Shocking incentive failure rate in North Carolina
@sandymaxey points me to a new report from the North Carolina Justice Center that is making my head spin. Picking Losers shows that the state’s flagship development program, the Job Development Investment Grant (JDIG), has seen 62 of its 102 projects fail in the period from its inception in 2002 until 2013. That is, 60% of the projects failed to meet either their job, investment, or wage goals, and had to have their awards canceled.
60%! This isn’t baseball, where a .400 batting average is outstanding, a feat that hasn’t been accomplished since Ted Williams in 1941. Let me tell you about a different failure rate: Investment Quebec takes equity stakes in a number of tech start-ups and other new companies. When I interviewed the director in Montreal in 2007, their failure rate was only 20%, a figure he considered needed to be reduced. In North Carolina, we are talking about a failure rate three times as high, despite giving the awards to firms that should not be nearly so risky.
One such firm was Dell Computers. In 2004, the company conducted a bidding war for a new computer manufacturing plant between Virginia and North Carolina. But North Carolina’s analysis of the project was so out of whack that in nominal dollars it offered almost $300 million ($174 million present value) compared to Virginia’s offer of $37 million. The plant shut down completely in 2010.
Here’s the paradox: North Carolina has some of the best taxpayer protections in the country; indeed, state and local governments lost only a few million dollars when Dell failed. The state is rigorous about canceling awards and clawing back monies already paid out. But the problem is that the state’s economic analysis of potential projects is simply atrocious. The 60% failure rate is one sign of this. The Dell fiasco, analyzed by the NC Justice Center and the Corporation for Enterprise Development in 2007, shows another aspect of fanciful economic modeling.
What can be done? I’ve written before about the weakness of economic development cost-benefit analysis. Even by that low standard, North Carolina’s performance is breathtaking. Report author Alan M. Freyer suggests that the Legislature needs to resist calls to expand JDIG or create another fund with the same purpose, maintain its jobs standards, focus on expanding industries, vastly improve its evaluation of potential projects, and focus help on rural counties. I would add that the state should reverse its cuts to education, one of North Carolina’s economic development crown jewels to date, and restrict its subsidies only to those types shown to have a positive national impact, primarily customized training for companies and generalized training for individual workers. Improving skills increases workers’ income, and it also strengthens the U.S. economy as a whole, as opposed to simply building up a company’s bottom line.
Cross-posted from Middle Class Political Economist.
This reflects the current state of the American version of capitalism. Gaming government gives some corporate persons an edge that keeps them in existence.
My favorite example is the NFL and the teams that threaten to move if the local government doesn’t build them a new bigger and better stadium.
Educating government leaders might help but it will not overcome the political clout of local ‘powers that be’.
Educating workers was supposed to be the cure for joblessness brought on by moving production overseas. That philosophy has increased the demand for education and the cost of that education but it certainly has not been a cure for that joblessness. For about 20 years the damage was hidden by lower and lower FED Funds rates but it was exposed in 2008. By gaming government, corporate persons have been able weaken American workers and the US government.
Our version of capitalism is turning into a farce.
I think that in Germany they train and re-train workers for specific occupations. German population has 16% college.
Ha-Joon Change claims in his book 23 Things They Don’t Tell You About Capitalism” that all this extra education we are getting these days, while praiseworthy in itself, doesn’t do that much for economic productivity. He cites Switzerland as an example: always was top efficiency but in two generations went from 15% to 40% college — because workers had to do it to compete in the job market with other workers on a relative basis.
Half a lifetime ago I heard that banks only lend money to people who don’t really need it. I don’t really believe that, but with estimates of business failure ranging from 30 percent to 80 percent, it would seem difficult for North Carolina or Quebec to do better without limiting aid to those who don’t need it.