“Coping” vs. “Creating”

“Coping” vs. “Creating”

A Special Policy Watch Interview on the Corporate Incentives Debate

By Rob Schofield

State policy news has been dominated over the last few days by the Governor’s decision to veto a new corporate incentives package for tire maker Goodyear and the apparent intent of legislative leaders to seek an override next week.

In an attempt to raise the level of the discussion on what is, by any reasonable analysis, an extremely complex topic, Policy Watch turned this week to veteran researcher and policy analyst, William Schweke of the national economic development think tank, CFED.

Schweke, who serves as Vice President of Learning and Innovation for the organization and works out of its southern regional office in Durham, has conducted extensive research over the years on the topic of economic development in the rapidly changing modern economy. Earlier this year, Schweke co-authored a hard-hitting examination of North Carolina’s current economic model for dispensing business subsidies entitled “Getting our Money’s Worth?”

Here are some selected excerpts from the conversation:

PW: What is your take on the current controversy surrounding the Goodyear bill?

Bill Schweke: The Goodyear proposal has been portrayed as representing a sea change in the discussion of incentives because the state is proposing to give millions of dollars to a business that’s been in North Carolina for a long time. This is only partially true. As the Governor said the other day, the state has already been giving a lot of public money to existing businesses for a long time.

What makes this deal different is that in the past the subsidy was at least arguably tied to a business expansion that would, in turn, generate more tax revenue. The idea was that the state would help encourage new investments and payroll expansions that wouldn’t have otherwise occurred by giving the company back some of what it and its employees would have otherwise paid in taxes. Whether that idea really worked (or works) in practice is another matter, but at least that’s the theory. With the Goodyear deal, the General Assembly proposes to help subsidize new infrastructure investments for a company that already pays little or nothing in the way of state taxes and that will, when all is said and done, likely employ fewer workers than it does today.  

PW: It sounds like you’re skeptical.

Bill Schweke:That’s a fair statement. What the General Assembly is proposing to do here is to transform the state’s incentives approach (or at least the theory behind it) from one that’s about “creating” to one that’s about “coping.”

PW: Say more about that distinction.

Bill Schweke: The idea behind the proposal is that if we don’t act, this giant multi-national corporation will leave us high and dry. In effect, we are going to authorize lots of new public spending just to try and hold on to some fraction of what we already have. We’re coping – that is, trying to keep our heads above water in an economic whirl pool over which we have almost no control. You could also call this “delaying the inevitable.”

In contrast, with a creating strategy, the state is constantly looking to the future – searching for new and creative ways to stay ahead of the economic currents by sacrificing a little to bring in new employers, investments and jobs that it wouldn’t have otherwise been here. Now admittedly, that’s just the theory. In practice, even the creating strategy is fraught with problems.

PW: Wasn’t that the point of your “Getting Our Money’s Worth?” report?

Bill Schweke: Yes. Our analysis there showed that even when you try to use a creating strategy, it can be extremely difficult to pull off. In many instances, the state ends up losing more revenue than it gains. When we looked closely at the Dell deal, for instance, (a deal that admittedly brought in new jobs that hadn’t been here before), North Carolina very likely overbid for the project by a significant amount. We concluded that this was principally the result of flaws in the state’s economic impact model – a model that had been created by some very smart folks.

PW: So, how do you put together an incentives strategy that truly creates more than it costs in public funds?

Bill Schweke: Well, first of all, it is possible to fashion a solid strategy in the abstract. With a combination of accurate modeling and projections, cautious assumptions, a more open process and a lot of other protections like targeting the incentives at truly disadvantaged areas, job creation mandates, solid worker protections, and “clawback” provisions that allow the state to gets its money back when the company reneges on a deal, incentives can work. 

The problem, of course, is that it’s hard to get companies to accept such terms when other states are offering them the moon. That’s why everybody – North Carolina included – finds themselves compromising and backsliding into this counter-productive race to the bottom. Once you start playing the game, it’s extremely difficult to “lose” – that is to be willing to walk away and suffer the political humiliation of watching the ribbon cutting ceremony take place in another state.

At a bare minimum, it’s essential that the state figure out and make public exactly what it is spending on- and off-budget on economic development in all of its forms. Many current investments are wise. Some have sufficient funds. Others don’t. And a number of these programs – scattered around in scores of different agencies and institutions – may be a total waste. But we can’t even figure that out unless the state puts together and publishes what we call a “Unified Development Budget Report.” 

PW: So what do we do? Is it possible to have an economic development policy that’s responsible and that actually works? 

Bill Schweke: Our research shows that it is possible to have narrowly-tailored incentives program that helps small existing businesses expand and hire the jobless. Such job creating incentives can be drawn down by every county in the state (not just the most affluent ones), fostering business expansion and investment – maybe not on the scale that would be as visible and sexy as some would like – but it is possible. It’s something that could be added to the mix. Similar programs have been run in Minnesota and abroad.

But, when it comes to the big picture and the long run, North Carolina would be much better off if it focused the vast majority of its economic development resources on what we call “community capacity building.”  This means getting away from pursuing big deals to land high profile companies and investing lots more time and resources in the physical and human infrastructure of communities themselves – roads, schools, health care, worker training and re-training, etc.

It also means investing in an effort to help communities to help themselves by enhancing their ability to work consciously and collaboratively to shape their own futures. We need to do a much better job of training local officials, nonprofit leaders and would-be entrepreneurs. It will take some time, but the payoff will be much richer than the current approach.

PW: So where does that leave us on the Goodyear deal?

Bill Schweke: The hard reality is that it’s a losing proposition to start investing large sums of public money in direct transfers to giant multi-national corporations like Goodyear to try and get them to stick around. The company is either profitable or it isn’t. We can’t affect that by giving them four-million dollars a year. All we might do is, at best, buy a little time.

Frankly, if we determine that Goodyear is serious about leaving, we would be much better served to take the forty-million dollars in question and invest it in the Cumberland County community – the workers themselves, their severance and retraining packages, the local infrastructure, all the things that would pre-position the community to endure such a blow and to move forward. As hard as that would be to accept, it is a reality we can’t deny. That’s what I mean when I say “focus on creating rather than just coping.”     

PW: And the Governor’s alternative?

Bill Schweke: From the descriptions we have, it does a better job of establishing general criteria for providing incentives to existing businesses in many counties, but in the long-run, it promises to cost a tremendous amount of money with, at best, uncertain results. The other danger, even if a well-structured program is created, is that another administration and legislature in the throes of negotiating with another business will “lower the bar” to get them to stay. And I worry that if no new jobs are created and we’re just paying them to stay put, that it will be harder for North Carolina to get its money back.

The best outcome for now is that lawmakers accept the Governor’s veto without rushing to pass any alternatives. Ideally, that will allow the state time to have an open, honest and comprehensive discussion in the coming months so that whoever is elected Governor next year will have a chance to pursue a fresh start.

About the author

Rob Schofield, Director of NC Policy Watch, has three decades of experience as a lawyer, lobbyist, writer and commentator. At Policy Watch, Rob writes and edits daily online commentaries and handles numerous public speaking and electronic media appearances. He also delivers a radio commentary that’s broadcast weekdays on WRAL-FM and WCHL and hosts News and Views, a weekly radio news magazine that airs on multiple stations across North Carolina.
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