The New Boondoggles
THE NEW riverfront park with the landscaped hiking trails, the downtown renovation, the convention center, the sports stadium with the attached garages and a mixed-use apartment complex — has it ever crossed your mind that they are all boondoggles?
Of course it has.
Economists have a nicer term for it. They speak of “rent extractions,” referring to the ability of officials to squeeze payments (seek “rents”) for favorable legislation. We call it press-release economics.
Whatever you call it , state and local governments spend more than $30 billion each year on economic development (eco-devo) incentives intended to influence location, expansion or job-retention decisions of private sector firms and to garner the subsequent political credit.
Russell Sobel of the Citadel and two other economists have surveyed decades of research on how that $30 billion a year is spent. Their conclusion:
“At best, these incentives are found to be weakly effective at job creation, but inefficient due to the distortions, secondary effects and increased rent-seeking they encourage with little public accountability.”
Wait, do we understand that right? All those billions didn’t create that many jobs? It gets worse:
“Once a state begins offering substantially larger development incentives, our results show that total organizational campaign contributions increase by approximately $1,067,500 in the average state. The gains come from construction and organized labor, business advocacy groups, and lobbyists and lawyers. These sectors either stand to directly benefit from the awards or represent firms in the political process. We also find a sizable electoral benefit for incumbent politicians; their median margin of victory increases by 7 percentage points after the large economic development incentives become commonplace.”
The Indiana Policy Review several years ago analyzed the filings for the four-year cycle leading up to a typical Indiana mayoral election. We identified the individual contributors as well as the owners or officers of companies that contracted with the city during or after that period.
Within industries, there was a strong correlation between the dollars contributed and the dollars paid in city contracts. Engineering companies, for example, had an R-squared value of 59 percent with a standard deviation of only 16 percent from the linear regression line.
The point is that these eco-devo projects are designed to reward politicians and their supporters. They aren’t designed to succeed as businesses — and they don’t.
Because the “profits” are distributed on the front end, it can take 20 years before a development falls flat on its face. A working example is the touted Circle Center Mall, a public-private partnership covering two square blocks of what should be prime real estate in downtown Indianapolis.
Twenty-five years ago, the $307.5-million, four-level mall was promoted as the magnet that would reinvigorate the city. But the development, politically managed and built on municipally owned (subsidized) land, has gone through refinancing and a string of owners and now is without an anchor or any serious tenant unless you count the Indianapolis Star offices.
The current owners describe their situation as “complicated” and are calling for more “public support” to avoid civic embarrassment. That means they will need more good public money to throw at a clearly bad business plan.
Ryan Cummins, an adjunct of this foundation and a former appropriations chairman for the Terre Haute Common Council, describes this as “painting the white elephant green” with yet more money borrowed from future tax revenue.
“The green slowly wears off over the years and they have to repaint it again and again,” Cummins quips.
At some point, silent partners might step in to buy the rolling disaster. They might pay, say, one-third of what the city and the other dupes have put into it. The rent extraction or boondoggle is thereby complete and the search begins for a new mark.
A poster boy for this economic strategy, Mike Pence’s director of the Indiana Economic Development Corporation, filed last week in the GOP primary for governor. Yes, the corporation is the arbiter of the state’s rent-extraction schemes. And yes, the election is almost two years away.
By the time we get there we’ll be lucky if our choice isn’t reduced to who can waste the most money “saving” our cities and towns. — tcl