Des Moines Teaches a Lesson in Economic Development Failure

Elected officials and bureaucrats always have big “economic development” plans. However, these plans are ineffective and cost taxpayers dearly.

The changing fortunes of downtown Des Moines, the people who live and work there, and the companies that call it home should teach us all a lesson on the limitations of local governments’ economic development efforts. In the real world, even millions of dollars in subsidies from taxpayers are virtually powerless to overcome the fundamental business factors that truly control companies’ site selection decisions.

The lesson begins in 2017, when Des Moines agreed to more than $3 million in subsidies plus additional tax breaks over 15 years for a project anchored by a Hy-Vee location. City officials argued the subsidies were necessary to attract a grocery store to downtown Des Moines, and they drafted the contract with politically helpful requirements the store has repeatedly resisted in response to the realities of supply, demand, and shopper demographics downtown.

For instance, the contract required the store to be open for business between 6:00 a.m. and 11:00 p.m. Nonetheless, earlier this year, Hy-Vee changed its hours to 8:00 a.m. to 6:00 p.m., later extending that to 7:00 a.m. to 7:00 p.m.  A spokesperson for the company suggested the change in hours has economic and safety reasons, as Hy-Vee has reportedly called police more than 200 times in six months for theft and loitering complaints. Now it appears the city and the grocer have reached a new agreement on operating hours.

In 2021, Hy-Vee announced a change (since aborted) to a “HealthMarket” format that would have replaced beer, wine, deli, and other offerings with vitamins, health food, organic produce, and more-health-conscious products. That earlier plan may have been intended to make the store less attractive to an undesirable element.

The Hy-Vee saga demonstrates one of the biggest flaws with the way government-run “economic development” programs function in Iowa and across the country: Elected officials and bureaucrats always have big plans, but the marketplace often has different ideas. These taxpayer-funded subsidies are meant to cover over the gap and create incentive for businesses to locate in one place instead of another.

The problem is that subsidies have become so common — and are so valuable as a political tool for politicians wanting to claim they “created jobs” for their constituents — that not getting money from taxpayers is now far more unusual for a project of any meaningful size than receiving it. As expensive as they are, however, the real-world evidence is that these subsidies aren’t big enough to change companies’ decisions about where to go, what to build, and how many people to employ.

Researchers Alan Peters and Peter Fisher of the University of Iowa concluded, in a study published in the Journal of the American Planning Association, “there are very good reasons — theoretical, empirical, and practical — to believe that economic development incentives have little or no impact on firm location and investment decisions.” Overall, they concluded, “the best case is that incentives work about 10% of the time and are simply a waste of money the other 90%.”

In Des Moines and other Iowa cities and towns, as well as across the United States, the amount of money wasted on these deals is reaching crisis proportions and imposing very real and harmful costs to taxpayers. Consider Wells Fargo, which was approved in 2000 for $15 million in subsidies from Des Moines taxpayers through May 2024 and achieved another agreement in 2003 for $9.6 million through 2028.

Again, city officials insisted the subsidies were necessary to keep Wells Fargo from moving its employees elsewhere (or laying them off entirely). Nonetheless, the financial services company announced in January 2023 it would move most of its employees from downtown Des Moines to its campus in West Des Moines and proceeded to make multiple layoff announcements over the course of the year. In total, the company reportedly cut 300 workers from the Des Moines metro area over the past two years, adding up to 1,400 area job losses since 2018.

A city spokesperson described a “mutual termination” of the agreement with Wells Fargo, but that’s public relations spin. Clearly, what happened was Wells Fargo’s leadership made business decisions based on the company’s current situation and future predictions, then went ahead and did what made the most business sense. The loss of future subsidies from Des Moines taxpayers was simply a cost to include in the equation.

In 2023, Wells Fargo reported $19.1 billion in net income. The $3.7 million of taxpayers’ money the company reportedly left on the table with that “mutual termination” had a mere 0.019% impact on its bottom line that year.

Such figures obviously cannot play a huge role in a company’s strategic site selection decisions. What they do, however, is raise inconvenient questions for elected and appointed officials: If the city’s subsidies weren’t enough to keep Wells Fargo in downtown Des Moines, then how much of a role did they truly play in the company’s locating there in the first place? How much of a role did they really play in the site-selection decisions of Hy-Vee, Krause Group (Kum & Go and Maverik), EMC, Principal Financial Group, American Republic, or any of the other companies that have received subsidies from Des Moines’ taxpayers?

Every year, Area Development Magazine surveys the people involved in such decisions — corporate site selectors — asking what factors are most important to them in the current environment. In this year’s 38th annual iteration, “state and local incentives” ranked 11th, below business-critical factors such as labor costs and availability, Internet and road infrastructure, environmental and labor regulations, energy costs, quality of life, and the overall corporate tax climate.

These results match those of dozens of research studies of the real-world behavior of companies across the country. Fewer than one in every four state or local government subsidies does anything to change the site selection decision that a company would have made anyway.

Said more clearly, the truth is that three out of every four subsidy deals announced in government press releases and news stories may be pure wastes of taxpayer dollars.

If these deals are so bad, why do mayors, councils, supervisors, and other elected officials keep making them? The answer is in that word, “elected.” While the evidence tells us these subsidies are terrible economic tools, it is even more clear they’re amazing political tools.

For instance, around the country, politicians who make these deals are more likely to receive campaign donations, and they’re more likely to be re-elected. On the flip side, companies that make political donations to relevant officials are four times more likely to enjoy subsidy deals than those that don’t, and their deals are more than 60% bigger, to boot.

In short, these deals don’t exist to create jobs. They exist to make voters believe politicians are responsible for creating jobs. Once you understand that the job being “created or retained” is a politician’s, Des Moines’ string of questionable, underperforming, and flat-out failed subsidy deals makes far more sense.

Of course, Des Moines taxpayers should not be forced to make what are effectively unregulated campaign donations to the city’s incumbent elected officials, purchasing them spots at groundbreaking and ribbon-cutting ceremonies. But as long as these subsidy programs remain in place, and as long as voters keep believing the spin that they’re “creating jobs” that wouldn’t exist otherwise, the deals will keep coming… along with the eventual disappointments, failures, and broken promises.

John C. Mozena is a contributing scholar for Iowans for Tax Relief Foundation.

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