The problem with VEGI

Not unexpectedly, Keurig Green Mountain has received initial approval for yet another Vermont Employment Growth Initiative (VEGI) — its fourth in the VEGI program’s seven-year history. This time, KGM is set to receive up to a million dollars in incentives. (Its four successful grants total nearly $7 million.)

In itself, this is not cause for outrage. VEGI is aimed at producing good-paying jobs, not necessarily green-friendly ones. The incentive grants are targeted at specific firms, and companies must meet job-creation targets to receive the payments. KGM may act like a corporate shark in the marketplace, and its core product (non-recyclable, non-biodegradable K-Cups) is bad for the environment, but the jobs are a good thing. If I lived in Waterbury, where KGM is headquartered, I’d be rooting for the company to succeed.  

(Of course, I don’t live in Waterbury. And K-Cups are not only environmentally unfriendly, they’re also seriously overpriced and make “painfully mediocre coffee.” So no, I don’t have a Keurig machine and never will.)

Which is not to say that there aren’t problems with the VEGI program — both in the details and in the basic concept.

Details: The “but for” test, and a possibly unbalanced playing field.

Basic concept: Do incentives like VEGI actually work?  

The “but for” test. VEGI grants are supposed to help create jobs that would not be created “but for” the VEGI funds. A company only qualifies if its growth would not occur without the incentive. It’s a sound idea, but it’s inherently subjective. How can you really know?

There’s also a flaw in the current formulation of “but for.” Judgments are based not on a single company’s growth projections, but on its entire industry’s. This is sensible in the case of, say, Commonwealth Yogurt (recipient of two VEGIs), which operates in the fast-growing Greek yogurt marketplace; state incentives would help it keep pace with larger competitors. It arguably makes a lot less sense in the case of KGM, which is the dominant force in its core market — single-serving brew technology. KGM may well continue to grow, but its prospects have little to do with a state incentive.

This isn’t the fault of the Vermont Economic Progress Council (VEPC) which awards VEGI funds; it’s only following the standards in the law. It has been argued that the law needs to be tightened, which is a matter for the legislature. Then-state auditor Tom Salmon argued as such in a 2008 report; his successor Doug Hoffer is currently taking a fresh look at the program.

Unbalanced playing field. So why is it that KGM has gotten four grants, while no other Vermont company has received more than two (Dealer.com and Commonwealth Yogurt, by my count)?

Well, it’s been a fast-growing firm for several years, and it’s created a whole lot of good jobs (along with a whole lot of mediocre, overpriced coffee in earth-unfriendly packaging). But I see two other advantages that have nothing to do with job creation or intrinsic merit.

First, as a sizable company, KGM has the resources to pursue every possible dime in VEGI money. It has the staff and experience to write grant proposals and see them through. A relatively new company at the beginning of its growth curve would have a harder time allocating time and expertise to a grant proposal.

Second, again as a sizable company, KGM has options. Such as the unspoken threat of moving to another state — not really an option for, say, fellow VEGI recipient Westminster Cracker Company. And don’t think the VEPC is unaware of that.

“It’s a fast growing company and the issue is do we want some of that growth to occur here,” says Fred Kenney, executive director of VEPC.

Which is the nice way of saying, “We don’t want KGM moving out of state.” I’m sure the good folks at KGM didn’t even have to hint at a possible move; everybody knows it could be an option.

The basic concept. The bigger question is, do programs like VEGI actually accomplish anything? Do they spur job growth, or are they just giveaways? Let’s turn to University of Massachusetts economist Jeffrey Thompson, who studied economic development incentive programs across New England:

Rigorous studies of these incentives and subsidies, however, suggest that their impacts are modest at best. As much as 96% of the jobs and most of the investments used to claim these tax credits would have been created without the incentives. Some studies do find an impact on economic growth, but much of that activity, is simply employment and investment that would have otherwise occurred in a neighboring city or state, mak-ing the investment a wash for the region as a whole.

… The real harm done by corporate tax incentives and subsidies is that they deplete resources that could be spent on real public investments. For example, one analysis finds that a long-term $875 million annual incentive program in New England would produce just 9,000 jobs, compared to over 130,000 jobs if that same amount of money was invested instead in high-quality universal preschool in the region.

