Why corporate welfare doesn’t boost employment

Pixar Animation Studios made no secret of why it chose Vancouver for its first international production office. Sure, the location was beautiful and the city boasted a bounty of educated and experienced workers. But it was the B.C. government’s aggressive new tax break for the digital film and animation industry that general manager Amir Nasrabadi said had made the city “a very cost-effective place to do business.”

At the 2010 press conference announcing the move, then-premier Gordon Campbell promised that the government’s plan to forgive nearly half the taxes on Pixar’s labour costs would be money well spent. He said it was the start of a partnership between government and industry that would last, “as Bud Lightyear would say, to infinity and beyond.”

Unfortunately for B.C., infinity lasted just three years. Last fall, Pixar’s parent company, Walt Disney Co., announced that, despite posting a US$1.6-billion profit that quarter, it was shutting down its Vancouver office, laying off 100 workers and shifting production back to its California headquarters in order to “refocus our efforts and resources under one roof.”

Pixar’s abrupt departure wasn’t the first bad news for B.C.’s film and video-game industry, which has suffered a steady stream of office closures since other provinces began luring the industry east with even more generous tax breaks and subsidies. In 2012, video game producer Rockstar announced it was moving from Vancouver to Toronto, thanks to a $2-million grant from the Ontario government.

B.C.’s experience is a harsh lesson in the high-stakes game of government incentives. Desperate to create new jobs at any cost, governments across North America have been offering an array of subsidies, tax breaks, and even free land and buildings, to companies willing to invest—even companies that are already posting record profits. The competition has only become more cutthroat since the global financial crisis put job creation and economic growth top of mind among voters. Yet research suggests the benefits of corporate welfare are, at best, fleeting and rarely successful in attracting high-skilled, high-paying jobs. Politicians may score points with voters when they cut the ribbon on a new plant, but many economists argue such incentives only serve to destroy competition, distort labour markets and inflict long-term damage on the economy.

In December, the Ontario government announced it would give Cisco Systems $220 million as part of 10-year deal to create 1,700 high-tech jobs in the province, even though the company reported close to $10 billion in profits last year. Four years after his company took billions in Canadian government handouts to stave off bankruptcy, Chrysler CEO Sergio Marchionne told the Detroit auto show in January that the automaker would need more money from government to expand production at its assembly plant in Windsor, Ont. “My advice to [government] is for all of us to do the right thing,” he said. Translation: More handouts, please.

South of the border, governments have become so aggressive in pursuit of jobs that subsidies often amount to hundreds of thousands of dollars per worker. The Chicago think tank Good Jobs First estimates that state and local governments shell out $70 billion a year in subsidies, including the record-breaking $8.7 billion in tax breaks Washington state offered Boeing last fall to keep production of its 777x jets in the state—a bidding war so fierce that competitor Missouri promised to rebuild a highway and expropriate a golf course if the company agreed to move. “I almost feel like opening a company, sometimes, just so they throw money at me,” says Dan Silverman, of Montreal economic development firm ROI, who works with governments in the both Canada and the U.S.

In the past, governments would typically kick in a small portion of a company’s total investment, between 10 and 20 per cent. Today, some U.S. states offer more than what companies themselves are willing to put in. That has put pressure on Canadian provinces to up the ante, even though provinces typically shoulder more burden for the cost of health care and social programs than their American counterparts. It has led to a string of high-profile job losses in Canada, as U.S. companies have closed their doors here in search of more generous offers back home. “I remember being in a competitive bid with a company, which ended up in a jurisdiction that put more incentives on the table than the value of the investment, which is outrageous,” says Sandra Pupatello, former Ontario industry minister, now the head of the WindsorEssex Economic Development Corporation. “Sometimes you have to step away. I have had to do that, and it’s really awkward and uncomfortable and you hope you’re doing the right thing.”

Canadian governments may have shallower pockets than their American cousins, but they have dug deep to stem the outflow of jobs. Since 1994, the three levels of government in Canada have handed out more than $200 billion in subsidies to businesses, says Mark Milke, a senior fellow at the Fraser Institute. The benefits from those handouts, he says, are usually felt only locally and are often short-lived. Bombardier has been one of the largest benefactors of the more than $34 billion that Industry Canada has handed out since 1961, according to an analysis Milke did last year of the department’s grants and loans. The company has received $1.1 billion from the department over the years, not including funding from other federal programs or provincial goverments. The company said the money was vital to ensuring its long-term competitiveness. Last week, Bombardier announced it was laying off 1,700 workers, including 1,100 in Quebec.

