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Economic Development Incentives - Do They Work?
By Royce Hignight - Special to GCN    Filed 1/7/05     Updated 1/9/05

The January 2, 2005, issue of the Sun Herald carried a most timely, pertinent, and informative article on economic development by Arthur E. Foulkes of the American Institute for Economic Research  of Barrington, MA. The article was titled, "Economic-development programs rarely have lasting benefits.” Citizens and public officials of Harrison County and of the State of Mississippi should pay particular attention to the message in the article. The article points out, although billions have been spent by local, state, and federal governments for economic development, “it is not clear that these huge annual expenditures, which have been taking place for four decades, have produced long term measurable benefits

The article stated the goals of economic development are: (1) “To attract new businesses and industries to communities; (2) or to keep existing businesses from emigrating.”  The article states, "In pursuit of these goals they offer a variety of inducements, including direct subsidies, tax breaks, grants, loans, and infrastructure improvements." Economic development proponents, including those in Harrison County, claim that offering these inducements is vital to achieving those goals.

The article goes on to say, "Economic-development programs enjoy wide popularity. Yet the sad truth is: Government economic development programs rarely have lasting benefits-for the simple reason that they run counter to good business practices." 

The article goes on to say, "The most glaring flaw in these programs is that they increase a behavior known to economists as 'rent seeking,' a euphemism for business efforts to secure government favors.  Businesses pay lobbyists, lawyers and consultants large sums of money to help them obtain economic-development funds.  Unfortunately, this makes less money available for higher priorities, such as capital investment." In addition, this causes a strong imbalance of power in the political process, in favor of such businesses over ordinary citizens. This imbalance of power is, in effect, paid for with the public’s very own funds.

Perhaps the most important point the article makes is that incentives undermine capital investment. The article states, "Besides, when a business succeeds in gaining government favor, the recipient firm gains an unfair advantage over other businesses, both direct competitors and those competing indirectly for capital and workers." In plain words, the ability of public officials to selectively bestow discretionary benefits can easily lead to favoritism, cronyism, and corruption of the political process.

Several of the points made in the Foulkes article are exactly the same as some of the points made by the critics of HCDC.

There are many examples in government economic-development programs that illustrate points made by Foulkes.  One of the most notable was the big legislative fight that took place over the bonds that were authorized in the "special legislature session," called by Governor Haley Barbour according to a Sun Herald news article dated November 5, 2004, (remember this date) to consider $103.7 million in bond bills for economic development.

One of the local recipients of $40 million of these taxpayer funded bond proceeds is Northrop-Grumman, which is going to receive a total of $120 million over three years for expansion of the facilities. In return, Northrop Grumman is supposed to create 2000 jobs at its facilities in Gulfport and Pascagoula according to press reports.  With a little investigation at the Secretary of State’s website, one can find that several of the recipients of these bonds and other bonds had politically connected lobbyists working for them.

A Sun Herald news article dated November 23, 2004, reported that the legislature had approved a $456 million bond bill that included authorizations for the bonds for which Governor Barbour had called the “special session,” as well as for other items that were tacked on.  During the especially contentious legislative  special session, legislators from the coast area, namely J.P. Compretta, Diane Peranich, Frances Fredericks, and Dirk Dedeaux, all of whom who had opposed the original bond bill, were subjected to intense political attacks in the media, portrayed unfavorably by the media, and treated as if they had committed heresy for not supporting the bond bills.

The November 23, 2004, article, quoted Philip Dur, President of Northrop Grumman as having said, “Improving out shipbuilding facilities is good for Mississippi and the economic partnership we have enjoyed with the state will continue to produce expanded employment opportunities in the face of serious economic challenges.”

According to a Sun Herald article dated December 8, 2004, Governor Haley Barbour delivered a check for $40 million to Northrop Grumman.  The article said that “Northrop has promised to create 2,000 new jobs, a goal that company President Philip Dur said Tuesday should be easily met.” The article continued, “Dur thanked Barbour and the South Mississippi lawmakers on Tuesday and said he never doubted the state would come through because of Barbour’s leadership.”

According to a Sun Herald news article dated December 19, 2004, 10 days after Governor Barbour delivered the $40 million check to Northrop Grumman, an article titled, “Energy firms help power Bush inauguration, revealed that Northrop Grumman donated $100,000 to the Bush inaugural.”

