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Dec 10, 2012

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Andrew Brod

The NYT series was impressive, but this is a very tough topic to get right in one attempt. If I were advising grad students these days, I'd recommend going into regional economics because there's so much room to improve our understanding there.

One of the main points of the series was that state and local governments rarely know if their incentives worked. But it suggested that this was because local governments are pressured by the "incentivized" companies. I think that's wrong. The main reason is that local governments don't have the resources to follow up. It's not a priority for a cash-strapped city or county. The problem isn't so bad in North Carolina, which uses performance-based incentives more than outright grants. But it's still a problem.

On a deeper level, no amount of research will ever answer that question. The only way to know if "incentivized" companies would have gone elsewhere but for the incentives is to ask them directly. And as a rule, they're not talking.

Brian

I would add this story as well to the discussion.

Andrew Brod

Like you, Ed, I'm wary of the averages thrown around by various studies. To be sure, they yield a lot of interesting results, such as the one about announcement bias (companies seeking incentives overstate their employment projections).

But it's hard to get at the nub of this issue via state-level correlations. Aggregation is important. After all, a national study will certainly show no effect. A job going to Virginia due to an incentive package would have gone somewhere else but for the incentive. Incentives don't induce job creation, merely (at best) job location. Looking at state data may blur that.

I'm reminded of the man with his head in the oven and his feet in the freezer; on average he was fine. And yet that doesn't mean he wouldn't benefit from a policy that changes the temperatures.

Until there's national legislation to curtail incentives, I'm afraid we're stuck with them.

Andrew Brod

The Pew Center on the States agrees with my comment that North Carolina does a decent job of following up.

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