Rhode Island and Massachusetts Chase Private Jobs with Public Money

It rarely works, but that doesn't stop public officials from trying. In two New England states, the lesson is being learned once again.
by | June 25, 2013

The ribbon-cutting ceremony for a new business that has been enticed to relocate from somewhere else and boost local jobs is a seemingly irresistible lure for most elected officials. And two cases playing out in New England in recent weeks illustrate all too well what happens to the fish that lunges for what looks to be a tasty meal:

For a while, Rhode Island legislators seemed to have come up with a way to avoid the pain from the state's decision to plow $75 million into 38 Studios, the now-defunct video-game company owned by former Boston Red Sox pitching star Curt Schilling: They would simply refuse to pay back investors who bought the company's bonds.

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The Rhode Island Public Expenditure Council (RIPEC), a government watchdog group, didn't think that was a very good idea. RIPEC noted that it would probably lead to state bonds being downgraded and estimated that the resulting increase in borrowing expenses would cost more than the approximately $90 million in principle and interest for which Rhode Island taxpayers are on the hook.

Gov. Lincoln Chafee agreed with RIPEC. He's long warned that refusing to pay back the 38 Studios bonds would make future borrowing for roads and other state projects more expensive.

Moody's Investors Service, the Wall Street credit-rating agency, proved Chafee and RIPEC right. Last week, Moody's downgraded the 38 Studios bonds two notches and put the state's overall bond rating on review for a potential downgrade, noting that "an environment in which any debt service payments are considered optional ... undermines our confidence in the full faith and credit of the state."

The message got through loud and clear. The next day, state legislative leaders unveiled a budget that included $2.5 million for the initial payment to 38 Studios bondholders. It will spare Rhode Island from becoming the first state since 1865 to refuse to pay off its bonds despite having the money to do so.

Just over the border in Massachusetts, the final stretch of the campaign for today's special election to fill a U.S. Senate seat were roiled by a Boston Herald article about how one of the candidates, U.S. Rep. Ed Markey, had worked to funnel $35 million in public money into Telecom City, a development project in his Boston-area district that was supposed to attract at least 7,500 high-tech jobs. Seventeen years later, the project has attracted 300 jobs, none of which are in the telecom industry.

Both are classic cases. Rhode Island put up the money to lure 38 Studios over the border from Massachusetts, and Telecom City was going to use taxpayer money to unlock the pot of gold waiting just over the rainbow.

But the reality is that the overwhelming majority of new jobs come from startups and the growth of existing businesses. Special deals to lure businesses from someplace else rarely pay off because any jobs created generally amount to little more than a rounding error in the overall picture.

It may be too much to expect public officials to resist that jiggling lure, but the fact is that it rarely produces enough jobs to be worth the costs in taxpayer money. Creating jobs requires the much harder work of keeping costs down, taxes predictable and regulation under control while developing a public-education system that produces the talent that drives most successful companies

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