Subsidizing business is a bad idea whoever does it

Events occasionally produce some good natural experiments. The fates of East Germany and North Korea relative to their neighbors to the West and South showed pretty clearly the superiority of capitalism over communism as an economic model.

The ideological ‘Border Battle’ between Minnesota and Wisconsin isn’t quite so stark. But the generally free market policies of Badger State governor Scott Walker make an interesting comparison with the more state-interventionist ones of our own Mark Dayton. ‘Progressives’ in Wisconsin and conservatives in Minnesota frequently look across the St Croix with more fondness than you might find in the states themselves.

Bad policy isn’t a monopoly

But bad policy is bad policy whoever it comes from. The much touted Foxconn deal across the border in Wisconsin doesn’t look so good.

There is an extensive economics literature on why government subsidies to business are generally a bad idea. If an investment is a good idea, why isn’t someone doing it already? The notion that politicians make better investors than, well, professional investors, would seem optimistic.

And politicians, on average, are no different to anyone else, on average. Generally speaking, politicians and investors invest to maximize returns. Private investors usually seek private returns. But so, generally, for all their rhetoric of broader ‘social’ returns, do politicians.* While an investor might gauge the success of an investment by how much money it bought her, a politicians might judge it by how many votes it brought.

People who live in glass houses…

But before we get too smug, we ought to note that such boondoggles are practiced here as well. In a recent interview with Twin Cities Business, Governor Dayton was asked

Q You’ve supported subsidies for some business ventures in the state, such as a proposed Louisiana-Pacific siding facility on the Iron Range. What’s your demarcation line on where the state should subsidize and where it shouldn’t?
(Dayton) It’s very competitive with other states offering subsidies. Now, there are studies that have shown they are not effective, but the reality is that a company like Digi-Key, interested in expanding in northwestern Minnesota, is a huge economic benefit to the region. When I was DEED [Department of Employment and Economic Development] commissioner, we looked at costs versus the economic gains of employment and tax collections.

Q But if studies show they are not effective . . . 
(Dayton) You can argue it either way, but it’s not a perfect world. Cliffs Mining has announced they’re going to develop a new facility in Ohio; $300 million in incentives. Their Republican governor is happy as can be. Incentives do make a difference.

Q So your criteria is a net economic benefit? 
(Dayton) Exactly.

One might suggest that private investors with their own capital at stake and even DEED are better judges of net economic benefit than Governor Dayton. Might the criteria be to shore up support with elections coming up?

Repentant ‘progressives’

Either way, opposition from ‘progressives’ to the taxpayer subsidies involved in the Foxconn deal are to be welcomed. For decades, they have seldom seen a failing industry they did not want to throw taxpayers money at to support. The lavish handouts to uncompetitive ‘green’ energy sources – $176 billion to wind alone – are the latest result of this. If Foxconn has brought them to their senses, the money may be worth it after all.

Anyway, about that Border Battle…

* This is one of the key insights from Public Choice economics.

John Phelan is an economist at Center of the American Experiment.