Other People’s Money (and Property)
Since its inception, the Show-Me Institute’s scholars have made a point of opposing “corporate welfare.” As pointed out in the institute’s statement concerning “corporate welfare” policy, “The Show-Me Institute develops policy recommendations to protect property rights and promote economic growth without caving in to demands for corporate welfare. Secure property rights encourage investment and entrepreneurship. Trying to create economic success through government intervention is a formula for failure.” With this philosophical underpinning, institute scholars such as Timothy Lee and myself have taken strong stands against governmental policies that allow the powerful and well-connected to secure subsidies and tax breaks that are not available to all, and have vigorously opposed the use of eminent domain to transfer property from one private owner to another.
In the ideal system, businesspeople would compete against each other on a level playing field, with their success or failure to be determined exclusively by those to whom they are marketing their products. This would mean that if an entrepreneur has an idea for a venture, they would either have to risk their own money by funding the project out of their own pocket, or they would have to generate seed money by convincing private investors that the prospects of success outweigh the potential for failure. If private investors don’t believe that the venture is likely to succeed, they won’t put their money at risk. On the other hand, if a few investors are willing to risk losses, they will be handsomely rewarded if the venture turns out to be successful. Thus, the risks of failure and the rewards of success are borne only by those who choose to participate in the venture.
Somewhere along the way, however, the government involved itself in the process. It began offering to subsidize certain ventures or even entire industries utilizing tax dollars, so that people managing subsidized businesses no longer had to persuade as many private individuals to put their own funds at risk. This is a negative development, for several reasons:
First, it gives an unfair competitive advantage to business owners who have the money or connections to influence those public officials who decide such matters. Receiving a subsidy may have less to do with the entrepreneurial merit of a proposal than with the number of elected officials with whom the businessperson has influence.
Second, it assumes that politicians will be adept at distinguishing ventures that will succeed from ventures likely to fail a challenge even for experienced businessmen, much less for elected officials who may have no clue about how to make such evaluations (Ballpark Village, anyone? Sunset Hills?).
And, third, it gives both government officials and private developers a license to gamble with other people’s money and/or private property in what they perceive as a low-risk, high-reward situation. If a subsidized venture fails, developers are insulated from the risk because they will lose far less, financially, than they would have without the subsidy. Similarly, a politician might face some political backlash from a failed venture, but the politician can always deflect blame toward someone else. The politician won’t suffer any personal financial loss, and it is not very common for politicians to be voted out of office following such fiascos. On the other hand, if a venture is successful, the developer will personally realize enormous financial gains, despite their lessened personal investment, while the politician will claim credit for its success and may be able to parlay his role into a profitable or influential position once he has left office. As far as taxpayers are concerned, even if a subsidized venture succeeds, the government itself will reap the financial benefit rather than the individual taxpayers from whom the funds were obtained.
Despite these downsides, governments continue to insert themselves into the world of economic development and these policies only spur more demands for governmental handouts. Just last week, we saw the unveiling of a proposal that, if successful, would completely reshape a gigantic swath of North St. Louis. In accordance with the incentives created by these policies, the developer’s plan calls for a massive commitment of taxpayer dollars, the creation of a TIF district, and the use of eminent domain to accomplish the developer’s vision. The General Assembly has already played a role by approving a $95 million tax credit that will assist the developer, and this developer is now pursuing a hefty chunk of federal stimulus funds, as well as support from local officials for the potential use of eminent domain in pursuit of the project. Thus, the policies that our government officials have created are fueling ongoing misuse of governmental authority and taxpayer funds, all of which works to the detriment of both ordinary citizens and market participants who believe it would be wrong to take advantage of these flawed incentives.
It doesn’t have to be this way. Redevelopment can and does happen without corporate welfare and eminent domain abuse. My hope is that, as government officials and developers continue to consider the plan to redevelop North St. Louis, they will consider alternative approaches that will respect the rights of other citizens. Rather than committing public funds and tax credits, city and state officials who believe in the plan’s promise could work with the developer to identify private investors who are willing to invest in his vision. Instead of pursuing eminent domain, the developer should present offers that will entice local residents to part willingly with their homes and businesses or, alternatively, he should figure out how to incorporate the remaining homes and businesses, intact, into his larger plan. If the North St. Louis redevelopment plan is as promising as its proponents suggest, it can and should be accomplished without resorting to corporate welfare or sacrificing citizens’ property rights.