What is seen and what is obscene

Posted: Mar 14, 2004 12:00 AM

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.

Welcome to the obscene.

A Bigger Picture Yet

The Washington state subsidy of Boeing's 7E7 plant is not an aberration. In fact, many other states bid for the plant, presenting Boeing with their own "incentive packages." Washington's was simply the most extravagant. Governor Locke and his legislature bent over backward for Boeing. This is real-world politics.

How unreal, then, is the standard rhetoric of the left. While Democrats talk hysterically of "making the rich pay their fair share" and of "closing loopholes for corporations," at every level they work to provide tax breaks and other "incentives" for a few select big businesses, making the bulk of businesses pay more than their proverbial "fair share." Gary Locke of Washington, after all, is not a so-called "Big Business Conservative," he's a Democrat in good standing.

And it's not as if this take-from-the-poor/give-to-the-rich subsidization game is out of place in the party. After all, the further left you go, the more people you'll find who fervently believe that forcibly taking wealth from some and giving it to others makes everybody better off. It's a laughable notion, but they point only to the recipients--and they think they're being clever.

Still, don't let the Republicans off the hook. After all, Republicans often bill themselves as being able to "promote business," which often means nothing other than throwing money at this business or that. Every Washington state Republican senator voted for the Boeing 7E7 tax incentives.

Churning and Churning in the Widening Gyre

The case for business subsidy lies in its political rewards, not its economic sense. Anyone who truly cares about economic progress and the general welfare opposes such schemes. Churning money from bucket to bucket does not increase wealth.

But the costs of subsidies are diffused throughout the economy, borne by millions of taxpayers and businessmen, while the benefits are quite concentrated--with those receiving them apt to be grateful. Rest assured, career politicians will never solve this problem. Once you enter the political fray, your incentives change.

Term limits would help, both by enabling more real-world business experience in the legislature and by lessening the value of reelection--and with it, the incentive to make economic mischief for political gain. Furthermore, it's easier to withstand the seduction of spending other people's money when one's stay in the halls of corruption is short.

Still, a more direct attack on these subsidies is in order. The policy of awarding special advantages to some businesses over others is as offensive as awarding advantages to certain races or religions over others.

The 14th Amendment?s guarantee of "equal protection" should already proscribe these special deals. A national prohibition would end the escalating competition between the states and localities to offer ever-bigger advantages to the biggest companies at the expense of everyone else.

But if the now-you-see-it/now-you-don?t equal protection clause isn?t operational, let citizen activists begin, through the initiative and referendum process, to address this policy by initiating reforms and taking these sweetheart deals to the voters in referenda.

The $40 billion estimated price tag does not measure the extent of the damage. The ideal of a free market, where ingenuity and hard work are more important than political connections, is being lost. In its place we see corruption, obscene government, and subsidy as a way of life.