Stick that in your back pocket the next time some conservative wails about Vermont needing to match the new Start-Up NY program of tax-free zones for job creation. No, we don’t.

Also, for a more common-sense version of Thompson’s argument, here’s our friend Paul Cillo of the Public Assets Institute:

…jobs are created by the private sector when there is a demand for goods or services, not because the state paid a business to hire someone.  An incentive of a few thousand dollars is not enough to justify spending $40,000, $50,000, or $70,000 on an employee you don’t need. And if a business does need more workers to meet increased demand, it doesn’t need the incentive.

And, going back to Thompson, wouldn’t a state with robust infrastructure and educational systems be a real draw to companies looking for a good place to grow a business? Of course, most business groups (and politicians) are too short-sighted to see that; if Vermont tried to end VEGI and other incentive programs, we’d hear cries of dismay over our alleged “anti-business environment.”

VEGI is better-structured than many incentive programs. But still, there are serious questions to be asked about it on both the micro and macro level. Call me cynical, but I think the best we can hope for is a legislative review of the detail issues. I doubt there’s any desire to take a radical and fundamental look at whether incentive programs are really a good public investment.  

17 thoughts on “The problem with VEGI

  1. In the past, I don’t believe there was much follow-up analysis through which to evaluate these programs of corporate welfare.  Perhaps that has changed, but with budget slashing the specialty of the day, I rather doubt that any new resources have been turned to this task.

    For example, one analysis finds that a long-term $875 million annual incentive program in New England would produce just 9,000 jobs, compared to over 130,000 jobs if that same amount of money was invested instead in high-quality universal preschool in the region.

    The impetus driving such incentive programs is really little more than blackmail.

    This is just another example of how Vermont bends over backwards to demonstrate “business friendliness” to businesses that really don’t need the help but are loathe to demonstrate such friendliness to the the tiny subsistence entrepreneurs who can just barely keep their families afloat.

  2. In the past, I don’t believe there was much follow-up analysis through which to evaluate these programs of corporate welfare.  Perhaps that has changed, but with budget slashing the specialty of the day, I rather doubt that any new resources have been turned to this task.

    For example, one analysis finds that a long-term $875 million annual incentive program in New England would produce just 9,000 jobs, compared to over 130,000 jobs if that same amount of money was invested instead in high-quality universal preschool in the region.

    The impetus driving such incentive programs is really little more than blackmail.

    This is just another example of how Vermont bends over backwards to demonstrate “business friendliness” to businesses that really don’t need the help but are loathe to demonstrate such friendliness to the the tiny subsistence entrepreneurs who can just barely keep their families afloat.

  3. …and see how the rash of lawsuits against KGM sugar off before awarding these incentives.  I think it’s up to 8 or 9.  (GMCR lost the last one to Rodgers).  

    If they don’t fare well with these antitrust lawsuits, the competition would get a healthy boost.  There are a lot of customers out there who have found out just how expensive Keurigs are and who’d jump brands easily.  

  4. In addition to the VEGI awards, the company was approved by VEPC for another $2.1 million for the predecessor to VEGI (EATI) in 2004. That brings the total to over $9 million.

  5. Coffee is fair at best. Have purchased flavored coffee which was just horrid – leading me to believe roasting-mishaps are routed to the “flavored” dept. Quality is inconsistant.

    Always wanted a Keurig. Never was able to make it down to this item on my wishlist during times of relative prosperity. Parents were given a Keurig, mother thought it was the best thing since sliced bread. Coffee tastes like hoss-piss & undrinkable afaic.  I’m suspecting what they sweep off of the floor is routed to the K-cup dept.

    A coffee connosieur & so were they until they hopped on the Keurig bandwagon w/this piece of junk. The one they have only fills the cup half-full! I was underwhelmed & mystified by the excitement. Glad I saved my hardearned cash & settled for free Gevalia-maker so I could afford the expensive coffee.

    Not fond of the company either. Ordered some stuff from website/catalog as a gift leaving a generous time-frame for arrival. When scheduled time arrived – no shipment! Called, received new inaccurate date. Checked shipper’s website, it had been sent to like NJ ??? so I knew it would never arrive on or near time. Hastily purchased suitable gift.

