State economic incentives: no bottom line?

Sen. Aldo A. DeAngelis had had his fill of second-guessers. He and other members of the Legislative Audit Commission had listened to two hours of testimony on the management of the state's economic development program. Now here was some professor, from Missouri no less, saying it wasn't such a good idea for the state to pay to keep Sears in Illinois. The Olympia Fields Republican from the 40th District finally exploded in frustration: "I guess you could have said to Sears, 'suck wind,' and see what happened."

Professor Charles Leven's argument was that Sears, Roebuck & Co. might have hustled the government out of a $61 million incentive package, tax breaks and development benefits by simply threatening to move its Merchandise Group to North Carolina or Texas. Leven teaches economics at Washington University in St. Louis, and he's concerned about using public money to influence corporate decisions, a tactic widely employed by other states as well. But it was Leven's implication that the state had been snookered, that maybe Sears had had no intention of leaving anyway, which finally pushed DeAngelis' patience to its limits.

The bipartisan commission had ostensibly scheduled its July meeting to review Auditor General Robert G. Cronson's highly critical examination of the operations of the Department of Commerce and Community Affairs (DCCA), the agency responsible for building Illinois' business climate. Cronson charged that DCCA had an incoherent policy for offering financial subsidies, failed to investigate some companies' credit-worthiness, gave some companies incentives they didn't need and overestimated the creation of jobs. One of the central issues was a charge that the state spent $86,669 per job at Diamond-Star Motors Corp. at Normal, far exceeding DCCA's $5,000 figure guideline. DCCA Director Jay R. Hedges estimated the true figure of public money expended closer to $29,000 per job —a price he believed worth paying to land the 2,800 jobs promised by the joint venture between Chrysler Motors Corp. and Mitsubishi Motors Corp. of Japan.

But the subtext of the contentious hearing was Republican Gov. James R. Thompson's practice of offering financial incentives — including outright grants, loans and various tax abatements — to corporations to lure them to the state or to convince them to stay. It was apparent throughout the discussion, however, that the economists, the auditors and the politicians were using different balance sheets. Economists, who contemplate the big picture, have the luxury of remaining detached from day-to-day decisions, and auditors zero in on specific numbers. But politicians are forced to strike a balance between public policy and constituent pressure. That pressure was intensified because the audit was released just as candidates jockeyed to replace the retiring Thompson. Thus the conundrum over economic incentives was hurled into the 1990 campaign as Democrats challenged the development strategies of the Republican era.

Politically, no elected official would be willing to risk losing a company like Sears. And they have measured winning by its euphoric psychological effect, not by a ledger sheet. "We would have lost a symbol of what Illinois has been," Thompson said. Irving Rein, a Northwestern University professor of communications studies, agrees: "There are some symbols of places that you just can't give away, that you simply have to fight for." Rein is writing a book, Place Wars, on the subject of competition over economic development, along with Donald Haider, who once ran for mayor of Chicago, and Philip Kotler, a marketing expert in the Kellogg Graduate School of Management at Northwestern. Rein said that if the state believes it can't afford to lose corporations to other states, the reason goes deeper than the public's pocketbook. He points to last year's legislative battle — and subsequent victory — to keep the White Sox from moving to Florida as another example of the importance of symbolism in so-called place wars. "We couldn't bear the loss of the Chicago White Sox, even if it meant economic sense," Rein said. "It wasn't so much the jobs that the White Sox would save. Having two major league baseball teams defines you as a world-class city."

Whether economic or symbolic, in fiscal year 1990, the state and federal economic incentive program in Illinois will total about $111 million for the Department of Commerce and Community Affairs, Hedges said. That figure counts about $65 million (including $33 million for the Sears deal) from state general revenue funds, $7 million from Build Illinois money for small and large businesses and $29 million in federal funds for the Community Development Assistance Program. In addition, DCCA oversees $220 million in federal funds for the Joint Training Partnership Act, Hedges said.

The governmental scramble for business is nothing new. As early as 1791, New Jersey granted corporate tax exemptions to stimulate investment, according to J. Fred Giertz and David L. Chicoine, University of Illinois economists who authored an article on incentive competition. A century ago Illinois

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settlements, struggling to survive, tried to attract business by competing for railroad routes. In recent decades, the increasing use of economic sweeteners has led to the modern equivalent of the war between the states. "At least temporarily," Giertz and Chicoine write, "the pace of events has outstripped the ability to understand and evaluate the situation." Nationwide, economic incentives and various promotional activities have become a billion-dollar battle, a battle some critics believe makes business the ultimate winner.

