The Con in Foxconn

Wisconsin
How economic impact studies justify the transfer of wealth from
taxpayers to corporations

By Lawrence Tabak

September 21, 2018

his summer, the roar of bulldozers replaced the sound of tractors

T over thousands of agricultural acres outside of Racine in

southeastern Wisconsin. Road, water, and electricity infrastructure
construction was well under way for a new industrial complex for Foxconn,
the Taiwan-based technology giant. In the project’s master plan, Foxconn will
eventually own 4.5 square miles of once-prime Wisconsin farmland, an
expanse about a fourth the size of the city limits of nearby Racine, population
77,000. The main 24-inch water main will have the capacity to deliver more
than 20 million gallons a day of high-quality Great Lakes water (home to 21
percent of the world's remaining supply), although initial usage has been
promised to be much less. Foxconn has pledged to be good environmental
stewards, even as Wisconsin has waived many of its basic environmental
regulations in order to expedite the project.

The company has promised to build a $9 billion to $10 billion sprawling

industrial complex which will employ “up to” 13,000 workers in jobs the
Wisconsin Economic Development Corporation (WEDC), the state’s semi-
private economic development commission, has repeatedly described as
“family-supporting.” Most of the attention has been on the proposed first
North America–based LCD panel manufacturing plant, described by boosters
as a state-of-the-art automated factory that will producing next-generation
large-scale screens for TVs and other consumer applications. More recently,
Foxconn has confirmed reports from the Asian press that revised plans call for
a more modest factory making smaller screens. Foxconn’s initial construction
project scheduled to begin this year is even less ambitious, designated as a
massive low-tech assembly operation, putting together TVs and other
consumer products using imported screens.

Wisconsin taxpayers will end up sending some

$3 billion to the company.

Industry experts put the employee count for even the original large-scale LCD
manufacturing plant at 2,000, just 15 percent of Foxconn's promised
workforce. Foxconn’s original plans estimated that three-fourths of its
workforce in Wisconsin will be hourly, a pattern that fits the company’s core
expertise: assembling iPhones and other electronic devices. For 15 years,
Wisconsin taxpayers will be subsidizing Foxconn’s payroll for employees
making at least $30,000 to the tune of 17 percent, while capital costs over the
first seven years of construction will receive a 15 percent rebate. Should
Foxconn hit its capital expenditure and employment targets, Wisconsin
taxpayers will end up sending some $3 billion to the company. While state-
level support is touted as tax relief, in fact Wisconsin has already waived
almost all of the pertinent taxes for businesses. The taxpayer-funded $3 billion
in incentives (the largest ever to a foreign company) will be paid largely in
cash. The local municipalities are chipping in another $764 million via a tax
increment financing (TIF) project so large that the state legislature had to pass
a waiver, since this amount far surpasses the statutory prudence level of 12
percent of existing municipal property values. Additional taxpayer-supported
costs have put Wisconsin's total outlay at well over $4 billion, more than
$300,000 a job. How expensive is this?

As Jeffrey Dorfman, economics professor at the University of Georgia,

reported for Forbes in 2017: “Realistically, the payback period for a $100,000
per job deal is not 20 years, not 42 years, but somewhere between hundreds of
years and never. At $230,000 [or more] per job, there is no hope of recapturing
the state funds spent from taxes on the company and its workers.” Tim Bartik,
an economist at the nonpartisan, independent W.E. Upjohn Institute in
Kalamazoo, Michigan, who specializes in economic development, concurs:
“The per job cost is at least five or six times, maybe seven or eight times, the
incentive average.”

For Governor Scott Walker and his boosters, the project is “transformative,” a
“once in a lifetime” opportunity. Wisconsin Speaker of the House Republican
Robin Vos called it “an American field of dreams.” Wisconsin Lieutenant
Governor Rebecca Kleefisch went on the record touting the deal’s value
because “We did not meet the company’s ask. Their number was bigger than
ours.” While Foxconn has described their completed complex as a self-
contained city, with housing and food services for workers, Walker has
preferred to call it the first step in a regional high-tech manufacturing boom
he calls “Wisconn Valley.” This vision of something wonderful blooming
around the Foxconn facility helps explain the blank-check largess of the
Walker administration. It’s also the sort of wishful thinking that flies in the
face of the evidence.

