The siren song of industrial policy

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“New Megafab Will Create Nearly 50,000 Jobs” proclaimed Gov. Kathy Hochul and Sen. Chuck Schumer at an Oct. 4 press conference announcing an agreement reached with Micron, a U.S.-based memory and storage manufacturer and one of the largest producers of semiconductors worldwide.

Ulysses and the Sirens (Herbert Draper, 1909)

Building on the federal CHIPS and Science Act of 2022 (CHIPS being the acronym for “Creating Helpful Incentives to Produce Semiconductors”—oh, how clever…), New York has committed $5.5 billion in “performance based” tax credits under the state’s “Green CHIPS” program plus $200 million in infrastructure spending and promised access to low-cost power through the New York Power Authority. Onondaga County promises an additional $25 million for workforce development and other supports and commits to a 49-year payment-in-lieu-of-tax agreement affecting property and sales tax liability.

For its part, Micron promises 9,000 jobs and $100 billion in new investment over the next 20-plus years and agrees to use 100 percent renewable power “with preferences for in-state sources.” It will be, the company says, the biggest private investment in New York history—and the largest semiconductor fabrication facility ever built in the U.S.

That’s heady stuff. Gilding the press release lily, the state cites a study (using a REMI model) that predicts “transformative growth” over the first 31 years of operation involving nearly 50,000 total jobs, $5.4 billion in annual disposable income to New York residents and a total of $25.6 billion in revenue to state and local government. (Wow! State and local taxpayers actually MAKE money on the deal! What’s not to like?)

Celebratory press conference

Central New York (and most of the upstate region) has been languishing economically for years. Of the 100 largest MSAs in the country, the Syracuse MSA ranked 93rd in job growth from 2000 to 2019. Buffalo and Rochester hardly did better, ranking 89th and 91st, respectively.

Nor has performance through the COVID-19 era been any better. From the 2019 average through August 2022, all three ranked in the bottom 10, losing more than 4 percent of total jobs.

By piggybacking on the federal CHIPS and Science Act, New Yorkers are taking advantage of incentives funded by federal taxpayers. This is one of New York’s core competencies, to be sure.

Too good to be true?

Breathless pressers from elected officials deserve careful scrutiny, particularly when they justify a substantial payout by taxpayers.

Nine thousand jobs in semiconductor manufacturing is impressive, were it to happen. These would be good jobs. The state Department of Labor reports employment of 16,307 in 258 establishments in 2021, with an average annual wage of $95,558 (QCEW for NAICS code 3334). The global demand for semiconductors is likely to be strong for decades to come and New York has demonstrated its ability to attract and retain firms and workforce in this sector. It isn’t fanciful to believe that the state can increase its market share.

Are the incentives a “good deal” for the state’s taxpayers? Leaving aside the federal subsidies provided through the CHIPS and Science Act and considering just the 9,000 jobs that are “countable” at Micron, the subsidy per job is well over $600,000.

That’s a lot of money. Timothy Bartik, economist at the Upjohn Institute in Michigan, has spent his long career exploring this question. His analysis of the CHIPS and Science Act is worth reading. Writes Bartik: “Prior studies suggest that well-run economic development programs that provide services and infrastructure for business development can create jobs at a cost per job of around $55,000.” As he implies, the question is not whether public spending to stimulate local economies is appropriate, but whether there are less costly ways to invest our tax dollars.

That’s why the “nearly 50,000 job” figure is important. Swapping 9,000 with 50,000 in the “cost per job” calculation lowers the figure to $115,000 (still twice the figure quoted by Bartik, however).

Yet this figure is highly speculative. Having conducted economic impact analyses for over 20 years, I know well that results of such analyses are heavily driven by assumptions.

The model cited in the press release estimates offsite or “spillover” impacts. These are the more than 40,000 jobs that are not directly connected to Micron. Spillover jobs (and associated payroll) includes jobs at firms that are supplying Micron with goods and services plus employment at firms supplying goods and services to Micron employees. As these jobs cannot be directly observed, these spillover estimates depend on changing and unpredictable future events.

■ Jobs at supplier firms may or may not occur within the state—or the nation, for that matter. Contracts with firms receiving incentives can force “in-state” sourcing, but even this does not guarantee that the jobs will be in state unless the program implements a costly (and likely inaccurate) tracing regime.

■ No one even tries to monitor or direct the spending of employees. The continuing expansion of online commerce erodes an important connection between economic development incentives and regional impact.

The REMI analysis claims that the investment will spin off 4.6 spillover jobs for every direct job. Without descending too far into the wonky details, this figure is about twice what would be generated from a simpler model that assumes that the structure of the economy remains largely unchanged. This larger impact depends on the Micron facility spurring synergistic growth in the state’s economy. That’s possible, of course, but by no means assured.

