Big Business Payoffs Bring Few Results

Published August 21, 2013 at the Rock River Times

On the third anniversary of the Wanxiang solar panel factory opening south of the Rockford airport, Channel 23 News began its story with a sobering fact. “It’s been nearly three years since a solar panel manufacturer opened its doors in the Forest City, a facility that was supposed to bring hundreds of jobs.” In reality, they reported, the plant has only 13 employees. After the segment, newscaster Tina Stein turned to her partner and remarked, “Quite a difference from what was originally promised.”

In exchange for receiving at least $1.2 million dollars in tax increment financing (TIF) funds, $4 million in state grants, 10 acres of land (worth $650,000), and guaranteed government contracts, Wanxiang was supposed to employ 60 people in its first phase alone. “This is the perfect example of how the city and county came together to create jobs,” Winnebago County Chairman Scott Christiansen said in August 2010. Today, the solar panel manufacturing center is barely operational.

Wanxiang Group is China’s second-largest privately held company, with revenues in the billions of dollars annually. Its founder, Lu Guanqiu, is the 33rd richest person in China, with a net worth of more than $1.87 billion. Did Wanxiang really need a few million dollars in public funds to open a factory in Winnebago County?

Wanxiang has made much larger investments. The company recently spent $256 million to acquire A123 Systems, a US company that produced lithium ion batteries and owned patents for sensitive military and battery technology. A123 Systems went bankrupt despite $249 million in Federal funding for “green energy” research.

This fiasco is a good example of how throwing public money and other giveaways at a business does not always deliver the expected results. If you follow the news reports on Wanxiang’s solar panel factory closely, you can actually see the job estimate fall. On February 9, 2009, the Rockford Register Star reported that the project could potentially create 240 new jobs. That estimate fell to 200 one week later on February 18, and then to 155 on August 17, 2010. Only five and a half percent of the originally estimated number of positions is currently filled.

Despite repeated failures, politicians love these deals because they get to appear in front of news cameras and brag about how many jobs they are bringing to the region. When the cameras are gone, however, harsh economic reality sets in.

The truth about business is that no one can accurately predict success or failure because there are too many factors involved. A business can start with millions of dollars in capital, but if there is not enough demand for its product, it’ll never make a profit. This is all the more reason why we should never gamble with public funds on business ventures, no matter how many influential people promise success. Let them invest their own money in projects they believe are worthy, and let’s not socialize risk.

Instead, we can help established businesses improve. What would have happened if over $5 million in state and local funding were made available to businesses on Broadway Avenue (one of Rockford’s most economically depressed areas) instead of a multi-billion dollar Chinese conglomerate? Dramatic improvement would occur in a matter of weeks.

This money would not come in the form of a blank check, however. Commercial property owners would need to write a specific proposal for structural improvements and provide an estimate to the city. The city would then write the owner a guarantee for that amount, and he or she would use that guarantee to secure a bank loan. After the repairs are complete, the city would give the owner a check that he or she would use to pay back the loan. That way, funding follows results. This is not ideal (from a free market point of view) but it makes more sense than the current approach.

Does government spending create jobs and spur economic growth? Many elected officials believe it does, and they are ever-willing to shove millions of dollars in public funds into the outstretched hands of big business to achieve that result. Experience, however, teaches us to question the effectiveness of this approach. Results are rarely as advertised. Sometimes they are disastrous. Generally, I believe government should avoid becoming involved with business, but if we are going to spend tax dollars on economic development, that spending should be carefully targeted to where it can do the most good.