Tuesday, November 01, 2005

Does the US have STATE AID rules?

In my recent time in the US, it was notable that a lot of their economic development professionals work hard, and spend a lot of time and $$$ trying to lure mobile investment, and property developments into their patch. This is done with incentives, tax breaks, land deals, cofinancing, or tons of cash. Now - this led me to think - so they don't have State Aid rules then similar to the EU?

I have been advised that US guidelines are fairly weak. In all federal economic development programs, US states and local government authorities are barred from providing funds that lead directly to job displacement (i.e. moving jobs from one region to another). The purpose is to ensure that federal funds only support new job creation or job retention. Some (but not all) states have similar rules for intra-state job displacement. At the federal level, these rules are enforced in fairly strict manner. However, direct federal investments in economic development do not account for a very large part of activities in this field – it is mostly states and local governments who are active. Most of the money for economic development comes from states and localities and even then, the money comes from off-budget items like tax abatements as opposed to direct cash outlays. Like the EU, funds for worker training are exempt, and thus in the US it is possible to do the same things as were done in London with Ford. For recent new auto plants in Alabama and Mississippi, the major public investments were in the areas of training and local infrastructure (highway off-ramps, nearby roads, etc.). This money was primarily from the state, but the federal government did provide some workforce related funds.

Now this is interesting. But I believe that there is a good case for State Aid rules. Such incentives and deal brokering between localities can be a poor use of public cash. And its a pyhrric victory or zero sum game in the end in Europe.

However, anyone whose ever had to deal with State Aid issues knows its a f*cking nightmare (so I am told). First you ask the lawyers who tell you that it might be ok if an economist says there's market failure, and if you explain that you are an economist, they look puzzled... and so the dance begins.


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