Timothy Bresnahan, Alfonso Gambardella, and AnnaLee Saxenian spent two

years studying the origin of technology clusters for their 2001 paper “‘Old
Economy’ Inputs for ‘New Economy’ Outcomes: Cluster Formation in the
New Silicon Valleys” in Industrial and Corporate Change. They wrote: “[O]ur
case studies clearly show the foolishness of directive public-policy efforts to
jump-start clusters or to make top-down or directive efforts to organize them.
… Direct, top-down policies are most likely to fail. Particularly worrisome are
policies that would direct at a level of detail such as picking the specific
industries or technologies to be sponsored.”

Expert Wall Street investors have trouble valuing corporations over the next
calendar year. It’s difficult to project the ten-year viability of even well-
established manufacturing plants making slowly evolving products such as
automobiles. How is it possible to value the 20- or 30-year prospects of a plant
making a product, such as high-tech LCD TV screens, subject to rapid creative
destruction? After all, 15 years ago we were all watching bulky rear-projection
TVs.

In the face of all of these questions, to say nothing of the growing body of
academic work shedding doubt on the wisdom of mega-incentive deals,
Wisconsin officials dipped into a familiar well for politicians, municipalities,
and state governments looking to invest public monies in large projects.

They brought in the consultants.

Economic Impact Studies

The economic impact–study business in the United States is well-entrenched
and has a long history. The field was pioneered by Nobel laureate Wassily
Leontief when he was serving as a consultant to the Office of Strategic Services
during World War II. At the end of the war, he used the same sort of
input/output model that is widely used today in commercial studies to
examine the likely impact of the decommissioning of the weapons industry. In
doing so, he not only established the power of these models, but their
limitations, as he issued a warning that the United States faced a second Great
Depression as a result of lost employment and production.

Imagine a long-term impact study focused on a

nuclear power plant, taking into account its
substantial construction and operational
workforce plus the spino economic bene ts of
a new source of cheap, clean electrical power.
Now suppose that plant is called Chernobyl.

A small circle of firms routinely produce reports (all of them positive)

examining the economic consequences of all kinds of major tax-dollar
spending. Sports stadiums, convention centers, manufacturing and
headquarters developments, and large convention hotels all are within this
consulting industry’s purview. A typical description of the process is provided
by one of the larger players in the field, KMPG (a firm not involved in the
Foxconn studies): “Economic impact analyses measure the direct and indirect
effects of a business, organization or event on the local, regional, state or
national economy. The presence and contribution of a particular project or
business generates total economic impact that is substantially larger than the
project’s or business’s activities on its own.” The telling point being the
assumption that the enterprise being studied not only will have a positive
impact, but one “substantially larger” than its immediate business. This
assumption is belied by experience. Imagine a long-term impact study focused
on a nuclear power plant, taking into account its substantial construction and
operational workforce plus the spinoff economic benefits of a new source of
cheap, clean electrical power. Now suppose that plant is called Chernobyl.

The first economic impact report on the Wisconsin project was prepared by
international accounting firm EY (formerly Ernst & Young) before Foxconn
had been publicly identified as the company behind the initiative. It was
commissioned by Foxconn and released in July 2017 under the code name
“Flying Eagle.” The EY report is the foundational document justifying the
massive payouts to Foxconn. It was in turn used by all the subsequent studies.
Baker Tilly, an accounting firm headquartered in Chicago, used the EY report
for an August 2017 follow-up study commissioned by the semi-private
Wisconsin Economic Development Commission, Wisconsin's deal-making
agency. A UW-Madison professor, Noah Williams, was commissioned to rush
out a paper, also in August, called “An Evaluation of the Economic Impact of
the Foxconn Proposal.” This paper also relied heavily on the EY report.

The Foxconn project was unveiled at ADVERTISEMENT

a White House event on July 26,

2017. Joining President Trump on the
podium were Paul Ryan (in whose
district the factory would land),
Wisconsin native and then–Chief of
Staff Reince Priebus, and Governor
Walker. Foxconn was represented by
its Chairman, Terry Gou, one of the
richest men in the world.