The personal income figure—$5.4 billion—is surely inflated. At $108,000 per job, this is higher than the average wage in New York semiconductor manufacturing in 2021 (again, $95,558). The spillover jobs would have to pay better than the “core” jobs at Micron. Yet the jobs spurred by Micron employees would be in the retail and service sectors, typically paying about half that of the semiconductor manufacturing jobs. Are jobs at firms supplying Micron making up the difference? That is improbable.

Moreover, I find the use of 31 years peculiar. When assessing the economic impact of incentives, it is typical to match the time frame of the impacts to that of the incentives, which is 20 years, not 31. Did the model need to run that long to ensure that the “return on investment” for the public sector turned positive?

Finally, let’s remember that we are basing an enormous commitment of state resources on a forecast that extends far into the future for a technically sophisticated product in a fiercely competitive global marketplace.

Oh, but we’ve been assured that the incentives are “performance based”—Micron benefits only if they meet their commitments. First, remember that Micron’s influence on off-site jobs is limited, so performance metrics can only address the 9,000 jobs, even though the magnitude of the incentives can be justified only with the spillover jobs included in the calculation.

Second, there’s a long history of high-profile economic development deals being renegotiated when job creation falls short. The state comptroller’s office issued a report in 2020 that is highly critical of Empire State Development oversight of major projects. Of the RiverBend Hi-Tech Manufacturing Hub in Buffalo, for example, the comptroller’s office notes that job creation agreements were amended several times, reducing the number of jobs required for the incentives provided.

In 2018, the Center for American Progress posted an overview of what can go wrong when we use incentives to attract jobs, noting the temptation to elected officials when “short term political optics often outweigh reality.” Other questions about the Micron incentives are addressed in an analysis by the Empire Center for State Policy.

We can hope that the Micron investment will truly be our “Erie Canal moment,” as Schumer declared. History suggests that the claims made on the deal’s behalf are wildly inflated, however. The incentives offered to Micron by New York may have been needed to secure the deal, given how the CHIPS and Science Act has encouraged many states to pursue chip fabs.

Let us not forget, however, that the fabulous sums being promised could have been used for other worthy purposes or simply left in the pockets of taxpayers.

Kent Gardner is Rochester Beacon opinion editor. The Beacon welcomes comments from readers who adhere to our comment policy including use of their full, real name.

6 thoughts on “The siren song of industrial policy

  1. This was a stark reminder that the hype and the reality don’t always agree. Let’s all hope this works out at something greater than the average employee funding program.

  2. Governor Kathy Hochul will indeed live to see,…..
    That said, where have I heard that tune of prosperity before?
    ….and just in time for the 2022 mid term election.
    You have to give politicians credit, they know how to “buy” the votes.
    Stay tuned as this major announcement fizzles over time.
    But in the mean time, bragging rights are here for a month.
    Sorry, but we have been duped before and we are about to be duped again.

  3. Good analysis, as someone who spent their career in the Chip industry, I have a few observations. One of my major beefs with CNY besides its (confiscatory tax rates compared to other states) is its failure to attract industry to the state (and stop industry from leaving or thriving) . So they have now called my bluff here by “buying” some Chip industry jobs for the Syracuse area. At first blush I was happy to hear this, finally a reason for someone locally who gets a Regents diploma from HS to go on to college and get themselves trained for one of these future jobs (instead of leaving the state). I was good until I read the price tag, $600K taxpayer subsidy per job created? WTH? (setting aside for a moment, that stuff usually happens when executing these deals and the job targets are rarely met) . That seems a bit steep to me. Next we still have (by most accounts) a well thought of SUNY University system as well as Cornell, Ithica, RIT, Rensselear etc come to mind. However if you look at a Oct 11 article in the D&C, titled “Deficit Ridden Institutions” that system is arguably broke. Also I read there are moves afoot to eliminate the NYS Regents program for high schools. (A big mistake IMO, especially if your education goal is to train for STEM careers) I also have to ask, if the taxpayer has to shell out $600K/ job, shouldn’t the same taxpayer be asking what’s so unappealing about CNY that we have to pay such a amount to get some decent jobs here? There are many other issues here, but I’ll only mention 1 more. The Chip (Semiconductor) industry is generally thought of in peoples unconscious minds as “clean industry”. I can assure you it is not. Wafer Fabs utilize Acids, solvents, photo resists , boron, phosphorous, and sometimes arsenic. All which has to be disposed of. In the old days, they dumped it on site. Now they pay a disposal entity to haul it away in barrels where it ends up injected into deep wells (remember all the hullabaloo about fracking in NYS because it injected relatively benign chemicals into the ground? Looks like if they had offered $600K / job we could of proceeded with harvesting NYS riches in Natural Gas and generated some less costly jobs that way) . Btw the manufacturing process I described is very similar to what is used to manufacture solar panels (another clean energy fallacy). For $600K a job, I hope we get a better CNY economy out of this . Count me as skeptical…..

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