Sears and the race to the bottom

The Atlantic Cities ran an interesting piece today about corporate relocation battles. The short of it is that states compete with one another to bring in specific corporations by giving away huge sums of public money. Right now, Ohio and Illinois are fighting over the Sears corporate headquarters, with both states offering around $400 million of public money to the corporation. Incentives like these amount to around $50 billion a year in state and local spending.

This kind of spending is of course disgusting. But, it is precisely what you would expect to happen in a world where capital can roam freely among separate sovereign states. As noted in the above linked article:

“They persist because the states are caught in a collective action system,” says Kenneth Thomas, associate professor of political science at the University of Missouri at St. Louis. “They’d be better off if they all didn’t do it, but as individual entities they’d be better off if they made the offer and it was accepted. Everybody responds, so they’re all worse off.”

This is the classic race to the bottom, a form of the game theory problem known as the prisoner’s dilemma. It would be better for all the states to cooperate and not hand out money to big corporations than to constantly undercut each other and empty out their treasuries competing to bring them in. But, as long as one state breaks the cooperation and starts to provide incentives, everyone else has to or they risk all of the capital flooding out of their state.

Traditionally, you solve problems like this by forcing everyone to cooperate. In a system like the United States, that would involve the federal government disallowing practices like this. There is $50 billion in savings to be had per year if we could do that. This wont ever happen in the political climate of the United States, but that has everything to do with the right-wing obsession with local government.

In fact, as I have written before, the right-wing tries to intentionally keep the federal government from making nation-wide rules in order to force states to compete in just this way. Conservatives think that making states fight one another for access to capital will cause them to dismantle regulations, labor protections, and taxes. But, as the corporate incentives demonstrate, competition for capital does not stop at cracking down on labor and poisoning the rivers. Just as it makes sense for a state to dismantle environmental regulations to lure polluting firms from other states, it also makes sense to simply hand over money to firms to lure them from other states. After all, what better way to promise a greater return on investment than to just fork over cash money.

The end result of this competition among the states then is not a libertarian, low-tax, low-regulation paradise (hellhole). Instead, it is a federal system of independent corporate welfare states all of whom try to lure capital into their specific state by putting tax revenue almost directly into the pockets of massive corporations.