Concentrated Benefits, Diffused Costs

Posted on by Christine Harbin

The Kansas City Star has some disappointing news:

A special legislative session offering incentives to Missouri’s automobile industry was transformed Tuesday into a tax-break boon for elderly homeowners, airplane makers and more.

The Missouri House passed legislation extending tax breaks to senior citizens, computerized data centers and manufacturers in a broadly defined transportation sector encompassing everything from bicycles to rockets and food-vendor carts to floating offshore oil platforms.

My colleagues and I have have been arguing voraciously against other companies that seek handouts from the Missouri state government. Other states are discovering that tax credits fail to deliver the results that they promise, and I have heard no convincing reason to believe that targeted tax credit programs will work any differently in Missouri.

From the perspectives of economics and fairness, these programs defeat their ostensible intended purposes: encouraging employment and helping states compete. In subsidy programs, the state government redistributes wealth to special interest groups in the form of concentrated benefits (e.g., sugar substitute manufacturers, data centers, ethanol producers, car manufacturers) and it diffuses the costs of these benefits to all those who remain unsubsidized in the marketplace.

Whenever the government subsidizes an activity, it comes at the expense of other activities. This is because time, money, and resources are scarce and finite. As a result of its decision to subsidize an activity, the state government incites individuals and businesses in Missouri to divert resources from other productive uses and invest them in activities for which they have a higher opportunity cost than others. By subsidizing these activities, the state gives up marginal levels of productivity. Missourians would be better off if each market participant specialized in the activities that they do well and profitably without the need of a subsidy, and left the production of other things — such as vehicles — to those who posess a comparative advantage in producing it. By focusing on profitable non-subsidized economic activity and then engaging in trade with others, overall levels of productivity and consumption will increase.

There are two systems within the unrestricted market that are better than tax incentive programs at promoting productive economic development: the price system and the profit-loss system.

The price system is a better means of achieving an efficient allocation of goods and services than targeted incentive packages. Prices coordinate individual action efficiently by communicating relative scarcities and preferences, but government officials knock the price system out of this equilibrium whenever they decide to subsidize or restrict an economic activity. This results in a misallocation of resources, and produces a market bubble that will eventually burst, as the subsidy ends. (Will Missouri host the first sugar substitute bubble? I hope not!)

Allowing the profit and loss system to allocate resources efficiently in a free market is better way to encourage economic development. However, when the government intervenes in the market through targeted subsidies, the “loss” signal is muted as a consequence because producers are at least somewhat insulated from risk. As an additional consequence, producers have less of an incentive to respond to consumer demand, which mutes the incentive for producers to target their operations efficiently. For example, as a result of agricultural subsidies and tariffs, much of the sugar that we consume in the United States is made from beets instead of from sugar cane. This is a less efficient process of making sugar, and consumers pay a higher price for it.

Government should focus on providing the basic institutions that foster reliable market exchange (e.g., enforcing contracts, backing currency, etc.), instead of favoring losers in the marketplace in the name of economic development.

Developer Should Bear Risk of Failure

Posted on by Dave Roland

I was pleased to see that the Post-Dispatch ran a letter to the editor today that I wrote in response to its recent editorial calling for St. Louis officials to renew efforts to subsidize the NorthSide redevelopment plan. This is the text of the letter:

Developer Should Bear Risk of Failure

In responding to Judge Robert Dierker’s ruling that St. Louis officials lacked authority to offer hundreds of millions of dollars to subsidize the NorthSide redevelopment plan, the editorial board, in the editorial “Celebrating Decline” (July 12), implies that the plan can proceed only if the city provides the anticipated subsidies. The developer’s own estimates indicate a belief that he will realize a profit of at least $251 million even without those subsidies.

Nothing in the ruling prevents the developer from pursuing his quixotic vision or from enjoying any profits that might result from its success; rather, it requires that, like all other entrepreneurs, the developer must personally bear the risks of failure instead of pushing them onto the taxpaying public.

Dave Roland — St. Louis

Policy Analyst, Show-Me Institute

More on MoDOT and Local Control of Roads

Posted on by David Stokes

Just yesterday, I wrote about the loathsome move by the itsy-bitsy, teeny-weeny city of Charlack to install speed cameras on I-170 in St. Louis County. We’ve had a discussion in the comment section of that entry about the closely related issue of what happens when the owner of a road (in this case, the state of Missouri) and the city it goes through (in this case, Charlack) disagree on a policy, such as a speed limit or cameras.

