Foxconn deal: Why Wisconsinites should be skeptical
By ANDREW HANSON
Courtesy of the Wisconsin Policy Research Institute
The potential for the Foxconn deal to provide a boost to Wisconsin’s economy and the excitement provided by media coverage make it difficult to think objectively about the deal. It is referred to as a “linchpin” investment, the “first domino” in a line, “a game-changer” and “transformational.”
But Wisconsinites need to be asking, “Is this a good deal for us?”
The truth is that we are not likely to know the answer for a long time — an analysis by the nonpartisan Legislative Fiscal Bureau suggests Wisconsin’s $3 billion investment may not pay off for a quarter-century. But there are reasons Wisconsinites should view the deal with a high degree of skepticism immediately.
• The $3 billion incentive package being offered to Foxconn Technology Group of Taiwan could instead be used for other economic development that may have more impact on Wisconsin’s economy over the long term. Most of that $3 billion is being promised as refundable tax credits over 15 years — meaning that the state will be making cash payments to Foxconn to offset payroll and capital investment that do not depend on Foxconn’s profitability as a business. These dollars instead could be returned to taxpayers or used for other economic redevelopment policies, perhaps those that level the playing field for all businesses — such as cutting corporate taxes, improving general infrastructure or encouraging entrepreneurship, all of which have a good track record of creating long-term growth.
• There is a high degree of volatility in the success that similar agreements have had on other local economies. Even the most optimistic studies find positive effects in only about a third of cases, with other cases showing either no discernable or negative effects. No matter what current projections might say, the truth is that there is uncertainty as to where in the spectrum Foxconn will fall. Adding to the volatility for Wisconsinites is that a successful deal hinges on Foxconn’s success as a business — something that depends on market forces that are nearly impossible to predict. We cannot know what future demand for Foxconn’s products — such as the LCD screens it plans to manufacture in Wisconsin — will be, what competition it will face and what other challenges it may encounter in the future.
• Even if Foxconn continues to be a profitable company, the hope that the deal will provide more benefit to the Wisconsin economy than alternative policies is largely based on something called the economic multiplier. The idea is that for every job created at Foxconn directly, some multiple of jobs will be created in the local economy through an impact on local supply chain, local retail and service establishments and general growth in productivity. Projections showing Foxconn employment in Wisconsin at 13,000 with total employment at 35,000 imply a multiplier of about 1.7. This is an extremely generous estimate. Many studies of similar deals find multipliers of zero, with some studies finding negative multipliers as the new employer hires away workers from other companies in the area. Even the most optimistic studies find only a multiplier of one for the skill level of jobs promised by Foxconn. Admittedly, multipliers for high-tech employers can be larger, but they are idiosyncratic, highly dependent on interactions with the existing economic base and, most important, uncertain.
• Citizens should question how offering the deal to Foxconn might affect the relationship between the state and other large employers. Why shouldn’t Kohl’s, Harley-Davidson, MillerCoors and others expect a similar deal? Maybe it would be in their best interest to see if other states would offer an incentive package if Wisconsin isn’t willing to do so.
• The physical enormity of the proposed Foxconn plant is an irreversible investment, and a large one at that. Once the plant is built, and the surrounding land and water used for industry, it is hard to imagine that it could be used for anything else. This isn’t a problem if the plant continues to operate, hopefully at full-employment capacity, but there will come a time when that is no longer the case. What happens to an empty 20-million-square-foot, specially built manufacturing facility? One needs to look no further than the abandoned 3.5-million-square-foot Packard plant in Detroit (empty since 1956) to get a haunting glimpse of the possibilities.
The Foxconn deal has some appealing qualities — production of a well-known, high-tech product, the promise of thousands of jobs — but, ultimately, it is filled with too much uncertainty to be good for residents of Wisconsin.
Andrew Hanson is an associate professor of economics at Marquette University. His research focus is in public finance and urban economics.