White Paper: Rating the Indiana Chamber of Commerce

July 3, 2015

(Repost of Sept. 1, 2011, white paper)
By Tyler Watts, Ph.D.

Indiana public policies, from state tax rates and environmental regulations to local noise and smoking ordinances, have tremendous implications for the viability of particular business firms, as well as the general “business climate” of the state.

Businessmen and economists generally understand that a state’s laws and regulations are an important determinant of the relative advantages of doing business there.

The Indiana Chamber of Commerce, which aims to “cultivate a world-class environment which provides economic opportunity and prosperity for the people of Indiana and their enterprises,” is understandably interested in the legislative agenda of the Indiana Statehouse. The Chamber scrutinizes the doings of the state legislature and develops positions on each piece of legislation that comes before the assembly. Will this bill help or hurt economic prosperity and opportunity in Indiana? To ask such questions, and establish a position on each legislative item based on careful economic analysis of the proposed legislation, is a truly good, right and salutary thing for any chamber of commerce to do.

However, if the Chamber truly desires maximum prosperity and economic opportunity for Hoosiers, it must come to terms with some glaring inconsistencies in its legislative analysis. Proposed legislation is not always what its backers claim. Seductive promises of local economic stimulus, jobs and energy conservation (to name a few), often come at the expense of hidden, though potentially severe, negative long-run consequences for overall economic prosperity. If the Chamber truly desires maximum opportunity and maximum prosperity for all Indiana residents — entrepreneurs, workers and taxpayers alike — it would do well to adhere to some basic tenets of longstanding economic wisdom on the subject.

Market-Based Economic Development

Adam Smith neatly summarized the preconditions for economic prosperity in 1755: “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.”

Few are opposed to the continued progress from “barbarism” (we might say poverty) to “opulence” (prosperity or wealth). But there are disagreements about how this progress comes about. According to free-market economics, a nation’s wealth consists in the valuable goods and services its entrepreneurs create, and the ability of those entrepreneurs to create wealth depends, in turn, on the institutions within which they operate.

Institutions in this sense refer to the rules of social interaction between individuals in society. There are many gradations of such rules, from the informal “we tend to frown on that kind of behavior” social norm, to the formally enshrined statutory “law of the land.” In general, when these institutions are permissive of open-ended, competitive entrepreneurship in the production of all manner of goods and services, economic growth and prosperity result.

But what, specifically, do such “good institutions” look like? Smith’s aphorism is quite useful in thinking about this question. Economics is particularly interested in how institutions govern entrepreneurs’ incentives to acquire the land, labor and capital needed to create a product, to manage the complex, risk-fraught process of production, and to face squarely the consequences of success or failure. While it is up to the individual entrepreneur’s judgment alone as to what to produce, how to produce it, and so on, both formal and informal institutions can give entrepreneurs confidence that their ventures will at least not suffer from historically common calamities, such as:

• Predation against person and property (theft, thuggery, etc.)
• Governmental confiscation of the fruits of one’s labor (taxation)
• Governmental interference with commercial pursuits (regulation)
• Violation of contract (fraud, default, etc.)

For example, one would not expect potential entrepreneurs to be eager about a venture if homes and businesses were not generally safe from bandits, or if a substantial portion of their net profits were expropriated by the state, or if there were no reliable legal remedy against non-paying customers. Accordingly, economists have always recognized the need for institutions that minimize or even negate such opportunism, from formal contract law and police forces to informal “business culture.”

With a full range of good institutions in place, what follows “by the natural course of things” is the market economy. All goods can be safely and reliably traded, long-term contracts can be reliably entered into, and prospective entrepreneurs are free to risk their wits and capital in any industry. The market prices that emerge for every good indicate their relative value to both consumers and other entrepreneurs; price changes give constant feedback and guidance to consumers and entrepreneurs concerning their market decisions. We should note here that true market prices — i.e., prices that are strictly determined by the interplay of supply and demand forces in the market — are the “brains” of the economy: they motivate and inform entrepreneurs and consumers towards prudent uses of all goods. The fact that market prices alone, without the guiding hand of some benevolent central politician or bureaucrat, are sufficient to coordinate economic activity and lead to an amazing outburst of wealth creation, led economists like Smith to marvel at the miracle of the market economy, stating that the orderly, productive activity that routinely takes place, although guided only by self-interested buyers and sellers, seemed to be guided by an “invisible hand.”

