Backgrounder: Keeping the Crony Out of Capitalism

September 28, 2014

“Cronyism is the substitution of political influence for free markets. It comes about when government has a lot of power over private-sector decisions and when the government officials in power have great discretion over how to use it.” — David Henderson, editor of the Encyclopedia of Economics

by Craig Ladwig

It is the time of year we collect annual reports from the various economic-development outfits around the state, quasi-government models of the new regional public-private partnerships. You will be impressed — if you don’t ask too many questions.

The report in front of me, for example, announces or at least implies the creation of 1,882 jobs with $480,488,541 in new investment. Whatever was accomplished, the chairman writes in her annual message, was accomplished through “teamwork and collaboration.” (1)

Welcome to the world of economic development — where every city is above average and prosperity is just around the corner if you trust your community’s well-being to bond issues, tax-increment financing (TIF), tax credits, carve-outs and such.

Skeptical? Well, your Hoosier common sense may be outspent in this argument. There has been a shift in big-money lobbying from Capital Hill to the statehouses. The New York Times reports that since 2008, America’s most prominent companies, from Aetna to Wal-Mart, have been stepping up contributions by millions of dollars to the campaigns of Republican governors, toward what the editors at the Indianapolis Star might call “Solutions Conservatives.” (2) (3)

The Chamber of Commerce? Know that if it hasn’t been the problem, it hasn’t been the solution. Fred McCarthy, a lobbyist and former Chamber official, detailed in a 2011 article the challenges facing business groups today. His conclusion, under the headline, “Reawakening the Chamber,” contained this warning:

“Government has for some time presented itself as a ‘partner’ with business, and currently holds that position in the public mind. Sometimes this partnership is voluntary, sometimes not. But if partner is the right word, government has been and always will be the senior partner. To the extent that business fails to make itself heard through effective public-affairs programs, this relationship will inevitably worsen. More and more decisions that should be economic will be political.” (4)

Three years later, the Chamber is still sleepy and Big Business is now whispering directly in the governor’s ear. Nor, arguably, does the Indiana GOP have an effective public-affairs program for free markets — no one in its leadership with a concerted plan to level the field for all businesses, to bolster the middle class, to create the economic environment that attracts the most competitive investment.

Note the qualifier “competitive” investment. The pragmatists at City Hall or the statehouse will read over that in their haste to get into the eco-devo race, to take credit for creating jobs within an election cycle (more Solutions Conservatism). And although it may be true that government favor can attract businesses in the short and narrow term, it also may be true that those businesses will be the least viable even as they employ the shrewdest negotiators.

David Penticuff, a veteran editor in Grant County, argues that his community’s faith in such enterprises has produced cut ribbons but also moribund ventures, some of them seemingly launched only to collect the politically driven incentives. He tells of watching in dismay as former Gov. Mitch Daniels cut ribbons twice  at the same industrial site.

Penticuff supported legislation that opened the records of local economic development groups to public inspection. “This is simple good government,” he argued. “The state and local economic-development groups are not conducting clandestine operations for national security; they are trying to lure capitalists to town. We need to be able to follow our tax dollars with the public invited along and make a judgment on whether those dollars are used wisely by those spending them.” (5)

But can anyone prove that public-private partnerships don’t work? How exactly can we know that the team of corporate attorneys sitting across the table from our hometown mayor can be trusted, that the band instruments will actually arrive? How do we know that their client would not have relocated or expanded anyway? And once the money is dispersed, how much sodium Pentothal would be needed to determine whether it actually produced any new jobs?

In philosophical terms, we have Bertrand Russell’s teapot, the nonsensical expectation that others should believe a teapot orbits the sun somewhere between Earth and Mars because they cannot prove that it does not.

