Saturday, December 13, 2008

Are foreign automakers in the South subsidized?

With Detroit getting criticism from free-market types for seeking government money, pundits on the left are pointing to the subsidies and incentives that foreign car manufacturers in the American South get. Jane Hamsher at the Huffington Post talks about her appearance on Fox Business where she said that subsidies to foreign automakers give them a "tremendous advantage" in the South – but is that really true? Surely the subsidies are real – Daniel Gross at Slate chronicled the rise of the non-union foreign auto plants in states like Alabama and South Carolina and notes the hundreds of millions of dollars in tax breaks and incentives that state governments bid to attract foreign automakers. But as for whether or not the special incentives are actually the reason the manufacturers locate there – that is, is it actually a "tremendous advantage" or just an unnecessary perk? – that's a different story.

As Rondinelli and Burpitt tell it in a 2000 paper on the impact of government incentives on FDI in North Carolina, the academic consensus is that these programs are largely just politicians trying to prove their usefulness to voters, and that special incentives rank very low on the list of reasons why foreign manufacturers actually set up shop in the South. The lack of unions and fewer labor regulations rank highest, followed by general business climate and access to transportation infrastructure (itself often a subsidy, but Michigan and the Rust Belt are just as well connected to rail and road networks). Marketing efforts by states, specific incentives such as state-sponsored job training, and tax breaks figure lowest in the decision-making calculus.

But there is one more subsidy that I've heard of – in the aforelinked Slate article, Gross mentions that "federally subsidized power from the Tennessee Valley Authority" is one reason why foreign automakers began building plants in the southeastern US in the 1980s. It is definitely true that TVA power – which accounts for a quarter of total American electricity generation – is heavily subsidized: Richard Munson notes that despite its terrible financial shape, the TVA has an AAA bond rating – a surefire sign that investors see it, like Fannie Mae and Freddie Mac, as essentially having the backing of the US Treasury, regardless of what the TVA's leadership would have taxpayers believe. Jane Jacobs, over twenty years ago, got into a NYRB-mediated spat with the TVA's chief economist, and said that "abundant and relatively cheap electric power [underpins] the TVA region's entire economy and standard of living." But this sounds like an exaggeration when applied to automakers. While buidling cars definitely relies more on electricity as an input than your average American service sector job, I doubt that the subsidy that industrial electricity buyers receive is enough to lead foreign car makers to choose the region over Michigan (as the TVA's Allan Pulsipher noted, the TVA's subsidies are given mostly to residential users).

So if Detroit's backers want to argue for the bailout plan, they ought to stop using foreign automakers' subsidies as an excuse for their own. It's becoming increasingly clear to me that it's the unions that have led American automakers down their present path, and it's the lack of restrictive labor laws that allows the South's car industry to thrive.


Anonymous said...

You are in error about TVA being subsidized by the government. TVA receives no money from the government and, in fact, is paying back money received from the government in the past - prior to 1957.

A former TVA Manager

Allen said...

"that is, is it actually a "tremendous advantage" or just an unnecessary perk?"

excellent question!

Raționalitate said...

The TVA might not have direct access to the Treasury, but they surely are subsidized. As the sources I cited noted, the TVA pays no state or federal taxes, and it receives loan guarantees from the federal government, meaning that it can borrow at lower rates than the private firms it competes against.

Ed said...

TVA make tax equivalent payments to the states it does business in. It paid almost 1 billion dollars in 2008. To say they don't pay anthing is untrue and misleading. I suspect the author convienently left this fact out.

TVA manager is correct, any money TVA recieved from the government is required to be paid back, with interest. TVA's financing is primarily through the power bond sales.