In the wake of this announcement came dual revelations. From the Foxconn
corner came the warning that they were only interested in sealing the deal if it
could be expedited. On the Wisconsin side, the magnitude of the deal so
exceeded the budget and charter of the WEDC and the state's existing
economic development authority that special legislation would be required. In
the rush that followed, the economic impact studies were the key drivers of
the Walker team’s campaign for public support and legislative momentum.
The studies did not go without some initial critique. One of the first objections
to the EY report was its failure to consider commuters from nearby Illinois
who would be paying taxes to Illinois, undercutting the tax-based repayment
calculation. This inspired the second commissioned study from accounting
firm Baker Tilly. In the haste, signals must have gotten crossed because Baker
Tilly’s initial report for the Foxconn-boosting WEDC put 40 percent to 50
percent of the construction workers and full-time Foxconn staff as out-of-
staters. This conclusion blew up the entire economic case for Wisconsin’s
investment. After what must have been a heated clarification meeting with
the WEDC, Baker Tilly came back with revised figures of 100 percent
Wisconsin residents.

Williams’s report was also clearly inspired by the out-of-state worker

concerns, as he spent considerable energy juggling numbers to show how
Illinois workers wouldn’t undermine Wisconsin’s payback. His argument was
that more Wisconsinites now commute to Illinois than vice versa, so Foxconn
would simply stem the flow. But neither of these reflexive and unconvincing
studies got specific about how the drive time from the Foxconn site to the
Illinois border is nine minutes, while it takes 25 minutes to drive from there to
downtown Racine, the local area with the heaviest poverty and
unemployment. Add to the reality of commuting convenience, demographics.
The Interstate running past the Foxconn site leads to Lake County, Illinois,
which has a population of 703,000, compared with Racine County’s 195,000.
Residents of western Lake County currently put up with commute times that
are the highest in the greater Chicago area. Next door, in McHenry County,
Illinois, also bordering Wisconsin, half the population commutes a half-hour
or more, mostly into Chicago metro traffic. As for the higher-paying Foxconn
jobs requiring post-secondary education, Racine County and adjacent Kenosha
County have college-graduate populations of 24 percent, compared with Lake
County’s 44 percent.

In the wake of all these studies, the nonpartisan Wisconsin Legislative Fiscal
Bureau prepared an important report for legislators who would be voting on
the Foxconn deal. It was released on August 8, 2017, and used EY numbers to
calculate the projected income and payback schedule. It was this report that
produced a 25-year payback number that quickly gained currency in the
legislative debate and in a wide range of media reports. Unfortunately, the
overlay of urgency didn’t seem to allow for examination of all the underlying
premises—for instance, the study’s choice to ignore the likelihood of out-of-
state construction workers or full-time workers from nearby Illinois, to accept
as granted the EY projection of $53,875 average salaries, and the Legislative
Bureau’s decision to calculate the break-even point without use of discounted
cash flow, the time value of money.

Finally, the December 2017 TIF deal, in which Racine County and the Village of
Mt. Pleasant (where the plant will be located) committed to $764 million in
bond-raised revenue for infrastructure in support of the Foxconn project, also
used EY numbers to justify the expense and project the payback, this based on
increased property values of the Foxconn development site, which in turn rely
on Foxconn’s estimates of capital expenditure. As Mark Fralick, a Texas-based
industry expert on automated production and a contributing editor to the
most prominent U.S. trade magazine in Foxconn’s industry, Supply Chain
Digest, put it: “Foxconn has a long history of overpromising and
underdelivering. I just hope the government entities and municipalities
involved don’t get screwed.” It’s not boding well. The TIF development
agreement between Foxconn and Mt. Pleasant specifically calls for a
“Generation 10.5 TFT-LCD Fabrication Facility,” with the implication for
massive supply-chain requirements including the $1 billion-plus Corning glass
plant predicted by boosters. Even before breaking ground, Foxconn has
voided this promise in lieu of a more modest facility, while Corning has
scoffed at the prospect for a huge plant in Wisconsin.
In the end, a pyramid of assumptions, report after report, and billions of
dollars of taxpayer commitments are all built on the case presented by the
initial EY “Flying Eagle” report. If this foundational document is flawed, then
everything about the project is in doubt. So you would assume that the EY
study, especially considering the possible prejudice associated with its
Foxconn commission and Foxconn-sourced assumptions, was the subject of
intense scrutiny. Perhaps you’d imagine that the subsequent studies would
pick apart the original’s methods and conclusions.

