Links 2023-11-15 - Corporate Welfare
Just say NO!
Three links to share today about corporate subsidies and why they are a bad idea. All of this falls within the realm of industrial policy, which politicians of all parties, technocratic economic planners, and cronies galore all advocate for.
First we have Pat Garofalo shows what the Taylor Swift effect really is and how it is wrongfully used and exaggerated. Here is a small sample:
A similar dynamic is at play in this piece, which claims “Taylor Swift’s two Denver concerts could give Colorado economy a $140 million boost.” Leaving aside why that number is bogus, which I will get to in a moment, even if it were true, it would represent 0.03 percent of Colorado’s GDP for the year. Calling that a rounding error would be generous. But it gets its own headline because that’s what folks will click on, which serves the interests of both the news outlet and the tourism and events industry that wants everything to sound like an Earth-shattering big deal.
Now, why is that $140 million number, as well as the other measures of Swift’s economic impact, as actually insignificant as they are, still way too big. Because much of the spending attributed to her shows is actually not new to the economy, but simply shifted around within it: People who attended a Taylor Swift concert did so instead of spending at least some portion of those same entertainment dollars on a different show, a sporting event, a night at a restaurant, some new clothes, etc. etc. So Taylor Swift, Ticketmaster, and the owners of the stadium she performed in benefitted, at the expense of a restaurant owner, clothing brand, different music venue, and on and on.
This is what economists call the “substitution effect,” and failing to account for it — out of intent or ignorance — plagues discussions of the economic impact of large events. Remember, it’s not like people sit around doing nothing waiting for a particular concert or sports match to come to their city; they spend their money in other ways. Choosing at one moment to spend it a particular way doesn’t alter the overall trajectory of an entire metropolitan area economy.
Next we have actually two pieces from Michael Munger. In the first he demonstrates that the only sensible solution to the game of state development incentives is not to play. He begins with a hypothetical that illustrates the losers’ game that is state funding for corporate projects:
The problem for Mungeria is that Salsmania is going to bid, also. Suppose that the benefits to the state, including the usual hand-waving about “multipliers” and “good jobs” are not just smoke and mirrors (they may be smoke and mirrors, but suppose not). How much will the two states “offer,” in terms of tax breaks, direct cash grants, and subsidies to build infrastructure such as roads, electrical capacity, and so on?
The optimistic conjecture is that the “winner” will bid the full amount of the estimated benefit to the state. Suppose that adding up all the multiplier, construction, and other increased economic activity in the state implies a “benefit” of $320 million. Mungeria and Salsmania will each offer packages—differing in detail, but not in value—of something close to $320 million.
That’s the best-case scenario, folks. And even then literally ALL of the economic benefit that would have gone to the state is given back to the corporation as a kickback. Of course, there are three things (at least) that can go wrong:
1. The promises of QAI-marsh turn out to be unreliable, and the half-built facility is abandoned, having wasted tens of millions of dollars of taxpayer money, but costing QAI-marsh very little. Further, the “incentives” are really tax money taken from firms already in the state, for the right reasons, and transferred to outside firms in a kind of political prostitution.
2. The “benefit estimates” turn out to be wildly optimistic: Even though QAI-marsh does build and operate the facility the actual benefits are only $200 million. State taxpayers have wasted $120 million because some glib consultant had learned to say “multiplier” in forecasts that had no actual economic basis.
3. Worst of all, there is no reason to expect that the upper limit on bids will be constrained by the actual economic value (and see #2, above, because “actual” economic value is probably a fib in the first place!). But suppose the benefit to the state really would be $320 million. It’s not the governor’s money, and it’s not the taxpayer’s money. Remember, the goal of attracting the facility is political, not economic; if Mungeria bids $450 million, then QAI-marsh says “Yes!”, builds the facility, and the political goal of electoral success is secured. Far from being a harm, overbidding is actually a benefit for political leaders doling out other peoples’ money.
In the second Munger expands upon the prior piece with recent, real-world examples and a full look at how bad the whole mess really is. His bottom line:
Unfortunately, the problems don’t end with (1) misuse of taxpayer money (2) to “invest” in projects that would not attract private investment support, though those two problems are significant. As I argued earlier this month, state “incentive” packages do more than pay companies the difference in costs. Politicians have every reason to pay up to, and beyond, the entire economic benefit to the state, because their calculus counts costs as benefits. “Extra” jobs, unneeded roads and utilities hookups, and large payments to politically connected consulting firms are all harms to taxpayers, but they help politicians get reelected.
The use of politically-motivated “incentives” as a means of attracting business to your state is a mook’s game. Taxpayers pay more than the company receives, because much of the cost comes from making unsuited areas “more competitive” for development. And more than all of the benefit that the state does receive from the new manufacturing jobs is spent by politicians using taxpayer funds to buy votes. It’s a “Tullock Auction,” and an example shows why it’s a bad idea.
Suppose a company wanted to auction off a $100 bill, and the bidders are state legislators. The “winner” gets to present the $100 bill to voters, with a big public ceremony and lots of news media fawning over the politician who brought home the Benjamin. How much would a legislator pay for such an opportunity to lock down votes?
It’s tempting to say that the bidding would quickly approach the full value of what is being “sold,” in this case, $100. But that’s wrong; there’s nothing to limit the bidding to that level. Remember, the “bids” are money taken from taxpayers, from the entire state. The legislator values the new project at $100, but her district is only going to pay a small fraction of that amount (North Carolina has 120 districts, so the benefit is $100 and the cost to one legislator is $100/120, or $0.83. Would you pay $0.83 to bring in $100? I would!) The legislator would be happy for the state to bid $200, or $500—even at $500 in costs, the cost share to one district is only $4.20!!—for the $100 benefit that goes primarily to her district.
There is simply no necessary connection between the total costs and the “benefits” being sought by politicians bidding with other people’s money. Far better to leave the money with taxpayers, who have other things to do with the resources, and depend on capital markets for investment, since for private ventures there must be some chance of producing net value.