    At this point, tried to cancel shipment, was told it was not possible (yes, I know I can return it unopened for credit – unfortunately, was sent to giftee & also huge hassle) contacted shipper, asked to cancel shipment, they did.

    Pissy attitude of reps, deception and refusal to deal with mistake soured the relationship. Asked them to kindly stop sending catalogs & take me off e-mail list. Sure we can do that! Ignored. Had to get a little pissy myself but ordeal finally ended.

    Another business-model lesson in “How to lose customers & keep them from ever returning”.

     

  6. I have often wondered about the merits of these State development programs, so I find myself easily persuaded by the arguments here.

    But for the purposes of this comment, let’s just assume that such programs DO have merit. I still wonder why these are structured as grants rather than long-term loans.  Specifically, the State’s purpose in making the grants is to create jobs, but the companies’ purpose in doing the hiring is to create future profits.

    I have no problem either with the idea of requiring repayment for jobs NOT created or with the idea of NOT requiring it for jobs created when the company sees no return: such grants make the hiring less risky than it would otherwise have been.

    But why not give the companies a time period of no interest loans, and then, if the companies profits have increased after the loan, begin to require a payback of the loan?  My language here is vague, because I haven’t thought this through carefully.  (I did say “after” rather than “because of,” because it’s far easier to demonstrate chronology than causation.)

    But the point is to allow companies to treat the grants as grants only if they do the hiring AND get no return from it.  If they DO get a return (as presumably expected), they should repay the funds.  If not, why not?

  7. In light of Doug Hoffer’s comment, let me clarify my own remarks above.

    Starting with his last comments first, I agree with both Doug’s comment and John’s original point: in Doug’s words, the legislature “should never view these things in isolation, but rather compare them to other investments ….”  It’s reasonably likely that, in doing this, the program will be abandoned entirely as being not very efficient.  I’m not a big fan of governmental handouts to businesses, so I won’t grieve if that’s the result.

    Having said that, however, my comments above were predicated on the assumption that the program is retained, so let me return to Doug Hoffer’s earlier point: “you’re assuming that profits are easily tracked and that there is a direct correlation between job growth and profit.”  Again to take the second point first, I tried to address it above in distinguishing between chronology and causation, but I’ll try to be clearer.

    From the business’s point of view, I think that correlation IS clearly assumed: why else would a business add employees if it did NOT expect to garner greater profits?  But from the public’s point of view, there’s no need to make that assumption.  Additional profits (and the taxes that ensue) would be a nice fringe benefit (so to speak) of this program, but the real motivation for the program is job growth.  Accordingly, since our point of view IS the public’s point of view, we need NOT assume the correlation.

    Rather, my suggestion is based on the possibility that such a correlation does, in fact, materialize.  If it doesn’t, and the jobs are added in good faith, then the program has accomplished its goal.  But if profits ALSO ensue, then I see no reason why the State should not try to get a portion of them back, as a repayment for the incentive it proffered.

    That leads to the question of how easily the profits are tracked.  It’s certainly true that business profits are “subject to creative accounting and the tax code,” but it’s also true that businesses are already obligated to report their profits (in one form or another) to the Vermont Dept. of Taxes.  Since we’re NOT concerned with correlation, then the arithmetic here is actually elementary: if the reported profit (after any adjustments the Dept may impose) is greater in one of the years following the grant than it was in the year prior, then this company qualifies for some kind of clawback.  It doesn’t matter whether the new jobs created the profit, or whether there is an entirely unrelated cause (e.g. better weather, loss of a competitor) The additional profit is there, and I ‘m suggesting that it’s fair game to get some of it back.  

    Will the profit calculations be subject to “creative accounting?”  Of course.  They always are. This program isn’t likely to change that substantially.

    In short, I basically agree with Doug Hoffer’s cavils, but I don’t find them sufficient to change my suggestion.

    In answer to Ernesto, while I’m not really familiar with any of this in detail, I’d be totally shocked if the change I’m suggesting did NOT require legislative action.  After all, it’s a substantial policy change.

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