[Editor's note: This story originally was published by Real Clear Policy.]
By James M. Hohman
Real Clear Policy
As lawmakers ask whether the unemployment insurance system is holding back the country’s recovery from COVID-19, they ought to be focused on a bigger question: How do we want to recover? New opportunities will emerge and old investments may not pay off, which will bring bigger structural changes than temporary labor shortages. To encourage better growth for everyone, states ought to abandon their practice of using taxpayers’ hard-earned dollars to try to lure businesses to relocate or expand.
Right now, when Amazon or Foxconn or whoever says that they’ve got a project to place somewhere, states pull out their checkbooks. It doesn’t matter to politicians whether these jobs actually drive state growth (they do not) or even whether the costs are worth it (they are not); politicians want to show that they’re doing something about jobs.
Even if these corporate handouts could deliver on their promises, this is not the kind of competition between states that benefits the public. People shouldn’t want local prosperity to come to the places that spend the most taxpayer cash on business subsidies. They should want companies to go to the place where it makes the most sense. The point of the economy is not to create jobs, but to get people the goods and services that they want. Economic growth is caused by people using their brains, brawn and determination to better serve human interests and needs, not by political deals to move businesses from one place to another.
While lawmakers label their attempts to bribe companies to their borders as “economic development,” they do not result in a better use of resources. Instead, these programs waste resources so that politicians can appear to be helping the economy grow. They’re not economic development programs, they’re political development programs.
It’s no small chunk of change, either. It’s $95 billion a year that gets spent for such purposes. By way of comparison, only $52 billion gets spent on fire protection. This spending is hard to stop, though, as policymakers claim that their states will lose out if they cease while other states do not.
There is a way out of this conundrum, however. States ought to join together in an interstate compact and agree that they won’t spend their taxpayers’ dollars to lure businesses. They can agree that they’d rather compete over business climate and investments in their communities rather than unfair giveaways to politically popular companies or industries. When enough states sign up, they agree to stop offering their subsidies. Compacts to end this kind of competition have already been introduced in 14 states.
While the fact that these business subsidies are expensive, ineffective and unfair to the businesses that don’t get them and the taxpayers that have to pay for them, they are popular enough with politicians, and they exist in every state. That popular support ought to change.
People should be skeptical when governments start to subsidize businesses. Private favors at the public expense ought to be rejected on principle, and it will be politically unpopular if there are enough people who believe that this is an inappropriate thing for governments to do.
This isn’t some hypothetical world, either. This belief used to be widespread in America. Most state constitutions ban the use of public money to support private businesses, which have unfortunately been defanged by the courts. And it used to be a judicial doctrine that public funds had to be spent for public benefits rather than a company’s private advantage.
Michigan voters called a state constitutional convention in 1961 and the delegates talked about explicitly loosening these rules. The idea to directly subsidize some businesses to spur economic growth was discussed and rejected. As one delegated noted, “The soundest and most wholesome economic development will not be an artificially stimulated state industrial subsidy … but one based on a positive, forward looking leadership, sound government and free enterprise.” These are sentiments not from an academic ideologue, but rather the politically active representatives of the people.
If there was today the kind of broad skepticism of favors that existed back then, governors would be lining up to agree with each other to end their business subsidies.
James M. Hohman is the director of fiscal policy at the Mackinac Center for Public Policy.
[Editor's note: This story originally was published by Real Clear Policy.]
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