Are economic development megadeals worth the price—and the risk? With cities trying to outbid each other for Amazon’s new headquarters, it’s worth examining potential cautionary tales.
Analysts say the recent Foxconn deal in Wisconsin, a blockbuster, multibillion-dollar investment in bringing more manufacturing to the state, is indicative of the sad state of big-ticket economic development deals, and even more tragic in light of the cheaper, more effective options available.
“Cities feel like there’s no alternative,” says Greg LeRoy, executive director of Good Jobs First, a Washington, D.C., policy center that promotes accountability in economic development. “They’ve grown up in a corporate dominated site-selection system, where public officials are playing poker with a weak hand. Their role is to wait for companies to come and knock on the door, and put as much money on the table as possible. We think HQ2 is a teachable moment to crawl inside the beast and show people how it works.”
Wisconsin bets big on Foxconn
Gordon Hintz grew up around manufacturing. The six-term Democratic state representative for Oshkosh, Wisconsin, is a native of the city, and has spent his career advocating on behalf of an area with one of the highest concentrations of manufacturing jobs in the country (paper mills and factories form the backbone of the regional economy). So when Hintz questions a deal to bring thousands of manufacturing jobs to Wisconsin, it’s notable.
The state and local incentive Wisconsin politicians put together for Foxconn was billed by Gov. Scott Walker as a $3 billion investment in the future. The third-largest such deal in U.S. history, the package enticed the Taiwanese multinational to break ground on a $10 billion plant that will eventually employ 13,000 to assemble liquid crystal displays.
It turns out those figures are a little off, in Foxconn’s favor. Last month, Hintz helped publicize a memo compiled by the state’s nonpartisan Legislative Fiscal Bureau that found the real cost to state and local governments was $4.5 billion. As Hintz told Curbed last week, the new numbers underline the big risk of shelling out public funds for jobs, the opportunity costs. The growing tab the state faces will use money that could be going to education and public schools, infrastructure, and other benefits.
“People want to see more manufacturing jobs,” Hintz says, “but they’ve also had enough of giving taxpayer money to billionaires. Why are we giving billions to a foreign company instead of investing in our own paper mills?”
Promoted vigorously by Walker, as well as area Congressman Paul Ryan and President Donald Trump, the Foxconn deal, its backers argue, will provide a jolt to the state and southeast Wisconsin region. During a meeting with Trump earlier this month, Walker said the factory, expected to open its doors in 2020, would result in 13,000 direct jobs, 22,000 indirect jobs, and 10,000 construction jobs.
The resulting infrastructure investments needed to support the massive manufacturing facility—expected to cover 20 million square feet of office space over 1.56 square miles—will update roads, electrical systems, fiber-optic networks, and water distribution across the region. An upgrade of Interstate 94, connecting Milwaukee to Chicago, was fast-tracked due to Foxconn’s expected arrival.
Officials representing municipalities near the factory expect additional dividends. Madison, the state capital, may be the site of a Foxconn-funded “hospital of the future.” A spokesperson for the local project team says the deal is a safe, conservative investment for the city and county, structured in a way that’ll guarantee investment in local infrastructure doesn’t come from existing city funds. Over time, the build-out will attract an ecosystem of more than a hundred new businesses to the area.
“We will have to develop an entirely new supply chain,” Mount Pleasant Village President Dave DeGroot told the Wisconsin State Journal. “The impact on this community is unprecedented.”
How local government helps pay for multinational companies
It’s a potentially transformative investment. But Hintz, LeRoy, and other analysts caution that local government is the one footing the bill in the long run.
Putting state resources into a single place to benefit a single employer is a risky deal, says LeRoy. In a state like Wisconsin, where austerity measures imposed by the governor and the legislature have already short-changed education and infrastructure spending, diverting resources to one employer means diverting money from already-thin budgets.
The infrastructure improvements for the Foxconn plant will come out of local budgets, specifically Mount Pleasant and Racine County. Foxconn will be part of what’s called a Tax-Increment Finance District, known as a TIF. This tax structure is meant to capture the additional value the company’s presence creates, then funnel that value to subsidize the promised infrastructure investments that attracted Foxconn in the first place.
The costs are substantial, including $160 million for water and wastewater and $116 million in public safety spending. This TIF has much more favorable terms than similar financing deals, and guarantees the city will be fully reimbursed for all infrastructure spending.
This is where opponents and supporters diverge. One one hand, it’s a better, safer bet; the city is guaranteed not to lose out on infrastructure spending. But it’s still a bet that this is the opportunity worth pursuing, and it still creates additional costs down the line.
“In terms of structuring a deal where the local community has some pretty solid protection that the investment will be repaid, this deal goes a long way,” says Rob Henken, president of the Wisconsin Policy Forum, a nonpartisan research group. “Where you could never hope to have appropriate protection is what happens after that.”
But Foxconn’s presence means property tax in the region will go up, and add more to the city’s coffers, correct? Not immediately: The estimated $31 million in additional annual tax revenue generated by Foxconn’s presence will be used to pay for $764 million in infrastructure investments needed to support the plant and surrounding campus.