Despite its popularity as a job-creation tactic, corporate subsidies tend to redistribute jobs from one community to another, not create new ones, says Milke. Last month, Kellogg’s announced it was shutting down a plant in southwestern Ontario and shifting some production to a company plant in eastern Ontario that had received millions in provincial support. “People see the obvious and supposed jobs created when politicians cut a ribbon and give money to a particular company,” he says. “What they don’t see is the competitor across town, across a provincial border or across international borders, that lays people off.” Sometimes governments are so desperate to bring jobs to economically depressed regions, they ignore obvious warning signs. In 2011, Ontario gave $7 million to a new company called Global Sticks, run by a former restaurant-supply salesman from B.C., who promised to create 130 jobs in Thunder Bay by reshoring production of popsicle sticks and wooden tongue depressors from China. The factory operated for six months before running out of money. It declared bankruptcy, owing $15 million to creditors. The plant equipment is to be auctioned off next month.

Companies have become well-versed in how to play governments against each other, says Silverman. In a typical scenario, a manufacturer that wants to move to upstate New York will ask Ontario and Quebec for bids, even if it has no intention of investing in those provinces. What’s more, governments that advertise the most generous deals are usually the ones that end up attracting the worst kind of investments. “When we talk to a company and it tells us it’s looking to go somewhere based on the incentives, it’s almost a red flag,” Silverman says. “What usually ends up happening is something bad. The company says, ‘We’re done here; we’re going to the next place.’ We want a company that’s going to come and stay for 20 to 30 years or more.”

Despite the obvious risks, many officials insist the practice is so pervasive that governments have no choice but to play along. “You have to be in the ballpark in order to stay on the company’s list,” says Pupatello, who is also a director of business development for PricewaterhouseCoopers. “If you’re not at all offering incentives in any way, then you’ve lost them. You can’t even get to the point of telling them how wonderful you are and what a great workforce you’ve got and how your retention rates on your shop floor are better. It tells me you had better have an offering, or they just shut the door before you get started.” Pupatello argues that Canadian governments need to be even more aggressive in selling themselves to businesses. They must also convince the public of the long-term economic benefits that come from such investments. Chrysler’s demands for government assistance to expand production at Windsor might seem excessive for a company that received billions in government bailout money only a few years ago. But Pupatello argues that, along with the 5,000 direct Chrysler jobs, the investment would add nearly 14,000 jobs among suppliers in the Windsor region. “When you get the top dog at the top of the food chain in any sector, you may be supporting that top dog, but what you get for that is the whole tail,” she says. “You get the whole supply chain suddenly swirling around your jurisdiction that you didn’t pay for.”

While the benefits of government handouts to business remain the subject of fierce debate, corporate subsidies are almost always good politics. In 2010, researchers from Columbia University surveyed 2,000 American voters on their attitudes toward corporate welfare, and found they were actually far more likely to support a governor who had attracted new business investment by offering incentives than a governor who had landed the same investment without spending any money. “If you are a governor of a state and are certain that a firm is going to locate within your borders, offering a tax incentive gets you an extra 5.6 percentage points of votes from independent voters,” they found. Ironically, governors got nearly the same boost by offering money to companies they knew weren’t likely to invest in their state. Simply offering up cash allowed politicians to claim credit for new jobs, or defend themselves when they lost them.

Of course, governments can also get burned when their investments fail. Alberta largely exited the subsidies game after losing billions on loan guarantees in the 1980s and 1990s, says Milke. Former Nova Scotia premier Darryl Dexter was defeated last fall, in part because of a public backlash after his government gave $300 million in grants and loans to Irving Shipbuilding, which had just won a $25-billion federal contract. “Why would we be giving grants, free money, to large corporations who, in some cases, are doing very well, and try to lure them to our province, then get ourselves caught in a situation where we’re really competing with other provinces in a race to the bottom?” says Liberal Premier Stephen McNeil, who campaigned against what he called his predecessor’s “chequebook” economic development.

The province is struggling with a weak economy and massive debt, he said in an interview, and for too long has tried to support individual companies rather than develop broad sectors. He prefers a strategy where government helps fund workforce training and research and development as a way to draw private investment without direct handouts. While he’s prepared to lose some business, he hopes to attract new companies lured by Nova Scotia’s natural strengths: its higher-education system, a skilled workforce and a time zone that’s an hour closer to Europe than competing northeastern states.

But McNeil understands what his government is up against. “There’s a tremendous amount of pressure,” he says. “There’s a culture of [subsidies] being the only economic development strategy.” It’s a culture that’s unlikely to change anytime soon.