I’ve blogged a few times about the use of investment incentives to attract firms and retain existing jobs.  My quick take is that these incentives are generally ineffective in swinging investment and are too costly relative to the benefits.

This week Kentucky approved up to $17 million in state and local incentives to attract retain Houston based Westlake Chemical.   

Interestingly, Businessweek ran a brief story on the owners of this company last month.  While the story focuses on the family owners, I was struck by the incredible performance of the company over the past year (7x increase in stock prices, 17% rise in profits, etc).

I think the obvious point from this story is that incentives aren’t being used to prop up a struggling company.  These incentives are being targeted to this firm, most likely either due to threats to leave Kentucky and/or the desire of politicians to use these incentives to take credit for this investment.

Eddy Malesky (Duke) and I are working on a book project that examines global incentives for investment that I’ve discussed previously on this blog.  You can read a very short summary of a survey experiment we can ran for this project here.

Reading some press releases, often by US state governors, we struck by a common pattern.  Governord don’t hide the costs of incentives, they advertise the resources they used to attract investment.  We argue that this is inconsistent with campaign contributions or “fiscal illusion” arguments on politicians using taxpayer money for “inefficient redistribution.”

Kentucky is a great example of this general pattern.  In a quote for the article on the Westlake incentives, Gov. Beshear stated:  “This is an outstanding step forward for Westlake and a tremendous boost for the economy of Calvert City and the surrounding. Kentucky has built a partnership with Westlake and we’re thrilled to see this multi-million dollar investment in the Commonwealth.”

This statement only alludes to these incentives. On the governor’s blog, there are clear statements on incentives, including claims that incentives were important in keeping auto manufacturing jobs in Kentucky.

“I am proud of the efforts of myself and others – including former Mayor Abramson and Sec. Larry Hayes and other members of the state Cabinet for Economic Development – to work with Ford to negotiate the investments and to set up incentives to help make the expansions successful.”

A quick examination of the Governor’s website and the other related organizations for economic development yields the same pattern.  You see an announcement about the Governor welcoming an investment or expansion and then a statement about the incentives used to attract or retain the investment.

To be fair, this is a cherry-picked example of incentives, but I didn’t have to look very hard.  A total of 131 incentives where accounced in Sept and Oct.  $17 million was on the sixth largest thus far (the biggest incentive was a $50 million loan for auto production in Michigan) and 15 deals topped $5 million.  My point is that this illustrates a general pattern we found in our research.