You’d be wrong on both counts.

Projecting, Not Predicting

Economic impact studies rely on software that allows for the inputting of
certain variables that in turn lead to a projected outcome. In an economic
impact study like EY’s for Foxconn, the direct impact is the capital cost of
construction and subsequent Foxconn hiring. Indirect impact comes from the
additional workers employed by the construction contractors plus the supply-
chain effect. Induced impact comes from the money all these new employees
spend on food and rent and consumables. These indirect and induced effects
are expressed as a multiplier. In this case, EY used established benchmarks to
predict that for every ten jobs Foxconn creates, another 17 jobs will be created
in Wisconsin.

Multipliers are the secret sauce in the consultant’s recipe. The number used,
while based on seemingly hard evidence such as regional qualities and
industry-specific metrics, is in actuality subject to considerable judgmental
oversight and wiggle room. As Iowa State economist David Swenson, who has
completed dozens of commissions using input/output models, explained: “You
can’t get good output without precise knowledge of the inputs and I’m
confident that Foxconn was not willing to reveal all the details of their
business plan. You also have to have specifics about the supply chain—do
these businesses exist in Wisconsin? I doubt they do. Without this
information, you’re forced to rely on the default model, which may not match
the realities of the project.”

Small adjustments in the multiplier can be leveraged into large shifts in

economic benefits. The result is the predictable manner in which virtually
every commercial economic impact study fulfills or exceeds the expectations
of the project’s sponsor (typically, the entity writing the check to the
consultant). And even if they seem somewhat magical, multipliers are real.
The only caveat is that multipliers for an enterprise can end up being less than
one or even negative (think of the former GM plants in Janesville, Wisconsin,
or Flint, Michigan)—a result never occurring in these commercial studies.
Peter Fisher, University of Iowa economist and research director at the Iowa
Policy Project, has spent a career studying economic development efforts,
concluding that much of the money spent makes little difference in location
decisions. He is particularly leery of the long-term payback calculations in the
Foxconn deal. “The average life expectancy of a new enterprise is under ten
years.”

The Foxconn studies modeled the electronics industry to pick a multiplier. Yet
most of the comparable companies don’t hire large numbers of low-paid
workers to assemble things (more often, they offshore these operations), and
neither do their enterprises include worker dormitories, on-site housing, a
large cafeteria, or other amenities, as do Foxconn’s plans for what it is calling
its “Smart City.” The giant Foxconn complex will be much more insular than a
normal factory, both due to location and design. Many of its employees (think
H1-B Chinese engineers and dormitory-dwelling immigrant labor) will not be
seeking commercial housing in the neighboring communities, nor spending as
freely there as the technicians and engineers at the kind of electronics
companies that were used as models. These regional companies also are
typically owned and headquartered locally, keeping profits in the community,
rather than being exported out of the region to distant executives and
shareholders.

Not only do the commercial studies fail to try to

encompass the broad range of possible
outcomes, they apply a linear model, so that the
impact of 1,000 jobs is exactly a thousand times
greater than one job.

University of Illinois at Chicago Associate Professor Joshua Drucker has

studied the economic impact of the building and closing of major facilities,
particularly military instillations. One of the lessons he’s learned is that the
local and regional economy can change across time, often significantly and
unpredictably. Not only do the commercial studies fail to try to encompass the
broad range of possible outcomes, they apply a linear model, so that the
impact of 1,000 jobs is exactly a thousand times greater than one job. “These
assumptions simply don’t hold in real life,” Drucker explains. “For instance, in
a new facility, one thing we see is a high percentage of jobs going to people
from outside the immediate area.” The studies also entirely ignore the non-
economic impact that a large project will have on a community in terms of
quality-of-life issues, such as traffic and potential air and water pollution.
What will be Foxconn’s short and long-term effect on what is now a sleepy
rural area in terms of the housing market, social service agencies, and new
stresses on infrastructure and local schools? Don’t look to commercial
economic impact studies for the answers.

