Spending millions on tax incentives and grants to lure corporate giants is a shortsighted approach to economic development, according to an Atlanta entrepreneur who argued that sustainable jobs are only created from the bottom up.
Sanjay Parekh, organizer of the annual Startup Riot conference in Atlanta, conceded that large factories are strong short-term catalysts but said they only provide temporary job gains while increasing the risk to the local economy.
"It's just like financial planners tell us to do with our own finances, with our own investments - you don't put all your money into one company. You diversify it across," said Mr. Parekh, who created Internet technology that enables geolocation based on IP addresses. He sold his company, Digital Envoy, to Landmark Communications Inc. in 2007.
The focus on big job wins, while good for a community's public image, is bad for the nation as a whole, he said, citing a 2010 study of the Ewing Marion Kauffman Foundation, which found that companies less than five years old accounted for all net new jobs, while older corporations taken together were net destroyers of jobs.
For that reason, economic developers should "play the long game" when thinking about where to allocate taxpayer money, Mr. Parekh told Global Atlanta in a video interview ahead of the Georgia Mayors' Day Conference, where his comments will be used to spark discussion.
Instead of thinking regionally, which results in one community poaching jobs from another, economic developers should keep the health of the entire U.S. in view.
"If we look at it as the perspective of Americans rather than Georgians or Atlantans or Gwinnettians, paying money to move jobs from one place to another doesn't actually accomplish anything for us as Americans," he said.
According to a New York Times analysis, Georgia spends $1.4 billion a year on incentives, with the majority - $1.19 billion - coming in the form of sales tax refunds, exemptions or discounts. Economic developers might argue that these shouldn't count as lost revenue, since the company paying them out might not have landed in Georgia without the incentives in the first place.
Indeed, tax help played a role in Caterpillar Inc.'s decision to put a $200 million plant in Athens that will eventually employ 1,400 people. The company qualified for $77.7 million in state and local incentives, including $15 million in property tax abatements. The state's portion included $45 million in job tax credits and project grants.
The state has "claw back" provisions allowing it to reclaim incentive money if companies don't meet investment or job thresholds. But some grants spent on land and infrastructure can't be recouped if a company folds, and it's unclear whether incentives are worth the investment purely in terms of tax revenues.
States, cities and counties have to compete with rivals around the region, but that's the problem, Mr. Parekh said.
"It's like mutually assured destruction. Everybody just keeps upping the ante and the tax revenues just keep going down because of it, and if everybody disarmed at the same time, then these folks that are running these companies could actually make decisions based on the actual economic realities," he said.
Good Jobs First, an organization that often criticizes the use of subsidies, put Georgia among the top states engaging in what it called "interstate job piracy" in a recently released report. Rather than the Peach State, it should be known as the "Poach State," the report suggested.
On a positive note, he said governments are beginning to warm to the value of startups, as evidenced by the consolidation of resources under banners like Invest Atlanta's Startup Atlanta and the Gwinnett Chamber of Commerce's Gwinnett Entrepreneur initiative.
In addition, co-working spaces are sprouting around the city, creating the opportunity for "serendipity," chance encounters that lead to ideas and relationships.
What do you think? Are incentives worth the money, or are governments getting played by big corporations.