Are Economic Development Incentives “Pay to Play” with Campaign Cash?

February 15, 2023

Two male wearing blue suits, they are doing a handshake.
Source: Khwanchai Phanthong via Canva

It’s a persistent question regarding economic development subsidies: Even though most studies don’t show incentives to be very effective, politicians and economic developers persist in using them, even increasing their use. What’s up with that?

The potential answers are numerous. One is direct self-interest by politicians (receiving campaign contributions) and economic development professionals (keeping their jobs). Another self-interest based argument, beginning with the work of Nathan Jensen and Edmund Malesky, is that voters reward governors with more votes when they try to attract investment using incentives. This holds true even if the incentive does not attract the investment: voters give governors credit for trying.

Jensen and Malesky found this result using direct surveys of voters around the country. However, they did not get the same result when they surveyed British voters. Nor did they get the same result when they worded the question to alert voters to the trade-offs inherent in subsidy use, particularly opportunity costs. But in a private discussion with GJF staff, UC Berkeley professor Cailin Slattery suggested that it is the rare newspaper that will highlight the trade-offs (such as schools, roads, or public health) in their reporting of a subsidy proposal, so voters rarely consider the trade-offs.

Today’s post focuses on studies using Subsidy Tracker to see how much campaign contributions affect subsidy use. All three papers I analyze emphasize the self-interest of politicians.

Russell S. Sobel, Gary A. Wagner, and Peter Calcagno identify 17 states that greatly increased their subsidy use, often into the $1 billion range for a single project, to see what happens to campaign contributions and incumbent politicians’ electoral outcomes after the spike. In the average state, they find that when costs of individual subsidy deals go up sharply, campaign contributions from organizations (unions, attorneys, and business organizations) increase by over $1 million. More strikingly perhaps, the median incumbent’s margin of victory increases by about 7 percentage points, they found. The authors argue that such effects may well explain the difficulty in reforming economic development subsidies.

Daniel Aobdia, Allison Koester, and Reining Petacchi focus instead on how companies benefit from campaign contributions. They find that state governments are more likely to allocate benefits, including subsidies, to politically connected firms. These connections are built with campaign contributions. Indeed, their analysis shows that firms contributing to state politicians are almost four times as likely to receive state incentives, and that their packages average 63% bigger than companies that do not make contributions.

That’s troubling enough, but the authors also find that connected, subsidized companies create fewer jobs and invest less than non-connected firms. As a result, subsidies to connected corporations are less effective: state governments pay more subsidies per job and per dollar of investment to politically connected firms. They conclude that subsidies constitute one way governments transfer money to the companies at the expense of taxpayers.

D. Brian Blank addresses the wider question of whether the ability to make political contributions increases shareholders’ wealth. He puts a fresh spin on the question, arguing that if contributions increase shareholder wealth, then reductions in contributions will reduce their wealth. He can test that theory because such reductions have been mandated by campaign finance reform laws in a little over 20 states.

Blank uses Subsidy Tracker data to document the subsidies received by firms that make campaign contributions, and finds that the biggest gains in stock prices occur at companies making the biggest donations. The author’s main test comes out as expected: Companies forced to reduce their campaign donations received less money in subsidies. He concludes that subsidies are an important element of how campaign contributions increase shareholder wealth.

Since we know from other research that stock ownership is heavily skewed by race (i.e., whites own a disproportionate share of corporate stocks), we can safely conclude that campaign contributions further widen the racial wealth gap in the United States.

Taken together, these three studies deepen our understanding of campaign contributions and subsidies. Campaign contributors receive more in subsidies than non-contributors, though they usually create fewer jobs. A state that awards a very large subsidy may set off a flurry of companies making campaign contributions seeking large incentive packages in the future. Campaign contributions appear to increase shareholder wealth, so given what we know about the racial distribution of stock ownership, subsidies are another cause of the United States’ racial wealth gap.

All the more reason we’ve been so proud of Subsidy Tracker since launching it in 2010!

Kenneth Thomas is a senior fellow at Good Jobs First and Professor Emeritus of Political Science at the University of Missouri-St. Louis.

This post is one in a series chronicling the ways academics have used the work of Good Jobs First in their research. We hope it’ll spark related and additional research, and show the practical ways our data can be used to inform debates and ultimately make economic policy more just and equitable.

Read more:

Good Jobs First Data Fuels Research on Subsidy Evaluation

Good Jobs First Data Fuels Research On Economic Inequality