Those who tout the value of targeted tax breaks in economic development are likely to point to the example of Alabama’s courtship of Airbus, as documented in the latest Bloomberg Businessweek.
For a corrective, they ought to consider the following recent observations from Roy Cordato:
The presumption is that political decision makers have special insight that is not available to private investors about the value added of industries. But in fact it is the exact opposite that is the case. In a free economy it is the role of private sector investors using their own money and looking at potential profits and losses to decide what kinds of investments will add the most value. There has never been any evidence that the government can improve upon this process. In arranging this, and other wealth transfers, … there is necessarily a dampening of economic activity in other parts of the economy. The problem is that there is no way to specifically identify these losses. So while governors and other politicians can point to all the “good” that their policies are doing, there is no way to identify the harm and therefore suffer any negative political consequences. From a political perspective they are the perfect government program, the benefits are obvious and the costs are hidden. While programs like this may benefit specific companies, localities, and politicians, they misallocate resources statewide and ultimately reduce economic growth and job creation.
