The complexities associated with trying to eliminate industrial incentives

I had an excellent conversation with this guy a couple of years ago. He is a professor at the University of Missouri-St. Louis and he was writing a book on the problems with industrial incentive policies in the United States.   He has an interesting example in his blog discussing a large industrial manufacturing plant moving from Quebec to Tennessee.

As I have said before, I would be in full agreement with a broad, global treaty meant to limit these kinds of industrial incentives but, like trade deals, you would need the vast majority of countries and provinces/states/cities to sign on.

In addition, it would be very complicated to define what is an ‘incentive’.   Grants – sure – how about loans?  How about low interest loans?  How about free or cheap land?  How do you decide what the definition of ‘cheap’ is?  How about tax breaks?  How about R&D money?  Governments around the world put billions into pre-commercialization R&D – is that an ‘incentive’?    There are dozens of other categories – training monies – welfare to work programs, agricultural subsidies, reduced fees on government services (incentive levels).

Defining incentives would be very hard, policing even harder.

And, at that, there would always be ways to work around any anti-incentive legislation.

I just think the mechanics of it would be almost unworkable.

We already have rules against this kind of stuff – between countries – written into free trade pacts.  The whole softwood lumber dispute was about so-called unfair, uncompetitive subsidization.  Canadian forest products firms were livid about the U.S. black liquor subsidies.

In the end, I think non-cash incentives are here to stay (tax incentives, for example, are almost impossible to quantify fully as they are based on expectations of future revenue/profits).  They may be able to draft rules around direct transfers between government and industry (cash) but in the U.S. very little of the incentive packages are in the form of cash.

I hope we keep discussing this because Professor Thomas is right – at a national level – or even North America level – these kinds of relocations are not value adding and may be value destructing (see his comments about the lowering of wage rates).

But efforts to make a jurisdiction competitive for investment – are very worthwhile and should be an important part of government policy.  New Brunswick is an example of a jurisdiction that has suffered from chronic economic underperformance and that has led to another kind of subsidization – the subsidization of government – federal to provincial ($1.4 billion in Equalization) and government income transfers to individuals ($450 million more worth of EI in 2009 than if we were at the national average).

Jurisdictions such as New Brunswick need to strive to foster the economic base required to generate the taxes needed to pay for the kinds of public services we want.  There are fairly simple ways to calculate this.  It was at the heart of the failed self-sufficiency agenda – remember that?

We may never reach this equilibrium in my lifetime but we at least should understand the target.