As if on cue, today’s Post-Dispatch has a story about a disagreement between St. Charles County and MoDOT regarding bicycle restrictions on state roads within St. Charles. One councilman, Joe Brazil (I have had the pleasure of meeting him, and we have praised him here in the past for his stances against annexation and TIF abuse), wants to ban bicyclists from certain state roads in the county. MoDOT is opposed. My purpose here is not to discuss this specific issue, but rather the process. Nonetheless, I don’t support banning bicyclists from any roads other than interstate highways, and I have to point out one comment in favor of the proposal to ban bikes by someone who, understandably, has a personal interest in the matter:

Among supporters was Stephen East of Cottleville, whose 16-year-old daughter was seriously injured in a 2003 accident on DD when the vehicle she was driving topped a hill and encountered a bicyclist in her lane. East said she swerved, ran off the road, hit a tree and was thrown from the car.

“Public safety trumps personal rights,” East said.

No, sir, it doesn’t. And it is exactly this far-too-common belief that our safety is more important than our rights that is causing us to lose our rights to safety zealots via death by a thousand cuts. I give you helmet laws, seat belt laws, closed swimming pools, and the fact that organizations can no longer just have a bake sale or parish pot luck because health regulations forbid food cooked at a home from being sold or given away elsewhere. Because, you know, that’s “dangerous.”

But I digress. MoDOT says St. Charles can’t enforce the ordinance because the Highway Commission won’t approve it. MoDOT says it simply won’t post the signs telling people about the law — making it invalid under state law, which specifies that traffic rules must be properly posted for people to see. So, if St. Charles passes the ban and MoDOT won’t allow the county to enforce it, there will be some sort of court challenge. That might be the only way to answer the question of who has final say about roads — the governmental jurisdiction that owns it or the governmental jurisdiction it passes through.

In my opinion, the final say on traffic laws should belong to the jurisdiction that builds, maintains, and “owns” the road, if for no other reason than consistency. Hopefully, this will be further clarified soon, and hopefully in a way that does not allow cities like Charlack to do whatever they please on state or county roads.

I’d be delighted to see a statewide ban on things such as red light cameras and speed cameras on all roads. As the laws are currently written, though, I don’t think there is any doubt that cities can do whatever they want on city roads. (Thanks to Combest for the link.)

There’s No Success Like Failure

Posted on by John Payne

A court ruling on Monday likely means that Paideia Academy — a charter elementary school in Saint Louis plagued with low test scores — will close permanently. Missouri law requires charter schools to have a sponsor, and Paideia has not been in compliance with the law since losing the sponsorship of the Missouri University of Science and Technology, so the ruling seems completely appropriate from that perspective. Paideia’s closing also illustrates an advantage of both charter and private schools: They can fail! Public schools are rarely punished for poor performance, and this leads to stagnation. As with any other endeavor, education is an evolving process that requires experimentation to discover which methods are successful and which are failures, but if schools are never allowed to fail, teachers and administrators have little incentive to sort the wheat from the chaff.

The major problem I have with the Paideia ruling from a policy perspective is that the closing is the result of a judge’s ruling, not from a lack of demand on the part of parents. Paideia certainly suffered from low test scores, but as charter school consultant Richard Hay argued in the hearing, improvement on the tests may be a far better metric of school success than absolute scores. Furthermore, perhaps the public schools into which the kids will be reassigned are even worse (and very unlikely to be closed for poor performance).

In the overwhelming majority of cases, parents and students have more incentive and better information to determine which school best meets their educational needs, and their decisions are far better guides for which schools should fail and which should flourish.

Tax Credits: Often Not the Panacea Promised

Posted on by Audrey Spalding

As a casual reader, it’s hard not to get optimistic when reading the statements state officials make when awarding tax credits.

On July 9, after awarding a multi-million-dollar tax credit package to a company that produces a sugar substitute, Gov. Jay Nixon’s office issued a press release claiming that 612 new jobs will be created in Missouri. The governor said:

These jobs will be a significant boost to Missouri’s economy and our manufacturing sector, and they’re another positive sign that our economy is beginning to move forward. I am pleased that my administration was able to provide a competitive package of strategic economic incentives to help bring these jobs to Missouri.

Statements from proponents of the tax credit for the Ford plant in Claycomo, despite the political finagling being done to push it through, sound reasonable. Sen. Victor Callan (D-Independence) told the Kansas City Business Journal that up to 3,700 jobs could be lost if the state doesn’t award Ford a large amount of state tax money.

But, although the claims can sound reasonable, they are only claims.

