Incentives Tread all over Fairness

Originally appeared in the Raleigh News & Observer, Sept 14, 2007.

North Carolinians who are still convinced that targeted incentives like those approved for Goodyear and other corporations are a good idea should start thinking outside the golden begging bowl.

I know, I know — some jobs will be spared by state aid to big tiremakers. But consider what’s lost.

Suppose government was to apply this Goodyear-type incentive as a consistent principle. That is, suppose any time a company threatened to move, reduce its work-force or change to become more efficient the state would pay it not to.

Depending on the business’ size, you could pay each company a corresponding amount. Even though these companies might not need the blubber — excess labor, product or whatever — the government would, as a matter of principle, hand out cash to keep them from changing. All in the name of keeping jobs. What would happen?

Consider this from economist Fred Sautet: "While across-the-board tax cuts expand economic activity, targeted tax incentives are inevitably financed at the expense of established businesses. Today’s winner of [incentives] is tomorrow’s victim of a broad increase in business taxes. Assuming, that is, this employer sticks around."

Companies everywhere would become like some teenagers — dependent couch potatoes on an allowance. Which is to say that the companies would be far less likely to make the changes needed to increase productivity, free up investment capital or offer better products at lower prices.

Instead, they’ll be more likely to invest in getting government goodies (lobbying). Making the wrenching changes required to remain competitive, flexible and solvent in today’s economy would be unnecessary in the short term. Why compete when you can blackmail the government?

As a result of such a principle, long-term growth is stifled and a special-interest Pandora’s Box springs open. Because dependent industries are not sustainable over time, we’d end up like 1990s Japan — a collection of uncompetitive interests for whom all the welfare would eventually dry up. The economy would lose its dynamism.

True, we’re only talking about targeted incentives, not a guiding principle. But aren’t targeted incentives different only by degree?

THE IDEA THAT COMPANIES SHOULD NEVER GO AWAY IS JUST NOT RATIONAL. It’s like saying no one should ever fail. This sort of utopianism isn’t just bad for efficiency, it overlooks the fact that folks have to pay taxes to keep less efficient companies in that condition (at the expense of other sectors people might spend money on). Economically, it’s rather like cutting off a digit to treat a boil.

If we didn’t give Goodyear the money, Fayetteville would probably lose jobs. But people in Podunk, Ind., may lose jobs as a new plant moves to Fayetteville next month. People in Podunk and Fayetteville could both benefit from a streamlined facility in California. And people everywhere will enjoy cheaper products and services as a result of all of these measures — because companies change in order to be more competitive, to re-invest in bigger ventures and to profit.

The economy is a dynamic ecosystem that we can’t design. While changes do affect people in the short term, we cannot continue to labor under the notion that government can successfully keep companies from changing without adverse distortions. Sure, a few politicians and a handful of thankful voters may gain from handouts that keep a company from getting leaner. But everyone else will lose out. In the long run, the unseen costs are huge.

WE SHOULDN’T FORGET HOW UNFAIR IT IS that mega-corporations enjoy the fruits of corporate welfare when small businesses don’t. I’m not suggesting everyone should get handouts. I am suggesting these policies aren’t principled, nor could they be. (There’s no trough big enough for every company to sidle up to.) But that makes incentives fundamentally unfair on the one hand, economically backward on the other.

North Carolina offers subsidies because its business environment is not particularly fertile. That should prompt us to ask: Instead of paying companies to come or stay, shouldn’t we be working on making our business climate more hospitable? Shouldn’t we be lowering corporate taxes to be competitive with other states? Indeed, aren’t we being so aggressive with our subsidies because we’re not competitive?

Currently we’re engaged in a bitter arms race in which states compete by throwing money at companies that don’t need it. That’s not capitalism. It’s another form of corporate welfare that distorts the market and enriches America’s largest companies. And while most politicians are operating under the calculus that "if we don’t do it, some other state will," it’s time our leaders exercised true leadership.

(Max Borders is a policy analyst for the Civitas Institute in Raleigh.)