European Union ends relocation subsidies
This isn’t actually news, but it’s news to me, and it’s something you need to know. Greg LeRoy sent me an article by James Meek in London Review of Books (20 April 2017) that he’d been sent by a friend, documenting more EU-permitted job piracy by Poland that preceded the case I discuss at length in my book, Investment Incentives and the Global Competition for Capital. There, I criticized the European Commission’s Directorate-General for Competition for approving a 54.5 million euro subsidy for Dell to move from Ireland to Poland in 2009. During my January 2011 book tour, I took a lot of flak from DG Competition when I presented there, with several staff pushing back on my criticism of this decision.
As the LRB article pointed out, this was another case involving Poland, where Cadbury received state aid of about $5 million (14.18 million zloty when the zloty was worth about 0.35 USD) in November 2008 to move from the Somerdale, United Kingdom, to Skarbimierz (the LRB gives a much bigger number, but from unspecified “Polish government figures,” so I cannot find a way to compare it with the EU’s case report). This case is only listed in the EU’s Official Journal, where it is reported as having been notified under the General Block Exemption Regulation. As this regulation is intended for uncontroversial cases, that makes it evidence, though hardly proof, for a relatively smaller rather than larger aid amount. For my purposes, the amount is less important than the fact that we have another documented relocation subsidy.
What’s the big “news”? In Meek’s article we read, “In 2014, too late for Somerdale, the EU recognised its error and banned the use of national subsidies to entice multinationals to move production from one EU country to another.” Just like that.*
Okay, I’m abstracting from the political process. But it’s pretty clear what happened. As I reported in Investment Incentives and the Global Competition for Capital, when Dell moved to Poland, all of Ireland was up in arms, including government officials and Members of the European Parliament. The European Parliament made its displeasure known. What the Somerdale case shows us is that there was at least one other country on the wrong end of a relocation subsidy, strengthening further the political pressure for state aid reform.
As I said, Commission staff believed they made the correct decision in the subsequent Dell case, and the rationale would have been exactly the same for Cadbury. The move sent economic activity from somewhere with high per capita income to a place with a far lower per capita income. They saw this as an overall increase of efficiency within the European Union. As I argued, though, even if that were the case, the decision wasn’t good for intra-EU solidarity, and it undermined support for policies promoting the growth of the EU’s poorer regions (“cohesion” policy in EU-speak). In light of the 2014 policy change, we know that arguments aligned to mine were the ones that carried the day politically.
This shouldn’t come as any surprise: People generally don’t like job piracy when they know about it. If you’ve read Chapter 5 of my book Competing for Capital, you know that it’s basically not allowed for states to use federal funds (Community Development Block Grants, Small Business Administration, etc.) to engage in job piracy. But in each program’s case, the reform happened only after one or more such incidents (many of them reported to me by Greg LeRoy during my research) had taken place, leading to demands for change.
Moreover, individual states know how to prevent job piracy within their own state. As of 2013, 40 states had shown their ability to write anti-piracy rules (p. iii). But they don’t hesitate to use relocation subsidies when it comes to raiding other states. They can’t seem to help themselves since they all need investment, and nothing stops other states from providing incentives. In fact, all multi-state anti-piracy agreement in the U.S. have failed, and even the most promising recent attempt (Kansas/Missouri) failed to get off the ground.
Only the federal government can stop states from stealing jobs from one another, but don’t hold your breath on it happening anytime soon even though the negative-sum nature of inter-state border wars is easy to see. It’s heartening to me to see the European Union has finally changed its policy, given that I have written mostly positive things about state aid control over the years. It’s great for the glaring exception to be gone.
*For the technically inclined, this is embodied in a ban of relocation subsidies under the General Block Exemption Regulation, and in the Guidelines for Regional Aid 2014-2020, which classifies a relocation aid (paragraph 122) as “a manifest negative effect,” “where the negative effects of the aid manifestly outweigh any positive effects, so that the aid cannot be declared compatible with the internal market” (paragraph 118).
