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Public subsidies have boosted development nationwide, including Pittsburgh. But are they a good idea?
Scripps Howard News Service photo by Darrell Sapp
Public subsidies have boosted development nationwide, including Pittsburgh. But are they a good idea?

Luring businesses
Do public subsidies pay off for communities? And if not, why do people still offer them?

By Bill Toland
Pittsburgh Post-Gazette

It might have been Phil Donahue, of all people, who introduced America to the concept of large-scale development subsidies, the type being offered to the Pittsburgh Penguins for a new hockey arena.

In February 1985, on the heels of a recession and a national downturn in manufacturing, General Motors trotted seven U.S. governors on stage during the “Donahue” talk show. Each begged GM Chief Executive Officer Roger Smith to build the company’s sexy new Saturn auto plant in his state.

New York even offered 100 megawatts of free electricity for 20 years in exchange for up to 6,000 promised Saturn jobs, while Minnesota presented $1.3 billion in incentives.

Bidding war

The bidding war, said Time magazine in June 1985, “has become a distraction and something of an embarrassment to GM.” The next month in the Los Angeles Times, an economics expert said politicians would have to re-examine their approach to wooing businesses. “The Saturn decision,” the expert said, “may be the last hurrah for such big bidding wars.”

Suffice to say that businesses no longer are embarrassed about cajoling for money, if they ever were. If it hadn’t occurred to CEOs before 1985, it certainly occurred to them after the circus-like Saturn scramble (Tennessee ultimately won the competition) — politicians are willing to do just about anything to create or preserve jobs.

Pitting states and even nearby cities against each other — or even against a city’s own sense of vitality and self-image — is an easy way to draw tax breaks, sweet financing deals and millions in construction grants, at the taxpayers’ expense.

“Once you get in the subsidy game, everybody else gets in line,” said Edward Lotterman, a Minnesota economist. “And some of the people in line would be building that project anyway.”

Tough questions

So here are the questions that are still tough to answer, two-plus decades after the Donahue Moment: Are these or any businesses worth such enormous public investments? If not, is it OK to sometimes make bad investments on behalf of the taxpayers if those same taxpayers also derive tangential benefit from the overpriced product?

Is it even possible these days to get something built without offering a big carrot first?

And if it’s hard to prove public subsidies are ever a really good deal, then why do politicians keep forking over millions? That last one, actually, is pretty easy to answer.

When politicians are cornered by campaign donors, rabid sports fans, powerful business leaders and trade unions that would benefit from the big construction jobs, “They say, ‘Look, I’ll play along ... And I’ll just keep my mouth shut on the economics of it,’ ” said Andrew Zimbalist, a Smith College economist who has made a name for himself by examining the economic impact of new arenas and sports teams.

“If you’re a business, you might as well ask,” said Robert Lynch, chair of Washington College’s economics department who spent 20 years examining studies on the effect of tax cuts and incentives on business decisions.

“(And) if you can get a million or $5 million or $10 million, why not?”

His conclusion after all those years of study is that many of the developers and businesses would have decided to build even without the tax breaks and cash.

“I wish politicians wouldn’t get involved in that game,” Lynch said, citing the economic theory of opportunity cost, which means money spent on one thing means opportunities foregone on other things.

Less for services

In many cases, he said, giving away cash in the present or deferring a business’s tax obligation into the future means the government has less money to spend on services, bridges, roads and schools, all of which he argued are a better investment for a city over the long term.

Sports venues are the biggest drain of all, most economists agree. Stadiums and arenas rarely pay for themselves — Pittsburgh’s Three Rivers Stadium, for example, cost $35 million to build, and 27 years later, when talks for a new football stadium and ballpark were under way, debt on the stadium was $41.4 million.

And unlike skyscrapers that may be underwritten with public subsidies, public arenas and stadiums almost never go on the tax rolls, meaning the city or county won’t recover the costs over time.

Of course, there is the hard-to-measure notion that being a “big league” city has some implicit value to the economy.

Spinoffs

Winning big projects, via subsidies, can sometimes unexpectedly create big free-market spinoffs — Toyota’s Georgetown, Ky., plant now employs 7,500, after initially starting as an $800 million factory employing 3,000.

Kentucky spent $325 million luring Toyota, but now the company pays more than $100 million in state taxes every year, and supports hundreds of new, nearby auto-parts suppliers.

Few in Kentucky would now say that the huge subsidies weren’t worth it.

But few were so sure in 1988. That’s part of the game.

“It’s what in game theory
is called ‘the prisoner’s dilemma,’ ” said Lotterman, the economist.

“If you think the other guy is going to do it, and if you’re a Pittsburgh and you are desperate for some jobs and some development, you have to do it, too.

CORRECTION

An article in Sunday’s edition should have said Alpine Management will receive $2.5 million in management fees over the next two years.

The Daily regrets the errors and is glad to set the record straight.

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