Corporate Welfare Undermines Economy

State politicians, ranging from Gov. Beverly Perdue to U.S. Sens. Richard Burr and Kay Hagan, descended on the Research Triangle Park recently to help celebrate an economic incentive deal with Cree Inc., a Durham-based light manufacturer. The deal will reportedly "create" 244 jobs.

Unfortunately, the economic reality behind the festive event is not worth celebrating.

What the Cree ribbon-cutting ceremony actually represents is a harmful economic fallacy debunked centuries ago. Focusing exclusively on the jobs "created" by the Cree incentives deal (or the Greenfire Development deal, for that matter) only describes the readily seen effects of the incentives.

Ignored are the unseen effects.

As the 19th-century French economist Frederic Bastiat pointed out more than 150 years ago, "There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen."

In order to provide sound economic analysis, the negative effects of these disruptive corporate welfare schemes must be foreseen.

What jobs must be destroyed, or never created, in order to finance the jobs "created" by the Cree and Greenfire incentive deals? It is impossible to know, but that makes them no less real.

Moreover, when government gets involved in granting favors to specific companies, the market process of allocating resources into the hands of entrepreneurs who can most efficiently create goods and services to satisfy the needs of consumers is distorted. Politically connected firms gain a competitive edge based not on superior efficiency, but because of their ability to lobby for special treatment. Such distortions impede the dynamic process by which new and more efficient means of production and innovation are discovered. Innovation and efficiency gains are an important part of generating wealth and lifting our standard of living.

This laissez-faire school of thought was recently described in these pages as a "Frankenstein" mindset — that the economy is "a creature of many parts that exerts its own will." That’s not quite how we see it, though.

The economy, or more properly the market, does not have a will of its own. Indeed, the market is a process of constant adjustments among individuals acting according to their own value judgments. There is no collective "will" of the market guiding it toward any destination. Rather, the economy involves a neverending process of market participants altering their behavior in order to best bring their interests into harmony. This involves consumers sending signals to producers through their daily decisions of what to buy, what not to buy and how much they are willing to pay.

Producers adjust their actions in turn, guided by a system of profit and loss. Thus, those producers that most efficiently anticipate and satisfy the needs of consumers are rewarded with profit, while those that don’t adjust are punished with losses.

It is this market process that ensures our society’s scarce means of production and resources are directed to their most valued uses. When this highly complex process is distorted, resources are squandered and society is worse off.

When politicians create an uneven playing field, the flow of the means of production is disrupted by favoritism. In the case of Cree, they will consume resources like labor, land, technology and other equipment — along with more than $4 million in the form of incentives ¬

This article was originally published in the Durham Herald-Sun on September, 25, 2010