by Joseph Coletti
Senior Fellow, Fiscal Studies, John Locke Foundation
Anything done a first time becomes easier to do a second time, for better and for worse. This understanding is why parents force children to try new foods before refusing to eat them and why campaigns against smoking, opioids, drunk driving, and multiple other sins try to keep people from taking the first step.
Market advocates have not taken this approach to businesses taking incentives from governments. They have forgiven companies many times over but never with a promise from companies to do better. Have market advocates undermined their support for markets by giving companies a pass on taking corporate welfare?
Consider how economic training can affect behavior and expectations. A common way to understand expectations of fairness is with an ultimatum game. One player in the game is given control of a resource, often $10, and is responsible for splitting it with another player. The other player can accept or reject the offer. Most people expect some measure of fairness in these games and the typical offer is about 40 percent of the total. An economics student would recognize that even a $1 return is better than nothing and act accordingly. Philipp Gerlach found exactly this. Economics students in these games “expected lower offers, made lower offers, and were less willing to enforce compliance with a fair allocation at a cost to themselves. The economics students’ lower expectations mediated their allocation decisions, suggesting that economics students behaved more selfishly because they expected others not to comply with the shared fairness norm.”
For some reason, even critics of government expect more of government officials than they do of business leaders. “We might wish that companies, or at least companies professing fealty to the principles of free enterprise, would voluntarily eschew all forms of corporate welfare. But then we might also wish that every day were sunny, and that chocolate drops flowered in our backyards,” James T. Bennett writes in Corporate Welfare: Crony Capitalism That Enriches the Rich. “Wishing will not make it happen.” [emphasis added] Instead, Bennett blames government with this quote from Ohio State Senator Charles Horn finding the common ground between Adam Smith and Karl Marx, “We know companies are manipulative, but it’s the nature of business to go after every dollar that’s legally available.” Because of the avaricious nature of business, Horn advised that, on the question of corporate welfare, “Don’t place the blame on the company, place the blame on government. This is government’s folly.”
Folly indeed. No matter how much money governments throw at them, companies do not make strategic decisions based on targeted incentives. For the politicians, though, there is no downside to this folly. Politicians offer tax breaks to demonstrate they are doing something to attract businesses to the area, according to work by Nathan Jensen and Edmund Malesky. If a courted company chooses someplace else, at least the politician tried, and if everything works and the company comes, the politician can claim credit. You could restate Horn to note that “it’s the nature of politics to go after every vote.” If cronyism brings votes, then how can we blame government for doing what is in its interest more than we blame companies?
Is there a case to make against companies taking targeted tax breaks? A recent survey of 500 business leaders by the Mercatus Center suggests there is. Corporate welfare cronyism is an addictive substance. Exposure to it starts rewiring the brain. Business leaders at companies who took a hit of government favoritism were more likely to have a positive view of government interference in markets. Researchers found, “Leaders of favored firms were 12 percent more likely to approve of government involvement in the economy, 9 percent more likely to think that regulations benefit consumers, and 16 percent more likely to say that regulations benefit the economy.” These business leaders were also less likely to disapprove of favoritism or to think competition is good.
Notably, the leaders of firms who received government favoritism had different ideas about what it takes to succeed in business. They were about 10 percent less likely to say that either customer focus or a unique business model are the most important factors for success and about 7 percent more likely to say that either knowledge of influential people or government assistance are the most important.
Michael Munger and Mario Villarreal-Diaz provide a broader context for these concerns, echoing questions of the sustainability of democracy, capitalism, and liberalism more generally given the appeal of crony capitalism. They argue that “successful capitalism leads to an impulse on the part of economic powers and political agents to restrict and control the destructive power of entrepreneurship.”
Against this impulse, there are numerous examples of the questionable value of crony capitalism to governments and companies. In addition, there are moral and emotional arguments against crony capitalism that market advocates have used against governments but rarely against companies. Economic development incentives and other aspects of cronyism are two-sided transactions with government supplying the benefits and company leaders receiving them.
People have tried shaming politicians only to find that many of them have no shame. Policy solutions have often failed because the payoff for politicians is too tempting. Companies have proven easier to shame, especially when giving in can give the stock price a boost. There is something to be said for establishing and enforcing rules of behavior in a community. Good neighbors do not threaten to leave if they do not get subsidies to stay or come in the first place. Good governments do not reward such petulance with subsidies.