9129i2019 ‘The Seen, the Unseen, and the Pitfalls of Business Subsidies | Inlematonal Liberty
International Liberty
Restraining Government in America and Around the World
Feeds: Posts Comments
The Seen, the Unseen, and the Pitfalls of
Business Subsidies
September 16, 2019 by Dan Mitchell
The great French economist from the 1800s, Frederic Bastiat, famously explained that good economists
are aware (https://danieljmitchell, wordpress.com/2015/01/30/the-wisdom-of-bastiat-as-revealed-by-
great-moments-in-federal-state-and-local-government/) that government policies
(https://danieljmitchell. wordpress.com/2015/01/30/the-wisdom-of-bastiat-as-
revealed-by-great-moments-in-federal-state-and-local-government/)have
indirect effects (the “unseen”)
Bad economists, by contrast, 01
(https://danic ichell. wordpress.com/2016/09/09/another-lesson-from-bastiat-
so-called-employment-protection-legislation-is-bad-news-for-workers/) direct effects (the "seen”)
Let's look at the debate over stadium subsidies. Tim Carney of the American Enterprise Institute
narrates a video showing how the “unseen” costs of government favoritism are greater than the “seen”
benefits,
titpsldaniamtchel wordpress.cor/2019/09/16the-seen-he-unseen-and-the-ifals-of-businese-subsidies! us9120i2019 “The Seen, the Unseen, and the Pitfalls of Business Subsidies | Inferatonal Liberty
Victims of subsidies | VICTIMS OF CRONYISM
Unfortunately, stadium subsidies are just the tip of the cronyism iceberg
(https://danieljmitchell.wordpress.com/2016/11/11/tesla-spacex-solarci is
plus-some-post-election-humor)).
In a-column (hitps//www dallasnews,com/opinion/commentary/2018/08/22/economic-development.
incentives-do-nothing-for-the-economy-or-development/) for the Dallas Morning News, Dean Stansel of
Southern Methodist University discussed some of his research on the topic.
While state and local economic development incentives may seem to help the local economy, the
offsetting costs are usually ignored, so the overall effect is unclear. Furthermore, from the perspective
of the nation as a whole, these policies are clearly a net loss. ...In a new research paper, my colleague,
Meg Tuszynski, and I examined Economic developnient incentives do
(nttpulfreedomandprosperity.orgiwp- nothing for the economy or development
content/uploads/2019/09/Sep-16-19-Stansel,jpg) whether there is any relationship between economic
development incentive programs and five measures of entrepreneurial activity. Like the previous
literature in this area, we found virtually no evidence of a positive relationship. In fact, we found a
negative relationship with patent activity, a key measure of new innovation. ...A recent study by the
Mercatus Center found that 12 states could reduce their corporate income tax by more than 20
percent if incentive programs were eliminated. That includes a 24 percent cut in Texas’ business
franchise tax. In six states, it could either be completely eliminated or reduced by more than 90
percent. These are big savings that would provide substantial tax relief to all businesses, both big and
small, not just those with political influence. ...That would provide a more level playing field in
which all businesses can thrive.
And here's a Wall Street Journal editorial (htt
11550274356) from earlier the year.
s://www.wsj.com/articles/another-subsidy-letdo
hitps:/daniolmtchell wordpress.com/2019I09/16the-seen-he-unst
the pitfals-of-business-subsidies! 2ssrono19 ‘The Seen, the Unseen, andthe Pills of Business Subsidies | Ilemational Lbery
Amazon left New York at the altar, turning down a dowry of $3 billion in subsidies. Foxconn’s
promised new factory in Wisconsin, enticed with $4 billion in incentives, has fallen into doub!
Now add General Electric , which announced...it will renege on its plan to build a glassy, 12-story
headquarters on Boston's waterfront. Another Subsidy Letdown
(http://freedomandprosperity.org/wy “
content/uploads/2019/09/Sep- 1g) ... The company reportedly ...pledged to bring 800 jobs
to Boston. In exchange, the city and state offered $145 million in incentives, including tax breaks and
infrastructure funds. GE’s boss at the time, Jeff Immelt, said not to worry: For every public dollar
spent, “you will get back one thousand fold, take my word for it.” ...two CEOs later, a beleaguered
GE won’ tbe building that fancy tower at all. There won't even be 800 jobs. .. .GE will lease back
enough space in two existing brick buildings for 250 employees. ... what a failure of corporate
welfare.