“It’s like the company taking money out of its front pocket and putting it in its back pocket,” says LeRoy. “All or most of the money will be spent on public infrastructure, but most of it will benefit Foxconn.”
What about all those jobs? According to Tim Bartik, an economist at the W.E. Upjohn Institute for Employment Research who specializes in the impact of subsidies, most of the employment figures thrown around for these types of deals don’t take into account the people migrating to town for work. Not only do new arrivals, attracted to the opportunities, often take most of the jobs, says Bartik, but their presence means more expenses for local governments.
New residents mean more education costs, health care spending, and infrastructure improvements, all potentially coming from the same budget line items that have been diverted for Foxconn-related expenses. The Foxconn TIF covers police and fire costs, but that’s just a part of expected increases in city spending. Bartik found that for many of these incentive deals, 20 percent of the jobs go to unemployed locals, and the other 80 percent go to people who lived elsewhere.
“I don’t think the state of Wisconsin will ever make money on this deal,” he says. “Once you account for public spending needs due to an increased population, [the state will] never break even.”
Even if you discount local expense, the state is grossly overpaying for jobs, according to Bartik’s research. He’s created a subsidy database, and found that Wisconsin is paying $230,000 per job, 10 times more per job than the national average. LeRoy says at that rate, the deal can only be described as “a transfer of wealth from Wisconsin taxpayers to Foxconn shareholders.”
It also means the state will be playing a weaker hand when bidding for future economic development opportunities.
“If some company comes and says they want to create a factory and hire people in Milwaukee, and asks for the same per-job subsidy Foxconn received,” says Bartik, “how does the state say no to that?”
Development deals favor big companies, not local startups
Local economic development subsidies have come a long way since they were pioneered in Mississippi in the 1930s, according to LeRoy. Then, the Balance Agriculture With Industry program would guarantee factory construction fees for northern firms willing to relocate. It was a modest affair. At the program’s outset, the small town of Columbia, Mississippi, held a public meeting where locals signed promissory notes to pay for the cost of relocation. These were then used to guarantee a larger bank loan.
Even in the ’50s and ’60s, when a roaring economy meant new corporate headquarters and expanded manufacturing across the country, subsidies weren’t anything like the state versus state race to the bottom they’ve become today. LeRoy’s research has shown that this “great game” to land new headquarters and shiny manufacturing plants costs states and cities $70 billion a year.
What may seem extra puzzling, considering the huge investment and undersized return, is that many signs point to the most cost-effective solutions to catalyze Wisconsin’s economy. Slow, incremental small-business growth doesn’t capture public attention the way a big corporate opening does—Bartik joked that he’s talked about Amazon and Foxconn to numerous reporters, but no journalists ever ask him about manufacturing extension programs or small-business development centers—but it works. In addition to funding infrastructure and education to create a region of highly skilled, mobile employees, simply giving existing entrepreneurs more support can make a crucial difference.
“Investing in a 4-year-old’s preschool is the best you can do for future job development, but I don’t know if it resonates with the public as much as seeing a factory,” says Hintz.
Hintz emphasizes the importance of supporting small businesses, especially since the state is lagging behind in many measures of new business formation. There’s no reason this can’t include manufacturing, which has seen an upswing in the U.S. in recent years. It’s just an issue of giving smaller, more nimble companies some of the attention lavished on the big conglomerates.
“If a fraction of what was made available to Foxconn went to nurturing small-business opportunities, especially with the capabilities of our research university, you’d have much better outcomes,” Hintz says. “Foxconn amounts to trying to buy economic development, and that’s not how it works.”
It’s one of the tricky narrative needles to thread in American politics, Hintz says. Politicians chase things people can identify with, such as old-school manufacturing jobs, even though a return to robust small-business formation would be just as much in line with the U.S. economy of yesteryear.
“So much of what drives political rhetoric is identifying job development that people can identify with and understand,” says Hintz. “The future always loses to the past, especially if you’re someone who’s been negatively impacted by the transforming economy.”
Business formation has been a problem across the country, but cities like Pittsburgh, which have invested in education to spur innovative research and entrepreneurship, have seen big returns. In Madison, Wisconsin’s capital, a burgeoning tech scene has become a huge economic catalyst; funding incubators and educational initiatives could pay great dividends across a range of industries.
According to LeRoy’s research, in an analysis of economic development incentives, 70 percent of the deals and 90 percent of the funding went to large businesses.
“There’s been a long-term academic consensus that entrepreneurship is in trouble in the United States,” LeRoy says. “The numbers of startups that thrive is down. The two trends [rise in economic-development megadeals and declining startup survival rates] are parallel.”
Wisconsin’s Foxconn deal ends up looking more like a poker player going all in. Instead of placing many small, nimble bets on local companies, it’s backing one big deal. In today’s economy, that makes even less sense, says Hintz.
“In 2005, would we have been excited by a Blackberry factory?” Hintz asks. “And more importantly, would we have gotten our money back in 25 years?”