Despite all the peer-reviewed critiques from economists, politicians continue

to enthusiastically commission reports and projects continue to be approved.
While partisan lines seemed well-etched in most large corporate subsidy
deals, with Republicans on the pro-business side, some of the most vocal
critics of the Foxconn-type mega-deal comes from the far right. Roy Cordato is
a lecturer at North Carolina State and senior economist at the John Locke
Foundation, a conservative, free-market-oriented nonprofit.

“The missing ingredient in economic impact studies is economics,” Cordato

states. He lambasts the shallowness of the software used by consultants and
their typical dearth of the academic economics background needed to
understand and explicate the inherent flaws. “All of these studies ignore basic
principles of economics and, as a result, do not meaningfully measure what
they claim to be measuring—economic impact.”

The philosophic underpinnings of Cordota’s bile is one that must have also
struck a  nerve in many Wisconsin ideological conservatives. How can you
support smaller government, free markets, and an America-first agenda while
also boosting a multibillion-dollar government handout to a foreign
corporation?

Cordota: “A lot of Republicans talk the talk about free enterprise but don’t
walk the walk. In our battle against corporate welfare, we find ourselves
aligned with advocates from the left with whom we might be normally in
conflict.”

Disturbing Assumptions
All of the reports prepared to analyze the Foxconn deal have one common
flaw: They were commissioned by interested parties. Even the report issued
by UW Professor Noah Williams turns out to be tainted. His chair is funded by
conservative sponsors (including the Koch brothers, big Walker supporters)
and he personally sought an economics consulting position on the Walker
presidential election team. This might help explain why he used a generous
2.7-times multiplier, producing a rosy prediction of economic bounty.

Here are four of the key flaws behind the economic impact reports and
resulting contract with Foxconn:

Opportunity Costs. The most glaring and unsettling flaw in standard

economic impact reports is their total lack of attention to alternative uses of
the massive monies involved. This lack of vision is especially glaring in a state
in which the governor has made major cuts to K-12 and university education
and with serious infrastructure erosion, as witnessed by its roads being
currently ranked among the worst in the nation.

Cuts to education spending under Walker have

already resulted in the loss of many highly
considered UW professors and the degradation
of the K-12 teaching profession, while in-state
students at UW are asked to pay more than
twice what they did in the 1980s in in ation-
adjusted dollars.

As Cordato puts it, “Any economic impact study that does not attempt to assess
these opportunity costs cannot legitimately be called economic analysis.” With
job trends favoring the educated and trained, education spending is one of the
key alternatives that should have been examined. In Wisconsin, for instance,
the most robust job market in the state is in the Madison area, where
entrepreneurs with University of Wisconsin ties have been responsible for
numerous fast-growing startups with highly compensated workforces in
medical software, biotechnology, and game development, among others. Cuts
to education spending under Walker have already resulted in the loss of many
highly considered UW professors and the degradation of the K-12 teaching
profession, while in-state students at UW are asked to pay more than twice
what they did in the 1980s in inflation-adjusted dollars. Cost-cutting at the
university level continues. In March 2018, the University of Wisconsin,
Stevens Point, which serves 8,600 students, proposed axing all of its
humanities degrees in response to a $4.5 million deficit, an amount equal to
0.01 percent of the state’s financial commitment to Foxconn.

The beggaring of public education to raise money for corporate incentives has
become something of a national scandal. In 2017, the Republican-led state
government in neighboring Iowa decided the best way to balance its budget
was to emulate Wisconsin’s deep cuts to public education. During the eight-
year governorship of Republican Tea Partier Bobby Jindal, Louisiana’s state
spending for its public universities dropped from 60 percent of their budgets
to close to 25 percent. Seven states were spending 15 percent or less on K-12
education in 2015 than in 2008 in inflation-adjusted dollars: Arizona, Florida,
Alabama, Idaho, Georgia, Texas, and Oklahoma. All seven have Republican
governors and Republican majorities in both houses. Donald Hall, the CEO of
Hallmark in Kansas City, has been a witness to many business incentive
expenditures as Missouri and Kansas bid over corporate relocations. He told
The New York Times that “If you’re looking at the competitiveness of a region,
the most important thing a region can do is to focus on education. And the use
of incentives is really transferring money from education to businesses.”

