A new study published in "Small Business Economics: An Entrepreneurship Journal" reveals that when states approve their first mega-subsidy deal, the number of lobbyists in that state increases by 3.6%. The research, conducted by three academic economists examining business subsidy deals across all 50 states between 1997 and 2019, concludes that these programs may create more crony capitalism than market capitalism. Like hundreds of studies before it, the paper finds that economic development subsidies may do more harm than good.
The researchers analyzed data from 40,000 lobbying firms alongside extraordinarily large business subsidy deals awarded across the country. The gains in lobbying were heavily concentrated in state capitals, where the number of lobbyists went up by nearly 5%. Only 17 states gave awards that were at least 3,500 times larger than their state's historical median subsidy—Michigan was one of those states to practice what the researchers called "a substantial policy shift." When states offered at least one extraordinarily large subsidy package meeting that 3,500 times threshold, lobbying-firm employment in capital counties, measured as a share of total private-sector employment, increased 6%. The analysis drew from two databases: the Good Jobs First Subsidy Tracker database and the National Establishment Time Series database, which tracks employment and sales at millions of establishments nationwide over many years.
According to the study, such deals may "inadvertently foster crony capitalism and wasteful lobbying rather than the genuine economic development they promise." The report points to hundreds of studies showing that state subsidy programs fail to live up to expectations, with no comparable body of independent academic research demonstrating broad success for those programs. One cited study examining 2,300 Michigan subsidy deals dating back to the early 1980s across nine programs found no measurable impact in five cases and a negative effect in another—of the three programs associated with additional job growth, each required extraordinarily large subsidies, with one instance costing the state $125,000 in subsidies per job per year.
The increase in lobbying matters because when corporations hire lobbyists to secure special favors like business subsidies, they divert resources toward activities unlikely to generate benefits greater than their costs—what economists call "rent seeking." The report explains that one study examining rent seeking and economic growth found that when states encourage such behavior, their economic growth slows. This may help explain Michigan's recent disappointing performance in job growth and broader economic measurements. Accounting giant Ernst & Young even produced a PowerPoint presentation years ago titled "Turn Your State Government Relations Department from Money Pit to a Cash Cow," which encouraged lobbyists to promote the purported fiscal and economic benefits of incentives while deploying the "'but for' threat"—the argument that without the subsidy, the company may not undertake the project.
The report calls for dismantling the state's corporate welfare industrial complex—sooner rather than later. The record of independent, academic research is clear about what subsidies do: they carry direct costs and harm the state's prospects by encouraging businesses to take resources away from productive uses and put them toward rent seeking. If all this lobbying produced economic gains beyond additional jobs for lobbyists, a case could be made to tolerate it—but study after study says otherwise.