Why Spend More Than $400 Million to Subsidize Warehouse Construction?

From today’s Post-Dispatch: “St. Louis’ dreams of becoming a gateway for Chinese air cargo are going to need some more state funding to become reality.” Specifically, state legislators are looking to award nearly half a billion dollars in subsidy to hub-related projects.

Trade boats in Changzhou, China. Photo by Audrey Spalding.

Given the opening sentence, a Post-Dispatch reader might misinterpret the article to mean that the $480 million in taxpayer money is intended to go directly to funding the proposed China Hub itself. But, as reported previously in the Post-Dispatch, a Chinese freight affiliate has already decided to send several cargo flights to the Lambert airport each week. Later in today’s article, the actual subsidy recipients are disclosed: $60 million would go to shipping companies that export by air from Missouri, and $420 million would go to build cargo warehouses and other storage facilities.

So, perhaps a better way for the Post-Dispatch article to start would be: “St. Louis developers’ dreams of building warehouses are going to need some state funding to become a reality.”

From an economic perspective, this doesn’t make much sense. If goals* are already in place to bring in increased air freight and to increase the number of Boeing 747s traveling between Saint Louis and Shanghai, then there surely will be an increase in economic activity, along with a demand for facilities to handle the increased freight and passenger traffic. If all it takes to profit off of that is to build some cargo warehouses, why does the state need to subsidize that construction?

Here are some possible reasons that state legislators are pushing for awarding the $480 million in subsidy:

1. There is a low chance of the “China Hub” idea actually coming to fruition.
    
   Well, then why subsidize the unnecessary construction of auxiliary cargo warehouses?
2. It’s very difficult to make a profit in Missouri.
    
   This may well be the case. But if the state awards tax credits without a corresponding decrease in other expenditures, the tax burden for everyone else (those who aren’t building warehouses in the Saint Louis area) will rise. Because the award of $480 million to the favored few will likely result in other businesses and individuals paying even more in taxes to the state, this proposal will actually make things more difficult for entrepreneurs.
3. Legislators want to award subsidy.
    
   It is also possible that there is no need for this subsidy, but that legislators personally benefit (increased power, campaign contributions, etc.) when they can claim responsibility for awarding millions in subsidy. And, fortunately for the legislators proposing this tax credit, there is little or no cost to them when spending $480 million in taxpayer dollars. There is a terrific branch of economic theory that examines this type of behavior in detail.

A better solution would be to reduce state barriers to trade, not increase them.

Reasons 1 and 2 are not legitimate. The state shouldn’t subsidize high-risk, unlikely projects, and legislators don’t get to spend other people’s money just to demonstrate their political heft. If subsidy is needed because Missouri puts up too many barriers to entrepreneurship, the state should remove some of those barriers instead of adding more. One idea could be to find an additional $500 million to cut from the budget (tax credits, perhaps), and reduce the tax burden for everyone.

But what about me?

Look, anyone can point out that some type of economic activity might not occur without state subsidy. That doesn’t mean that the state should throw millions at the “under-produced” project.

For example, I could say that “Audrey Spalding’s dreams of owning 10,000 pairs of shoes will need some state funding to become a reality.” The reason I don’t already own those shoes isn’t because of a market failure — it’s because I’m not willing to pay for that myself.

Similarly, developers can invest money, and take on the risk and possibility of a profit if they want to build warehouses themselves. If they’re unwilling to do that without nearly half a billion in taxpayer money, then these warehouses, like my 9,990 additional pairs of shoes, will have to wait.