WHAT THE McDONNELL CASE TELLS US ABOUT
GOVERNMENT ‘DEVELOPING’ THE ECONOMY
Last week former Virginia Governor Bob McDonnell was convicted of 11 counts of corruption related to his acceptance of personal gifts in exchange for using gubernatorial power to promote a company named Star Scientific. The story of McDonnell’s downfall will no doubt be used as yet another example of the need to get money out of politics.
That shallow interpretation, however, entirely misses the point. What generated the McDonnell scandal isn’t that a company tried to use governmental power to its advantage. What generated the scandal, rather, is that governmental power was in a position to meet the company’s request in the first place. And that problem is present in one way or another at every level of government in the United States. When governmental authorities can give preferential treatment to certain companies and not others, whether in the form of promotional efforts or tax breaks or outright subsidies, companies will try their hardest to gain those benefits.
And why not? If they don’t, their competition will.
While the former Virginia governor’s actions were unethical, they weren’t that unusual. Politicians across the country routinely engineer deals to provide benefits to one company or another, but as long as they don’t accept cash or material gifts, they can claim to be involved with “economic development.” Politicians do get something out of these deals, however. If nothing else, they gain political capital by claiming their incentives packages helped to generate private investment or jobs. These same politicians can later leverage this capital for electoral gain.
So politicians receive political benefits and businesses receive financial benefits. What do citizens get? Supposedly they get “jobs” and economic growth, but the empirical evidence for this claim is deeply unpersuasive.
In recent decades, of course, South Carolina state government has been committed to an economic development strategy based on taxpayer-financed incentives. Yet despite the commitment to and heavy use of incentives, the economic prospects of South Carolinians showed little improvement over the first decade of the twenty-first century. The trend has continued in the 2010s, too.
Economic incentives fail to produce lasting growth for this simple reason: public officials don’t know which businesses are going to create value, and which won’t. Only the market process driven by the free choices of consumers can signal which companies are best producing value. Incentives just like private investments are a gamble, but they face worse odds of success because public officials (unlike private investors) don’t have any personal stake when “investing” public money.
To put it otherwise: There is far less motivation to do the homework on an investment when it’s being made with someone else’s money. This problem of motivation can help to explain a number of recent incentives deals that, as reported by The Nerve, failed to produce promised jobs and investment, and in some cases were even given to companies where executives currently faced or would go on to face legal action from accusations of fraud.
Incentives would be harmful enough if confined to wasting taxpayer dollars. Unfortunately, their capacity to generate waste stretches into the private sphere as well. The mere knowledge that incentives are available causes businesses to lobby politicians in order reap the benefit of targeted tax breaks or subsidies. Companies can’t be blamed for this behavior; it’s in their rational self-interest to get every possible benefit they can from the government in order to become more profitable. Businesses are also encouraged to lobby by knowing that if they don’t seek some form of government favor, their competition may not be so noble and may use the state to gain a competitive edge.
But while subsidy may benefit businesses, it harms the consumer. Every dollar that a business spends on lobbying for subsidies is a dollar that isn’t being spent on productive enterprise. When companies lobby for subsidy, they aren’t engaged in the creation of wealth: they’re seeking to seize a share of wealth taken from taxpayers. Unlike competitive enterprise, lobbying is a zero sum game; every dollar won through lobbying is a dollar lost by someone else.
Ultimately, economic incentives can distort profit and loss signals for a time, but they are not a substitute for genuine economic growth driven by value creation.
As long as subsidies are available, businesses will use every available means to get them – and politicians like the former Virginia governor will soil their reputations in the process. If we want to get money out of politics, our first task should be to get politics out of money.