Even Thompson has raised some concerns: "I think states are finding out that these so-called border wars are getting very expensive. And companies are, in some instances, taking advantage of them. If we could find a way for all of us to cut back at once or to quit at once, I'm sure we'd do it. But nobody wants to be the first to let go of the economic incentive package that may send a plant that was destined for Illinois to Wisconsin." Hedges conceded that the strategic value of using incentives needs to be re-examined. "I personally don't feel we're going to be in the same kind of climate in five years," Hedges said while announcing his plans to take a private sector job. "I think we've sort of reached the peak of effectiveness of large incentives." In fact, more policy analysts across the country are saying that "smokestack chasing" has become passe. High-profile projects like that with Sears, Hedges said, probably will result in a "public backlash and a reassessment of whether or not those [strategies] are effective."

Most states offer a range of incentives, according to Blaine Liner, director of the Urban Institute's state policy center in Washington, D.C. Nearby Indiana and Ohio, for example, also have reputations for aggressiveness. But, Liner said, Illinois has as many — or more — incentive packages than most. And that makes plenty of mayors and business leaders around Illinois happy. Decatur Mayor Gary Anderson said such financing is the trick to creating jobs. "DCCA's loan program," he said, "has been that final 10 or 20 percent financing that's necessary to make a business work. I may not like the atmosphere that we have to compete in. To compete, we've got to beat the competition."

For the scholars at the Chicago-based Heartland Institute, economic incentives are a zero-sum game that creates no wealth. To subsidize some business, this argument goes, the state has to tax other businesses. But Greg LeRoy of the Midwest Center for Labor Research at Chicago would simply attach a few strings. LeRoy calls for formal contracts mandating companies to pay back the value of incentives if they fail or renege. European countries, for example, routinely have required these guarantees. For Thompson, however, that's "more show-biz than reality. We haven't had enough bad experiences in Illinois economic development policy to be worrying about that as a priority at the moment. Neither Sears nor any other corporation in America can guarantee what its employment is going to be five or 10 years from now."

Unless there is a major financial disaster, Illinoisans may not find out exactly what economic criteria politicians eventually could agree upon. Even without a crisis, Hedges said the debate about incentives should continue, and the gubernatorial election campaign is the appropriate forum: "Certainly, with the governor choosing not to run again, it's time for a new administration to assess the needs of the economic community in Illinois and determine a new strategy and a new path."

Secy. of State Jim Edgar, the leading Republican candidate for governor, said: "It will be very difficult, if not impossible, for Illinois unilaterally to end economic incentives, and I would not take such unilateral action. However, I would work to persuade other governors that we should call a truce — or at least agree to a more limited war. But I must say that some of the most vocal critics, including my opponent, were silent while the Sears package and others were being approved by the General Assembly. And they would have been among the first to criticize the Thompson administration if Sears had left Illinois."

Atty. Gen. Neil Hartigan, the Democratic gubernatorial front-runner, is the most visible opponent (although he is just one of many Democrats lining up to bash Thompson and attach his policies to all Republicans). In launching his campaign, Hartigan wasted no time calling for the dismantling of DCCA. To keep Sears, Hartigan said, he would have deployed a team of congressmen and corporate leaders to help persuade Sears to stay. Further, he would have asked consumers to join him in a statewide vigil to destroy their credit cards: "You would have heard a rip that would have gone across this state — from a consumer marketing point of view — that would have been unprecedented in this country. And I'll bet you one thing. They wouldn't have left Illinois."

Thus the timing may be right to reconsider economic incentives. But not many lawmakers — Democrats or Republicans — are eager to be spoilers when jobs and benefits for favored businesses are at stake for individual legislative districts. Auditors and economists want to create an economic incentive equation that works without politics in Illinois. But sterile textbook theories that subtract the politics won't work. DeAngelis underlined the conflict at the July commission meeting. "I think the failure of this [DCCA] audit," he told the auditors, "rests in the inability to recognize the role of a public agency in a private sector activity by completely overlooking the political ramifications that are involved. "□

Peggy Boyer is Statehouse bureau chief for Sangamon State University's WSSU-FM, the anchor station of the Illinois Public Radio Network. Ray Long is a Statehouse correspondent for the Peoria Journal Star.

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