Cross-posted from Middle Class Political Economist.
In my general and cursory examinations of subsidies provided by States to obtain new businesses or compete with another state to obtain an existing business (or it’s expansion), it isn’t at all clear that the subsidies can provide any significant increase in the per capita State tax revenues over 10 years. i.e < rounding error in per capita tax collections.
Though sufficient detail on the value of the new or relocated business to a state (less the subsidy provided) is never provided publically in sufficient real detail to make a solid analysis the net real benefit to providing the subsidy must be purely for political gain… e.g. retaining or increasing political power (eg. propaganda about new jobs, new revenue from employee income taxes, multiplier effects, and new corporate income tax, but without sufficient information to say whether the subsidy in fact doesn't negate most of that 'gain').
The net effect then is that the tax payers who are in the then present political minority are paying to retain and/or increase the opposing party's power. It seems to me then that the real incentive for States to subsidies is to line pockets of a relative few movers and shakers in the State's political benefactors.
Thus, State subsidies are a form of direct bribery which benefits the relocating or new business profits and lines the pockets of the political elite power brokers and beneficiaries in the state, where the bribe is being paid out of the tax payer income taxes but whose taxpayers obtain no net benefit in the end.
It would seem to me that the federal gov't could put a stop to this charade of bilking taxpayers while benefiting the political power in a state… and the bugger they neighbor effect of it, simply by requiring a federal analysis of whether there is indeed a significant benefit provided to the states taxpayers which aren't a direct loss of benefits to the residents of the state from which the business is relocating or expanding. Alternatively the Federal commerce law could simply make inter-state transfers of business or new business by the use of subsidies illegal, though I'm not sure that could pass constitutional muster… and certainly note under a conservative court majority.
The federal analysis you call for is exactly what the Directorate-General for Competition does in the European Union. While non-controversial subsidies under an already approved program can be notified afterwards in an annual report, all other subsidies have to be notified in advance. At that point, the Commission does a preliminary analysis of the proposed subsidy. If there is any doubt about the legality of the measure, the Commission opens a comprehensive investigation.
Regarding the Commerce Clause, the case Cuno v. Daimler-Chrysler raised that issue against state and local subsidies in Ohio. After federal courts narrowed it to the state subsidies only and plaintiffs won at the Appeals Court level, the Supreme Court ruled 9-0 that they did not even have standing to file their suit.
Ken, the 2006 case you refer to ruled that state taxpayers didn’t have standing to question the State’s taxation authority…. that’s my basic interpretation. However, interstate commerce regulates commerce between or among States, which it seems to me therefore allows one state to use the commerce clause to prevent another state from offering subsidies which provide incentive for business to move or shift business to another state.at the original state’s expense in revenue lost.
I’m no legal beagle of course so that’s just my rough speculation. But it therefore seems to me that the entire issue of bugger they neighbor from state to state regards using subsidies provided by or at the expense of taxpayers is yet to be questioned. Of course this get’s into “states rights” v the commerce clause but what else is new?
Taken to extreme, since there’s no restriction by law, then a state with sufficient where-with-all to subsidize business’s to relocate to their state could devastate other or another state’s revenues by enticing with subsidies as many large business’s as they could afford… even by issuing state bonds to finance it. I would guess that the interstate commerce clause would be applicable with standing for the state or states who were negatively impacted to file suit to prevent such.
The only issue I have with the federal gov’t using a fair evaluation to decide whether relocation was to taxpayer’s benefits (per the EU method) is that any new congress could change the conditions or threshold to effectively negate the law without actually repealing it…. just as we see occurring now and have witnessed in the past several decades as the majority swings from left to right and back again.
In any event it doesn’t appear to be within ear-shot of the U.S. taking similar law into consideration. i don’t think this is a private property rights issue since there’s no enjoinder for a business to relocate where it want’s…it’s only about tax-payers rights when business obtains a subsidy by taxpayers or underwritten by tax-payers (e.g. state bonds) t relocate.