Let's wrap this up with a look at some additional scholarly research.
Economists for the World Bank investigated (https://papers.ssrn.com/sol3/papers.cfm?
abstract_id=3238341) government favoritism in Egypt and found that cronyism rewards politically
connected companies at the expense of the overall economy.
This paper presents new evidence that cronyism reduces long-term economic growth by
discouraging firms’ innovation activities. ... The analysis finds that the probability that firms invest in
products new to the firm increases from under 1 percent for politically connected firms to over 7
percent for unconnected firms. Do Politically Connected Firms Innovate,
(http://freedomandprosperity.org/wp- Contributing to
content/uploads/2019/09/Sep- World-Bankl jpg) The 19n8~Term Economic Growth?
results are robust across different innovation measures.
Despite innovating less, politically connected firms are more capital intensive, as they face lower
marginal cost of capital due to the generous policy privileges they receive, including exclusive access
to input subsidies, public procurement contracts, favorable exchange rates, and financing from
politically connected banks. ... The findings suggest that connected firms out-rival their competitors
by lobbying for privileges instead of innovating. In the aggregate, these policy privileges reduce
long-term growth potential by diverting resources away from innovation to the inefficient capital
accumulation of a few large, connected firms.
For economics wonks, here’s Table 2 from the study, showing how subsidies are associated with less
innovation.
hitps:/daniolmtchell wordpress.com/2019I09/16the-seen-he-unst
the pitfals-of-business-subsidies! ais9129i2019 ‘The Seen, the Unseen, and the Pitfalls of Business Subsidies | Intemational Liberty
(http: /ireedomandprosperity.org/wp-content/uploads/2019/09/Sep-16-19- WB-Table.jpg)
The World Bank also found awful results (https://danieljmitchell.wordpress.com/2018/08/30/the-hidden-
tax-of-cronyism/) because of cronyism in Ukraine,
But this isn’t a problem only in developing nations.
‘There's some depressing research (https://danieljmitchell. wordpress.com/2016/07/21/a-very-depressing-
chart-on-creeping-cronyism-in-the-american-economy/) about the growing prevalence of cronyism in
the United States (ethanol handouts (https://danieljmitchell. wordpres 122/ted-cruz
rand-paul-deserve-praise-for-their-admirable-and-principled~ oe encicoreupictharalubatlca
the Export-Import Bank (https://danieljmitchell. wordpress.com/2017/02/17/trump-big-government-
export-import-bank-and-the-washington-swamp/), protectionism
imitchell wordpress.com/2018/08/27/modern-day-protectionism-enables-cronyism-and-
corruption/), tax favoritism (https://danieljmitchell wordpress. com/2015/11/30/everything-y
peciainteresttaepovisions), bailouts bailout:
{hs dani itchel sondoress comm /2018/0(L4/eugarsubsidieedmnpose-adtte-pricecavearkers
consumers-and-taxpayers/), and green energy
(https://danieljmitchell. wordpress,com/2017/11/29/reducing-solyndra-style-cronyism-is-another-reason-
to-be-excited-about-tax-reform/) are just a few examples of how the friends of politicians get unearned
wealth).
Cronyism is bad under Democrats (https://danieljmitchell.wordpress.com/2017/05/04/cronyism-
corruption-and-the-obama-white-house/) and it’s bad under Republicans
(https://danieljmitchell. wordpress.com/2017/02/17/trumy overnment-th
the-washington-swamp/). Time for separation of business and stat
(https://danieljmitchell. wordpress.com/2017/08/24/to-fight-cronyism-lets-have-separation-of-business-
and-state/)!
port-import-bank-and-
Posted in Cronyism, Government intervention, Subsidies | Tagged Cronyism, Government intervention,
Subsidies, World Bank | Leave a Comment
Comments RSS
hitps:/daniolmtchell wordpress.com/2019I09/16the-seen-he-unst
the pitfals-of-business-subsidies! ais9129i2019 ‘The Seen, the Unseen, and the Pitfalls of Business Subsidies | Inlematonal Liberty
This site uses Akismet to reduce spam. Learn how your comment data is processed
Blog at WordPress.com,
titpsldaniamtchel wordpress.cor/2019/09/16the-seen-he-unseen-and-the-ifals-of-businese-subsidies!
WPThemes.
os