the employment gains, as was the case with the foreign auto transplants.

And, especially as companies seek to lower their labor costs by locating in Southern states, Partridge said, the bidding wars may actually have negative consequences for the national economy as a whole. “If I offer incentives to move a BMW plant from Michigan, where the transportation network is the best and there are lots of well-trained workers, to South Carolina, where the infrastructure is not nearly as good but costs are cheaper,” he said, “then that plant will probably have a lower productivity.”

“The net cost to BMW might still be lower in South Carolina, but to society the cost is higher,” Partridge concluded.

Local benefits exaggerated

Claims that subsidies to business help a locality spur economic growth and increase employment are grossly exaggerated, explained Peter Fisher, the research director of the Iowa Policy Project and one of the country’s foremost experts on subsidies.

“What we know is that the vast majority of this investment would have happened even without a subsidy,” Fisher said, so the job creation figures that states and local governments put out “are often misleading.”

In a comprehensive review of the economic literature in 2004, Fisher and a colleague, Alan Peters of the University of Iowa, concluded that, at best, subsidies are responsible for about 10 percent of the jobs that are created by the businesses that receive them. The rest, he said, would have been generated anyway. A more recent review, in 2007, found that incentives can be slightly more effective if they are well-targeted, but that state and local officials often drastically overestimate their value while underestimating their cost.