Government officials can’t improve upon the free market when it comes to identifying good investment opportunities and their efforts at boosting the economy almost always end up wasting resources.
Michigan, which has led the US in unemployment for quite a few years now, is an object lesson. State politicians have embraced the notion that the way to “grow the economy” (to use that annoying phrase of Bill Clinton’s) is to use targeted tax breaks to lure in companies. As this editorial in today’s Wall Street Journal points out, however, this approach has been a bust for Michigan. North Carolina has had a lot of experience with this too.
It’s easy to see why this lousy policy is politically popular — the governor gets to take credit for whatever little successes occur. In contrast, a policy of just reducing taxes across the board and getting rid of costly regulations that drive investors away works far better, but doesn’t give the gov a photo opportunity.
As public choice economic theory points out, elected politicians tend to sacrifice the general interest in favor of their own particular interest. That’s what is behind this foolish policy of targeted tax breaks.
