The Problem with Public Money Going to Private Companies

The following is adapted from More Good Jobs.

A long history exists of government funding that targets healthcare, environment, defense, or other societal needs. While it makes sense to allocate some public dollars toward research being conducted by colleges and companies, a grayer area creeps in when public funds go into commercializing a new technology or expanding production capacity, both of which become assets owned by a private company to grow their business. 

The attractiveness from a political standpoint is clear: let the government write a check to a company as part of an economic development effort to create jobs. But who really wins with these initiatives?

More often than not, the private company wins, the government comes out looking like they’ve made an effort, or nobody wins at all. But despite the public footing the bill, citizens like us almost never see real benefits. In fact, what is meant to be a major job-creating effort turns out to be a waste of money. 

The Government Can’t Pick Winners

The biggest problem with public money going to private companies is that it puts the government in the position of picking winners. 

History has shown us the government’s track record for picking winners is horrible. A recent paper from Columbia Business School and Princeton claimed researchers found no evidence that tax incentives given to individual companies increased overall economic growth. Furthermore, the study found that almost a third of total state economic development incentive spending “went to .0072% of new firms and 1.41% of all jobs created by those firms.”

Professional investors with their own money at stake have a hard enough time predicting which companies will grow. Even the best professional startup investors in the world pick more losers than winners. To expect a government bureaucrat to be able to outperform these investors is ridiculous. 

Publicly Funded Publicity Stunts

Putting politicians in charge of deciding which companies will be the beneficiaries of public support starts going down a slippery slope, with economic consequences that are rarely transparent. It opens the door for corruption, where instead of choosing the company best positioned to create jobs, politicians might give the benefits to a political donor or other special interest. 

At best, the results are that these efforts underperform and fail to create the promised number of jobs. At worst, they’re little more than a publicity stunt for the politicians and companies involved. 

When the government is in the position of choosing private beneficiaries without transparency, taxpayers aren’t shown the magnitude of tax dollars invested per job created or have awareness of any other alternatives that might grow more jobs. Instead, all attention is given to the ribbon cutting photo op with a collection of politicians vying for the opportunity to lay claim in saying, “Look at what I did for you.”

Often, it doesn’t matter to the politicians whether or not their initiative was successful, only that it reflects well on them. Suffice it to say, in this scenario, the public loses. 

Even Successful Companies Can Fail to Deliver Results

You might think, politicians simply need to choose the right companies to support, but even successful corporations regularly fail to meet expectations. 

For example, New York State under Governor Andrew Cuomo spent $750 million to build a solar panel factory to be used by Tesla, which had promised to create 5,000 high-paying, high-tech jobs upstate—3,000 of them in Buffalo. Yet the company has fallen short of its 2020 job creation goals. Worse, the state then lowered expectations from what was originally promised. 

According to the Albany Business Review: “A Vanity Fair story in August found the state quietly changed the requirements Tesla must meet in exchange for its $1 lease on the Buffalo factory. The requirement for 1,460 “high-tech” jobs at the factory was watered down to jobs of any type. An agreement to hire 900 people at the factory within two years of construction ending in 2017 changed to 500. And the timing for creating additional jobs was extended to 10 years after the factory was completed.”

This example shows that even when relatively successful companies are involved, government efforts often fail to create meaningful jobs in the numbers needed to help our communities thrive. 

It’s Time to Ditch the Top-Down Model

In the quest to create good jobs, public money going to private companies is not the answer. Tax incentives, government-built properties, and other benefits fail to produce results. These strategies have not proven their ability to create more good jobs at a cost that makes sense to taxpayers. 

Instead, when we look at the places where true, organic creation of good jobs has happened, we see that it hasn’t been fueled by top-down policies or tax incentives. Good jobs come from the bottom-up, in which the best job generating communities embrace innovators and attract young, educated workers. Local entrepreneurs and community leaders in these talent magnet cities foster environments in which startups and innovative companies can thrive. 

If more communities embrace a long term commitment to embrace these principles, we’ll have a chance to see tax dollars spent on more meaningful community investments – as opposed to the overhyped and underperforming ploy of putting our money into the coffers of private companies. 

For more insights on how to transform local economies toward job growth in newer industries, you can find More Good Jobs on Amazon.

Martin Babinec founded NYSE-listed TriNet, a Silicon Valley cloud-based HR service, where he served as CEO for the company’s first twenty years. Relocating to his hometown of Little Falls, New York, he founded nonprofit Upstate Venture Connect, StartFast Ventures, and UpVentures Capital, all of which help grow, support, and invest in transforming Upstate New York’s economy toward job growth in the newer industries. As an independent candidate for New York’s 22nd Congressional District in 2016, Babinec also founded the Upstate Jobs Party (UJP) to influence political discourse on better solutions to grow jobs and reverse regional population decline.

2 Responses to “The Problem with Public Money Going to Private Companies”

  1. I never really understood why states are allowed to “compete” against each other. Look at Amazon HQ2. If we are really one nation what sense does it make for NY to be able to outbid another start. It’s the wrong type of competition

  2. Sir, that was a truly amazing piece. Succinct, well structured, eloquently written with the appropriate detail to support the assessments & conclusions within. I am now knocking vigorously upon my desk, in tribute. As far as the underlying message, I concur. While many programs may be conceived and designed with the best intentions; adjudication and disbursement of funds often (unfortunately) does not result in the intended result/ROI. Proper oversight might address this, but the speed at which public programs tend to operate …. are counterproductive to these intended applications. This reminds me of the saying
    If “Pro” is the opposite of “Con”; What is the opposite of “progress”?
    One thing I have learned is that identifying the issue “cause” is but the first step. The countermeasure and execution of, is what will bring change. It is good to know that someone with the experience, influence and resources to facilitate change (you) is engaged to address this. In the interim, I am building my company (bottom up) and have already learned not to rely on public funding and/or programs; however, I do intend to use them (where possible) for the mutual benefit of our private investors and our organization. Possible? Just “Watch me” 😉


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