The Outstater: Hooray for the Half-Bad

April 24, 2017

We learned this legislative session that somewhere in his political career the governor confused fiscal policy with economic policy. Let us hope that our children and grandchildren will not have to pay for the mix-up by having to go elsewhere to find a decent job.

Fiscal policy is the use of government revenue collection (mainly taxes) and expenditure (spending) to influence the economy. Please note the emphasis; it influences the economy, not becomes the economy. That would be mercantilism or, more commonly, cronyism.

That last was epitomized by the GOP leadership approving money the governor wants for investment in a politically selected venture capital firm to boost politically selected Indiana companies (the definition of “Indiana” being negotiable). The dollars, fittingly, will come from the state’s Next Generation Fund.

That’s how governments grow. That’s not how economies grow.

I have an example of the real deal. Some years ago, an insurance executive was asked why his company had chosen to relocate in Fort Wayne. Was the regional city’s presentation that impressive? No, graduates of high schools there proved seven times more productive than other employees.

Here is another. Unlikely Waco, Texas, hot and windy, has become a tourist attraction. Why? Not because of any economic-development scheme pushed through by the Chamber of Commerce. Rather, it has been the energy, talent, work ethic and family values displayed by a typical Waco couple in their HGTV television series on home remodeling.

In contrast, if you want to know how the governor’s strategy works out in the long run — that is, what happens when you use tax funds instead of productivity or market forces as the attractant — study the lesson of subsidized ball parks.

Our Fred McCarthy of the blog indytaxdollars has detailed the sorry economic record of subsidies to Indianapolis sports venues for many years now. The same has been true nationwide. Economists Dennis Coates and Brad Humphreys conducted a national survey of research on subsidies for sports franchises, stadiums and mega-events. Their conclusion, as far as I am able to determine, still holds:

“‘Tangible’ economic benefits generated by professional sports facilities and franchises are small; clearly far smaller than stadium advocates suggest and smaller than the size of the subsidies. The fact that sports subsidies continue to be granted, despite the overwhelming preponderance of evidence that no economic benefits are generated by these heavily subsidized professional sports facilities, remains a puzzle.”

The researchers, who call such subsidizes “collective foolishness,” offer an educated guess, one that applies both to the owners of professional sports teams leveraging a capital improvements board and to corporates executives caging money from a regional cities office. It is that elected officials are susceptible to flattery from such powerful men, flattery that overrides any cost-benefit calculus. (Is “flattery” an economist’s word for bribery?)

Interestingly, when Coates and Humphreys focused their attention on research done by actual economists as opposed to that generated by urban development and planning departments, the two found “near unanimity” that stadiums, arenas and sports franchises have no consistent, positive impact on jobs, income or tax revenues.

There is one more thing. The new budget bolsters the Indiana Economic Development Corp., which uses tax revenue to create miniature political machines throughout the state (regional cities). It will get $15 million a year for “business promotion and innovation programs.”

Our friend Tom Huston sums it up nicely: “Crony capitalist initiatives always get kissed by Republicans in the General Assembly, but if the idea is really a bad one, they fund it at only half the requested level.” — Craig Ladwig



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