In regard to the above mentioned job creation, a Sun Herald article dated January 4, 2005, is titled, "Defense trims Navy funds for destroyers," bylined, "Northrop Grumman not optimistic." Thereafter, The Times-Picayune carried an article in the January 6, 2005 issue titled, “Northrop may slash 2,500 Jobs.”  The article explained Northrop Grumman has two shipyards, along with smaller fabrication facilities in Gulfport, Mississippi, and Tullulah, Louisiana, which employ a total of about 20,000 people.  According to the article, Philip Dur, President of Northrop Ship Systems, predicted the number of employees would fall about 13 percent, to 17,500, by the end of 2007.  Dur was quoted as saying, “The peak that we are at can’t be sustained with the business that we project.”

A Sun Herald article dated January 7, 2005, titled, “Northrop laying off 120 in two weeks,” quoted Jim Cassady, Northrop Grumman Ship Systems’ vice president, “An overcapacity of approximately 120 workers in the drafting/design disciplines sectorwide were given notice today, with an effective termination date of Jan.20.”

In addition to getting public money from the citizens of Mississippi, the Times Picayune article also revealed that Northrop Grumman obtained public funds in Louisiana when the state and Northrop agreed to split the costs for $110 million in equipment and facility improvements at Avondale in August of 2003. In turn, Northrop promised to keep employment to at least 5,200 full-time workers through 2007. 

The Times-Picayune article also noted that recent commercial jobs at both yards have been costly and painful with losses of several hundred million dollars on commercial ships.  This poses a question.  Are public funds being sought to cover these losses? 

Apparently, Northrop Grumman may well have known in advance of the “special legislative session,” called by Governor Barbour on or about November 5, 2004, that there was the strong possibility that there would be budget cuts in the Department of Defense that would lead to cutbacks in shipbuilding for the Navy.

There was a news article dated September 7, 2004, in the Washington Post, titled, “Navy Plans to Buy Fewer Ships,” which said, “Squeezed by budget constraints, the Navy is proposing significant cuts in its shipbuilding program that could batter the already struggling industry.” The article went on to say, “The Navy’s cuts, if enacted, could lead to thousands of layoff’s and force a restructuring of the industry, said Cynthia L. Brown, President of the American Shipbuilding Association.  That would be in addition to the thousands of workers the industry was already expecting to lose through the end of the decade, Brown said.”

The article stated there are six remaining shipyards that are owned by Los Angeles-based Northrop Grumman and General Dynamics.  The article quoted Christopher Hellman, director of the Project on Military spending Oversight at the Center for Arms Control and Non-Proliferation as having said, “It’s too late to preserve competition in a market already split between two companies that often share the work rather than battle for it.” Hellman further said, “They argue that there is competition in the shipbuilding industry, but that’s a joke.” In addition, Hellman said, “Most shipyards operate at 50 percent capacity, leaving more than enough ability to accommodate the Navy if it unexpectedly needed to build 30 ships a year.”

Apparently Northrop was asked to comment on the Navy proposal.  The article stated, “A Northrop spokesman said it was premature to comment on the Navy proposal since it has not been finalized but added that ‘to preserve the industrial base, the Navy clearly needs to increase the number of ships it plans to build in the coming years.’”

It seems from the above, that the State of Mississippi may have bought a $120 million "pig in the poke," in the name of economic development or is there something the writer is unaware of? It seems there are questions, in regard to this expenditure of public funds, which need to be further examined. Were Northrop Grumman and the Governor aware that the Navy had proposed budget cutbacks that could lead to a demand for fewer ships that would lead to a need for fewer jobs at the shipyards while the public was being led to believe, at least by press reports, new jobs were going to be created if the bonds were approved? Were the Navy’s budget proposal cutbacks the big reason why a special session of the legislature was called in November 2004, instead of waiting for the next regular session in January 2005?

In any case, these bonds and the other expenditures authorized pursuant to the "special session," have set the stage, potentially, for one of the most contentious sessions ever in the legislative session that is just beginning with a $1 billion shortfall, exacerbated by the spending in the special legislative session.  Either current services and/or benefits will have to be cut, or taxes will have to be raised.

