by Jon Sanders
Director of the Center for Food, Power, and Life, Research Editor, John Locke Foundation
This newsletter has occasionally discussed the real-world folly of state economic incentives. They come with official declarations of "jobs created" here but ignore the job creation stymied there, there, and there.
That is, they ignore the opportunity costs of the dollars redirected from productive parts of the economy into a sector that politicians wish to make productive. (The politically favored sector is, by revealed market preference, not that productive. If you have to make people send it money involuntarily, then it’s not getting people to support it on their own.)
Once the incentives are established, the not-that-productive sector knows it needs to keep getting involuntary funding to keep going. Representatives from that sector somehow get media to go along with their annual announcements of just how important their sector is to the state’s economy, an importance undercut by their followup point about how ending or limiting this economic life support from the state would totally annihilate their industry.
This broadcast panhandling often uses the sector’s own "economic impact" studies that purport to show just how many jobs they’ve created directly and indirectly, thanks of course to state money. The idea is to sell legislators on the idea that you, Mr. or Ms. Legislator, are creating jobs just by voting to continue our funding. And you don’t want to discontinue our funding, right? You don’t want to kill jobs, do you?
Economists will point out when those studies lack an accounting of opportunity costs, which they almost invariably do. When those costs are properly accounted for, they tend to show the incentives to be net money losers. Which would imply net jobs killers.
In other words, thorough studies tend to show that the fundamental basis of microeconomic theory hasn’t been overturned.
Man, opportunity costs are hard to account for sometimes
This business with House Bill 1224 — the last-gasp, super incentives bill that was defeated this week — showed how even attempts to properly account for opportunity costs could still miss some big ones.
The bill would have expanded the Job Development Investment Grant Program and the Job Maintenance and Capital Development Fund and created a new Job Catalyst Fund. An economist trying to calculate the opportunity costs of those funds’ expenditures might do an excellent job, but he might miss accounting for other costs imposed by the expansions, expansions that would not happen without also making other changes in state law.
Confused? Let Carolina Journal’s Barry Smith explain:
Through a complicated process, H.B. 1224 was linked with a couple of companion bills that would have provided local school boards with more teachers assistants (House Bill 718) and changed the qualifications for television shows, movies, and commercials produced in the state to get film incentives (House Bill 189). The two companion bills would have been considered if H.B. 1224 had become law, but it didn’t, so H.B. 718 and H.B. 189 were not taken up.
The entire legislative package also included provisions addressing unemployment insurance confidentiality and modifying local sales tax laws.
Just the change to local sales tax laws would have been taxing to the economist trying to account for all costs and benefits. (That’s "taxing" in the dictionary sense of being "wearingly burdensome," a definition whose origin is a complete mystery to such entities as "progressives" and media, whose reflexive approach to problem-solving is to raise taxes.)
Capping the local sales tax at 2.75 percent could have had a significant effect. While it might have helped taxpayers in some urban counties, in many other counties it could have made it more likely that the sales taxes would increase.
If those other bills and add-ons were part of a package deal with expanding incentives, then their net costs would be part of the equation of evaluating the expansions’ economic effects.
Fortunately, this is all an exercise in what might have been. But it does make me realize that legislative maneuvering and crony shenanigans mean some opportunity costs of state programs are probably missed, and in some cases, they could be big.
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