The problems of using tax credits to encourage economic development have been discussed at length: Tax credits often don’t create economic activity, but instead merely shift it to another location; tax credits are a form of centralized economic planning, which has a bad track record of encouraging economic growth, whereas lower tax rates do a better job of stimulating the economy; government officials have no special ability to predict future economic growth or success; and, of course, tax credits allow elected officials to play favorites.

In addition to the list above, casual readers should be skeptical of the future job claims made when state tax credits are doled out, because they are merely promises and forecasts. Studies have shown that job claims are often very different than what is ultimately accomplished with taxpayer money. A study by the Mackinac Center for Public Policy compared job promises made in press releases issued by Michigan’s economic development agency as it awarded tax credits to the actual outcomes of those programs. During a 10-year period, Mackinac found that of 127 projects that promised fully produced facilities, only 10 projects were completed on time and produced the number of jobs promised.

A report recently published by the Columbus Dispatch showed that Ohio is still waiting on some jobs and investment promised. In fact, as reporter Mark Niquette found, of the $1.6 billion in tax credits initially awarded in Ohio, only about 40 percent were ultimately redeemed. This disparity, as explained to me by Niquette over the phone, can be attributed to two factors: First, many tax credits awarded are never redeemed at all by the company, and second, some of the outstanding tax credits awarded may be redeemed in the future.

Of the companies that did manage to redeem Ohio state tax credits, roughly 1 in 10 jobs promised were not created.

Interestingly, one company that’s also dominating Missouri tax credit news failed to deliver on promised job creation in Ohio. Niquette writes:

Still, there are more than 100 projects that fell 50 jobs or more short with no action reported. At the top of the list is Ford, which received more than $1 million in tax breaks for a 2002 project to create 800 jobs for production of the Escape and Mariner in Avon Lake.

The data show “zero” jobs actually created because Ford moved the production to Missouri, officials said. The state said Ford stopped getting the tax breaks when the production left Ohio.

Only additional research can show whether Missouri’s Department of Economic Development has a tax credit track record better or worse than that found in Michigan, or that found in Ohio. But we all have to keep in mind that promises made in press releases about job creation and about the investment that will take place as a result of tax credits are only promises. In other states, those promises have a tendency not to bear out.

Speed Cameras Are Detestable

Posted on by David Stokes

The Post-Dispatch reports today that the city of Charlack is installing speed cameras along I-170 in near-north St. Louis County. The city is installing the camera on a state-owned bridge to give tickets for speeding on a federal/state highway. The mayor of the town of 1,431 people must think the rest of us are morons if he actually expects anyone to believe this:

Despite criticism that cameras are aimed at generating revenue, [the city’s mayor] said Charlack passed a budget that did not count on camera fines. He said the ultimate goal is to phase out the photo program once motorists regularly drive more slowly through town.

The idea that the city will phase out the cameras once people drive more slowly is perhaps the most unbelieveable statement I’ve heard a politician say in a long time. And who cares if they passed a budget that did not count on camera fines? All that means is that they can spend the money however they want once it starts flowing in.

I have argued that the many small cities in St. Louis County should continue to exist as long as the citizens want them to. Here is the conclusion to my Government in Missouri study:

Missourians have chosen to have a large quantity of smaller government units. They have also chosen to have a large number of elected officials, representing smaller areas than the national average, so that the citizens may be in closer contact with those officials and monitor them more effectively. Economies of scale can be exploited in larger governments, as shown in the graph of per-capita spending for class three counties, but the efficiencies and benefits of larger government are less common and less significant than often supposed. The assumption that larger, less fragmented government is a more capable and efficient provider of services does not stand up to initial analysis and is not supported by the research.

But behavior like installing speed cameras, which is nothing more than a technologically advanced version of St. George–style speed traps, makes me question that once again. I would certainly favor legislation at the state or county level to forbid these types of cameras on the road — at the very least, on state or county roads.

I believe that speed cameras, just like red light cameras, are nothing more than a giant scam. I also believe they violate our rights — most importantly, the right not to be tracked by cameras every moment of your life. I am confident that would have been the Eleventh Amendment included in the Bill of Rights, if cameras had been invented yet.

Next on the Agenda: 100% of the Carriage Wheel Market!

Posted on by Caitlin Hartsell

Last week, MissouriNet reported on the president’s speech in Kansas City, in which he talked about clean energy:

President [Barack] Obama said in his speech that just a few years ago, the U-S accounted for 25% of the world’s economy, but was only making 2% of the world’s advanced batteries for hybrid and electric vehicles.

“But thanks to our new focus on clean energy and the work that’s taking place in plants like this one, we could have as much as 40% of the world’s market by 2014,” Obama said.

