Foxconn's economic impact study fails to show the math

The Foxconn Technology Group project proposed for southeastern Wisconsin will generate a huge economic output, more than $7.6 billion per year once the sprawling manufacturing facility reaches full production.

The economic impact study that provided this figure came with a high status logo on its cover, too, that of the global accounting and consulting firm EY.

Given that big number, though, it's still far from a no-brainer for Wisconsin public officials to jump up and claim credit for this one. That's because the economic impact would be the same if Foxconn paid for everything with its own money. And it's not going to.

There could be more than $3 billion of Wisconsin taxpayer subsidies thrown into the project. Could all that subsidy, spread around a thousand Wisconsin businesses, generate twice as many good jobs as the Foxconn project?

What the people of Wisconsin needed was a cost-benefit analysis to answer that question. What they got was Foxconn's economic impact study — and few things are as useless as one of those when trying to make a good decision.

But these impact studies are enduringly popular. A huge number is exactly what promoters are eager to pitch when they go looking for taxpayer money.

"Our lawmakers, if they ever hear of an economic impact study, they should just recoil in fear," said John Spry, economist and finance professor at the University of St. Thomas. "They are being hoodwinked."

No one bothers to teach students in economics how to do one of these, Spry said, because it's hard to justify an analysis that omits the very fundamental idea of how much a rational person would be willing to pay for whatever benefit they got. He described, with genuine exasperation, some memorable economic impact studies he has seen crop up in recent years.

One was produced to show the impact of a proposed shrimp production facility in southwestern Minnesota. Sure, a new shrimp operation would have an impact on the local economy, Spry said, yet that doesn't mean it's a good use of taxpayer subsidies.

He also remembers the Minnesota State college and university system looking for consultants to provide economic impact studies for its campuses. Why are those good uses of time and money? All they would really prove is that the Minnesota State system spends a lot of money to run a college campus.

A community college or shrimp-growing facility are small potatoes, though, to what seems to be coming to fruition across the river in Wisconsin with Foxconn, and its announced plan to spend roughly $10 billion on a sprawling facility to manufacture electronics displays.

Foxconn, formally Hon Hai Precision Industry Co., is from Taiwan. The company mostly builds under contract the products designed and sold by others, including millions of iPhones and a host of other electronics products bought by Americans.

It's a fine idea for Foxconn to have a big plant closer to the end users of many of the products it builds. Wisconsin won the bake-off for the project with an eye-popping taxpayer subsidy package.

In addition to public spending for infrastructure, the state agreed that Foxconn will be eligible for tax credits of up to $2.85 billion based on employment and capital spending, spread over 15 years, and also will get out of paying some sales taxes.

This deal is roughly 50 times bigger than the next biggest taxpayer-subsidized economic-development deal for a manufacturer in Wisconsin history. The state usually provides 7 cents in tax credits for every $1 paid to workers. In this deal, Foxconn would get 17 cents in credits.

These tax credits are "refundable," too, which means the company doesn't need a Wisconsin tax liability to still get a tax credit. It will simply get a big check. That means Wisconsin taxpayers will basically be paying 17 percent of the payroll.

For economists like Timothy Bartik of the W.E. Upjohn Institute for Employment Research in Michigan, one big unanswered question is what other beneficial use the state could put $200 million a year to, rather than mailing it to the home office of a global electronics manufacturer.

The state might miss out on the economic benefits of having that $200 million go into K-12 education. Or maybe the Foxconn subsidies get funded by higher individual income taxes, costing the state the economic impact of money that won't be spent on home improvements, new cars or other household items.

The way you get to a bottom line on this kind of choice is to do a cost-benefit analysis. They sound costly and complex to do, but the concept is really no more complicated than just the "Is spending this money worth it?" exercise that business owners do all the time.

No business owner would be happy with just an economic impact study. Imagine the boss receiving a recommendation from the CFO to build a new facility for all the great benefits it would provide, but the memo didn't quite get around to saying it would also cost $10 million to build.

At least one head would roll.

Any analysis also has to acknowledge that there are lots of projects that could generate a benefit, but with limited money which ones should be funded?

On the Foxconn deal, Bartik has questions even about the more limited economic impact analysis. For one thing, a proposed factory complex so close to the Illinois state line seems to let a lot of the benefits go to the taxpayers of Illinois, who will pay nothing for them.

Bartik said state and local governments are actually getting much better at figuring out the true costs and benefits of tax credits and other incentives they dole out to companies. But in this case the state of Wisconsin hasn't shown its work on the "extraordinarily high" subsidies for Foxconn that are about six times the average government incentives for each new job, he said.

It's up to the state, he said, "to provide evidence that there are extraordinarily high economic benefits."