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What is an assembly plant worth?

Posted in Posts, and Syllabus Schedule

As a native Kentuckian, I am very excited about the new Lexus ES350 plant to be built in Kentucky. However, I find myself wondering if I am 146.5 million dollars excited. That figure is the amount the state of Kentucky will be giving to Toyota, and Lexus by extension, in the form of tax breaks and other incentives in order to secure the plant being built in Georgetown. Obviously, the plant will be a boon to the economy, but I am curious rather or not the benefit justifies the substantial cost.

On the one hand, the plant will bring around 750 permanent jobs, and many temporary construction jobs to Georgetown, as well as large tax revenues. But, is it worth almost a hundred and fifty million dollars? Looking purely at permanent jobs, the state of Kentucky will be paying roughly 195,000 dollars per job. In comparison, the CBO reports that during federal stimulus spending from 2008 to 2010 the US government was paying roughly $500,000 to $4,000,000 PER JOB! So, maybe Kentucky isn’t making out to badly for itself.

However, even if it is cheaper then what the federal government is “paying for jobs,” I have a feeling the plant could have been secured for much less. Toyota already operates a Georgetown Kentucky plant producing the Toyota Camry, a platform cousin to the ES350. In 2009 over 60% of ES350 sales occurred in the US. With a strengthening YEN, it makes little sense to produce a car in Japan when the large majority will be exported to the US. An established production infrastructure in the Georgetown area makes it a prime location for the new ES350 plant.  Knowing Toyota has these incentives to build its plant in the area already, I cant help but feel like the state of Kentucky “overpaid” for this new plant.





  1. clara

    750 permanent jobs is the number of jobs that the plant creates itself. I believe when the plant is put there, it will attract other services/firms to come to the area and eventually attract population plus create even more jobs. Cities in the U.S. are formed and develop thanks to the existence of firms (e.g., Charlotte prospers because of Wells Fargo & BOA). Therefore, a plant should be valued based on the whole potential economic profits it brings about, not the number of jobs it can create alone. A big plant like this I think will stimulate the economy of the area and its surroundings pretty well.

    May 15, 2013
  2. andrew

    It is true that big job creators bring people and stimulates the economy. However, the Kentucky city should be prepared just in case the plant eventually closes or they will suffer the same fate as Detroit.

    May 16, 2013
  3. kuveke

    Clara is right. The long term benefits of such an addition to the local economy are difficult to measure precisely because of all the multiplier effects the plant will have. While the cost for Kentucky is 146.5 million dollars it is not out of pocket cost. Most of the cost is the money that the state would receive if it fully taxed the plant and made the plant cover all its own costs. By sharing some of the costs with the plant Kentucky is investing in relatively high paying jobs. Jobs which reduce unemployment and increase money in the community. The extended effects of increasing per capita income in a region are lower crime rates, higher housing prices (which increase equity meaning even more money in the community), better schools, and more business. In a sense the plant is a bargain.

    May 16, 2013
  4. The field of regional science studies this issue, and finds that in general incentives don’t make sense. Companies considering a new plant shop different states, and on some occasions (Mercedes in Alabama) manage to set off a bidding war. So overpaying is typical.

    Now the calculation is more favorable when unemployment is high. Still, if you calculate how much taxes will be paid it is steep. You need a lot of additional jobs — and there are likely to be few local ones at this point, instead there will be a job here and another there as existing plants add a line, in establishments scattered across the auto zone from Michigan to Tennessee and Pennsylvania to Missouri.

    When an economy is at full employment, the gains are even smaller: you bump people up from poorer jobs to better jobs, not from no jobs to good jobs. The net economic gain is then considerably smaller.

    I know of cases in Japan where industrial recruitment likewise generates a “prisoners dilemma” game in which the players (local governments) lose.

    May 16, 2013

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