We Need a Federal Law Banning Public Subsidies for Private Companies

American states, counties, and cities routinely offer huge tax incentives and subsidies to private businesses in order to lure those businesses into locating themselves in a particular place. Spend a little to get a lot, the theory goes. Priming the pump of economic development, etc. The problem is that what is supposed to be spending for the public's benefit in fact benefits only private corporations. And it should be outlawed.

If you have not read Louise Story's grand NYT investigative series on this topic, I encourage you to do so now. It illustrates quite clearly the two main drawbacks of this asinine pattern of chasing private investment with public money: First, the fact that American municipalities are competing against one another means that the money spent produces no net gain for our country; and second, most businesses would do whatever they would do even without these massive public subsidies. Corporations are machines designed for making money, and if they find that they can make money by playing municipalities against one another, of course they will. But if business is bad, they close, or move, and they make those decisions based upon raw business considerations, not upon any promises of goodwill towards specific areas that graciously showered them with cash.

The NYT points to G.M., which reaped billions in public subsidies in this manner, and then promptly closed or relocated factories when it needed to, leaving the cities with nothing to show for their money. This is bad.

For many communities, the payouts add up to a substantial chunk of their overall spending, the analysis found. Oklahoma and West Virginia give up amounts equal to about one-third of their budgets, and Maine allocates nearly a fifth.

All this money spent simply to retain business already there, or to try to woo businesses away from somewhere else. Remember, when Oklahoma attracts a factory from, say, Alabama, Alabama loses. This is a zero sum game on the national level. The only winners are the private businesses who are playing states against one another.

Soon after Kansas recruited AMC Entertainment with a $36 million award last year, the state cut its education budget by $104 million. AMC was moving only a few miles, across the border from Missouri. Workers saw little change other than in commuting times and office décor. A few months later, Missouri lured Applebee's headquarters from Kansas.

This is, essentially, economic trench warfare between states, in which both take massive losses in order to make no forward progress. This is public money—your money, my money, money that can be used to hire teachers and police and firefighters and to pave roads and build hospitals and feed the hungry and house the homeless. Instead, that money is funneled into the pockets of private businesses, where it enriches executives and shareholders, rather than helping out the public at large. The article notes that with the money that New York hands out to film producers every year, the state could hire 5,000 teachers.

Do you think that New York could use 5,000 more teachers? I think so.

For private businesses, this is found money. A delightful bonus, given to them by taxpayers, just for doing what they would be doing anyhow—namely, operating their business in a normal fashion. This is not an activity that needs or deserves to be subsidized by taxpayers. The solution to this is very simple: a federal law banning business subsidies that exist for no reason other than interstate competition. If no states were offering these bonuses, businesses would make their choices on normal business considerations, and taxpayers would save billions. The two sides of this story are very simple and clear cut. The government perspective:

"If you've got some states doing it, it's hard for the others not to do it," [former Illinois governor Jim] Edgar said. "It's like unilaterally disarming."

And the business perspective:

"I know people like to blame the industry for taking advantage of the incentives, but you go back to what your fiduciary responsibility is to the stockholders," [former GM executive Marilyn] Nix said. "As long as you've got people that are willing to better the deals, the management owes it to their stockholders to try to get the best economic deal that they can."

If businesses know the money is available, they will do everything to can to get it. That is what corporations do. They do not care about the general public good. They care about their bottom line. Likewise, if states know that other states are offering subsidies, they will do it also. That is what state governments do. They do not care about the general public good. They care about the good of the citizens of their state. They will happily work to make citizens of other states unemployed, if it benefits their own citizens.

"The business community" is always wiling to carry on about its patriotism and good citizenship. Here is a chance for them to prove it. They can start by paying their taxes, rather than taking our tax money.

This is why we have a federal government. Ban this scam. Draw the law carefully and clearly, and ban it. And hire some teachers.

[NYT. Photo: chloester/ Flickr]