The Beacon Center, a libertarian think tank based in Nashville, has released a new film highlighting and describing the impact of corporate welfare in Tennessee. Starring University of Tennessee professor Glenn Reynolds, Rigged tells the story of small business owners in Memphis who were harmed by the massive tax breaks which the Shelby County government bestowed upon the furniture giant Ikea for opening a location in the Memphis area. The film has sparked a renewed focus on cronyism across the state.
Just recently, the four largest media firms in the state published the results of a ten month investigation into Tennessee’s subsidy and incentive programs. They found that the volunteer state’s corporate welfare programs amount to $2.5 billion annually. The Times Free Press reports that the Department of Economic and Community Development, whose raison d’être is to dole out state privileges, has increased its spending by 80 percent since Bill Haslam became Governor.
The investigation also lamented the lack of oversight and accountability. The Times Free Press concludes that it is impossible to conclude if these corporate welfare programs have succeeded even on their own metric, creating jobs. Some officials didn’t even have records of the size of their handouts. However, one does not need to have numbers to prove that cronyism is inherently detrimental to an economy.
Why Cronyism is a Fool’s Errand
The main benefit touted by supporters of corporate welfare programs is its ability to create jobs. Proponents maintain that businesses who receive subsidies, tax credits, and other privileges would not be able to profitably locate themselves within their community. The establishment of these business means more and potentially better jobs for workers in their area. These jobs provide incomes for workers and therefore raise their living standards as well. Without corporate welfare programs, proponents maintain that they would likely face unemployment and economic hardship.
The first flaw in this reasoning is the idea that jobs would not be created in the absence of corporate welfare policies. While it is true that businesses may be lured to different areas through these policies, focusing on these immediate and visible results is to ignore the full effects of the policy.
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Corporate welfare advocates fail to see the jobs which would have existed in the absence of their programs. The resources which were redirected by the state to these new businesses by subsidies and other privileges would have been used by other businesses to produce other goods. In simpler terms, consumers would have used their money to demand goods that most effectively meet their needs, and entrepreneurs would have used the resources in these communities, including labor, to produce them. After all, one must deny human nature to think that entrepreneurs would not undertake profitable business opportunities.
The above paragraph touches on perhaps the most fundamental flaw in these policies. The benefits of corporate welfare are not determined by consumer choice, but by the political decisions of legislatures and bureaucrats. In a free market where consumers are allowed to freely exchange, profit and loss are naturally determined by how well a business predicts and satisfies consumer needs. Through this crucial mechanism, consumers ensure that resources are being used in the most effective and efficient manner, as nonproductive firms are consumed by losses and productive ones are lavishly rewarded with profit.
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In fact, the only reason a business would need a subsidy or tax credit to exist is if it is not capable of adequately meeting consumer needs. Through corporate welfare, government forces resources into inefficient lines of production, allowing failing firms to exist at the expense of consumers. The economy’s production structure becomes distorted, and no longer reflects the real demands of the people. The misallocation of resources cause by the state’s crony policies means that less real wealth is being created than would be in their absence, consumer needs are poorly met, and wealth goes into the hands of those who have not properly earned it.
Once one recognizes this misallocation of resources, any jobs which are supported by corporate welfare are of a temporary nature. Barring any significant changes in economic data, these firms are only sustainable so long as the corporate welfare programs themselves are sustained. As soon as they stop or become otherwise insufficient, the business will fail, and the workers they employed will again find themselves in a period of unemployment. The severity of this transitional period is likely to increase as workers become increasingly specialized in these privileged fields, making it more difficult for them to fit into other industries.1
While undoubtedly a short term pain for those involved, the liquidation of these firms should be viewed as a major long term positive. With the state’s interference gone, resources would once again directed by profit and loss into production structures which more accurately reflect consumer preferences. With corporate welfare gone, less resources would be wasted, and more consumer needs would be met.
A Better Way to Promote Growth
Corporate welfare must come to an end if we want an economy which best fulfills its purpose, improving the lives of the most amount of people. The truth is that good businesses simply do not need the state’s handouts. Only bad ones do. If legislators truly wish to see their community grow and develop, they would be wise to pursue other reforms.
The best path for a legislature to take is to get themselves out of the private sector’s way. Economic growth is slowed, halted, or even reversed when the state taxes, regulates, or otherwise violates private property rights. Removing licensing laws, lowering taxes, and repealing burdensome regulations would all be great choices to accelerate economic development and promote the welfare of local communities. Crucially, these reforms should be as generally applicable as possible to avoid the same harmful and distorting effects of the current corporate welfare programs.
- 1I am indebted to the always insightful Bernardo Ferrero for this last point.
