• There are many reasons to oppose corporate welfare programs, including their poor track records
  • Defenders of such programs, however, say that their “clawback” provision means that failed projects are costless
  • Closer inspection reveals that is not the case

The recent ribbon-cutting ceremony celebrating biotech giant Amgen’s expansion in Wake County felt like a final parting blow in a litany of corporate welfare schemes secured by now former Gov. Roy Cooper.

Cooper’s tenure was packed with taxpayer giveaways to hand-picked massive corporations, some putting North Carolina taxpayers on the hook for 39 years.

Among many other objections, critics of such programs cite the very poor track records they have. Consider, for example, the Job Development Investment Grant (JDIG), which is the state’s largest corporate welfare program. Research shows that nearly half of JDIG awards were withdrawn from or terminated before the firms reached their hiring goals and that fewer than half of the “new jobs” promised ever materialized.

Supporters of such programs counter this criticism by pointing to the clawback provision of JDIG, which states that if the grant is terminated without meeting its hiring goals, the recipient company must return any funds received from JDIG. Because of this ability to claw back funds awarded, they argue, there is no downside risk or costs imposed for failed projects.

But is that really the case?

Not at all, for the following reasons:

Opportunity Costs

When evaluating the allocation of scarce resources, we must always take into account the opportunity costs involved. The opportunity cost is that which is foregone when resources are devoted to a certain goal.

In the case of Amgen, it’s been reported that they are planning on making a $1 billion investment in expanding their manufacturing plan. That means scarce resources like land, steel, time, heavy equipment, and much more will be devoted to construction on the site. These resources, therefore, become unavailable for any other projects or investments. These other potential projects and investments are the opportunity costs; they never materialize because those resources were devoted to Amgen.

If the foregone opportunities would have been more successful and productive than the JDIG project they were passed up for, society is made worse off. Even with the recipient company returning the JDIG grant money, the opportunity costs must be considered.

Market Forces vs. Political Decisions

As Friedrich Hayek observed, all economies are planned, the critical issue is whether “planning is to be done centrally, by one authority for the whole economic system, or is to be divided among many individuals.”

What programs like JDIG do is direct economic planning into the hands of a centralized authority. Government agencies put a thumb on the scale by offering taxpayer handouts to select corporations, circumventing the natural market process whereby entrepreneurs anticipate and respond to consumers’ needs and wants, not government goodies.

Granted, market-based entrepreneurs often err as well, but in a market system economic power is dispersed among the many, with consumer preferences providing guidance. When government interferes with this process by granting privileges to certain companies or industries, however, power over the economy is shifted from the masses to the hands of the political class. Rather than a freely adjusting, competitive economy, the economy begins more and more to resemble one centrally directed by government planners.

Economies in which decisions over scarce resources are spread out among entrepreneurs and private actors enjoy much greater prosperity than those directed centrally.

Market-based economies are much better at minimizing opportunity costs, which means that government interventions like JDIG increase the likelihood of society being deprived of more valuable investments than the ones chosen by central planners in a government bureaucracy like JDIG.

Programs like JDIG shift scarce resources into the hands of businesses with the best lobbyists rather than the most competent entrepreneurs.

As such, even with its clawback provision, JDIG harms our economy.

Cronyism

Finally, the existence of programs like JDIG invite political corruption and cronyism. A system whereby politicians are hand-picking which large corporations will get competitive advantages via government privileges and handouts creates an atmosphere ripe for political corruption.

It requires no stretch of the imagination to see corporate lobbyists doling out campaign contributions with an explicit expectation of receiving taxpayer handouts in return.

Conclusion

Defenders of corporate welfare face criticism from both the right and the left. One go-to defense of taxpayer handout programs like JDIG is the clawback provision, which in their minds makes failed grant projects costless. But that is simply not true.

The bottom line is that government intervention like JDIG makes society poorer, centralizes more economic power into the hands of the political class, and invites political corruption. A far better plan for economic development would be to scrap all programs granting political privileges and taxpayer handouts and to lower taxes and regulations for all businesses so that they can compete on a level playing field.