Hicks: A foolish economic development strategy in Indiana? No thanks – The Daily Reporter

Over the past two weeks, Hoosier executives celebrated two new factory announcements in the state. Together, they promise 1,900 factory jobs and about $4.6 billion in new investment. Unsurprisingly, this is the kind of stuff elected officials love to brag about. The sunny news release on economic development is older than the country and is a particularly bipartisan indulgence.

Still, if you pay attention to this kind of job ad, there’s no getting around the feeling that something is wrong. The reason for this is more than just gut instinct; much of what you see and read about these job postings is pure political fiction. Informed taxpayers should better understand what is going on. There are three aspects that make me very uncomfortable and that should worry both taxpayers and elected officials.

The first is the boldness of the claims and argument that job creation deals are a big part of the economy. This is plain nonsense. In a typical year, Hoosier companies create about 0.5 million jobs statewide and destroy about 0.5 million jobs elsewhere. Some years there are more creations than destructions, and other years we lose more jobs than are created. Either way, those 1,900 jobs spread over the next few years are a measurement error in Indiana’s labor market dynamics.

The same goes for capital investment. Today, Indiana has over $0.5 trillion in capital investment. The aforementioned $4.6 billion sounds great, but spread over two or three years is unlikely to represent 1/1,000 of the state’s capital investment in a year. As with the employment numbers, this is literally within the range of measurement error for business capital.

In a good year, state economic development agencies will interact with companies that create perhaps 4.0% of new jobs. This is a remarkable achievement for IEDC’s small, hardworking staff, but it does not prove the state’s economic performance.

Our civic discourse would be better off if elected officials were more honest about these deals. But, given the bipartisan zeal for job ads, it’s up to all of us to educate ourselves. Yet the political exploitation of these agreements ranks at the bottom of my three concerns. What bothers me the most is the public spending on these jobs.

Boone County and Howard County, where these plants will be located, have unemployment rates of 3.1 and 3.8 percent respectively. Thus, there is no readily available labor for these factories. Traditionally, this void drew labor from around 30 surrounding counties. There might even be some immigration because both counties have attractive communities. Still, most employees will come from other companies already operating in the region or outside the county.

In a free market economy, this displacement of workers is acceptable; new businesses have every right to lure employees away from existing businesses. However, what is happening here is the absolute antithesis of a free market economy. We don’t yet know what the tax incentives will be for the Lilly plant in Boone County, but the incentives are about $130,000 per job for the Howard County plant. It’s just incredibly irresponsible for so many reasons. Some might even call it “socialism”.

Much of the incentive will come from local taxpayers, including businesses whose workers will now be attracted to someone who does not pay taxes in those communities. Benefits from those jobs will go to where those workers live, leaving Boone and Howard County taxpayers to pay most of the costs while most of the benefits accrue elsewhere.

The state’s contribution to these incentives is performance-based; the local contribution is an upfront payment with no realistic recovery options. It is a grave error in state policy to view a tax giveaway as “the skin of the game” when local spending on good schools, safe neighborhoods and paved streets is not.

Even if these communities received the full benefits of this deal instead of the more realistic 10%, it would still be a troubling public expense. Paying $130,000 a job to attract a new plant to Indiana makes for big headlines and happy press releases while being the very definition of short-term, uninformed tactical thinking. Tax incentives are not a viable economic development strategy.

If Indiana’s economic development strategy is to pay $130,000 per factory job, we are failing. The best way to understand this is to simply note that the cost to bring back the factory jobs we’ve lost in the last 20 years alone is over $16 billion, or about $5,600 per Hoosier family. Again, if this is Indiana’s economic development strategy, we must prepare for costly and repeated disappointments.

The Howard County plant is an automotive parts manufacturing company. The state has lost over 40% of jobs in this industry in 20 years, and we’re 10% below where we were in this industry in just 2019. Those 1,400 new jobs are only 2.2% of total jobs in this industry. By the time these incentive jobs materialize in two or three years, we will probably have lost another 5,000 jobs in auto parts plants. From a strategic point of view, these incentives are like buying gold-plated buckets to refloat the Titanic.

An even worse revelation is that this industry pays wages 16% below the state manufacturing average. That might explain why the jobs ad was so oddly silent on salaries. Again, if this is a successful economic development strategy, I shudder to imagine what a failed strategy might look like.

Despite the recklessness of the tax incentives, my biggest concern about this deal is not the lack of political leadership. I have few illusions that the other political party would be more responsible with taxpayers’ money. I’m more concerned about what this says about the quality of companies and business leaders we attract to the state.

Indiana’s manufacturing business tax is now the fourth lowest in the nation. To put this in shocking context, a single mother earning $35,000 a year pays twice the effective state and local tax rate of the average manufacturing company in the state. Similarly, non-manufacturing businesses in Indiana pay nearly three times the average factory tax rates. It should be noted that non-manufacturing businesses have been responsible for 180% of job growth in the state since 2000. Try to think about that for a few minutes.

The message to companies must be clear. If paying the fourth lowest tax in the country is too onerous for your factory, you don’t have a viable business plan. Indiana doesn’t need you; go away. If your company wants to use our public infrastructure, public services (e.g. police and fire protection) and our graduates from public schools and universities, but expects others to foot the bill, don’t come not in Indiana. The state needs fewer business leaders like this, and that’s precisely the message that careful, thoughtful, market-oriented leaders should give to businesses.

Michael J Hicks is the director of the Center for Company and Economic To research and the george and french Ball Distinct Teacher of Economy in the Miller Middle School of Company at Ball State University. His column appears in Indiana newspapers.