Foxconn as Alchemy: Magic Multipliers

The Foxconn plant isn’t even built yet, but the Walker Admin and its allies (including a few local apologists for corporate welfare in Whitewater) now resort to fantastic, magical claims about how much economic development will come from nearly four billion in taxpayer subsidies.

So magical, so fantastic, that they now claim an 18-1 multiplier (yes, really):

A fully built Foxconn Technology Group plant would add $51.5 billion to Wisconsin’s gross domestic product over the 15 years the state pays incentives to the company, a new analysis by the Metropolitan Milwaukee Association of Commerce concludes.

That would equate to $18 of economic impact for every $1 spent by the state, the business group, which worked to help attract Foxconn, said.

Averaged over the 15 years, the MMAC’s estimate amounts to an additional $3.4 billion annually in state gross domestic product from Foxconn. That would tack another 1% onto Wisconsin’s current GDP of about $313 billion.

A few remarks:

A Laughable Return. The MMAC analysis assumes a return that, in a first-world market, is both speculative (Foxconn doesn’t guarantee this) and too-good-to-be-true. One public dollar in corporate subsidies gets you 18? Did Bernie Madoff even promise a return like that?

Data Foxconn Itself Doesn’t Use. The MMAC analysis uses a 13,000 figure for Foxconn direct employment – Foxconn itself has never guaranteed that number, or anything like it. It’s all couched as ‘up to,’ ‘as many as,’ or ‘the potential to.’

Wisconsin won’t break even on Foxconn plant deal for over two decades sets the story straight:

And that’s still assuming that Foxconn actually creates the 13,000 jobs it claimed it might create, at the average wage — just shy of $54,000 — it promised to create them at. In fact, the plant is only expected to start with 3,000 jobs; the 13,000 figure is the maximum potential positions it could eventually offer. If the factory offers closer to 3,000 positions, the report notes, “the breakeven point would be well past 2044-45.”

The authors of the report even seem somewhat skeptical of the best-case scenario happening. Foxconn is already investing heavily in automation, and there’s no guarantee it won’t do the same thing in Wisconsin. Nor is there any guarantee that Foxconn will remain such a manufacturing powerhouse. (Its current success relies heavily on the success of the iPhone.)

A Self-Interested Study. MMAC isn’t an independent organization – it’s a group that “worked to help attract Foxconn.”

Fat Cats Are The New Alchemists. In 2009, Alan Reynolds rightly criticized, in Faith-Based Economics, wildly generous multipliers that Democrats used to justify big publicly-financed capital projects. It’s the GOP that now controls Wisconsin and federal spending, and they’re using the same bad arguments that Reynolds criticized in ’09:

Such reasoning lay behind the infamous “multiplier,” which the late Harry Johnson described as an “inexhaustibly versatile mechanical toy.” Because people employed in burying and digging up bottles will supposedly employ other people by spending their paychecks, the initial increase in government spending was thought to have a multiple effect on total spending. And that, said Keynes, will lead to an “increase in employment and hence in real income.” But checks received for producing nothing are not real income. Real income per worker depends on real output per worker – incentives to produce, not incentives to spend.

If there is no multiplier effect, the multiplier is one – a billion dollars of government spending adds a billion to national income, but no more. Keynes offered a hypothetical example suggesting the multiplier could be ten if people promptly spent 90 percent of added income on consumer goods. That is how he came to imagine that “public works even of doubtful utility may pay for themselves over and over again at a time of severe unemployment if only from the diminished cost of relief expenditure.”

Recent research finds multipliers to be very small at best, if not negative. In 2002, the IMF published “The Effectiveness of Fiscal Policy in Stimulating Economic Activity – a Review of the Literature” [link added] by Richard Hemming, Michael Kell, and Selma Mahfouz. They found that “short-term multipliers average around a half for taxes and one for spending, with only modest variation across countries and models.”

These MMAC  claims are political, not economic. It’s a confidence game, to dupe hopeful but gullible people into supporting incumbent politicians.

Here in Town. Whitewater’s had its own local version of this hucksterism for years, indeed about a generation. Flacks for fly-by-night tech ideas, nutty capital spending projects, and outside developers are just tricking ordinary residents into believing a string of false promises.

Instead of reasonable spending on behalf of good, local businesses and cooperative initiatives, one hears nothing but sales pitches for fancy-sounding tech fantasies and out-of-area developers looking to cash in their tax credits.

The city’s still struggling with this chapter in her history, much to the detriment of her residents.

PreviouslyFoxconn Destroys Single-Family Homes10 Key Articles About FoxconnFoxconn Devours Tens of Millions from State’s Road Repair Budget, and The Man Behind the Foxconn Project.

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