It's The Economy, Stupid

I recently wrote about the big Foxconn expansion in Wisconsin and the $3 billion incentive package.  I wondered about the ROI on that level of incentives.  It wasn’t clear to me if the project would achieve any real ROI over time – based on the economic impact numbers published by the Wisconsin government.

Then I read this.  It’s an interview on the project from what appears to be a respectable economic development consulting firm.  Here’s the point that bugs me.  It’s made by a consultant: “Three billion of anything is a lot. But again, as with everything when you dig deeper and look at the economic upside of jobs and investment you can see why Wisconsin or quite frankly any state would come to the table so aggressively. You know, I guess one of the things I try and do is remove all the zeros and think about it in simple terms and you know this is simplifying it perhaps too much but Wisconsin is getting $10 and their giving back $3.”

Nope.  That is not correct.    The only ROI measure that works for government investment into economic development is incremental tax dollars.   Comparing the $10 billion investment to the $3 billion in tax incentives is like a company comparing revenues and profits – they are related but separate concepts.

This Reuters article makes the point.  Based on the scenario outlined, the article says the state might not break even on the $3 billion for 25 years in terms of incremental state taxes.

Economic developers cannot miss this fundamental point.  The only ROI that matters is “for every tax dollar we pay out, how many incremental tax dollars will be generated?”.

The public purpose of economic development is not jobs or investment or new plants.  It is to drive economic activity to ensure there is enough tax revenue to pay for good quality public services and public infrastructure.  That’s it.  If a government dips into the tax coffers and spend $1 million to attract a firm and the tax revenue from that firm over 10 years is $5 million – that means for every $1 in you get $5 out- that is an ROI.

Although, as an aside, there are other public ‘costs’ to having that company in your state.  It will have trucks beating up the roads, it’s employees will have kids in schools and they may use public health care – you get the point.  In the example above, the calculus is really: $1 million worth of incentives + $2 million worth of public ‘cost’ over the ten years – to generate $5 million in incremental taxes for a real ROI of 0.66 – for every dollar we put in, we generated an incremental $0.66 in tax revenue above the cost of the incentives and the public costs associated directly with the project.

I’m all for attracting big plants.  I think it will help put Wisconsin on the map and may yield benefits not yet quantified.  But if we move to a world where we don’t care about taxes-based ROI – I think we are heading into dangerous territory.  I remember when the big auto manufacturing plants were getting $200 million and $300 million back in the 1990s there was outrage- but there was a clearly definable tax-based ROI over 10-15 years. Auto has a huge supply chain which helps.

And as for economic development experts and consultants, they are not doing the public any favors by spreading this nonsense about “Wisconsin is getting $10 and their giving back $3.”

This is very bad grammar, it is even worse economics.