Here & Now

New Study Says Foxconn Could Depress the State Economy

Frederica Freyberg:

The multi-billion dollar incentive package Wisconsin gave tech giant Foxconn was more than a bad deal. It could depress state economic activity by tens of billions of dollars over the next 15 years. That’s according to a new special study by economists at George Mason University in Virginia. In tonight’s first look, we talk with one of the authors. Michael Farren is a research fellow at Mercatus Center at George Mason. He joins us from Asheville and thanks very much for being here.

Michael Farren:

Thanks so much for having me.

Frederica Freyberg:

Why did you research Wisconsin’s $3.6 billion plus subsidy to Foxconn in particular?

Michael Farren:

So we were doing an analysis. Asking the question: Do economic development subsidies actually work? That is do they actually create economic growth at the local level and the national level? We decided to use Foxconn as a case study because it was in the news and there was a lot of information already available about it.

Frederica Freyberg:

Your premise and conclusion, again, is that such targeted subsidies, especially gigantic ones like Foxconn’s, do more harm than good. In fact, as we lead with you say the subsidy may depress state economic activity by tens of billions of dollars over the next 15 years. How so?

Michael Farren:

So the first question is is that most studies that examine these subsidies never count the costs. So you have to understand that for every dollar you pay in subsidies to a particular company, you have to tax that away from taxpayers and that has its own economic impact, a negative economic impact. The $3.6 billion subsidy that Wisconsin offered to Foxconn would decrease economic growth in the state by about $20 billion over the next 15 years.

Frederica Freyberg:

You also assailed the so-called multiplier effect of spin-off jobs related to Foxconn. Why in your research doesn’t that add up?

Michael Farren:

The multiplier effect is valuable, but most of the time, multipliers take place naturally. You don’t actually need to incentivize them. That’s part of the issue with economic development subsidies in general, that they only work in the context of swaying where a company decides to locate or on expand between 2% and 25% of the time. That means about 75% of subsidies or more are just pure wastes of public money.

Frederica Freyberg:

Your research also discusses how else the state of Wisconsin might have used $3.6 billion. Like how?

Michael Farren:

So one humorous example that we used is that the state could have instead subsidized seven square miles of greenhouses to move Florida orange growers up to the upper Midwest. That would also create multipliers and would create an exportable industry, but it’s obviously not a good use of taxpayer money.

Frederica Freyberg:

You talked about how that $3.6 billion might have been plowed back into tax cuts. Would that have been more economically beneficial?

Michael Farren:

Absolutely. So right now, with the current corporate income tax rate, if that subsidy to Foxconn had instead gone to all companies throughout the state, it could have lowered corporate income taxes by 22%. That would do a lot more for broad-based economic growth rather than picking one favorite and rolling the dice on it.

Frederica Freyberg:

Now, your report piles on with the idea that subsidies actually reduce competitive practices among companies that receive them because basically those companies are playing with somebody else’s money?

Michael Farren:

Absolutely. So subsidies essentially give a monopoly advantage to the receiver of the subsidy. One of the sayings about monopoly advantage is that the best part of monopoly power is having an easy life. So essentially it allows the company that receives the subsidy to be a little bit less attentive to consumer desires, to be less focused on production and efficiencies resulting in less economic growth rather than competition, which forces companies to really be focused on pleasing customers and eliminating waste from their production.

Frederica Freyberg:

It almost goes without saying that you and your fellow economists are not good with these kinds of targeted subsidies, but you say that states don’t even need to offer them because other factors for where companies might locate are more important, like labor costs. But would Foxconn have ever come to Wisconsin without the billions in targeted subsidies?

Michael Farren:

So that is an open question and no one can really answer that. The fact of the matter is is that most subsidies don’t matter and even Amazon HQ2, which we also studied last year, was — its focus was on tech talent. That’s the reason why it chose Arlington, Virginia as a place to locate. And also on the ease of doing business in Virginia. They only also chose New York City before pulling out of that deal later on because they weren’t sure that Arlington, Virginia could provide enough talented workers for their tech industry. So the end of the day, it’s all about production and access to customers. Subsidies are a secondary or even tertiary consideration.

Frederica Freyberg:

And again you say that, quote, subsidizing governments are wasting their money” and presumably our money. What’s been the reaction to your paper, from policymakers or other economists, who tout such subsidies?

Michael Farren:

So generally the reception has been very good. And we’re only saying something that economists have been saying for a very long time. We’re just trying to get the message out into the broader public understanding a little bit more. And it’s very well-understood that a lot of policymakers would get away from offering these subsidies if other policymakers almost also promised to do so. We waste about $45 billion a year in state and city taxes on these subsidies that could be repurposed to tax cuts, to grow the economy or other valuable public services. That would be definitely something that would grow the economy rather than shrink it.

Frederica Freyberg:

All right. We need to leave it there. Michael Farren, thanks very much for joining us.

Michael Farren:

Thank you.