A couple of weeks ago, something surprising happened in North Carolina. As the Carolina Journal explained:
RALEIGH — Twenty-eight House Republicans bolted party ranks Tuesday, joining 26 Democrats to defeat an economic incentives program that some labeled “corporate welfare.” It was a rebuke to House Speaker Thom Tillis, R-Mecklenburg, Senate leader Phil Berger, R-Rockingham, and Gov. Pat McCrory, all of whom championed the legislation.
The 47-54 vote against House Bill 1224 signaled that the end of the meandering 2014 “short session” of the General Assembly could be nigh, arriving perhaps as early as today.
The move marked an unusual triumph of economic rationality over special-interest politics. As Brian Balfour explained it in the Civitas Review, the bill combined two unrelated policies: it capped local sales tax rates while expanding the state’s corporate welfare efforts. Now, however, the Washington Post is reporting that the governor is under intense pressure to call a special session so the legislature can reconsider the legislation.
If they do come back into session, legislators would be wise to study up on the issue before they reconsider their votes. A good place to start would be a recent Mercatus working paper by George Mason University Professor Christopher Coyne and GMU Ph.D. candidate Lotta Moberg. The paper explores the effects of targeted economic development incentives, stressing two under-appreciated downsides to the policies:
(1) they lead to a misallocation of resources, and (2) they encourage rent-seeking and thus cronyism. We argue that these costs, which are often longer-term and not readily observable at the time the targeted benefits are granted, may very well outweigh any possible short-term economic benefits.
To gain a better understanding of the effects of these policies, my colleague Olivia Gonzalez and I have begun looking at the empirical literature. While our results are still preliminary, what we have found so far should give Tar Heel legislators pause in re-thinking their decision. We found 26 peer-reviewed papers that assess the effect of targeted incentives on the broader economy (a surprisingly large number of studies only look at whether incentives help the privileged firms and sectors, ignoring how they affect the broader economy).
The pie chart below shows what we’ve found. Just 2 studies, constituting 8 percent of the sample, found that targeted incentives positively affect the economy-at-large. Four studies (15 percent of the sample) found that targeted incentives negatively affect the broader economy. Another 6 studies found that they produce some positive effects (such as higher employment) but also some negative effects (such as lower labor force participation). One study in the sample found a distinct group (manufacturers) benefited while others (finance, insurance, and real estate) lost. Thirteen studies (half the sample), simply found no statistically significant effect of targeted incentives.
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On balance, this is not a strong case for the effectiveness of targeted economic development incentives. It suggests that when states privilege particular firms or industries, they are wasting taxpayer resources, benefiting some at the expense of others, and potentially harming the broader economy. Of course, some pathologies of privilege such as long-term resource misallocation, rent-seeking waste, and corruption may not manifest themselves for years and are not likely to be picked up by these studies.