The study on tech clusters by ADVERTISEMENT

Professors Bresnahan, Gambardella,

and Saxenian took a different route
to the same insight. They conclude
the key factor in sparking the sort of
synergistic development of
successful enterprises that
characterize employer hotspots like
Silicon Valley or North Carolina’s
Research Triangle is entrepreneurial
talent and skilled labor. The best
public policy? “Invest in education.”

Labor Dynamics. The primary benefit of the Foxconn deal touted by Walker
and his boosters is the creation of good jobs. While the promise of thousands
of $54,000-a-year jobs harkens back to all those lost, well-paid, union
manufacturing jobs in the auto industry, the reality is likely to be otherwise.
The rub is in the calculation of average wages. Foxconn lobbied hard to allow
up to $400,000 of higher-paid jobs to factor in the average, allowing them to
hit their average income target with more than 90 percent of jobs paying in
the $30,000 range. Foxconn has already opened up a TV manufacturing facility
in Mt. Pleasant, where it has been hiring workers through employment
agencies. The “family-supporting” wage Foxconn is currently paying these
assemblers? Fourteen dollars an hour, a figure that is not only not “family
supporting,” but will potentially qualify families for food stamps, housing
subsidies, and Badgercare, the state’s health-care program for low-income
residents.
One of the inherent weaknesses in standard economic impact studies is the
failure to calculate the difference between new job creation and job poaching.
These reports assume all workers are new workers. This might be sensible if
there were a large pool of qualified, unemployed workers. This is not the state
of affairs in Wisconsin. In fact, quite the opposite. Not only is the state
operating at near full employment, the demographics are getting worse, rather
than better. In September 2017, the Wisconsin State Journal bannered a
headline story on employment calling it a “looming workforce crisis.”

What happens to companies who lose skilled workers to Foxconn? They might
fill these jobs. Then again, the new subsidized competition might price them
out of the market, forcing them to downsize, relocate offices or jobs, or go out
of business. For instance, the 2008 opening of a large Honda factor in
Greensburg, Indiana, didn’t lead to the economic impact study’s projected
boom of thousands of regional auto-parts supply-chain jobs. Instead, a 2015
study by California State University, East Bay’s Brian Adams (“The
Employment Impact of Motor Vehicle Assembly Plant Openings,” Regional
Science and Urban Economics) showed that after five years, the area had
experienced a net loss of 500 supply-chain jobs as the limited labor force was
cannibalized by the subsidized new factory. These negative possibilities are
not a consideration in commercial economic impact studies.

The Wisconsin Fiscal Bureau projections show a major uptick in state tax
revenue in 2019 and 2020, when they predict the 10,000 construction workers
anticipated in the EY study will be deep into excavation, concrete work, and
building fabrication. The assumption is that these 10,000 workers would
otherwise be unemployed Wisconsinites. In 2012 a major study on a similar
issue was commissioned by Metrolinx, the Toronto planning authority, to
examine construction capacities prior to some major infrastructure projects.
Unlike the studies on Foxconn, Metrolinx surveyed area construction firms
and discovered major constraints among contractors likely to be involved,
with skilled labor being the most important. The result was not unconstrained
expansion of the labor market, but constraints on the number of simultaneous
regional projects. One solution might be the migration of labor, but permanent
relocation (with the anticipated Wisconsin tax revenue) is unlikely to be a
major factor for specialized jobs that might only last a year. A more accurate
scenario is Foxconn construction work forcing the delay of other construction
projects.

