Politics, we are told, makes for strange bedfellows. But the orgy of bad policy that erupts out of legislative assemblies around the country stretches the metaphor. None more so than the policy of business subsidy: in short, welfare for the rich.

This is the economic policy that is most obviously perverse, the kind that should be easiest to combat. And yet it is rampant. It is a vice not merely tolerated and accepted, but actively and enthusiastically practiced by politicians--both Republicans and Democrats--in every state in the union.

Subsidy as Way of Life

The idea is simple: give tax money to a business so that it will stay within the boundaries of the political organization doing the granting. The execution can be more complex, from straightforward donations to elaborate tax breaks.

Though many business subsidies go on at the federal level--for instance through the Export-Import Bank--the bulk of it increasingly takes place at state and municipal levels. There's no official data as to its extent. Alan Peters, a University of Iowa professor of urban planning, is one of the few academics to hazard an informed estimate of the total loss of city and state tax revenue nationwide. His guess? At least $40 billion.

Of course, there are gains. The recipient company obviously benefits, and usually stays in the area.

But not always: sometimes the subsidized do not stay put. In the early '90s,

Indianapolis raised hundreds of millions to build a state-of-the-art maintenance center for United Airlines. But after a few years the airline figured that even with the subsidy it was too expensive to do the work there, and so it outsourced to the south. Indiana's multi-million dollar facility now sits vacant.

Boeing, Boeing: The Bouncing Logic of Business Subsidy

Boeing, the aerospace company, has been a seasoned recipient of government subsidies. It was for ample reasons that the U.S. Senator from Washington was commonly called "the Senator from Boeing." Regular readers of my Common Sense e-letter are well informed on the many special favors the Congress has awarded Boeing.

Last year, the Washington legislature threw over $3 billion at Boeing to entice the company to build its new 7E7 assembly plant in the state. To sweeten the deal, the state agreed to set up a plush employment center just for Boeing, and is kindly arranging for a local government to build the company a deep-water port.

The politicians, bureaucrats, and businessmen who dream up these schemes aim, of course, to provide long-term benefits to the communities doing the subsidizing (as well as to themselves). But like most government interventions into markets, it's all based on illusion.

We see fairly clearly the positive effects: jobs. We lack the same clarity to see the real costs: other jobs--and the impartiality of government. These remain unseen.

Governor Gary Locke explained that the state had "as many as 150,000 jobs" and "$540 million tax revenue per year" at stake in this one Boeing plant. So the $3.2 billion "incentive package" that he pushed through seems fairly reasonable, no?

No. Those "150,000" jobs were not the jobs created at the proposed plant. That number will be no higher than 1,200--and could be as low as 800. The remaining 149,200 jobs in Locke's projection are all the real and imagined suppliers and grocers and garbage men, et al, who would service Boeing's plant and employees in some way. Oh, Locke also figured that if the state didn't help Boeing, the company would pull up and leave, so he threw in Boeing's total personnel, too!

If those 800 new jobs went elsewhere, would Locke's remaining 149,200 workers wander the Evergreen state doing nothing? Of course not. The economy is dynamic: companies would have managed supplying other businesses while some workers would find other jobs.

And of course the dire possibility of an unsubsidized Boeing bugging out lock, stock and barrel was more scare tactic than certainty. Predicting the movements of businesses is tricky. Many of the suppliers Locke figured in his projection aren't moving to Washington after all. Had Boeing left, it follows that some of Washington's current Boeing suppliers would also have stayed put.

Locke's projected tax revenues likewise diminish in significance. And, in the standard politicians' manner, he ignored the costs of the initial outlay and the tax breaks offered.

If you are taxed so that Joe Bloeing may prosper, you're out some funds. If you hadn't been taxed, you would have spent that money in trade with others. Helping Joe causes secondary effects; but leaving you untaxed would also have had secondary effects. But these are unseen?at least by politicians who can?t take the credit.

Plus, tax breaks given to Joe mean that his competitors continue to shoulder a burden that Joe himself does not. Hardly a level playing field and the opposite of a free market.

We can also see plainly that it is the largest companies that gain; it is the smaller, newer competitors who are most often harmed. This, despite the lack of loyalty these big companies show to their regional subsidizers. Boeing is the state's largest outsourcer, and, since the tax incentive plan was voted in, it has fired three times more people in Washington state than it will hire for the new plant. Continued...