How Not To Do Economic Development

Camden is one of the most distressed cities in the United States, and if any city needs state help to build its economy, it’s Camden. While the state of New […]

Camden is one of the most distressed cities in the United States, and if any city needs state help to build its economy, it’s Camden. While the state of New Jersey has responded, the way it has done so adds up to one of the most egregious examples of misuse of economic development incentives in recent memory. At the same time, it offers some useful lessons for thinking about urban economic development, especially about a concept that people working in this field don’t think about enough—opportunity costs.

New Jersey has created what it calls the Grow NJ program, a suite of incentives to encourage corporations to move into or stay in the state. It targets certain areas, with the most generous incentives offered for companies to stay in or move to the state’s four poorest major cities: Camden, Trenton, Paterson, and Passaic. So far so good.

Under this program, New Jersey has given out $1.1 billion in tax incentives to 16 companies in the city of Camden since late 2013. Five account for $900 million of this total, as shown in the table below. All are major, well-heeled corporations. With the exception of EMR, which is a scrap metal facility already located in Camden, all of the companies were already operating in nearby suburbs. The businesses are being paid nearly $400,000 per job, on average, to move operations 5 or 10 miles into new buildings in Camden, along with creating a few additional jobs once the companies relocate.

What’s wrong with this picture?

Since almost all the jobs are being moved from nearby suburban locations, one can reasonably assume that the existing workers will simply shift their commute to Camden from Cherry Hill or Moorestown. The likelihood of future jobs is uncertain, and in any event, most aren’t likely to go to Camden residents. Currently, seven out of eight jobs in the city are held by commuters, and as far as I’ve been able to tell from the documents available, none of these companies have to hire Camden residents for any additional jobs that were promised.

The EMR scrap metal facility is a special case. It employs 201 people, but available data suggests that only 40 or 50 are Camden residents. Moreover, this facility, which is located close to a low-income residential neighborhood, has been a source of residents’ complaints about pollution-related health problems for decades.

Subaru’s new office building, which is being built as part of a new secure office park adjacent to the Campbell Corporation headquarters, was described by a Philadelphia Inquirer writer as, “a lonely island in an asphalt sea containing 1,031 parking spaces.” On top of this, Subaru and the other beneficiaries of New Jersey’s largesse will pay no property taxes on the building for 10 years, and only pay full taxes after 20 years. On a $118 million building, Subaru will pay taxes only on the land, or about $100,000 a year for the first 10 years, compared to over $500,000 on the building it is leaving behind in suburban Cherry Hill.

The Holtec facility, rather grandly named the Holtec Technology Campus, is equally isolated on the site of a former shipbuilding facility along the Delaware River in the shadow of the Walt Whitman Bridge. It doesn’t do much for Camden. It’ll get a few shiny new buildings, but the company won’t be employing many Camden residents—hence the large parking lots—and it won’t be paying much in property taxes for the foreseeable future. People who work in isolated buildings like the Subaru and Holtec facilities are likely to drive to work in the morning, and drive out in the evening. The chance of much in spin-offs, even a sports bar or deli, is remote. Frankly, it looks to me like the state of New Jersey is more interested in looking concerned about the revitalization of Camden than it really is.

But there’s a more important issue here. That’s the question of opportunity costs. Let’s try a thought experiment. Assume that New Jersey (or any state) were willing to commit $90 million a year in state revenues for 10 years, as these incentives demand. Assume again that these funds could be used to support any economic development activity. The money could be used for job training, rebuilding infrastructure, providing direct grants, and/or leveraging private capital investment; or, assuming the state was willing to extend the commitment beyond 10 years, capitalized to create an investment fund of $1.5 billion to $2 billion. Under those circumstances, what benefits could be created for Camden and its residents? It’s pretty safe to say that the same level of state funds could yield vastly greater benefits than these incentives will.

It’s equally safe to say that New Jersey’s economic development planners didn’t spend much time thinking about opportunity costs, or if they did, their ideas got little traction with whomever made the decisions. But it’s a broader issue. As a field, we don’t do much evaluation of alternatives or weigh the opportunity costs of our decisions. Yet every choice we make has opportunity costs. Every day, the decisions we make—which neighborhood to target, which house to rehab, whether to use funds for houses or job training, whether to help elderly homeowners or struggling landlords, etc.—inevitably forecloses something else that could have been done instead. It's true that local practitioners may not always have choices because of the requirements of state or federal programs, but we owe it to our communities to be constantly thinking about this question, and constantly challenging ourselves to think about alternatives, rather than continue down familiar tracks.

For further information:

Changing Skyline: It’s What Makes Subaru a Tax Dodge,” by Inga Saffron. Philadelphia Inquirer, Aug. 29, 2015.

The List: Camden Banks on Millions in Tax Subsidies to Help Fund Its Future,” Tara Nurin. NJ Spotlight, Oct. 6, 2015.

Photo credit: Rendering of Subaru's office building in Camden. By Granum A/I.

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