The realpolitik of state business subsidies

The Biden administration recently announced $8.5 billion in subsidies to build new Intel semiconductor plants. It sounds like a great deal, as subsidies often do if you only listen to what politicians say when they write big checks to big companies. It provides good paying jobs for workers. It protects the future of the country. It shows that this is where people want to be. We are building economic momentum. Yada yada yada.

It’s all baloney.

There is a very simple reason that politicians hand out elected favors. A company spokesperson asked for a favor and the elected official says yes.

Elected officials don’t come up with many original ideas. However, there are many people who do things to them. Every governor has a line out the door of people who want to make their case.

This is a trend that rigs the game against taxpayers. It is the classic problem of concentrated benefits and distributed costs. Some people see a common interest, rally around it, and ask for favors. The problem is that there is a cost to granting them favors. The people who face the costs are not unionized, so they are unlikely to lobby against favors.

One lobbying firm had a great way of putting it, in a sales pitch for its services: “If you’re not at the table, you’re on the menu.”

Not everyone asks for special favors. Sometimes people really want a policy that benefits the public. But because the beneficiary will gain a lot from the subsidy, while an individual taxpayer will save little by preventing the subsidy, the scales are tipped against the public.

Hollywood looking for money, manufacturers looking for “withholding tax capture”, research firms looking for tax credits and others are clearly people seeking favors at the expense of the public.

Politicians get something in return when they say yes. Sometimes they may receive campaign contributions. But the press they get from business flyers is more valuable.

They may appear at ribbon-cutting and groundbreaking ceremonies. They get their names in the news for what they have done to create jobs. And they are praised by the people involved.

It’s as simple as that.

Let’s note what is not a business material. It’s not a strategic decision about trying to get a piece of a growing industry.

If it were, a country’s major industries would not be its biggest beneficiaries. Aerospace tops the list in Washington state, oil and gas takes the lion’s share in Louisiana, and Michigan gives hundreds of millions to the auto industry. The big boys in the state ask for favors, and lawmakers are eager to give them what they want.

Subsidies are about showing that the legislature is doing something about jobs, which is different from improving economic performance. Lawmakers trumpet their job announcements instead of turning press releases into increases. There’s little follow-through with subsidized companies, and lawmakers hope you’ll just accept the press release. Sophisticated estimates of the economic effects of favoritism show that it never lives up to the hype.

Elected officials usually only talk about work to explain why their favors are important. If you press them, they can offer two more excuses: that they need to provide subsidies to compete with other states, and that it is better to offer favors than to lose company expansions.

The contest point rings hollow. Instead of competing for favors, elected officials can agree with each other to stop giving away public money. They could enter into an interstate compact to end selective favors. But they are less interested in that than saying yes to companies that demand special treatment.

The argument that states should give favors rather than lose any business expansion or relocation remains a convenient excuse. But no one seems to want to test this claim. After all, these subsidies are selective, and lawmakers can opt out of the deals if they want to. But there are no political benefits to holding money.

People need to understand that corporate welfare benefits go to politicians and big business, not the public. If they did, politicians would be more likely to refuse requests for favors.

James Hohman is director of fiscal policy at the Mackinac Center for Public Policy, a free-market research and education institute based in Midland, Mich.

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