“I am not aware of how anyone could prove the growth and vitality in any community can be attributable to the utilization of TIF, for example,” says Sen. Greg Walker of Columbus. “With so many factors in the decision to invest, so many variables at play, in so many economic arenas nationally and internationally, the ‘but for . . .’ argument is impossible to substantiate. It is therefore largely ignored because of how impractical the task of proving the negative.” (6)

Logic, though, remains, and connecting the dots is Tad DeHaven, a deputy director of the Indiana Office of Management and Budget in the Daniels administration. He is more impolitic, dubbing the game that governors play “press-release economics”:

“The Indiana Economic Development Commission (IEDC) might not admit it, but most businesses already know where they are going to locate before they contact the agency. Businesses consider a myriad of factors, including demographics, transportation logistics and workforce capabilities when choosing where to set up shop. Although the tax and regulatory climate is an important consideration, IEDC handouts are just that — handouts. Because a governor will get credit for creating jobs, businesses know they can extract taxpayer money from the state for these subsidies. After a company reaches an agreement with the IEDC, the administration issues a press release. For the high-profile deals, it arranges a choreographed ribbon-cutting ceremony at the company’s facilities. The company helps fulfill its end of the bargain by telling the press that the administration’s support sealed the deal.” (7)

Finally, there is a chart showing that Indiana has given out 1,339 grants to targeted businesses in recent years, only a few hundred less than that paragon of good government, Illinois. (8)  This means we are close to ending up on that “wrong side of history,” to affect an Obama-ism, or at least on the wrong side of economic history.

That warning is sounded by the American Legislative Exchange Council, a conservative think tank for state legislators. It has just published a white paper advising governors and lawmakers to teach themselves how jobs and investments are economically created rather than politically manipulated:

“Choosing to introduce tax policies that are favorable to a few large firms, rather than implementing competitive tax policy for all firms — whether currently existing or soon to be started by entrepreneurs — hurts a state’s growth potential. Government does not know which firms will provide innovation, employment growth, wage growth and tax-revenue growth for the state. Empowering government to cater to a few high-profile firms while not fixing underlying problems in the tax code is poor policy, as policymakers and bureaucrats are unlikely to outperform diversified market performance relative to their narrow picks.” (9)

By way of summary, McCarthy took up a challenge to propose a better way. He did it by writing a new “Invest Indiana” advertising campaign in the form of a pledge:

“The State of Indiana announces a new policy for business development. In the belief that businesses locate or expand more productively using long-term, genuine economic logic, we will no longer offer temporary tax incentives. Instead, we pledge the efforts of government to create and maintain the best business climate for you. Within the limits of fairness and justice, rules and regulations inhibiting such productive operations will be reduced or eliminated whenever possible. Grants, abatements, subsidies and other tax gimmicks that depress governmental revenues and increase other taxpayers’ bills will cease. On the other hand, be assured that tax dollars you may pay in the future will never directly finance your competitor. All private businesses will be treated in the same way.” (10)

If your economic-development director won’t sign it, he is wasting your community’s time.

Craig Ladwig is editor of The Indiana Policy Review.

djv

 

Endnotes

1. 2013 Annual Report. East Central Indiana Regional Economic Development.

2. Jonathan Weisman. “G.O.P. Error Reveals Donors and the Price of Access. The New York Times, Sept. 24, 2014, posted at http://nyti.ms/1ChQydn  (last viewed Sept. 25, 2014).

3. Tim Swarens. “The Evolution of Mike Pence.” The Indianapolis Star, Sept. 26, 2014. Posted at http://www.indystar.com/story/opinion/2014/09/26/swarens-evolution-mike-pence/16264671/  (last viewed Sept. 26, 2014).

4. Fred McCarthy. “Reawakening the Chamber. The Indiana Policy Review, summer 2011.  Posted at http://www.pageturnpro.com/Indiana-Policy-Review-Foundation/28142-Summer-Fall-2011/index.htmll#1.

5. David Penticuff. “Indiana Eco-Devo: Progress With Transparency.” The Indiana Policy Review, Dec. 30, 2012.

6. Greg Walker. “A Lawmaker Demystifies TIF.” The Indiana Policy Review, April 23, 2013.

7. Tad DeHaven. “The Governor’s ‘Press Release’ Economics.” The Indiana Policy Review, March 25, 2010.

8. Weisman, op. cit.

9. William Freeland, Ben Wilterdink and Jonathan Williams. “The Unseen Costs of Tax Cronyism: Favoritism and Foregone Growth.” The American Legislative Exchange Council. Posted at http://www.alec.org/publications/taxcarveouts/ (last viewed Sept. 25, 2014).

10, McCarthy, op. cit.

djv



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