It is true that if we devote a large amount of our resources to clean energy, we could expand our share of the world’s market. If we wanted to, in fact, I’m sure we could devote exorbitant sums to clean energy and capture 80 percent of the world’s market.

Does that mean that it would be a good investment for the U.S. government? When someone invests her own money, she has a stake in that investment working out. Investors who make wise investments have more money to make additional wise investments. No matter how vital government officials think it is to invest in clean energy, they do not have that feedback; whether they invest wisely or not, their cash inflow is not affected. The government does not have the right competitive mechanisms in place, and thus may create more problems for clean energy than they solve.

Why is that? When the government favors certain types of clean energy over others (perhaps yet undiscovered) energy sources, they change the dynamic. As a result, those energy producers make money not because they efficiently produce energy, but because they have curried political favor. Energy producers who receive government monies are also restrained by government regulation and procedure, which stifles innovation.

From the aforementioned speech (emphasis added):

“[…] But my answer to those who don’t have confidence in our future, who want to stop, my answer is come right here to Kansas City see what’s going on at Smith Electric. I think they’re gonna be hard pressed to tell you that you’re not better off than you would be if we hadn’t made the investments in this plant,” Obama said.

I beg to differ. In the cases where clean energy is as good an investment as some proponents claim, private individuals will be willing to put money toward the venture. Many companies want to use efficient, environmentally friendly energy because consumers appreciate that. Clean energy, at its best, will lower costs, a condition necessary for it to become a primary energy source. Cutting the tax rate for all businesses would better promote the move toward clean energy sources than targeting incentives toward specific clean energy plants. If clean energy production is to become sustainable, it needs further exposure to market forces so that the most efficient product can succeed.

“Doesn’t Anybody Notice This? I Feel Like I’m Taking Crazy Pills!”

Posted on by Christine Harbin

According to the St. Louis Business Journal, the Missouri state government just doled out $17 million in state funds to Mamtek, a sugar substitute manufacturing company, to locate a plant in Moberly. The incentive package also included $37 million in city bonds. From the article:

The state of Missouri awarded Mamtek $7.6 million in Missouri Quality Jobs Program tax credits and $6.8 million in Missouri BUILD program tax credits, [the governor’s] office said Friday. The state also provided $2 million in Community Development Block Grant Industrial Infrastructure Program grant funds; $800,000 in funding for job training; and $368,000 for employment recruitment and referral services.

Wait, I’m confused. Wasn’t this incentive package endorsed by the same person who supported limits on Missouri tax credits in April? Isn’t this the same person who the Associated Press described as “cutter in chief” in May? If cutting such expenditures is a good idea, it’s important to maintain that position with more consistency, especially in the face of political pressure to the contrary.

A Free-Market Journey

Posted on by Martha King

While running errands last week, I was witness to an interesting phenomenon twice over. First, I passed a Walgreens that used yard placards to advertise $35 camp and sports physicals at their in-store clinics. Amazing! How rarely it is that one sees medical services competitively advertised with the true price right up front. Plus, it looks like customers can walk right in without insurance and without appointments, much like going to a restaurant and paying for a meal.

On the topic of food, my next stop along my journey was to grab a bite to eat at Bread Co. While scanning the menu on the wall, I noticed something I hadn’t ever seen before in Missouri — the calorie counts of all the food posted right next to the offerings. Amazing again! Free information at my disposal to make a decision about my health.

Why get excited over something so mundane? For one, there was a free exchange of useful information. The price system — much like the nutritional information system — is an amazing way of communicating information quickly and accurately. Second, in both instances the information was freely provided. Missouri restaurants, unlike some in New York City, are not required by law to include caloric information on their menus. But businesses here are still free to post that information as upfront as they’d like.

Best of all, businesses that choose to be more open with their information freely elect to bear the costs of collecting that information. The burden is usually on the customer to sort out the nutritional value of her food, but in some cases it may be in a restaurant’s business interest to display information more explicitly, or even to be more charitable. The result is a free and fair exchange of information or money that leaves both parties better off.

Ultimately, the most fascinating part of my journey was the fact that the businesses and I were free to choose. The businesses chose to offer certain services and bear those costs in the hope of attracting or retaining more customers. For my part, I could have purchased a sports physical if I wanted, but I didn’t need to. I could have purchased the healthiest sandwich on the menu, or the least healthy. I could have ignored the caloric content completely, and ordered dessert for dinner. No one got to tell me what to order, and I could have left the restaurant altogether if I had wanted. Information freely available at my disposal helped shape my decisions.

As usual, the more freedom and information we have as a society, the better choices we can make for ourselves and those we care about. And that’s always something to get excited about.

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