Delaware Public Media

Q & A with Professor Jim Butkiewicz

Jun 28, 2010

A total of $41.5 million from Delaware's Strategic Fund sweetened the deals that lured Fisker Automotive here to build electric cars at the former General Motors site in Newark and persuaded PBF Energy to buy the troubled Delaware City refinery, potentially restoring hundreds of jobs that were lost when the two plants closed down. The Markell administration has leaned heavily on the Strategic Fund, administered by the Delaware Economic Development Office (DEDO), to help existing businesses avoid job cuts, and to attract new businesses to the state.

Yet not everyone is a fan of spending millions to attract businesses to the state. Responding to questions via email, Jim Butkiewicz, an economist at the University of Delaware's Lerner School of Business, characterized the administration's multimillion-dollar gambit for big businesses a "risky" strategy.

Q: What is your overall impression of Delaware's use of strategic funds?

A: States compete for businesses in various ways. Delaware creates a favorable environment for corporations due to its laws and legal systems and corporate tax rate options. Revenue is generated from the taxes firms pay to incorporate in Delaware. The FCDA created a favorable regulatory environment for financial firms, as well as favorable franchise taxes for the new banks. Again, revenue is generated for the state.

Strategic funds differ in that the state actually spends money in an attempt to develop new business. This is a riskier proposition because business failures will occur. Four of five new small businesses fail within five years after start up. So the question is whether the state is taking reasonable risks or high risks.

Q: Do you know of any research on the impact a new job in Delaware has on the economy?

A: Measuring the impact of new expenditures, economists use a concept call a "multiplier effect." The multiplier is based on the dollar value of new spending. Thus, the value of a job depends on the income generated. The higher the pay, the greater the impact. Generally for the national economy we assume a maximum multiplier of 2. So a job worth $20,000 may generate up to $40,000 of total income.

Q: Is it possible to quantify what each job is worth to Delaware's economy?

A: Delaware is very small; subject to considerable leakage. If the job created goes to a non-resident, the effect is smaller, perhaps much smaller. If a non-resident worker spends all of her income in her home state, the impact is much less than [a multiplier of] 1. Tax revenue will be generated, but not much else. Of course, reality lies between the extremes of 2 and close to zero. Overall, the average impact is probably greater than 1, but less than 2, likely much less.

Q: The strategic funds used for Fisker Automotive and the Delaware City refinery made big headlines, but how much of an impact is made on small businesses that receive money?

A: A new, successful big business will create demand for many small businesses. Small businesses may evolve into big businesses, but they don't create immediate demand for big businesses. As I noted, the probability of small business failure within five years is 80 percent. [But] the probability of big business failure may also be high. All new ventures are risky. In the economic literature, the benefit of this type of government spending is questionable.

Q: How significant is it to have these funds available to address a business like Fisker Automotive in a quick way?

A: I have serious concerns about the funds being given to Fisker. I have never been able to ascertain how much money the principles are risking on this project. Do they stand to lose money? If so, how much?

I think Fisker is very high risk. The price points reported for their vehicles are very high, way above what an average household can afford. I don't know where the demand will come from.

Also, in addition to the other firm attempting to develop an electric vehicle, Fisker is competing with all existing auto manufacturers. These firms are also developing alternatives to the traditional gas-powered automobile. Their futures are at stake, and they have considerable financial resources to invest in the development of alternatives. I question whether Fisker is a good use of taxpayer money. I think the refinery, while far less exciting, has a greater chance of sustained success.

Q: Are these funds more helpful for smaller businesses?

A: Not necessarily. As I have stated, these expenditures are risky. I have never been an advocate of subsidizing small business development. Small businesses develop in response to consumer demand.

Consider the restaurant business. Do we need to subsidize the development of restaurants? Of course not. The market supplies a more than adequate number of places to eat. The same is true for other types of small businesses.

Our economy, and others around the world, managed to grow and develop new businesses long before government subsidies. I have doubts about the usefulness of this spending. Of course the recipients, many well connected politically, will state the contrary opinion.