The Payback. The nonpartisan Legislative Fiscal Bureau crunched the

Foxconn and EY numbers to come up with a 25-year payback. Regardless of
the assumptions involved (and there are deep flaws), the very exercise is
problematic. Greg LeRoy, executive director of Good Jobs First in Washington,
D.C., whose mission is promoting accountability in economic development,
says “It’s preposterous to think anyone can predict what is going to be
happening with the economy in 25 years, particularly in high-tech where
product lifecycles are so volatile.” One example of the flawed assumptions: In
its calculation of the 25-year payback for the Foxconn project, the bureau did
not use the accepted standard of discounted cash flow. Instead, it calculated
the break-even point as when Wisconsin gets its original money back—even
though inflation alone across the 25 years mocks the entire concept. The Office
of Management and Budget recommends that public projects use a 7 percent
annualized rate of cash discount. Using such a number and retaining even the
credibility-stretching bureau’s job assumption, the payback period quickly
diminishes from the 25-year period the bureau produced to … never.

The False Security of Clawbacks. Over the years, as states and municipalities
have been burned in corporate incentive deals, a sort of insurance has been
added to these agreements. They give the sponsoring body authority to
reclaim their upfront money if the corporate entity fails to fulfill its promises
—typically measured by capital expenditure and job creation. Clawbacks are
an important part of the contract between the semi-private Wisconsin
Economic Development Corporation (formed soon after Walker's initial
election in 2010, with Walker as chairman) and Foxconn.

As an April 25, 2016, story by Gabrielle Gurley in the Prospect explained,

“Clawbacks have met with checkered success across the county.” Pro-business
officials who are personally invested in a project find it hard to activate
clawback provisions even when they are triggered due to fear it will sour their
pro-business reputations and confirm their over-optimism. Another factor can
be the leverage that a corporation has once it has accepted and used a large
amount of public funds. The optimistic forecasts by Wisconsin’s fiscal bureau
predict the state will be in the hole to Foxconn by at least $1 billion by the end
of 2025. What would state officials say if Foxconn demands at this point a
rewriting of the clawback schedule due to unforeseen industry or economic
changes? Would they be willing to let Foxconn just walk away from the
project? Could they successfully sue for clawback damages from a Taiwanese
corporation or from the other guaranteeing entity, Chairman Gou’s personal
corporation, based in the Cayman Islands?

A deep look at the economic impact study process is bound to end up in a

place of a certain amount of cynicism. Academics of all stripes have been
taking shots at the industry for years without making much of a dent. It’s a
business model that is self-rewarding and self-perpetuating as long as
politicians look for quick fixes, photo opportunities, and job-creation
campaign fodder.

Michael LaFaive is another example of the strange bedfellows who are united
in their distaste for taxpayer-funded megadeals driven by economic impact
studies. He’s been keeping an eye on the escalating economic incentive game
for years from his position as senior director of the Morey Fiscal Policy
Initiative at the nonprofit Mackinac Institute in Midland, Michigan, a
conservative think tank backed by the Koch and Bradley foundations, among
others. He’s been lobbying for years for Michigan to get out of the economic-
incentive bidding wars, without much success. In fact, Michigan was ready to
pony up billions of its own to get Foxconn. “We won by losing,” LaFaive
summarizes. “It’s not that people are blind to the liabilities of this endless
bidding to get industry. I talk to state officials all the time and as leery as they
might be, they believe they can’t unilaterally disarm.”

Some hopeful signs have emerged. Kansas and Missouri have signed what
amounts to a détente agreement over not spending wildly to get corporate
headquarters to move a few miles over their state lines. Florida has adopted
an Australian-developed software model that allows its leaders to compare
opportunity costs among several expenditures, so that decision-makers can
look at the relative cost/benefit among disparate spending options such as a
corporate incentive, beach improvements, or tax relief.

LaFaive sees two potential end games as corporations become bolder with
their demands (think Amazon’s new headquarters) and states and cities show
greater creativity and willingness to raise the requisite funds. “Either the
whole thing collapses on itself, possibly via scandal, or people come to their
senses. All it will take is a few governors calling their colleagues together to
declare a truce.”

