The public is the loser in "economic war between the states"

Via Clawback, we see a new study by the Public Policy Institute of California that finds that the state's enterprise zones have no overall effect on job growth. That's in line with findings in other states, including Minnesota, that offering tax credits and other incentives to businesses may raise employment in certain areas, but not within the region, because companies move from zone to zone to take advantage of the incentives.

The same might be said about what Federal Reserve economist Art Rolnick has called "the economic war between the states."

It is a war in which states are actively competing with one another for businesses by offering subsidies and preferential taxes. Economists find that there is a role for competition among states when it takes the form of a general tax-and-spend policy. Such competition leads states to provide a more efficient allocation of public and private goods. But when that competition takes the form of preferential treatment for specific businesses, not only is it not “admirable,” it interferes with interstate commerce and undermines the national economic union by misallocating resources and causing states to provide too few public goods.

Still, states hungry for jobs are willing to pay "front money" to untethered corporations, even while shortchanging other services that would make their states more attractive in the long term. In another post, Clawback provides recent examples of how states can shuffle federal stimulus money to pay these incentives.

Cynics might say: what should we expect? Federalism means it is okay for large, footloose corporations to play states and cities like a fiddle so that small businesses and working families get stuck with higher taxes and lousier public services. (And home rule means it is okay for companies to do the same thing to cities and suburbs, fueling sprawl and stretching local tax bases so thin they become unsustainable.)

Says Growth & Justice Policy Fellow for Infrastructure & Economic Development, Matt Kane:

The public sector should pursue economic development policies that result in broad benefits for residents and businesses in the region, especially benefits that will continue to have a positive impact even if specific businesses close or move. 

— Charlie Quimby

Comments

[Craig Westover]

Welcome aboard.

We free marketers have always noted that preferential treatment for specific industries is bad economic policy. We oppose programs like JOBz. We agree that tax and spend policy has more impact on economic development than special perks for specific businesses. We understand that "pro-business" is not the same as "pro-free market."

Of course, the sin of shuffling stimulus money lies in providing the stimulus money in the first place -- at the level of threshold principle there is no difference between a state providing budget money to specific industries or the state providing stimulus money to different specific industries -- but you know that, right?

[James Brazier]

Regulation of federalism to create a level economic playing field is unlikely unless done by the federal government through the exchange of money for compliance with certain conditions. An economic recession is the best timing of such a new policy. One example of a policy could be to offer states budget deficit insurance with the condition that each recipient state be required to have tax and spending policies that create the level economic playing field.

[Charlie Quimby]

Craig,
Thanks for the welcome, but Growth & Justice has not been sailing on the Good Ship Lollipop. We've consistently called out the shortcomings of JOBZ-like subsidies.

Stimulus dollars do bring perils, too, as the links describe. One difference, though, is stimulus spending is supposed to be short-term.

Like using a one-time accounting shift to get through a bad period, stimulus spending might have a limited role. But the way you patch a boat in an emergency is certainly not the way to build one.

[Craig Westover]

Charlie --

Football players get knocked down all the time while you and I may trip and fall just one in a while, but gravity works the same in all cases. So does economic principle. "short-term" is not a justification for stimulus programs -- they do the same damage as industry and business subsidies.

James --

Regulating federalism is a Draconian cure far worse than the disease of state subsidies for business. "Regulated federalism" is an oxymoron. A quid pro quo to states to get their citizens tax dollars back has always been little more than a bribe to end run the Constitution. Leveling any kind of field is a bad basis for public policy.