Friday, May 6, 2011

Are All Business-Friendly Expenditures "Corporate Welfare?"

Dispenser of Corporate Welfare?

Today the Richmond Times-Dispatch praises Virginia Governor Bob McDonnell for his veto of legislation appropriating taxpayer funds to Virginia's Public Broadcasters. The paper quotes with approval the Governor's statement that: "We must get serious about government spending. That means funding our core functions well, and eliminating spending on programs and services that should be left to the private sector."

At the same time, the paper also takes Governor McDonnell to task for "handing out" other "subsidies" to private business, subsidies used to induce such businesses to locate in Virginia. The Times-Dispatch cites what it calls "$6.9 million in state spending to bring a Microsoft data center to Mecklinburg," thereby inducing Microsoft to bring 50 new jobs to the state. The paper also cites a $300,000 expenditure to support a new General Electric IT center in Henrico, as well as $4.6 million in state assistance to support the production of a Steven Spielburg movie in the state, calling such expenditures "corporate welfare." The Times-Dispatch concludes with the following ringing critique of the sort of subsidies this Governor --- and past Governors as well --- have used to attract businesses to Virginia.

"The free market, say free-marketers — including, presumably, the governor — is the most efficient and effective allocator of resources. Using state money to distort market decisions leads to less than optimal outcomes. We agree with the governor about public broadcasting. Now if only he could agree with himself."

While the Times-Dispatch may be onto something, its critique of the Governor paints with too broad a brush. To be sure, simply handing out taxpayer cash as bounties to reward firms for locating in the state will result in an allocation of resources different from that produced by a free market and thus presumptively destroy wealth, as such subsidies will distort firms' investment decisions. Still, all government spending is not created equal, and not all such spending is analogous to such bounties. Indeed, some of the spending that brought the Microsoft project to the state is what the Times-Dispatch itself concedes is "infrastructure." According to one source, the Governor and Lieutenant Governor Bolling have worked to increase "the number of sites with roads and infrastructure in place to handle large facilities. Those changes have resulted in projects like software maker Microsoft Corp.’s plan to invest up to $499 million and create 50 jobs at a data center in Mecklenburg County."

Many, including Adam Smith, would argue that the construction of such infrastructure is a core state function and thus not analogous to the sort of naked subsidy that the Times-Dispatch rightly condemns. After all, such infrastructure will benefit firms and individuals other than Microsoft, and construction of such infrastructure at an efficient cost will require deployment of the power of eminent domain to acquire the necessary real property. Thus, reliance upon an unbridled private market to build such infrastructure will result in under-investment in such projects, because 1) private actors won't be able to capture all the benefits of such projects because so many will benefits and 2) such actors will pay higher than reasonable prices for the land necessary to construct them. Investing in infrastructure to attract new business to the state seems to be an example of competitive federalism at work and is entirely consistent with the Governor's veto of handouts for public broadcasting.

Of course, not all subsidies doled out by Virginia and other states take the form of justified investments in infrastructure. Some such subsidies seem to be outright grants, like the $4.6 million incentive package of tax credits, in-kind contributions and other funds used to lure the production of a Steven Spielburg movie to the state. As the Times-Dispatch suggests, such naked largesse is no more justified than doling out funds to public broadcasting. (Some such expenditures are "in between," like the $300,000 the state will spend to subsidize job training and recruitment by GE in connection with its construction of an IT Center in Henrico. While there are solid arguments for subsidizing some job training programs, it's not clear why GE cannot pay its own recruitment expenses.) Moreover, applied across the board, a policy of bidding for such businesses with outight grants would rapidly bankrupt the Commonwealth, particularly if firms already located in the state begin making credible threats to depart as a way of extorting similar largesse out of the state for themselves. To avoid such bankruptcy, Virginia would have to pick and choose among various possible recipients of such largesse, that is, pick winners and losers.

In sum, the Richmond Times Dispatch is on to something, even if has painted with too broad a brush. As this blog had previously explained, empowering governments to steer the allocation of scarce resources by handing out naked largesse will likely reduce our economic welfare. This is one of those rare instances in which reliance on competitive federalism could result in a "race to to the bottom." At the same time, we should not throw the baby out with the bathwater and condemn any and all state efforts to make expenditures, such as expenditures on infrastructure, that attract a company to its jurisdiction. And, we should not overlook the fact that Governor McDonnell supports Virginia's status as a right to work state and has worked to close the state's deficit without raising taxes, contrary to his predecessors who either raised taxes (Governor Warner) or tried and failed (Governor Kaine.) So, when it comes to policies that encourage a free market allocation of resources and thus facilitate wealth-creation, this Governor's glass is far more than half full.