Timothy Bartik, the W.E. Upjohn Institute economist, has kept a jaundiced eye
on economic development spending for many years. He is particularly critical
of the conceits behind many of the impact studies and subsequent state
decisions that assume incentives are the primary factor in location decisions.
“I’m also flabbergasted at how the studies behind the Foxconn project looked
at it from a purely statewide fiscal perspective, and ignored the substantial
costs to the local communities in terms of added educational demands, police
and firefighting, roads and social services.”
The Foxconn project has turned into a major issue in this November's
gubernatorial election. Walker, who has been cited in numerous national
roundups as a vulnerable incumbent, initially seemed surprised by the
backlash against the project. In the months after the announcement, he was
jubilant over landing the deal, no doubt still deep in the thrill of winning the
multistate bidding war. He was pleased to have ammunition to fight his critics
who pointed to how he had fallen far short of his first-term job development
projections. He was also sensitive to his vulnerability over the state’s economic
competitiveness exposed by his presidential primary opponents in 2015,
particularly Donald Trump. But when late 2017 polling showed the
unpopularity of the multibillion-dollar commitment, he temporarily
eliminated the topic from his stump speeches.  But there were never any signs
of doubt about the deal from the Walker camp. For a career politician better
characterized by his ambition than his vision, with the prospect of fighting a
blue-wave election cycle, Walker felt the need for the kind of dramatic and
short-term boost provided by the prospect of thousands of imminent Foxconn
jobs.

Since then, Walker, with Foxconn’s assistance, has been assiduously working
on promoting the project’s statewide benefits, a tough sell considering the
project’s geographic location in the far southeast corner of the state. In July,
Foxconn announced plans to develop R&D “innovation centers” in far-off Eau
Claire and Green Bay, which have been noted as odd choices, given the
educational and commercial landscape, which puts liberal-leaning Madison
and its University of Wisconsin at the center of engineering and technological
talent.

Critiquing the Foxconn deal was a common thread among the Democrats
vying to run against Walker this November. In their first televised debate, all
eight candidates pitched in. Madison Mayor Paul Soglin took this shot at
Walker: “I’d like to know what he was smoking when he negotiated this deal.
In China they’re laughing at us.” Another candidate promised to sue to break
the contract. Eventual September primary-winner Tony Evers, the state’s
superintendent of public schools, has also been anti-Foxconn, although less
stridently, stating, “Obviously, Walker sold the farm on that one.” Among his
first ads was one criticizing Foxconn, in which he concludes, “Just think if we
invested that money in our schools instead.”

Would the Foxconn deal have been approved it had been put to a statewide
referendum, rather than pushed through a compliant, Republican-controlled
Y
statehouse? It seems highly doubtful, since polls show significant skepticism
T
 in
over the benefits of the deal even among the state’s Republicans. Business
JA
leaders such as Kevin Conroy, CEO of fast-growing Madison biotech Exact
U
Sciences, maker of Cologuard, has severely critiqued the deal, lamenting the T
lost opportunity cost of using even a fraction of the investment as incubation
and venture capital, with the potential to create the kind of high-paid C
workforce seen in his company and other emerging companies in the state. R
LO

As Wisconsin superintendent since 2009, Evers has seen the dramatic effects M
d
that Walker’s education spending cuts and attacks on public unions have had
w
on the quality of K-12 and university education. He’s on the side of evidence- st
backed, peer-reviewed research that demonstrates that taking money from
education and using it for corporate subsidies can be a disastrous path for any T
state. Historically, the Wisconsin electorate has proven to be finely balanced, R

T
most recently electing both Tammy Baldwin and Ron Johnson, among the
a
most liberal and most conservative senators in Washington. The soft-spoken im
Evers may believe he can convince Wisconsin voters that Walker has misspent p
billions of taxpayer dollars to bring Foxconn to the state. But as of yet, he has c

not articulated exactly how he would go about modifying the signed contracts
and the promised subsidies, nor is it clear that an onslaught of Walker ads
touting the thousands of wonderful Foxconn jobs and concomitant statewide
economic bounty will fail to sway. After all, which is easier to parse: 13,000
“family-supporting jobs” or “just thinking” about what a few billion dollars
could do if spent on education.

Long after deal-maker Scott Walker and the current legislators who voted for
Foxconn incentives are out of office, Wisconsin and Racine County taxpayers,
as well as their children, will still be paying the bills.

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