Another example of economic development going awry is an article that appeared in the January 3, 2005 issue of the Sun Herald.  The article is titled, "State-backed plant now deeper in debt," by-lined, "Newly disclosed expenses push tab to $51.4 million.”  This article details how the state through the Mississippi Development Authority guaranteed loans to a meat processing plant that was supposed to create jobs, but the plant is now unable to pay its debts leaving the taxpayers on the hook.  A Clarion Leger article dated January 5, 2005, reveals the potential taxpayer loss is at $54 million and climbing.  It has also come to light that the plant agreed to pay a $3.5 million consulting fee in March of 2003.

A Clarion Ledger article dated January 7, 2005, titled, “Deadline up; beef plant faces foreclosure,” reveals that the plant closed Nov. 17, and represents a setback to the state of at least $54.06 million.  The article went on to say, “State Auditor Phil Bryant has asked lawmakers to draft legislation to ensure state investments into private business ventures are handled in a more businesslike way, preventing such occurrences.”

According to the article, Bryant said, “I have sent a letter to the lieutenant governor and to the speaker of the House.”  “Bryant’s letter tells lawmakers to “set a higher standard of review prior to funding speculative projects for any individual or corporation.” 

“Bryant asked lawmakers to require of future applicants: A completed application with a detailed business plan including application with a detailed business plan including a resume indicating past work history relevant to the business being proposed; A credit review of the individuals and/or businesses involved; A market analysis by an independent firm with necessary expertise for the specific projects; An independent CPA firm’s review of the financial records of the recipients and, if applicable, any others providing funding to evaluate stability and accountability; Matching funds or a letter of credit for working capital and construction should be mandatory with any future alliances.” By implication, proper due diligence was not done on this project by state officials.

Asking for the above now is tantamount to, “closing the barn door after the horse is already out.”  The above requests are very elemental.  A financial institution would not even talk to anyone about a loan with out at least the above information and would probably ask for a whole lot more and then would closely monitor the situation.  The big question is, why did the State Auditor wait this late in making his recommendations?  The second big question is, was some body in state government so incompetent as to guarantee such a loan without the proper due diligence, or was there some other influence brought to bear?  (See Royce Hignight’s article, “Mississippi’s Open Wound"on this website).

The Foulkes article flat out states, "Government economic-development programs, no matter how well intended, operate counter to fundamental economic principles.” Those public officials and those seeking public funds must be held accountable for the subsequent consequences to the public.

One could write volumes of examples on the loss of public funds in economic development schemes, including right here in Harrison County.  Economic development has long been a sacred cow that is nearly always sold to the public as a means of creating jobs, which has always received broad support, escaping public and official scrutiny, while the true beneficiaries are often hidden from public view.  Likewise, the true cost per job, are hidden and the actual benefits are spun to look good to the public.

Foulkes offered advice that leads to real economic development while admitting the proponents of economic development programs would not like it.  His advice is: “government can best promote economic growth and prosperity by sticking to the basics: (1) Protect private-property rights: (2) Enforce the law;(3) Provide basic services;(4) Keep taxes and regulations to a minimum;(5) Lastly, government should get out of the way and let the economy work.”

Following Foulkes advice will not only lead to economic growth and prosperity, but will also insure that maximum public benefit is obtained for the expenditure of public funds.  In addition, there will be a gigantic step in the removal of the potential for favoritism, cronyism, and corruption from government, which will, in turn, attract reputable businesses and industries that contributes to the community rather than looking to take from the community. State and Harrison County officials should pay particular attention to Foulke’s advice and consider taking economic development in a fresh new direction, a direction that will produce real measurable results.


For more information see:

Navy Plans to Buy Fewer Ships - Washington Post - Sept. 7, 2004

GCN's Arrested Development Archive

GCN's Slippery Business Archive.

About the Author

Royce Hignight is a long time Coast resident and retired FBI Agent who spent much of his career investigating white collar crime and corruption in the state and area. He currently operates a private investigative and consulting service.

Hignight is among public and private citizens that have been campaigning for reforms in the county's leading economic development agency.

To Contact the Author: mailto:hignight@cableone.net

 

 

 

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