From this point of view, if the state seeks to promote economic prosperity, it should exert itself towards keeping the peace (i.e., preventing overt theft and predation), minimizing the tax and regulatory burden — which, importantly, also entails equal treatment across industries so as not to disproportionately favor one faction of entrepreneurs at the expense of another — and maintaining an efficient apparatus of contract enforcement, tort liability, and property protection through the court system.

Moreover, in this free-market framework there is little, if any, room for proactive government action on behalf of “job creation” or “economic development.” The subsidies and taxes that such schemes require simply distort market prices and skew entrepreneurs’ incentives towards politically favored fads and politically connected power brokers. Beyond the basic public goods functions such as police, courts, the military, etc., the role of the state is to simply let markets flourish. If the political regime can defend citizens’ property from domestic and foreign aggressors, establish a neutral, open and swift legal system — and, perhaps most importantly in our day, avoid the temptation of taxing citizen A to subsidize citizen B — maximum prosperity will result.

Market-Based Critiques of the Chamber’s Legislative Positions

Our sketch of what makes for optimal market-based economic development distills some of the key insights of centuries’ worth of economics. It also provides a useful background by which to assess the positions the Chamber has taken on various proposed legislation. In what follows we will point out where the Chamber’s positions on some specific legislation, as represented in the 2011 Legislative Vote Analysis, have turned out to be inconsistent with the tenets of the free market.

1. “Buy Local” (SB 584/ 1183)

The Chamber’s argument in support of this economically absurd bill essentially argues that spending more on public works by state and local governments somehow promotes economic prosperity.

A well-known truism in economics holds that every man desires the highest price for what he sells, and the lowest price for what he buys. Indeed, obtaining the lowest possible price for one’s purchases (holding quality constant) is the very definition of economizing behavior. As any housewife knows, spending less on her children’s milk means more funds are available for meat and bread, or books and clothes — or, better yet, for the family’s savings account. In like manner politicians ought to know that spending less on public-work project A means more funds are available for projects X, Y,
and Z — or, better yet, that the citizens’ tax burden need not be so high. A principle so obvious hardly needs more elaboration; the economizing principle that applies to the common citizen’s household surely applies to the state highway department.

But what about the jobs? Won’t keeping a greater proportion of one’s spending in the “local” economy boost local employment? Yes, this may be true to a certain extent but it is a half truth at best, and the costs of ignoring the missing half entail needless impoverishment, contrary to the general goals articulated by our Chamber.

Yes, when dollars “stay local,” they will employ local workers. But if local prices exceed non-local prices (however one wishes to define what is and is not “local”), buyers will naturally patronize the latter. The fact that local prices for the good in question, whether it is raw commodities or complex construction services, are higher than nonlocal prices means that local workers aren’t as productive at making that good. After all, the definition of greater productivity is the ability to produce a given good at lower cost.

Therefore to encourage local spending when cheaper non-local substitutes are available only subsidizes inefficiency. The more that Indiana policies support such localism, the greater the inefficiencies. Imagine the results if Indiana went all-out to “encourage” local industry: Forget about those imports of Florida oranges, of Texas oil, of Michigan iron ore, of Ohio construction companies, by which Hoosier dollars support jobs in other states. Would it be a good idea to bring these jobs home? No — for the obvious reason that it would be absurdly inefficient to attempt to make ourselves what nature and human genius have combined to provide elsewhere on the planet at much lower cost. But for the same reason it is absurd to needlessly spend one, three or five percent more of Indiana taxpayers’ funds on public works simply to encourage local
employment.

2. “Indiana’s Kelo?” (SB 72)

In June 2005, the Supreme Court of the United States shook the foundations of private-property rights in this country. In the infamous Kelo vs. City of New London, the court ruled that private companies could indeed use state eminent-domain powers to take other citizens’ property for their own commercial use. We hope the Chamber agrees with our unequivocal declaration that private-property rights are the sine qua non of the free market economy, and therefore the use of state power of property confiscation to further the business interests of particular individuals is an abhorrent violation of property rights and the market economy.

The silver lining of this tragic abuse of state power was a groundswell of eminent domain reform across the country. Forty-three states including Indiana reformed their eminent-domain law to prevent such abuses like the Kelo case in their own states. Indiana’s reform bill is explicit: for private property to be taken by condemnation, public purpose must be shown.

