The realpolitik of state business subsidies

The realpolitik of state business subsidies

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

It is all baloney.

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

Elected officials don’t come up with a lot of original ideas. There are many people who pitch them things, though. Each governor has a line out the door of people who want to present their case.

This is a tendency that rigs the game against taxpayers. It’s the classic problem of concentrated benefits and diffuse costs. Some people see a common interest, band together around it and ask for favors. The problem is that there are costs to giving them the favors. The people who face the costs are not banded together, so they are unlikely to lobby against the favors.

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

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

Hollywood asking for cash, manufacturers asking for “tax withholding capture,” research firms asking for tax credits and others are clearly people asking for favors at the public’s expense.

Politicians get something in return for saying yes. Sometimes they may get campaign contributions. But the press they get from business handouts is more valuable.

They get to show up at ribbon cutting and groundbreaking ceremonies. They get their names in the news about what they did to create jobs. And they get lavished with praise from the people involved.

It is as simple as that.

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

If it were, a state’s major industries wouldn’t be its biggest beneficiaries. Aerospace is at the top of the list in the state of Washington, oil and gas get the lion’s share in Louisiana, and Michigan gives hundreds of millions to the auto industry. The big guys in the state ask for favors, and lawmakers are prone to give them what they want.

Subsidies are about showing that the lawmaker is doing something about jobs, which is different from improving economic performance. Lawmakers trumpet their job announcements rather than their record at turning press releases into growth. There’s little followup with the subsidized companies, and lawmakers hope you just take the press release at their word. The sophisticated assessments of the economic effects of favoritism demonstrate that it never lives up to the hype.

Elected officials usually just talk about jobs to explain why their favors are important. If you press them, they might offer two other justifications: that they have to offer subsidies to compete with other states, and that it’s better to offer favors than miss out on company expansions.

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

The excuse that states ought to give out favors rather than missing out on some business expansion or relocation remains a convenient excuse. But nobody seems to want to test that claim. These subsidies are selective, after all, and lawmakers can opt out of deals if they feel like it. But there are no political benefits from withholding money.

People ought to recognize that the benefits of corporate welfare go to politicians and big businesses, not to the public. If they did, politicians would be more likely to reject requests for favors.

Editor’s note: This article originally appeared in The Hill March 30, 2024.

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