Tuesday, November 19, 2019

Amid budget shortfall, how much is Nashville spending on economic development incentives? Does it pay?

by Mike Reicher and Sandy Mazza, The Tennessean -  For the past 20 years Nashville's mayors have wooed companies here with promises of low taxes, a diverse economy, a creative culture — and more than $541 million of financial incentives.

Now Mayor John Cooper, who inherited a worsening budget deficit, has to decide how he will keep recruiting new jobs with tight finances. As he focuses on cost-cutting, one growing category is the annual impact of economic development incentives.

Metro has paid or lost out on an average of $31 million a year over three recent fiscal years, according to a Tennessean analysis of city records. That includes cash grants for jobs, property tax breaks, redevelopment loans, and entertainment subsidies for television shows such as "Nashville."

The annual impact climbed from $25.6 million in fiscal 2016 to $37.3 million in fiscal 2018, the most recent year of complete data available. (read more)

Rod's Comment: The measure of the economic impact of a policy or subsidy or development is hard to measure.  Having served in public office and having been a close observer of government for many years, I have come to the conclusion that the estimate of the benefit of a policy or expenditure is so much pie in the sky public relations.  It is about as reliable as picking a number out of a hat. 

Almost certainly, as an example, our funding of the TV soap opera Nashville, helped tourism. When people were thinking about where to go on a weekend vacation, some people might have thought about visiting Nashville, who would not have done so if not for Nashville being in their consciousness because of the TV show.  How much was it worth? I don't think anyone can say. The city provided $3 million in incentives and the State $5.5 million. The owners of the show estimated its first season impact at $75 million.  I think that is a SWAG- Scientific Wild Ass Guess.

What about the $17.5 million cash grant offer to Amazon?  They promise to create 5,000 jobs.  Is the grant worth it? I don't know but I doubt it. The number of jobs added is easier to measure than the economic value of favorable publicity, but the economic impact of those jobs is hard to measure.

How much do we benefit when we bring a company to town? We know they provide jobs but some of those jobs are people they transfer here. They are not hiring Nashvillians.  Of course, those jobs, even if they import the workers, causes economic activity. The new people buy homes and cars and groceries and everything else. Of course, that growth also comes with a cost; new congestion, and new demand for more police and firemen and all types of government services. They also increase the cost of housing and create a housing crisis and cause greater income inequality.   Growth does not always pay for itself. Growth does not come cheap. Nevertheless, it is better to grow than shrink.

When measuring the economic impact of a development or policy it reminds me of this story.  A growing company needed to hire someone in management to help with the companies finances. The CEO interviews three candidates, a mathematician, an accountant, and an economist. He interviewed them separately and asked each the same simple question. "What is two plus two?" he asked the mathematician. "That's easy," the mathematician replied. "It is four."

Next he interviewed the accountant and asked, "What is two plus two?"  The accountant said, "There is a 99 percent probability that it is four with a plus or minus factor of .2."

Then he interviewed the economist. "What is two plus two," the CEO asked.  The economist, glanced both directions, leaned forward, lowered his voice and said, "What do you want it to be?"

Take a companies estimate of their economic impact with a grain of salt. I would prefer that we had a free market and gave no incentives to businesses or sports teams. However, we can't unilaterally disarm.  As long as cities we compete with do it, we have to do it.  That is the way the game is played. But, we need to be judicious. I do not oppose all incentives and it is not easy to determine which ones are worth it and which ones are not. Without incentives we would not have a professional sports teams and I don't think there is little doubt that they have benefited the city.  We need to be careful though. With Tax Increment Financing and cash grants, and other incentives, we could be giving away the farm.

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