Five short years later, however, an inbred coalition of self-interested businessmen and politicians sought the power to potentially commit the same abuse on Hoosier citizens. SB 72 was an attempt to allow private companies the use of eminent-domain to build CO2 pipelines. It soon became apparent, thanks to some astute media watchdog work, the private companies in question had ties to the Mitch Daniels’ administration. Catching the heavy scent of cronyism wafting from this bill, a bipartisan coalition of legislators initially opposed it in the senate.

The legislation itself boldly asserted that CO2 pipeline development would be “in the public interest” and “a benefit to the welfare of the people of Indiana.” We call foul; while the CO2 project may have created jobs, it intended to do so in a way that undermines the free economy. The ends don’t justify the means. If they did, and our highest public goal was jobs, why not let any number of demonstrably able private entrepreneurs use state power to accumulate other people’s resources for the sake of “development?” Angie’s List, for instance, is doing great — why not condemn some “unused” property in downtown Indy and fork it over to this proven job-creator? It would surely promote Hoosier employment — at least in some industries and for some time period. But it would also undermine the voluntary trade basis of the market economy.
The final result of such “development” policies, if taken to their logical conclusion, is Soviet-Style central planning — hardly a recipe for prosperity.

3. “Green Subsidies” (SB 260)

The Chamber’s statement in support of this bill is that “energy conservation is one of the elements of the Chamber’s energy policy as a method to decrease our energy demand and promote cost savings for Indiana businesses and industries.” Cost savings for businesses are by and large a good thing (See item 1 above.) Indeed, it is interesting that the Chamber is in favor of cost savings for Hoosier businesses but not for Hoosier governments.) Merely asserting that reducing “energy use” in one measured dimension, such as electricity or petroleum units, is an unequivocally good thing is preposterous.

Economies grow wealthy in proportion to their people’s ability to harness and utilize greater and greater amounts of energy. Indeed, one could essentially catalog relative wealth among world economies on the basis of per-capita energy use; the correlation between these is no coincidence.

Nonetheless, entrepreneurs will naturally strive to minimize the expense needed to obtain a given amount of energy — a phenomenon known as economizing. The more useable energy one can capture from a gallon of gas or a kilowatt of electricity, the more wealth he can produce and enjoy overall.

The bill in question purports to subsidize energy conservation in general, and specifically the use of “clean energy.” We might point out that economizing on energy — which differs from strict conservation as noted above — needs no subsidy. In a market economy, businesses pay for the energy they use. To get more production from the same volume of energy inputs is rewarded naturally in the form of lower unit costs (higher profits). Surely the Chamber understands this simple principle. So whence the support of “clean energy” subsidies by local Hoosier governments? Perhaps well-connected entrepreneurs in the “clean energy” business and its ancillaries, unsatisfied with the natural level of demand for their products, are chomping at the bit for a dose of taxpayer subsidized capital? Again, we detect the subtle yet pungent odor of cronyism. We contend that government subsidies, whatever their particular structure, are a narcotic that, while generating an initial high for some, ultimately saps the vigor of a competitive, open, market economy.

Pro-Market, or Pro-Business?

In conclusion, we salute the Indiana Chamber of Commerce for being among the few state chambers that rate proposed legislation with respect to its impact on the state’s economic climate. Yet we caution that, to be effective in promoting and preserving long run prosperity and opportunity for all classes of economic actors, such rankings must be based on a sound foundation of the economics of the free, competitive market. There is a danger for chambers of commerce here: because they explicitly represent the particular business interests of their constituent members, they face many temptations to support ad hoc policies that will visibly, immediately benefit this constituency, but may well have subtle, drawn-out corrosive effects on the health of the market economy in general.

In contradistinction to the Chamber, there is no lobbyist for “the market economy.” Academic economists, who study the market economy itself in generalized, abstract terms, are typically mute when it comes to advocacy of the abstract principles of the free market. Most ironically, those who have the most to gain from a more liberalized, competitive marketplace, such as the unemployed and the poor, tend to be economically uniformed and not prone to activism. Opportunities that are lost because resources are politically shifted to favored constituents are invisible but nonetheless real; subsidies are not free. We therefore hope that the Chamber, in future legislative analysis, will take greater care to address free-market principles, especially when faced with proposed legislation that so clearly smacks of waste, cronyism, and subsidies.

Tyler Watts, Ph.D., is an adjunct scholar of the Indiana Policy Review Foundation.



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